ITO Vs Coolberg Beverages Pvt Ltd (ITAT Mumbai)
Summary: A company’s past losses may justify a close examination of its projected profits. They do not, by themselves, permit the Assessing Officer to discard a Discounted Cash Flow (DCF) valuation chosen under Rule 11UA and replace it with a Net Asset Value (NAV) valuation. Applying that distinction, the Mumbai ITAT has upheld deletion of a ₹1,93,82,720 addition under section 56(2)(viib) in the case of Coolberg Beverages Pvt. Ltd.
The share issue and the two competing values
Coolberg Beverages, which sells and markets non-alcoholic beer, issued 1,962 equity shares at ₹43,266 per share, comprising a face value of ₹1,250 and premium of ₹42,016. It supported the issue price with a report from a merchant banker, KJMC Corporate Advisors (India) Limited, which determined fair market value at ₹43,281.77 per share using the DCF method. The shares were thus issued at a price slightly below the value shown in the report.
The Assessing Officer questioned the report because its future projections came substantially from the company’s management and the valuer had not independently audited or investigated every input. He also considered the projected results insufficiently justified. Rejecting the DCF valuation, he applied the NAV method and arrived at a value of approximately ₹7,636 per share.
During assessment, the company pointed out that part of the investment came from IQ Alpha III Fund, forming part of a Venture Capital Fund, and claimed the applicable statutory exclusion. The Assessing Officer accepted that contention and withdrew a proposed addition of ₹1,64,96,690 to that extent. He nevertheless made a ₹1,93,82,720 addition under section 56(2)(viib) in respect of the remaining shares.
The CIT(A) deleted that addition. The Revenue appealed, maintaining that the merchant banker had largely applied the DCF formula to figures supplied by the company without adequately testing their reliability.
Can earlier losses discredit a projected turnaround?
The Revenue pointed to a sharp difference between Coolberg’s recent results and its projections. The company had incurred losses of approximately ₹8.48 crore and ₹10.30 crore in the two preceding years, yet the valuation projected profit after tax of about ₹5.45 crore for the relevant year. According to the Department, the report did not adequately explain that turnaround.
The Tribunal accepted that such a contrast is a legitimate reason to examine the forecast closely. A DCF report does not become immune from scrutiny because a merchant banker has signed it. The Assessing Officer may test the business assumptions, projected growth, discount rate, terminal value, market conditions and other inputs. If demonstrable defects are found, a fresh determination within the chosen method may be called for.
That was not what had happened here. The CIT(A) had found that the Assessing Officer identified no arithmetical error, internal inconsistency or factual inaccuracy in the DCF computation. He had not established that the growth assumptions, discount rate or terminal value conflicted with contemporaneous material or industry norms. Instead, he moved directly from doubting the projections to valuing the shares under NAV.
The method chosen by the assessee
The ITAT followed the approach discussed in the Bombay High Court decision in Vodafone M-Pesa Ltd. v. PCIT and a coordinate bench decision in DCIT v. Max Hospitals and Allied Services Limited. Where an assessee has validly chosen a method prescribed by Rule 11UA, the Department can examine the valuation produced by that method. It cannot substitute another method merely because it considers the projections optimistic.
That distinction is particularly significant for DCF. Its inputs necessarily include estimates of future cash flows based on information available on the valuation date. The fact that management supplies projections is inherent in the exercise; it does not automatically make the report unreliable. Nor can a forecast be rejected simply because historical losses suggest that a turnaround will be difficult. The Department must identify what is wrong with the assumptions and support that criticism with relevant material.
In Coolberg’s case, the Revenue did not show that the merchant banker’s method departed from Rule 11UA or that the computation had a foundational defect. The Tribunal therefore upheld the CIT(A)’s deletion of ₹1.93 crore and dismissed the Revenue’s appeal.
Author’s comment
This decision protects the assessee’s statutory choice of valuation method, while preserving the Assessing Officer’s power to scrutinise the valuation itself. It should not be read as a rule that every DCF report must be accepted at face value. A weak or unsupported forecast remains open to challenge; the challenge must engage with the actual DCF inputs rather than substitute NAV as a shortcut.
For a company with recent losses, the strongest valuation file will explain why a turnaround was reasonably projected on the valuation date—through business plans, funding, distribution expansion, contracts, market data and the assumptions supplied to the merchant banker. The question is whether those contemporaneous assumptions were supportable when the shares were issued. In Coolberg, the Department raised doubts about the forecast but did not establish specific defects before changing the method. That failure decided the appeal.
Cases Discussed
- DCIT v. Max Hospitals and Allied Services Limited, ITA Nos. 3083, 3084 & 3085/Mum/2025, order dated 11/08/2025
- Vodafone M-Pesa Ltd. v. PCIT, (2018) 92 taxmann.com 73 (Bombay)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI
The present appeal is filed by the Revenue against the order dated 03/02/2026 passed by the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (“Ld. CIT(A)”), for Assessment Year 2022-23 on following grounds of appeal:
1. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the addition of Rs. 1,93,82,720/-made u/s. 56(2)(viib) by applying NAV Method since the valuation report as per DCF Method was not reliable since the valuer solely on the information provided by the assessee.
