Catwalk Worldwide Limited Vs ACIT (ITAT Mumbai)
The Mumbai ITAT deleted a massive addition of ₹36.54 crore made under section 56(2)(viib), holding that once an assessee adopts a prescribed valuation method under Rule 11UA — such as the Discounted Cash Flow (DCF) method — the Assessing Officer cannot discard it merely because actual future performance differs from projections.
The assessee had issued shares at a premium of ₹518 per share based on a DCF valuation report prepared by a Chartered Accountant valuing shares at ₹536.17 each. The AO rejected the valuation after comparing projected profits with actual subsequent financial results, substituted actual figures in place of projected figures, and even attempted valuation under the NAV method before making the entire share premium taxable under section 56(2)(viib).
The Tribunal strongly relied on the Delhi High Court ruling in Cinestaan Entertainment Pvt. Ltd., reiterating that valuation is not an exact science and DCF valuation inherently rests on estimates, assumptions and future business expectations which cannot be judged with hindsight. It emphasized that tax authorities cannot sit in the armchair of a businessman and question commercial wisdom of investors or replace projections with actuals while applying DCF methodology.
The ITAT further observed that section 56(2)(viib) is an anti-abuse provision intended to curb introduction of unaccounted money through bogus share premium arrangements, and not to interfere in genuine commercial transactions involving independent strategic investors. Since the AO failed to bring any cogent material showing perversity in the valuation methodology adopted by the assessee, the addition was held unsustainable and deleted in full.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This captioned appeal is preferred by the assessee, directed against the order of Commissioner of Income Tax Appeals/ National Faceless Appeal Centre (NFAC), Delhi [in short, “the Ld. CIT(A)”], dated 11.09.2025 for the assessment year 2017-18,which in turn arises from the assessment order u/s 143(3) of the Income Tax Act, 1961 (“the Act”) dated 27.12.2019 passed by Assistant Commissioner of Income Tax Circle-6 (2) (1), Mumbai (in short, “the Ld. AO”). The grounds of appeal are as under:
“1. Erred in confirming the addition made by the Assessing Officer (“AO”) of the entire share premium of Rs.36,54,46,130 by invoking the provisions of section 56(2)(viib) of the Income-tax Act, 1961 (‘the Act’);
2. Erred in confirming that the share premium received by the appellant company was unjustified, ignoring that the valuation was duly carried out by a qualified Chartered Accountant as per the Discounted Cash Flow (‘DCF’) method prescribed under Rule 11UA of the Income-tax Rules, 1962;
3. Failed to appreciate that as per Explanation to section 56(2)(viib) of the Act read with 11UA of the Income-tax Rules, 1962 (‘the Rules’), once the assessee has exercised its option and adopted a prescribed method of valuation (DCF method), supported by a valuation report from a qualified accountant, the AO has no jurisdiction to disregard such valuation merely based on his subjective perceptions or by substituting his own valuation methodology;
4. Erred in disregarding the DCF valuation on irrelevant and extraneous grounds such as projections, assumptions, financial performance and liquidity position, without demonstrating any specific infirmity or inconsistency in the valuation report and then carrying out the valuation by considering actual results of the Appellant company;
5. Failed to appreciate that the shares were issued to an unrelated party who was a strategic partner in the same line of business.”
2. Brief facts of the case are that the assessee is a Private Limited Company, engaged in the business of manufacturing and trading of ladies footwear. The assessee company has filed its return on 30.12.2017, declaring income of Rs.79,240/- and book profit of Rs.8,44,63,698/-, has paid tax of Rs.1,87,67,058/-. During the year under consideration, the assessee company had allotted 705387 shares to Sara Suloe Pvt Ltd (SSPL) at face value of Rs.10/- plus a premium of Rs.518/-. The transaction of allotment of shares by the assessee during the year becomes the issue for addition in the present case. In the year under consideration, Ld. AO invoked the provisions of section 56(2)(viib) of the Act to the aforesaid transaction, for which explanations were called for from the assessee. In response, the assessee submitted a valuation report under Discounted Cash Flow Method (DCF)dated 21.03.2016 prepared by Singhal Gupta and Co., Chartered Accountants, according to which the valuation per share has been worked out at Rs.536.17/-.
