Payswiff Technologies Private Limited Vs DCIT (ITAT Hyderabad)
DCF Is Your Choice—But the Valuation Still Needs Evidence
The dispute: Share premium meets the valuation test
The assessee company, engaged in software-related technical and consultancy services and the digital payments ecosystem, filed its return for AY 2021-22, declaring a loss of ₹12,94,39,906.
During scrutiny, the Assessing Officer noticed that the company had issued equity shares at two different prices. It allotted 36,842 shares at ₹950 per share, receiving ₹3,49,99,900, and another 1,06,348 shares at ₹1,348 per share, receiving ₹14,33,57,104.
The company maintained that these prices were supported by valuation under the Discounted Cash Flow method, a permissible method under Rule 11UA(2). The Assessing Officer, however, rejected the valuation and adopted the Net Asset Value method, determining the value at ₹149.69 per share. This resulted in an addition of ₹15,69,22,893 under section 56(2)(viib).
Why the Assessing Officer rejected the valuation
The Assessing Officer observed that the company had low operational cash flows and operating revenue. He considered the DCF valuation substantially higher than the value determined under the NAV method.
More significantly, the company had not furnished an independent valuation report before the Assessing Officer or adequate supporting analysis to substantiate its projections. Consequently, the Assessing Officer treated the difference between the issue prices and his NAV valuation as taxable income.
The CIT(A) sustained the addition, questioning the supporting data and assumptions underlying the projections. Reference was also made to losses and negative cash flows in subsequent years, which, according to the appellate authority, did not support the projected financial performance.
The company’s argument: The Department cannot choose our method
Before the Tribunal, the company argued that the option to select the valuation method belonged to the assessee. Once DCF had been chosen, the Assessing Officer could not simply replace it with NAV.
The company explained that it was in a growth phase and that the projections reflected reasonable management estimates. A business with present losses could still have substantial value based on its expected future cash flows.
It also contended that actual results differing from projections did not, by themselves, justify rejection of DCF. Reliance was placed on decisions including Vodafone M-Pesa Ltd., Milk Mantra Dairy Pvt. Ltd., Rameshwaram Strong Glass Pvt. Ltd., Cinestaan Entertainment and VVA Hotels Pvt. Ltd.
These authorities were cited in support of the assessee’s choice of method and the need to identify defects in the valuation rather than discard it merely because later performance differed.
The missing evidence became central
The company filed an application under Rule 29 of the Income-tax (Appellate Tribunal) Rules, seeking admission of two valuation reports as additional evidence. It submitted that these reports were crucial to determining the fair market value of the shares.
The Revenue accepted that the choice of method rested with the assessee but stressed that the company had to substantiate the valuation with the prescribed report and relevant evidence. Alternatively, it requested that the matter be remanded for examination of the fresh reports.
The Tribunal recorded that no valuation report had been filed before the Assessing Officer. It also noted the company’s claim that a report had been submitted before the CIT(A), but that the appellate authority had not considered it.
The Tribunal’s balance: Choice comes with responsibility
The Tribunal agreed that DCF was a permissible valuation method and that the assessee had the option to choose it. It referred to the ICAI Technical Guide on Share Valuation, recognising DCF as a widely accepted technique based on expected future cash flows.
However, it emphasised that selecting DCF did not complete the exercise. The assessee had to justify the valuation through supporting evidence, cash-flow assumptions and an independent valuation report.
Given the absence of adequate material before the lower authorities, the Tribunal found that the company could not secure acceptance of its valuation merely by relying on the legal right to choose DCF. The cited judgments did not overcome that evidentiary deficiency.
The result: Fresh examination, not outright deletion
The Tribunal admitted the two valuation reports because they were crucial to deciding the fair market value. It also observed that the Assessing Officer had abruptly switched from DCF to NAV, although a change required a demonstrated basis, such as an incorrect method or errors in the valuation report.
Accordingly, the CIT(A)’s order was set aside and the issue restored to the Assessing Officer. He was directed to reconsider the addition in light of the DCF reports and examine supporting evidence, including justification of operational cash flows and income of subsequent years.
The appeal was allowed for statistical purposes. The ₹15.69 crore addition was not finally deleted.
Author’s comments: A valuation option is not a valuation exemption
This decision makes the practical distinction clear: the assessee chooses the permissible method, but must support the resulting value. A DCF report should explain the commercial basis of projections and assumptions sufficiently to permit meaningful examination.