2. The appellant craves to leave to ament or alter any grounds or add new ground which may be necessary.”
2. Brief facts of the case are as under:-
Assessee is engaged in the business of selling and marketing non-alcoholic beer under the brand name “Coolberg”. For the year under consideration, the assessee issued 1,962 equity shares having face value of Rs.1,250/- each at a premium of Rs.42,016/- per share. The issue price was accordingly Rs.43,266/- per share. The assessee furnished a valuation report obtained from a Merchant Banker, M/s. KJMC Corporate Advisors (India) Limited, wherein the fair market value (“FMV”) of each equity share was determined at Rs.43,281.77 by adopting the Discounted Cash Flow (“DCF”) method prescribed under Rule 11UA of the Income-tax Rules, 1962.
2.1. The Ld.AO, however, was not satisfied with the valuation report. According to the Ld.AO, the valuation was substantially based on information and future projections supplied by the management and not on independent audit or investigation had been carried out by a valuer. The Ld. AO further observed that the projected figures were not supported by sufficient justification and consequently rejected the valuation arrived at under the DCF method. The Ld.AO thereafter proceeded to determine the FMV by adopting the Net Asset Value (“NAV”) method under Rule 11UA(2)(a) and arrived at a value of approximately Rs.7,636/- per share.
2.2. In the course of assessment proceedings, the assessee pointed out that part of the investment was made by IQ Alpha III Fund, forming part of a Venture Capital Fund, and therefore fell within the statutory exclusion. The Ld.AO accepted the said contention and withdrew the proposed addition to the extent of Rs.1,64,96,690/-. However, rejecting the DCF valuation in respect of the remaining shares, the Ld.AO made addition of Rs.1,93,82,720/- u/s. 56(2)(viib) of the Act.
Aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A).
3. The Ld.CIT(A), after considering the submissions by the assessee, and the valuation report placed on record, observed that Rule 11UA(2) recognises both the NAV and DCF methods as permissible methods for determining the FMV of unquoted equity shares and that the statutory option to select the appropriate method rests with the assessee. The Ld.CIT(A) further observed that the Ld. AO did not point out any arithmetical error, internal inconsistency or factual inaccuracy in the DCF computation. There was also no specific finding that the growth assumptions, discount rate or terminal value adopted by the Merchant Banker were contrary to contemporaneous material or industry norms.
3.1. The Ld. CIT(A) further held that the fact that the projections were based upon management inputs and that the valuer had not independently verified every assumption could not, by itself, constitute sufficient ground to discard the DCF valuation. It was observed that reliance upon forward-looking estimates and management projections is inherent in the DCF methodology. The Ld. CIT(A) accordingly held that the Ld. AO could scrutinise the assumptions adopted by the valuer, but could not discard the DCF method altogether and substitute it with the NAV method. Accordingly, the addition of Rs.1,93,82,720/- made u/s. 56(2)(viib) was deleted.
Aggrieved by the order of Ld. CIT(A), the Revenue is in appeal before this Tribunal.
4. The Ld.DR relied upon the assessment order and also filed written submissions. It was submitted that the valuation report prepared by M/s. KJMC Corporate Advisors (India) Ltd., was based on projections and information furnished by the assessee itself. According to the Ld.DR the report did not disclose any independent methodology or exercise undertaken by the valuer to verify the projections supplied by the management.
4.1. The Ld. DR further submitted that the valuer had itself stated that the valuation was based upon information and projections supplied by the assessee and that no independent audit or investigation had been carried out. It was contended that this indicated that the valuer had merely applied the valuation formula to figures furnished by the assessee without independently testing the reliability thereof.
4.2. The Ld. DR further emphasised that the valuer had projected Profit After Tax of approximately Rs.5.45 crore for the year under consideration despite the assessee having incurred losses of approximately Rs.8.48 crore and Rs.10.30 crore in the immediately preceding years. According to the Ld. DR, there was no adequate explanation in the valuation report to justify such a substantial turnaround. It was therefore submitted that the DCF valuation was unreliable and that the Ld. AO was justified in adopting the NAV method. The Ld. DR accordingly prayed that the order of the Ld. CIT(A) be reversed and the addition made by the Ld. AO be restored.
5. Per contra, the Ld.AR supported the order passed by the Ld.CIT(A). It was submitted that the issue is squarely covered in favour of the assessee by the decision of the Coordinate Bench in DCIT v. Max Hospitals and Allied Services Limited, ITA Nos.3083, 3084 & 3085/Mum/2025, order dated 11/08/2025. The Ld. AR submitted that in the aforesaid decision, an identical dispute relating to rejection of the DCF method and determination of FMV for the purpose of section 56(2)(viib) came to be considered and the Revenue’s appeals were dismissed.
