DCIT Vs Hem Securities Limited (ITAT Jaipur)
Summary: The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT), comprising Shri Kuldip Singh, Judicial Member, and Shri Prakash, Accountant Member, dismissed the Revenue’s appeal against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, dated 10 September 2025, in the case of Hem Securities Limited for Assessment Year 2018-19. The dispute concerned an addition of ₹3,37,80,000 under Section 56(2)(viib) of the Income Tax Act, 1961. The assessee had issued 15,00,000 equity shares having a face value of ₹10 each at a premium of ₹75 per share, aggregating to ₹12,75,00,000, to four existing directors and shareholders. The issue price of ₹85 per share was supported by two valuation reports obtained from independent Chartered Accountants. One report determined the fair market value at ₹85.37 per share using the Net Asset Value (NAV) method, while the other determined it at ₹85 per share using the Discounted Cash Flow (DCF) method.
The original scrutiny assessment under Section 143(3) had accepted the returned income of ₹7,08,34,920. Subsequently, the Assessing Officer reopened the assessment by issuing a notice under Section 148 dated 30 March 2024. The Assessing Officer computed the fair market value of the shares at ₹62.48 per share under Rule 11UA and treated the difference of ₹22.52 per share as taxable excess share premium, resulting in an addition of ₹3,37,80,000. The Assessing Officer rejected the valuation reports because the DCF projections were based on future profits and cash flows, the valuers had relied upon management estimates without independent verification, and the financial projections had not been audited. The reassessment was completed at ₹10,46,14,920. On appeal, the CIT(A) upheld the validity of the reassessment proceedings but deleted the addition on merits, holding that the assessee had substantiated its share issue price through recognised valuation methods and that the Assessing Officer had not demonstrated any material defect in the reports.
Before the Tribunal, the Revenue contended that the DCF valuation lacked an independently verified basis and that the formula-based valuation of ₹62.48 per share should prevail. The assessee argued that Rule 11UA(2) permits the assessee to choose between the NAV and DCF methods and that the Assessing Officer could not replace the selected method merely because he preferred another valuation. The Tribunal accepted the assessee’s position, observing that the Assessing Officer may examine the valuation report and test the correctness of its underlying assumptions, but rejection requires demonstrable errors in the methodology or material inaccuracies in the data. The Tribunal relied upon Rameshwaram Strong Glass (P.) Ltd. v. ITO and Cinestaan Entertainment (P.) Ltd. v. ITO, which recognised that DCF valuations necessarily depend upon projections and cannot be rejected simply because subsequent financial performance differs from the original estimates.
The Tribunal further relied upon the Madras High Court’s decision in CIT v. VVA Hotels (P.) Ltd. and the Delhi High Court’s decision in Pr. Chief CIT v. A.H. Multisoft (P.) Ltd.. These decisions established that an expert valuation report cannot be rejected merely because it contains standard disclaimers or relies upon management-provided information, unless the Assessing Officer identifies a material error. In the present case, the DCF report disclosed a cost of equity of 18.14%, a terminal growth rate of 5%, and year-wise projected cash flows. The Tribunal found that the Assessing Officer had neither identified specific inaccuracies nor produced a valid alternative expert valuation. It also considered significant that the shares had been allotted only to existing promoters and directors whose identity, creditworthiness and transaction genuineness were undisputed. Holding that the Revenue had failed to justify rejection of the prescribed valuation methods, the Tribunal upheld deletion of the entire addition of ₹3,37,80,000 and dismissed the Revenue’s appeal.
Cases Discussed
1. Rameshwaram Strong Glass (P.) Ltd. v. ITO (ITAT Jaipur); [2018] 172 ITD 571. The Tribunal relied upon this decision for the principle that the assessee’s choice of the DCF method under Rule 11UA(2)(b) cannot be replaced by the NAV method merely because projected results differ from actual subsequent performance. Related TaxGuru discussion.
2. Cinestaan Entertainment (P.) Ltd. v. ITO (ITAT Delhi); [2019] 177 ITD 809. The Tribunal relied upon this decision, subsequently affirmed by the Delhi High Court, concerning the assessee’s right to select a prescribed valuation method and the prohibition against arbitrary substitution of the DCF valuation.
3. CIT v. VVA Hotels (P.) Ltd. (Madras High Court); [2020] 429 ITR 69. The Tribunal relied upon the High Court’s finding that the Assessing Officer could not reject a DCF valuation without identifying a flaw in its calculation methodology.
4. Pr. Chief CIT v. A.H. Multisoft (P.) Ltd. (Delhi High Court); [2025] 305 Taxman 347. The Tribunal relied upon this decision for the principle that standard disclaimers in expert valuation reports and reliance on management data are not sufficient grounds for rejection without demonstrating a material error.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
1. This appeal by the Revenue is directed against the order of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “the learned CIT(A)”] dated 10.09.2025 arising out of the assessment order dated 06.03.2025 passed by the Assessing Officer (hereinafter referred to as “the AO”) under section 147 read with section 144B of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
2. The grounds of appeal raised by the Revenue before us in the memorandum of appeal in Form No. 36 read as under:
“1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in deleting the addition of Rs. 3,37,80,000/-, ignoring the facts that the valuation is based on the future projections of profit after tax, cash flows etc. for upcoming five years but along with the valuation report, no basis/justification/rationale to adopt these figures has been given?
2. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in deleting the addition of Rs3,37,80,000/-, ignoring the facts that the valuer has relied on the details, data and estimates provided by the management and no independent verification has been made so as to verify its accuracy genuineness and reasonableness?
3. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in deleting the addition ignoring the facts that the financial projections given by the assessee has not been verified/audited by the valuer?
4. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in deleting the addition ignoring the facts that as per balance sheet for the financial year ending 31.03.2016, the FMV of shares as determined under rule 11 UA, comes to 62.48 per share. The formula given in rule 11 UA is prepared looking to various aspects of activities carried out by the companies?”
3. Briefly stated, the facts of the case are that the assessee, a company in which the public are not substantially interested, filed its return of income for the year under consideration on 18.08.2018 declaring a total income of Rs. 7,08,34,920. The return was processed and the case was taken up for scrutiny, and the assessment was completed under section 143(3) of the Act on 27.02.2021 accepting the returned income.
4. During the previous year relevant to the assessment year under consideration, the assessee had issued 15,00,000 equity shares of the face value of Rs. 10 each at a premium of Rs. 75 per share, that is, at Rs. 85 per share, to four allottees who were its existing directors and shareholders, aggregating to a consideration of Rs. 12,75,00,000. The issue price of Rs. 85 per share was supported by two valuation reports obtained from independent Chartered Accountants, one adopting the Net Asset Value method at Rs. 85.37 per share and the other adopting the Discounted Cash Flow method at Rs. 85 per share.
5. The assessment was thereafter reopened and a notice under section 148 of the Act dated 30.03.2024 was issued to the assessee. The AO took the view that, as per the method prescribed under Rule 11UA of the Income Tax Rules, 1962, the fair market value of the shares worked out to Rs. 62.48 per share, and that the premium charged in excess thereof, namely Rs. 22.52 per share on 15,00,000 shares aggregating to Rs. 3,37,80,000, was chargeable to tax under section 56(2)(viib) of the Act. Rejecting both the valuation reports filed by the assessee as unreliable, the AO completed the reassessment under section 147 read with section 144B of the Act on 06.03.2025 at a total income of Rs. 10,46,14,920, after making an addition of Rs. 3,37,80,000 under section 56(2)(viib) of the Act.
6. Aggrieved by the said addition, the assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A), while rejecting the assessee’s challenge to the validity of the reopening, deleted the addition of Rs. 3,37,80,000 on merits. The operative finding of the learned CIT(A) is reproduced as under:
“Having addressed the question of validity, the next issue is whether the addition u/s 56(2)(viib) is sustainable. On this aspect, for reasons already discussed, I find that the appellant has duly substantiated the share issue price with expert valuation reports, both of which adopted prescribed methods and corroborated the price of Rs. 85 per share. The Assessing Officer’s computation at Rs. 62.48 per share is strictly by formula, but the law clearly permits acceptance of substantiated valuation by the appellant if higher, as is held by judicial precedent relied upon by the appellant in its replies during the course of appellants proceedings. In this case, the substantiated value is higher and has not been shown to be invalid. Therefore, the addition made under section 56(2)(viib) cannot be sustained.
In conclusion, while the objection regarding the validity of reassessment proceedings is dismissed, the addition of Rs. 3,37,80,000/- made u/s 56(2)(viib) is directed to be deleted. The valuation adopted by the appellant is accepted as valid and justified.
6.2 In the result, the appeal is partly allowed.”
7. The learned Departmental Representative (hereinafter referred to as “the learned DR”) supported the order of the AO and reiterated the grounds of appeal. It was contended that the valuation reports filed by the assessee were rightly rejected, inasmuch as the valuation rested on future projections of profit and cash flows for which no basis or rationale had been furnished, the valuer had relied only on the data and estimates provided by the management without any independent verification, and the projections had not been audited. It was submitted that, on the basis of the balance sheet and the method prescribed under Rule 11UA of the Rules, the fair market value of the shares came to Rs. 62.48 per share, and that the learned CIT(A) was not justified in deleting the addition.
8. The learned Authorised Representative (hereinafter referred to as “the learned AR”) supported the order of the learned CIT(A). It was submitted that under section 56(2)(viib) of the Act read with Rule 11UA(2) of the Rules, the option to determine the fair market value of unquoted equity shares, whether by the Net Asset Value method or by the Discounted Cash Flow method, lies with the assessee, and that the AO is not empowered to discard the method adopted by the assessee and substitute a valuation of his own. It was submitted that the assessee had duly substantiated the issue price of Rs. 85 per share by two valuation reports prepared by independent Chartered Accountants adopting recognised methods, that the AO had not pointed out any specific error in the valuation, and that the shares had been allotted only to the existing directors and shareholders whose identity and the genuineness of the transaction were never in doubt.