At the same time, the Department cannot treat current losses or a lower NAV as an automatic answer to DCF. The scrutiny must address the valuation actually adopted and its supporting material. Here, both the evidentiary gap and the abrupt substitution of methods required a fresh assessment.
Cases Discussed
- Vodafone M-Pesa Limited Vs. PCIT, (2018) 92 taxmann.com 73 (Bombay High Court) — relied upon by the assessee for the proposition that the option to choose the prescribed valuation method rests with the assessee and the Assessing Officer cannot substitute another method merely because he disagrees with the valuation.
- Milk Mantra Dairy Private Limited Vs. DCIT, (2022) 140 taxmann.com 163 (ITAT Kolkata) — relied upon by the assessee in support of its contention regarding the permissible choice of DCF valuation and the Assessing Officer’s authority to examine such valuation.
- Rameshwaram Strong Glass Private Limited Vs. ITO, (2018) 96 taxmann.com 542 (ITAT Jaipur) — relied upon by the assessee for the proposition that where Rule 11UA permits the assessee to choose a valuation method, the Assessing Officer cannot force adoption of another prescribed method.
- PCIT Vs. Cinestaan Entertainment Pvt. Ltd., (2021) 433 ITR 82 (Delhi High Court) — relied upon for the proposition that DCF valuation based on projections cannot be rejected merely by comparing projected performance with subsequent actual results.
- CIT Vs. VVA Hotels Private Limited, (2020) 122 taxmann.com 106 (Madras High Court) — relied upon for the proposition that a prescribed valuation method adopted by the assessee cannot be rejected without identifying a defect or flaw warranting such rejection.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
This appeal filed by the assessee is directed against the order of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [in short “NFAC”], Delhi, dated 28.11.2025, pertaining to the assessment year 2021-22.
2. The grounds raised by the assessee company read as under :
“1. Ground 1 Addition on account of difference in determination of Fair Market Value of shares:
1.1 On the facts, and in the circumstances of the case, and in law, the Hon’ble CIT(A) / learned AO have erred in not appropriately applying the provisions of section 56(2)(viib) of the Act read with Rule 11UA of the Income Tax Rules in relation to issue of equity shares by the Appellant in the captioned year.
1.2 On the facts, and in the circumstances of the case, and in law, the Hon’ble CIT(A) has misread the order passed by the learned AO and also failed to pass a speaking order/ giving observations while upholding the addition made by the learned AO.
1.3 On the facts, and in the circumstances of the case, and in law, the Hon’ble CIT(A)/ the learned AO has erred in not appreciating the background and the industry of the Appellant and the basis of value determined as per the DCF method. In fact, the DCF valuation has been rejected merely stating that since the Appellant has very less operational cash flows/ revenues.
1.4. On the facts, and in the circumstances of the case, and in law, the Hon’ble CIT(A) / learned AO failed to apply the principle laid down by various Courts and Tribunals that the choice so conferred on the Appellant is absolute and, as such, once a particular method has been chosen by the Appellant the learned AO has no mandate to change such method and to impose the method of his own choice.
1.5. On the facts, and in the circumstances of the case, and in law, the Hon’ble CIT(A) / learned AO failed to consider the principle laid down by various Courts and Hon’ble Tribunals that the DCF method cannot be rejected solely because the actual performance does not match the projections.
In view of the above, the Appellant prays that the learned AO be directed to delete the addition amounting to INR 15,69,22,893 as the same is unwarranted and ought to be deleted.
The Appellant craves leave to add to, or alter, by deletion, substitution, modification or otherwise, the above ground of appeal, either before or during the hearing of the appeal.”
3. The brief facts of the case are that the assessee, “Payswiff Technologies Private Limited”, is a company engaged in the business of providing technical and consultancy services in the field of software and providing a seamless payment experience to build a digital payment ecosystem globally. The assessee filed its return of income for the assessment year 2021-22 on 07.01.2022, declaring a total loss of Rs. 12,94,39,906/-. The case was selected for scrutiny and, during the course of assessment proceedings, the A.O. noticed that, during the year under consideration, the assessee company had issued 1,43,190 equity shares to two different shareholders at different rates and, therefore, called upon the assessee to furnish details of the persons who had paid the share premium, along with documentary evidence to establish the genuineness of the transactions and to justify the fair market value of the shares, along with the relevant valuation report, if any. In response to the show-cause notice, the assessee, vide letter dated 16.12.2022, submitted that, it had issued 36,842 equity shares at the rate of Rs. 950/- per share to Sesireddy Investment Advisors Private Limited and received an amount of Rs. 3,49,99,900/-. Further, the assessee had also issued 1,06,348 shares at the rate of Rs. 1,348/- per share to various shareholders and received an amount of Rs. 14,33,57,104/-. The assessee submitted that, the shares had been issued at a premium and that the fair market value of the shares had been determined by an independent valuer under the discounted cash flow method, as per Rule 11UA(2) of the Income-tax Rules, 1962. The assessee further submitted that, since it had justified the fair market value of the shares by an independent valuation report under the discounted cash flow method, the question of determining the fair market value under the net asset value method does not arise.
