Namdev Finvest Pvt. Ltd. Vs ACIT (ITAT Jaipur)
Section 56(2)(viib): AO Cannot Replace DCF Valuation with NAV Merely by Calling Future Projections Unreasonable
The controversy
The Jaipur Tribunal deleted an addition of ₹18,57,73,482 under Section 56(2)(viib), holding that the Assessing Officer had wrongly rejected a merchant banker’s valuation under the Discounted Cash Flow method and substituted the Net Asset Value method.
The rejection rested on the observation that future projections appeared unreasonable when the company was reporting losses. However, the Assessing Officer had undertaken no inquiry or investigation into those projections and had not identified material errors in the underlying data.
The Tribunal held that such a passing observation was insufficient to discard the expert valuation.
Shares issued at different premiums
During the relevant year, the assessee issued 3,60,000 equity shares at ₹50 each, comprising face value of ₹10 and premium of ₹40.
It also issued 71,42,852 compulsorily convertible preference shares at ₹70 each, comprising face value of ₹10 and premium of ₹60.
To support the issue prices, the assessee furnished merchant banker valuation reports under both DCF and NAV methods.
The DCF valuation determined fair market value at ₹70 per share, supporting both issue prices. The NAV valuation, however, indicated a value of ₹44.28 per share.
The dispute arose because the Assessing Officer adopted the lower NAV figure rather than the DCF valuation relied upon by the assessee.
AO substituted net-asset valuation
Using ₹44.28 as fair market value, the Assessing Officer treated the excess issue consideration as taxable under Section 56(2)(viib).
The resulting addition comprised ₹20,59,200 concerning equity shares and ₹18,37,14,282 concerning preference shares, aggregating to ₹18,57,73,482.
The Assessing Officer questioned the projected cash flows used in the DCF report. He referred to negative figures for the earlier periods, followed by positive projections for subsequent years and a substantial terminal value.
According to him, these assumptions resulted in an unreasonable increase in valuation.
CIT(A) upheld rejection of the projections
The Commissioner (Appeals) accepted that DCF was a prescribed valuation method, but held that the report still had to be reliable and supported by substantiated assumptions.
The appellate authority concluded that the assessee had not demonstrated through convincing evidence that its projections were realistic or founded on reliable contemporaneous data.
It therefore upheld the Assessing Officer’s adoption of NAV and confirmed the entire addition.
Before the Tribunal, the assessee challenged both the substitution of the chosen method and the absence of a proper evidentiary basis for rejecting the DCF report.
Choice of valuation method rested with the assessee
The Tribunal accepted that, under the applicable valuation framework, the option to adopt DCF or NAV rested with the assessee.
It referred to the earlier Jaipur decision in ITO v. Universal Polysack (India) Pvt. Ltd., ITA No. 609/JPR/2017, dated 31 January 2018.
That decision distinguished the assessee’s choice of method from the Assessing Officer’s power to examine its application. The officer could scrutinise the methodology and underlying assumptions and suggest reasoned corrections, but could not simply discard DCF and substitute book-value valuation.
The Tribunal also considered its recent decision in DCIT v. Hem Securities Ltd., which discussed the same distinction.
Expert valuation remained open to meaningful scrutiny
The Tribunal did not hold that a merchant banker’s report must be accepted without examination.
Referring to A.H. Multisoft (Pvt.) Ltd., it emphasised that rejection of an expert report requires identification of material errors in the data used.
The order also referred to the Madras High Court’s decision in VVA Hotels (P.) Ltd., concerning rejection of DCF valuation without identifying flaws.
Thus, the protection afforded to the chosen method did not remove the obligation to support the valuation. It required the Revenue’s objections to be specific, investigated and founded on demonstrable defects.
Current losses did not establish that projections were wrong
On the facts, the Tribunal found that the Assessing Officer’s conclusion rested merely on the figures appearing in the valuation report.
There was no inquiry from the assessee concerning the projected figures, no investigation into their basis and no discussion of any justification contained in the merchant banker’s report.
The observation that future projections were unreasonable because the company was reporting substantial losses was therefore insufficient.
The Tribunal held that the DCF report had been wrongly rejected, directed deletion of ₹18,57,73,482, and allowed the appeal.
Author’s comments
The decision draws a useful distinction between challenging a valuation and replacing the valuation method.
A DCF valuation necessarily involves estimates of future performance. The existence of current losses does not, without further examination, demonstrate that those estimates are materially defective.
