DCF Valuation Accepted: ITAT Upholds Deletion of Rs. 8.94 Cr Share Premium Addition

The assessee, a private limited company engaged in publishing (incorporated 06/10/2003), submitted a return of income for AY 2016-17 on 17/10/2016, revealing a loss of Rs. 1,36,05,019. The case was selected for limited scrutiny to verify the large share premium received during the year under scrutiny under Section 56(2)(viib). During assessment, it was recorded that the assessee allotted 8,438 equity shares having a face value of Rs. 10 each at a premium of Rs. 10,655.85 per share, increasing the share premium account of Rs. 8,99,14,062. The assessee produced a valuation report by an accountant applying the Discounted Cash Flow (DCF) method under Rule 11UA(2)(b) to substantiate fair market value.

The AO examined the projections used in the DCF report, considered them inconsistent with the company’s prior performance, issued notices, including under section 133(6) to the investors (which were not responded to), rejected the DCF valuation, and applied the Net Asset Value (NAV) method to compute FMV at Rs. 64.3 per share. On that basis, the AO made an addition of Rs. 8,94,55,878 under Section 56(2)(viib).

CIT(A) Held: The assessee contested the addition before the CIT(A), who deleted the addition relying on the principle that once DCF has been validly adopted under Rule 11UA, the AO cannot substitute another method.

Main Issue: Whether the Assessing Officer was justified in rejecting the DCF valuation adopted by the assessee under Rule 11UA(2)(b) and substituting the NAV method while making an addition under Section 56(2)(viib).

ITAT Held: The Tribunal examined the facts, the valuation report and the rival submissions. It observed that Rule 11UA permits the assessee to adopt either the book-value/formula (NAV) or the DCF method and that valuation under DCF is projection-based and involves expert judgment. Relying on precedents cited in the order (including Cinestaan Entertainment Pvt. Ltd. and other authorities), the Tribunal held that once the assessee exercises the statutory option by producing a DCF valuation from a recognized professional, the AO does not have jurisdiction to discard that method and substitute his own valuation unless there is a clear legal basis to do so.

The Tribunal further held that comparing DCF projections with historical figures (or thereafter substituting NAV) is inconsistent with the nature of DCF valuation. Finding the CIT(A)’s order to be a reasoned and speaking order, the Tribunal found no infirmity and dismissed the Revenue’s appeal, thereby upholding deletion of the addition of Rs. 8,94,55,878 under Section 56(2)(viib).

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