DCF valuation certificate by Chartered Accountant held wrong and defective by ITAT: ICAI Technical Guide on Share Valuation not considered

The assessee filed its return for AY 2015-16, declaring NIL income and business loss. The case was originally scrutinised under section 143(3) and accepted. Thereafter, based on INSIGHT information on a high-risk transaction, the Assessing Officer reopened the assessment, alleging that the assessee received Rs. 3.99 crore as share premium on the issuance of 8,000 shares at Rs. 4,990 premium each.

The assessee furnished a DCF-based valuation report issued by a Chartered Accountant valuing shares at Rs. 5,017 per share. During reassessment, the AO found that actual financials did not match projections. The AO therefore rejected the DCF valuation and instead computed fair market value under Rule 11UA (NAV method) at Rs. 10 per share and treated the excess premium of Rs. 3.99 crore as taxable under Section 56(2)(viib).

The CIT(A)/NFAC upheld the AO’s findings. The assessee appealed to the ITAT.

Issue Raised: Whether the DCF valuation report furnished by the assessee could be accepted for determining FMV of shares under Rule 11UA(2)(b), or whether the AO was justified in rejecting it as defective and invoking Section 56(2)(viib).

ITAT Decided: The Tribunal dismissed the appeal and upheld the addition of Rs. 3,99,20,000. It held that the DCF report was fundamentally defective, based entirely on management inputs without independent verification, lacking a basis for growth assumptions, and not in accordance with ICAI’s Technical Guide on valuation. The CA failed to justify major factors, including the terminal value of Rs. 25.59 crore.

The Tribunal observed that the company had no performance history to support high projections; actual results diverged sharply; no dividends were ever declared; and the Chartered Accountant ignored essential valuation parameters. The Tribunal held that as the DCF report was flawed, the AO was correct in determining FMV at Rs. 10. The maxim sublato fundamento cadit opus was applied, which means “when the foundation fails, the entire structure falls.” Thus, the addition under Section 56(2)(viib) was sustained.

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