ITAT clarifies on use of DCF vs NAV valuation methods for share issuance

 The Delhi Bench of the Income Tax Appellate Tribunal (ITAT), in a recent ruling, has deleted the addition made under Section 56(2)(viib) of the Income-tax Act, 1961 (“the Act”), holding that the Assessing Officer was not justified in rejecting the valuation report furnished by the assessee under the Discounted Cash Flow (DCF) Method merely on account of disclaimer language contained in the valuation report. The ITAT emphasized that such disclaimers are standard professional caveats in valuation reports and their presence, by itself, cannot form a valid ground to disregard a valuation of an expert.

In this case, the assessee had issued shares at a premium during FY 2015–16 based on a DCF valuation conducted by an independent valuer. During assessment, the accession officer (‘AO’) rejected the valuation as –

·       the report mentioned a disclaimer that projections were based on management inputs and estimates, and

·       the projected business results did not match subsequent actual performance.

The AO instead recomputed the FMV by adopting the Net Asset Value (NAV) method and made addition under Section 56(2)(viib) of the Act (being difference of DCF vs NAV method), which was upheld at the NFAC level. On further appeal, the ITAT observed that the valuer had duly appeared in response to summons and confirmed preparation of valuation on the basis of projections and business plans shared by the management, and that the FMV was determined in accordance with Rule 11UA using a recognized method. The ITAT held that deviation between projections and actual results cannot, by itself, invalidate a DCF valuation, as business performance is inherently subject to uncertainties. It further noted that where the AO doubts about a valuation, the proper course is to refer the matter to a Valuation Officer — not to disregard the report or substitute it with a different valuation methodology.

Relying on the jurisdictional Delhi High Court ruling in Cinestaan Entertainment Pvt. Ltd. and reversal of an earlier ITAT ruling in Agra Portfolio Pvt. Ltd., the ITAT reiterated that once the assessee has adopted a prescribed valuation methods through an approved valuer, the Revenue cannot challenge the method merely on the basis of hindsight comparison or standard disclaimer language. Accordingly, the addition under Section 56(2)(viib) was directed to be deleted.

The ruling reiterates that DCF valuation, being inherently forward-looking, cannot be invalidated merely because actual financial outcomes differ from projected figures, and that standard disclaimer language in valuation reports does not undermine their credibility when prepared in accordance with Rule 11UA by an approved valuer. While Section 56(2)(viib) now stands omitted, the principle should continue to remain relevant across other FMV-linked provisions; including restructuring transactions. A key takeaway from the decision is that bona fide valuations based on recognized methodologies should ordinarily be respected by the Revenue, and any concerns should be addressed only through statutory valuation mechanisms.