Equally, the ruling does not protect unsupported projections from scrutiny. Companies should retain the business plans, assumptions and contemporaneous material supporting the merchant banker’s report.
The practical principle is that a reasoned valuation requires a reasoned challenge. Here, the addition failed because the Revenue substituted NAV without adequately investigating or demonstrating defects in the DCF valuation chosen by the assessee.
Cases Discussed
- ITO Vs. Universal Polysack (India) Pvt. Ltd. — ITA No. 609/JPR/2017 (31.01.2018)
- DCIT Vs. Hem Securities Ltd. — ITA No. 1579/JPR/2025 (16.09.2026)
- CIT Vs. VVA Hotels (P.) Ltd. — [2020] 429 ITR 69 (Madras)
- Pr. Chief CIT Vs. A.H. Multisoft (Pvt.) Ltd. — as cited in the order
- CIT Vs. Vaani Estates Pvt. Ltd. — cited in VVA Hotels
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT JAIPUR
The present appeal has been filed by the assessee against the order passed by the National Faceless Appeal Centre (NFAC), Delhi(hereinafter referred to as “Ld. CIT(A)”), dated 05.03.2026 under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
2. The grounds raised by the assessee read as under:-
1. The Ld. CIT(A), NFAC has erred on facts and in law in confirming the addition of Rs. 18,57,73,482/- u/s 56(2)(viib) of IT Act, 1961 by considering the fair market value of shares issued by the assessee at Rs.44.28 per share adopting Net Asset Value method whereas the FMV of shares as per Discounted Cash Flow Method is Rs.70 per share.
2. The appellant craves to alter, amend and modify any ground of appeal.
3. Necessary cost be awarded to the assessee.
3. The solitary issue in the present appeal relates to the addition made to the income of the assessee invoking the provisions of Section 56(2)(viib) of the Act amounting to Rs.18,57,73,482/-.
4. The addition made relates to the excess of the fair market value and the price at which shares were issued by the assessee, the assessee being a Private limited company. As per the facts of the case, the assessee had issued equity shares and compulsorily convertible preference shares (CCPS) at premium. The assessee had issued 3,60,000 equity shares at a price of Rs.50 /- per share(face value Rs.10/- and premium Rs.40/-) and 71,42,852 CCPS at Rs.70/- per share( face value Rs.10/-[ and premium Rs.60/-).
5. The assessee justified the premium by submitting valuation report of Merchant Banker, both as per Discounted Cash Flow (DCF) method and Net Asset Value (NAV) method as prescribed under Rule 11UA of the Income Tax Rules, 1962. The value as per DCF justified the premium received by the assessee, however, the valuation as per NAV showed the fair market value to be less than the price on which the shares were issued. The DCF value submitted by the assessee obtained from a merchant banker showed the fair market value at Rs.70, while the valuation report submitted on the basis of NAV method showed the fair market value of the shares at Rs.44.28 per share.
6. The AO adopted the NAV of Rs.44.28 per share to be the fair market value of the shares and added the difference between the fair market value and the issue rate of shares , being Rs.20,59,200 (3,60,000 equity shares at the rate of Rs.5.72 (Rs.50- Rs.44.28) and Rs.18,37,14,282 (71,42,852 CCPS at Rs.21.72( Rs.70- Rs.44.28) to the income of the assessee. u/s 56(2)(viib) of the Act.
7. Before the Ld. CIT(A), the assessee contended that the method to be adopted forvaluation ,whether DCF or NAV, was, as per Rules prescribed, the option of the assessee. It was contended that the DCF valuation report was obtained from a SEBI registered Merchant Banker determining the fair market value of Rs.70 per share and the AO therefore was not justified in discarding the merchant banker valuation and adopting another valuation report based on NAV.
8. The Ld. CIT(A) rejected the contention of the assessee stating that the assessee’s valuation by the DCF method was found by the AO to be not supported by convincing projections and assumptions and the AO was right therefore in rejecting the valuation by adopting DCF method. He stated that the law is well settled that the AO is not precluded from examining the correctness of assumptions and rejecting the valuation which is unrealistic or unreported. His findings in this regard are contained at page 4 and 5 of his order as under:-
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6. Decision
Ground Nos. 1 and 5 relate to legality of proceedings and adequacy of opportunity. The assessment records indicate that multiple notices under sections 143(2) and 142(1), show cause notice and video conference opportunity were provided. The appellant filed submissions during assessment proceedings. Therefore, the allegation of lack of opportunity is not borne out from record. These grounds are dismissed.