5.1. The Ld.AR placed reliance on the decision of the Hon’ble Bombay High Court in Vodafone M-Pesa Ltd. v. PCIT reported in (2018) 92 taxmann.com 73 and submitted that, though the valuation furnished by an assessee is not immune from scrutiny, where the assessee has validly selected a method prescribed under Rule 11UA, the Ld.AO cannot reject that method and substitute another prescribed method of his own choice. Hon’ble Bombay High Court observed that, the Ld.AO may scrutinise the valuation and, if required, undertake or obtain a fresh valuation, but the exercise must proceed on the basis of the valuation method opted for by the assessee.
We have perused the submissions advanced by both sides in light of the record placed before us.
6. The short controversy before us is whether the Ld. AO was justified in rejecting the valuation of the shares determined under the DCF method, being one of the methods prescribed under Rule 11UA, and thereafter substituting the same with valuation under the NAV method for the purpose of making an addition u/s.56(2)(viib) of the Act.
6.1. It is undisputed that the assessee obtained the valuation from a Merchant Banker and adopted the DCF method. The FMV arrived at under the said report was Rs.43,281.77/- per share, whereas the shares were actually issued at Rs.43,266/- per share. Thus, the issue price was marginally below the FMV determined by the valuer under the method opted for by the assessee.
6.2. We find that an identical controversy was considered by the Coordinate Bench in DCIT v. Max Hospitals and Allied Services Limited (supra). In that case also, the assessee adopted DCF method for valuation of shares and the Revenue questioned valuation on the ground that the projections were not commensurate with the actual or historical financial performance. The Coordinate Bench, after considering the provisions of section 56(2)(viib) read with Rule 11UA and the judicial precedents on the issue, held that where the assessee has adopted one of the prescribed methods, the valuation cannot be rejected merely because the Revenue considers the projections unrealistic or because subsequent results do not match the projections.
6.3. The Coordinate Bench further took note of the principle that valuation, particularly under the DCF method, is based upon projections, estimates and assumptions prevailing on the valuation date. Such valuation cannot be expected to possess mathematical exactitude. Factors such as future growth, market conditions, anticipated demand, business environment and cost of capital necessarily involve estimation.
6.5. We also find force in the reliance placed on the decision of the Hon’ble Bombay High Court in Vodafone M-Pesa Ltd. v. PCIT (supra). The principle emerging therefrom is that the valuation report submitted by an assessee can certainly be subjected to scrutiny. Thus, the assessee’s choice of DCF method does not render the valuation sacrosanct or beyond examination. However, where the Ld. AO finds defects in the assumptions or inputs employed, the corrective exercise has to remain within the framework of the method validly opted for by the assessee. The Ld. AO cannot discard the DCF method and substitute the NAV method merely because he considers the projections unacceptable.
6.6. In the present case, the principal objection of the Revenue is that the valuer relied upon information and projections furnished by the management and did not independently verify such projections. We are unable to accept this objection as sufficient to sustain the action of the Ld.AO. We note that DCF valuation, proceeds on estimated future cash flows and management projections. The mere fact that such projections originate from the management does not ipso facto render the valuation unreliable.
The argument of the Ld. DR that the assessee projected profit of Rs.5.45 crore despite losses in preceding years can undoubtedly constitute a factor for examining the reasonableness of the underlying assumptions. However, even if the Ld. AO entertained doubts regarding such projection, what was required was an examination of the underlying business assumptions, growth rates, discounting factors, terminal value, market conditions or other material components of the DCF exercise. If such assumptions were found demonstrably erroneous, fanciful or unsupported, the Ld. AO could have required a fresh determination under the DCF method itself. The past losses, by themselves, do not empower the Ld. AO to abandon the method validly adopted under Rule 11UA and shift to an altogether different valuation methodology.
6.8. In this regard, we find that the Ld.CIT(A) catagorically recorded that no arithmetical error, internal inconsistency or factual inaccuracy in the DCF computation was brought out by the Ld.AO. There was no material brought on record to establish that the growth assumptions, discount rate or terminal value were contrary to contemporaneous material or prevailing industry norms. The Ld.AO proceeded directly to determine the FMV under the NAV method. In our considered opinion, this is precisely the course which is impermissible in view of the legal position discussed hereinabove.
6.9. We, therefore, find that the objections raised in the written submissions of the Ld. DR do not distinguish the present case from the principles laid down in DCIT v. Max Hospitals and Allied Services Limited (supra). The Revenue has also not brought before us any material to demonstrate that the method followed by the Merchant Banker was contrary to Rule 11UA or that the DCF computation itself suffered from such foundational defects as would justify disregarding the valuation. We accordingly find no infirmity in the view taken by the Ld. CIT(A) and the same is upheld.
Ground No.1 raised by the Revenue is accordingly dismissed.
Ground No.2 being general in nature does not require separate adjudication.
In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 21-09-2026.