4. The A.O., after considering the relevant submissions of the assessee and also taking note of the relevant details of allotment of shares with premium to different shareholders at different rates, observed that, although the assessee claimed to have determined the fair market value of the shares by using the discounted cash flow method, having regard to the operational results of the assessee, the assessee had very low operational cash flows and operating revenue, and the fair market value determined under the DCF method was much higher than the net asset value determined under the NAV method. Further, the assessee had not submitted any independent valuation report or sound analysis of projections to substantiate the DCF valuation. Therefore, the A.O. rejected the explanation of the assessee and determined the fair market value of the shares by using the net asset value method and worked out the fair market value of the equity shares at Rs. 149.69/- per share, as against the issue prices of Rs. 950/- and Rs. 1,348/- per share, and thereby made an addition of Rs. 15,69,22,893/- u/s 56(2)(viib) of the Income-tax Act, 1961.
5. Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee challenged the addition made by the A.O. towards consideration received for issuance of equity shares u/s 56(2)(viib) of the Act, and argued that, when the assessee had determined the fair market value of the shares under the DCF method, there was no provision under the law for the A.O. to change the method and adopt the NAV method. The assessee further submitted that, as per Rule 11UA(2)(b), the option to choose the method of valuation was with the assessee and, therefore, the A.O. could not change the method and determine the fair market value so as to make an addition u/s 56(2)(viib) of the Income-tax Act, 1961. The assessee also submitted that it had justified the fair market value determined under the DCF method on the basis of its projections and valuation.
6. The Ld. CIT(A), after considering the relevant submissions of the assessee and also taking note of various facts, observed that the fair market value of equity shares determined by the assessee company at Rs. 950/- and Rs. 1,348/- per share under the DCF method was not acceptable, as it was based on the assessee’s future projections, which were without any authenticated data and supported assumptions. Further, the assessee had not justified the fair market value of the shares by filing any independent valuation report. Although the assessee had filed a valuation report from an independent valuer for justifying the value of the shares, going by the empirical data, including the operational cost and income of the assessee for the subsequent period, it was noticed that the assessee had incurred losses for all the years and had negative cash flows, which did not support the projections considered by the assessee for the purpose of determination of the fair market value of the shares. Therefore, the Ld. CIT(A) rejected the explanation of the assessee and sustained the addition made by the A.O. towards consideration received for issuance of shares u/s 56(2)(viib) of the Income-tax Act, 1961. The Ld. CIT(A) also rejected the arguments of the assessee on the issue of computation of book profit u/s 115JB of the Act, by making an addition towards consideration received for issuance of equity shares.
7. Aggrieved by the order of the Ld. CIT(A), the assessee is now in appeal before the Tribunal.
8. The learned counsel for the assessee, Shri Ajit Jain, C.A., submitted that, the Ld. CIT(A) erred in upholding the additions made by the A.O. towards consideration received for issuance of equity shares u/s 56(2)(viib) of the Act, without appreciating the fact that the A.O. cannot disregard the fair market value determined under the DCF method by an independent valuer. The learned counsel for the assessee further submitted that, neither the A.O. nor the Ld. CIT(A) had made out any case of defect in the valuation report filed by the assessee. Merely stating that a loss-making company cannot adopt the DCF method is unjustifiable, arbitrary and unreasonable in nature. The assessee’s future projections were based on reasonable and justifiable management estimates and, given that the assessee was in a growth phase during the year, the independent valuer appropriately adopted the DCF method and valued the shares on the basis of these projected financials. The learned counsel for the assessee, further referring to the Technical Guide on Share Valuation, submitted that, it recognizes the DCF method as the most commonly used and widely accepted valuation technique, as it is based on expected future cash flows, reflects business-specific performance rather than short-term or non-economic factors, and is not affected by accounting conventions such as depreciation. Further, a combined reading of Section 56(2)(viib) of the Act, and Rule 11UA makes it very clear that the assessee has the option to choose either the net asset value method or the DCF method for determining fair market value, and this principle has been upheld by various judicial authorities, including the decision of the Hon’ble Bombay High Court in the case of Vodafone M-Pesa Limited Vs. PCIT, reported in (2018) 92 taxmann.com 73, the Hon’ble Kolkata Tribunal in the case of Milk Mantra Dairy Private Limited Vs. DCIT, reported in (2022) 140 taxmann.com 163, and the Hon’ble Jaipur Tribunal in the case of Rameshwaram Strong Glass Private Limited Vs. ITO, reported in (2018) 96 taxmann.com 542.