Ground Nos. 2, 3 and 4 relate to addition under section 56(2)(viib) in respect of equity and preference shares. The issue to be decided is whether the fair market value adopted by the appellant based on merchant banker valuation under DCF method is acceptable or whether the Assessing Officer was justified in adopting value based on NAV method and making additions.
Section 56(2)(viib) read with Rule 11UA provides for determination of fair market value of unquoted shares. The appellant has argued that the valuation method is at its option. However, the valuation furnished must be reliable, consistent and capable of substantiation with underlying assumptions. The Assessing Officer examined the valuation and found that the fair market value based on available financials and net assets was Rs.44.28 per share. The appellant’s valuation at Rs.70 per share was not supported by convincing projections and the assumptions adopted in the DCF model were not substantiated with correspondingevidence during assessment proceedings.
The law is well settled that though DCF method is a prescribed method, the Assessing Officer is not precluded from examining the correctness of assumptions and rejecting a valuation which is unrealistic or unsupported. Reliance may be placed on judicial principles laid down in decisions by various courts of law wherein it has been held that valuation reports can be scrutinized for reasonableness and correctness of underlying data.
In the present case, the Assessing Officer has recorded reasons for adopting the value determined on the basis of net assets and has quantified the differential amount. The appellant has not demonstrated before the undersigned with cogent evidences that the projections used in the DCF valuation were realistic or that the valuation was based on reliable contemporaneous data. Therefore, the rejection of merchant banker valuation by the Assessing Officer cannot be said to be arbitrary.
Accordingly, the additions of Rs.20,59,200 in respect of equity shares and Rs.18,37,14,282 in respect of preference shares under section 56(2)(viib) are confirmed.
Ground Nos. 2, 3 and 4 are dismissed. Ground No. 6 relates to initiation of penalty under section 270A. Since penalty proceedings are separate and independent, this ground is premature and dismissed as infructuous.
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9. Before us, ld. Counsel for the assessee reiterated the submissions made before the Ld. CIT(A) that the requirement of Rule 11UA of the Rules, merely was to obtain a valuation report from merchant banker by DCF Method or NAV method at the option of the assessee, and the assessee having obtained the valuation report as per the DCF report, the AO could not have rejected the same. He further contended that Courts have consistently held that there is no discretion with the AO to discard the DCF method of valuation and adopt book value method. Thatthough the AO is well within hisrights to examine the methodology so adopted by the assessee and/or the underlying assumption and where he is not satisfied with the same, he can challenge the same and suggest necessary modification/alterations provided the same are based on sound reasoning and rational basis. In this regard our attention was drawn to the decision of ITAT Jaipur Benches in the case of ITO Vs. M/s Universal Polysack (India) Pvt. Ltd. in ITA No.609/JPR/2017 dated 31.01.2018, more particularly to para 16 and 17 of the order as under:-
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As it is clear from the above, Sub-Rule 2 of Rule 11UA talks about method of valuation of unquoted equity shares of the assessee company specifically for the purposes of section 56(viib) of the Act and the same overrides the general provisions of Sub-rule 1 of Rule 11UA. In the instant case, the context in which the valuation of the shares have to be determined is in the context of section 56(viib) of the Act as invoked by the AO and therefore, both the assessee and the Revenue are equally guided by the said provisions and there is no discretion with either of the parties in terms of non-applicability of Sub-Rule 2 of Rule 11UA. Therefore, we are unable to accede to the contention so raised by the Id DR that Sub-Rule 1 of Rule 11UA which provides for determination of fair market value of unquoted equity shares as per book value as per formula so specified is applicable in the instant case. Rather, Sub-Rule 2 of Rule 11UA is more specific for the purposes of determination of fair market value of unquoted equity shares under section 56(viib) and shall be applicable in the instant case. The latter provides an option to the assessee to determine the fair market value of the shares either as per the book value or Discounted Free Cash Flow Method. The exercise of such an option by the assessee is not subject to fulfillment of any specified conditions and it is left to the solediscretion of the assessee as it deems fit to apply. In the instant case, the assessee company has exercised its option to value its shares as per DCF method and we find that the objection of the AO is primarily directed at not adopting the book value of determination of value of shares as against DCF adopted by the assessee company. The exercise of such an option cannot therefore be challenged by the Revenue once the same has been exercised at first place by the assessee.