9. We have heard the rival contentions and perused the material available on record. The only issue that arises for our consideration in this appeal is whether the learned CIT(A) was justified in deleting the addition of Rs. 3,37,80,000 made by the AO under section 56(2)(viib) of the Act.
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 not open 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.
12. This position is well settled. The Coordinate Bench of this Tribunal at Jaipur, in Rameshwaram Strong Glass (P.) Ltd. v. ITO [2018] 172 ITD 571 (Jaipur), has held that where the assessee has exercised its option to adopt the Discounted Cash Flow method under Rule 11UA(2)(b), the AO cannot compel the assessee to adopt the Net Asset Value method, and that the rejection of a Discounted Cash Flow valuation by comparing the projections with the figures subsequently achieved is contrary to the very contemplation of the said Rule. To similar effect, in Cinestaan Entertainment (P.) Ltd. v. ITO [2019] 177 ITD 809 (Delhi), which has since been affirmed by the Hon’ble Delhi High Court, it has been held that where one of the prescribed methods has been adopted by the assessee, the AO has to accept the same, and that there is no provision under the Act or the Rules enabling the AO to adopt his own valuation under the Discounted Cash Flow method; a recognised method of valuation cannot be discarded unless the Revenue is able to show that the assessee adopted a demonstrably wrong approach, or that the valuation was made on a wholly erroneous basis.
13. The view so taken by the Coordinate Bench is in accord with the decisions of the Hon’ble High Courts which are directly on the point. In CIT v. VVA Hotels (P.) Ltd. [2020] 429 ITR 69 (Madras), where the Assessing Officer had discarded the Discounted Cash Flow valuation adopted by the assessee and had substituted the Net Asset Value method on the ground that the projected revenue did not match the revenue actually realised in the subsequent years, the Hon’ble Madras High Court, at paragraph 11 of its order, observed as under:
“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.”
14. To the same effect is the recent decision of the Hon’ble Delhi High Court in Pr. Chief CIT v. A.H. Multisoft (P.) Ltd. [2025] 305 Taxman 347 (Delhi), where the Assessing Officer had rejected the valuation report for the reason that it contained certain disclaimers and was founded on the data furnished by the assessee. Rejecting that approach, the Hon’ble Delhi High Court, at paragraph 26 of its order, held 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.”
15. When the facts of the present case are examined in the light of the settled position noted above, we find no infirmity in the order of the learned CIT(A). The assessee had exercised its option under Rule 11UA(2) of the Rules and had substantiated the issue price of Rs. 85 per share by obtaining two valuation reports from independent Chartered Accountants, one under the Net Asset Value method and the other under the Discounted Cash Flow method. The objections raised by the AO, namely that the valuation rests on future projections, that the valuer relied on the data and estimates furnished by the management, and that the projections were not independently verified or audited, are objections which go to the very nature of a Discounted Cash Flow valuation, which is necessarily founded on projections of future performance based on the inputs of the management. The AO has not brought on record any specific error in the data adopted or in the methodology followed by the valuers, nor has he placed on record any alternative valuation of the fair market value of the shares determined by a merchant banker or an accountant, as contemplated by Rule 11UA(2) of the Rules.
In substituting the value of Rs. 62.48 per share arrived at under the formula, the AO has, in effect, compelled the assessee to accept the Net Asset Value method as computed by him, which, for the reasons already discussed, is impermissible. These are precisely the objections which the Hon’ble High Courts, in VVA Hotels (P.) Ltd. (supra) and A.H. Multisoft (P.) Ltd. (supra), have held to be insufficient, by themselves, to justify the rejection of a valuation arrived at under a method prescribed by Rule 11UA(2) of the Rules.
It is, in any event, not factually correct that the valuation was adopted without any basis, for the report determining the fair market value under the Discounted Cash Flow method itself sets out the build up of the discount rate adopted, being a cost of equity of 18.14 per cent, and records the basis for the terminal growth rate of 5 per cent applied by the valuer, apart from setting out the year wise projected cash flows in the annexure thereto. Equally, the disclaimers on which the AO placed reliance, namely that the projections were furnished by the management and were not audited by the valuer, are general disclaimers of the kind ordinarily found in such reports, which, for the reasons already noted, cannot by themselves justify the rejection of the report.
16. It is also relevant that the shares in question were allotted only to the existing directors and shareholders of the assessee company, whose identity, creditworthiness and the genuineness of the transaction were never doubted by the AO. Section 56(2)(viib) of the Act is, in its essence, an anti abuse provision intended to bring to tax amounts received by a closely held company by way of unaccounted money in the guise of an inflated share premium. No such element is present in the case before us, the funds having been infused by the existing promoters and directors for the ongoing business of the company.
17. In the light of the above discussion, we are of the considered view that the learned CIT(A) was justified in deleting the addition of Rs. 3,37,80,000 made under section 56(2)(viib) of the Act, and we find no reason to interfere with the said finding. Accordingly, the grounds of appeal raised by the Revenue are dismissed.
18. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 16.09.2026