9. The learned counsel for the assessee, further referring to the petition filed by the assessee under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963, for admission of additional evidence, submitted that, the assessee had obtained two valuation reports from an independent valuer, and the same were not submitted before the lower authorities. The additional evidence filed by the assessee was crucial, as it goes to the root of the matter and was germane to dispensing justice. Therefore, the learned counsel submitted that, the additional evidence filed by the assessee be admitted and the issue be decided as per law. The learned counsel for the assessee, further referring to the reasons given by the A.O. and the Ld. CIT(A) for rejection of the DCF method, submitted that, the DCF method cannot be rejected solely on the ground that actual performance differs from projections, as it is irrational and without basis, and that allowing the Revenue to rely on the NAV method would render Rule 11UA(2)(b) nugatory and purposeless. He further submitted that, the DCF method cannot be rejected unless the A.O. points out errors in the valuation report submitted by the assessee, as held by various High Courts, including the decision of the Hon’ble Delhi High Court in the case of Cinestaan Entertainment, reported in (2021) 433 ITR 82, and the decision of the Hon’ble Madras High Court in the case of CIT Vs. VVA Hotels Private Limited, reported in (2020) 122 taxmann.com 106. Therefore, he submitted that, the A.O. erred in making an addition towards issuance of shares by changing the method for determination of fair market value of shares from DCF to NAV, and the Ld. CIT(A), without appreciating the relevant facts, simply sustained the addition made by the A.O. Therefore, he submitted that the addition made by the A.O. should be deleted.
10. The Ld. CIT DR, Ms. Seema Meena, on the other hand, supporting the orders of the A.O. and the Ld. CIT(A), submitted that, there is no dispute with regard to the fact that the option is with the assessee to choose a particular method for determination of fair market value of shares as per Rule 11UA of the Income-tax Rules, 1962. However, fact remains that it is for the assessee to justify the method followed for determination of fair market value by filing relevant details. In the present case, although the assessee claims to have followed the DCF method for determination of fair market value of shares, but it has not substantiated the fair market value by filing relevant evidence and an independent valuation report from the valuer, as required under Rule 11UA of the Rules, 1962. The A.O. and the Ld. CIT(A), after considering the relevant facts, have rightly rejected the method followed by the assessee and adopted the net asset value method for determination of fair market value, which resulted in the valuation of shares being much lower than the value determined by the assessee for issuance of shares to different shareholders. Since there is a difference between the fair market value of shares as determined by the assessee and the A.O., the difference amount has been rightly assessed as income of the assessee u/s 56(2)(viib). Therefore, she submitted that, the order of the Ld. CIT(A) should be upheld or, in the alternative, since the assessee has filed fresh additional evidence in the form of further valuation reports from an independent valuer for justifying the fair market value of the shares, the matter may be remanded to the file of the A.O. to verify the issue under consideration as per law.
11. We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. There is no dispute with regard to the fact that the assessee has issued 1,40,190 equity shares to two different shareholders at two different rates. The assessee had issued 36,842 equity shares at the rate of Rs. 950/- per share to Sasi Reddy Investment Advisors Private Limited on 11.06.2020. The assessee had also issued 1,06,348 shares at the rate of Rs. 1,348/- per share to various shareholders on 31.03.2021. The assessee has determined the fair market value of the shares under the DCF method and claimed that the method followed by the assessee is one of the permissible methods as per Rule 11UA(2) of the Income-tax Rules, 1962, and, therefore, the A.O. does not have any authority to change the method followed by the assessee unless, the A.O. makes out a case that the method followed by the assessee is erroneous, which is not supported by relevant details. The A.O. rejected the DCF method followed by the assessee on the ground that the assessee has not submitted relevant evidence to substantiate the future operational cash flow/income and further has not filed any independent valuation report to justify the fair market value of the shares as on the date of issuance of shares. Therefore, the A.O. has followed the NAV method in terms of Rule 11UA of the Income-tax Rules, 1962, and determined the fair market value of the shares at Rs. 149.69/- per share. Since there was a difference between the fair market value of the shares determined by the assessee and the fair market value determined by the A.O., the difference amount has been assessed as income of the assessee under the provisions of Section 56(2)(viib) of the Income-tax Act, 1961.