17. Further, where the Assessing officer is of the opinion that the methodology so adopted by the assessee and/or the underlying assumption while determining the share valuation as per DCF is not acceptable to him, there is no discretion with the Assessing officer to discard the DCF method of valuation and adopt book value method. At the same time, in our view, the Assessing officer is well within his rights to examine the methodology so adopted by the assessee and/or the underlying assumption and where he is not satisfied with the same, he can challenge the same and suggest necessary modification/alterations provided the same are based on sound reasoning and rational basis. In the instant case, we find that certain basis objections have been raised by the Assessing officer in terms of applying the estimated turnover numbers instead of actual numbers and discounting factor, etc which, in our view, has been satisfactorily explained by the assessee company during the appellate proceedings and nothing has been brought on record which can substantially challenge the methodology or the underlying assumption while determining the value of the shares. Further, the fact that the said valuation and the projected financials have been found acceptable bythe Bank while sanctioning the term loan and working capital limits, it cannot be said that the same are purely hypothetical and not based on sound financial understanding and market dynamics of the industry in which the assessee operates.
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10. Our attention was also drawn to the decision of ITAT Jaipur Benches in the case of DCIT Vs. Hem Securities Ltd. in ITA No.1579/JPR/2025 dated 16.09.2026 wherein it was pointed out that the ITAT referred to the decision of the Hon’ble Madras High Court in the case of CIT Vs. VVA Hotels (P.) Ltd. [2020] 429 ITR 69 (Madras) wherein the Hon’ble High Court at para 11 of its order held that the Assessing Officer could not have discarded the Discounted Cash Flow valuation adopted by the assessee without pointing out any flaw and substitute with the Net Asset Value method on the ground that the projected revenue did not match the revenue actually realised in the subsequent years as under:
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“Furthermore, it was pointed out that the Assessing Officer did not point out any flaw in the method of calculation of the value of shares by adopting the DCF method but, out rightly rejected the same, which should not have been done. The Revenue by relying upon the decision of the Division Bench of this Court in CIT vs. M/s. Vaani Estates Pvt. Ltd. [T.C.A. No.224 of 2018 dated 04.04.2019], submitted that the matter may be remanded to the Assessing Officer for fresh consideration to determined the fair market value of the shares in question as required in Explanation to Section 56 of the Act.”
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11. It was pointed out that the ITAT in the said decision also referred to the decision of the Hon’ble Delhi High Court in the case of Pr. Chief CIT Vs. A.H. Multisoft (Pvt.) Ltd. [2025] 305 taxmann.com 347 (Delhi) wherein the Hon’ble Delhi High Court held that the expert report of the merchant banker could not be rejected on frivolous grounds without the AO pointing out any material error in the data used by the Expert. Our attention was drawn to the decision of the Hon’ble Delhi High Court reproduced in the order as under:-
……. “The learned ITAT had found that the disclaimers set out by the expert in the valuation report were general disclaimers and are common in all such reports furnished by experts as they are founded on the data as provided by the entity. The expert report could not be rejected on the ground of such disclaimers without the AO pointing out any material error in the data as used by the expert.”
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12. It was pointed out that the ITAT on reading Rule 11UA(2) of the Rules held that choice for the method of valuation whether NAV or DCF had been left to the option of the assessee and once the assessee has exercised that option and has determined the fair market value in accordance with one of the prescribed methods, it is not open to the AO to discard that method and substitute a valuation of his own. It was pointed out that the ITAT held that the AO is entitled to examine the valuation report and decide the correctness of the report but he cannot reject the report merely because he entertained a different opinion or because the projections adopted in the DCF are based on estimates that may differ from the actual figures. That he could reject the report only by demonstrating that it has been arrived only on a wholly erroneous basis or demonstrating wrong facts. Our attention was drawn to para 10 and 11 of the order as under:-
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10. Section 56(2)(viib) of the Act provides that where a company, not being a company in which the public are substantially interested, receives from a resident any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income tax under the head “Income from other sources”. The Explanation to the said clause provides that the fair market value of the shares shall be the higher of the value determined in accordance with the method that may be prescribed, or the value substantiated by the company to the satisfaction of the Assessing Officer based on the value of its assets. The method so prescribed is contained in Rule 11UA(2) of the Rules, which provides that the fair market value of unquoted equity shares shall be determined, at the option of the assessee, either as per the Net Asset Value method under clause (a) or as per the Discounted Cash Flow method by a merchant banker under clause (b).
11. A plain reading of Rule 11UA(2) of the Rules makes it clear that the choice of the method of valuation, whether the Net Asset Value method or the Discounted Cash Flow method, has been left to the option of the assessee. Once the assessee has exercised that option and has determined the fair market value in accordance with one of the prescribed methods, it is notopen to the AO to discard that method and substitute a valuation of his own. The AO is undoubtedly entitled to examine the valuation report and to test the correctness of the basis adopted therein; but he can reject the valuation only by demonstrating that it has been arrived at on a wholly erroneous basis or on demonstrably wrong facts, and not merely because he entertains a different opinion or because the projections adopted in a Discounted Cash Flow valuation are based on estimates that may differ from the figures actually realised in the later years. …….
13. Ld. Counsel for the assessee therefore contended that it is judicially settled that the option for adopting any of the prescribed methods under Rule 11UA(2) of the Rules, lies with the assessee, whether DCF or NAV ,and the valuation so submitted being that of an expert it cannot be rejected by the AO on frivolous grounds.
14. Thereafter, he pointed out that in the facts of the present case, the grounds for rejecting the valuation submitted on DCF basis with the AO was due to unreasonable figure of estimates/future projections of Revenue. Our attention was drawn to the findings of the AO in this regard at page 18 of his order as under:
……. While considering the valuation of share, the reason for significant increase in the value of equity and preference shares from the rate of Rs 44.28 per share to Rs 70 per share within a span of three months was due to unreasonable figure considered in respect of present value of free cash flow of Rs.542 lakh, Rs.614 lakh and Rs.1,375 lakh inrespect of the period ended 31.03.2024, 31.03.2025 and 31.03.2026 respectively in comparison to the said value in loss of (-)Rs.1,293 lakh and (-)Rs.485 lakh as on 31.03.2022 and 31.03.2023 respectively (loss for the period which has already been passed). The present value of free cash flow for the Terminal Year has been considered at Rs. 9,624 lakh.
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15. It was contended that the AO had no reasonable basis for finding the estimates or projections of Revenue adopted by the expert valuer to be incorrect and therefore pleaded that the order of the Ld. CIT(A) be set aside and the addition made by the AO by adopting the NAV valuation be deleted.
16. The Ld. DR however, heavily relied on the order of the Authorities Below contending that the AO had rightly rejected the DCF value noting the unreasonable assumptions made by the assessee.
17. We have heard the rival contentions and we find merit in the contention of the ld. Counsel for the assessee that the valuation report of the merchant banker submitted by the assessee based on DCF method for the valuation of Equity shares and CCPS issued by the assessee during the year was wrongly rejected by the AO and the NAV method adopted by him. There is no dispute with regard to the fact that as per the Income Tax Rules 1962 governing the valuation of shares for the purposes of Section 56(2)(viib) of the Act, i.e Rule 11UA ,the option rest with the assessee to obtain the valuation report from merchant banker either by adopting the DCF method or NAV method. It is also judicially settled and is not disputed by either sides that the AO cannot reject the option exercised by the assessee until some grave errors are pointed out therein.
18. In fact, the Hon’ble Delhi High Court in the case of A.H. Multisoft (Supra) has categorically noted that the AO has to point out material errors in the data used by the assessee to reject the valuation of an expert (merchant banker) submitted. The Hon’ble Madras High Court in the case of V.V. Hotels Pvt. Ltd. (Supra) has reiterated the same .
19. In the facts of the present case, the basis for rejecting DCF valuation submitted by the assessee is that the assessee has shown unreasonable projections for the future for valuation purposes when it was returning huge loses during the impugned year. The conclusion of the AO that the projections of Revenue are unreasonable is merely based on figures of Revenue presented in the report. There is no inquiry or investigation done by the AO from the assessee on the projections so adopted. There is no mention in the order of the justification if any given in the report of the merchant valuer, for the adoption of estimates. It is a mere passing remark by the AO and which we hold is not sufficient to reject the valuation report submitted by the assessee from a merchant banker adopting the DCF method of valuation.
20. In the light of the same, we hold that the Ld. CIT(A) was not justified in upholding the order of the AO adopting the fair market value of shares and making addition of Rs.18,57,73,482/- to the income of the assessee u/s 56(2)(viib) of the Act. The addition made therefore of Rs.18,57,73,482/- is directed to be deleted.
21. In effect, the appeal of the assessee is allowed.
Order pronounced in the Open Court on 13.10.2026