12. The assessee has challenged the additions made by the A.O. u/s 56(2)(viib) of the Act, on multiple grounds, including on the ground of the authority of the A.O. to change the method of valuation. The assessee claimed that, as per Rule 11UA(2)(b) of the Income-tax Rules, 1962, the option is with the assessee to choose a particular method, whether it is DCF or NAV, and once the assessee has followed a particular method, then there is no scope for the A.O. to change the method, unless the A.O. makes out a case that the method adopted by the assessee is erroneous and is not substantiated. In our considered view, there is no dispute with the legal position as per Rule 11UA(2)(b) of the Income-tax Rules, 1962, that the option is with the assessee to choose a particular method for determination of the fair market value of shares. Further, it is also not in dispute that the DCF method is one of the permissible methods for determination of the fair market value of the shares, and this has been reiterated by the Institute of Chartered Accountants of India in the Technical Guide on Share Valuation, wherein it has been clearly stated that the DCF method is the most commonly used and widely accepted valuation technique, as it is based on expected future cash flows and reflects business-specific performance rather than short-term or non-economic factors. But fact remains that, it is for the assessee to justify the method followed for determination of the fair market value of shares by filing relevant details, including justification of future operational cash flow/income by filing supporting evidence and also independent valuation report from an independent valuer, as required under Rule 11UA.
13. In the present case, it is an admitted fact that, the assessee has not filed any valuation report before the A.O. for justifying the fair market value of shares under the DCF method. Further, the assessee claims to have submitted a valuation report before the Ld. CIT(A), but fact remains that the Ld. CIT(A) has not considered the valuation report submitted by the assessee. The assessee has filed additional evidence in the form of two valuation reports from an independent valuer for justifying the fair market value of the shares determined on the date of issuance of shares. Since the assessee has not justified the fair market value of shares by filing relevant details, in our considered view, there is no error in the reasons given by the A.O. and upheld by the Ld. CIT(A) to reject the fair market value of the shares determined by the assessee.
14. Insofar as various case laws relied upon by the assessee in support of its contention, including on the issue of the authority of the A.O. to change the method, in our considered view, as we have already stated in the earlier part of this order, the option is with the assessee to choose a particular method for valuation of shares, but fact remains that the method followed by the assessee should be justified by filing relevant evidence, including a valuation report, if any, from an independent valuer. Since the assessee has not justified the fair market value of shares by filing a relevant valuation report, in our considered view, the arguments canvassed by the learned counsel for the assessee in light of those case laws are devoid of merit and cannot be accepted. Therefore, we reject the case laws relied upon by the learned counsel for the assessee.
15. Having said so, let us come back, whether the assessee has fully justified the determination of fair market value by filing relevant details. Admittedly, the assessee has not submitted any valuation report or other particulars in support of its claim of fair market value of the shares determined on the date of issuance of shares at Rs. 950/- per share and Rs. 1,348/- per share. The assessee has now filed two valuation reports from an independent valuer for justification of the fair market value of the shares on the date of issuance of shares and claimed that these evidences were filed, which are very crucial and go to the root of the matter for determination of the fair market value of shares. Since the assessee has filed valuation reports for the first time before the Tribunal by way of additional evidence and further has not submitted any details to justify the fair market value of the shares issued to two different shareholders, in our considered view, the additional evidence filed by the assessee should be admitted because it is very crucial to determine the fair market value of the shares determined by the assessee for the purpose of issuance of shares. Therefore, we admit the additional evidence filed by the assessee and remand the issue to the file of the A.O. to reconsider the issue of additions made towards the differential amount of the consideration received for allotment of equity shares u/s 56(2)(viib), because the A.O. had also abruptly changed the method from the DCF method to NAV, even though there is no provision under the law to change the method unless the A.O. makes out a case that the method followed by the assessee is incorrect or there are errors in the valuation reports submitted by the assessee. Thus, we set aside the order of the Ld. CIT(A) and restore the issue back to the file of the A.O. and direct the A.O. to reconsider the issue in light of the additional evidence filed by the assessee in the form of valuation reports submitted by an independent valuer under the DCF method to justify the fair market value of the shares as on the date of issuance of shares. The A.O. is also directed to examine the relevant details in support of determination of fair market value of the shares, including relevant evidence for justification of operational cash flow/income of subsequent years.
16. In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open Court on 30th September, 2026.
