Assessing Officer Cannot Arbitrarily Reject DCF Valuation Report Without Specific Findings of Error.
Issue
Whether the Assessing Officer (AO) can reject the valuation of shares determined by the Discounted Cash Flow (DCF) method and tax the share premium under Section 56(2)(viib), without identifying any specific inaccuracies or technical shortcomings in the valuation report submitted by the assessee.
Facts
The assessee-company issued equity shares at a premium during the Assessment Year 2015-16.
To justify the share price, the assessee submitted a valuation report from a Chartered Accountant firm.
The valuation was computed using the Discounted Cash Flow (DCF) method, which is a recognized method under the Income Tax Rules (Rule 11UA/11UV) for determining Fair Market Value.
The Assessing Officer (AO) rejected the valuation report and treated the entire share premium collected as income of the assessee under Section 56(2)(viib).
Decision
The court/tribunal ruled in favour of the assessee.
It held that it is not legally permissible for an AO to simply reject a valuation adopted by the assessee based on the DCF method without pinpointing specific inaccuracies or shortcomings in the report.
Since the AO failed to provide specific findings regarding any error, mistake, or wrong approach in the report, the addition made under Section 56(2)(viib) was held to be invalid.
Key Takeaways
Sanctity of DCF Method: The DCF method involves projections and estimation. Unless the AO can demonstrate that the methodology is flawed or the data used is demonstrably false, they cannot substitute the valuer’s expert opinion with their own.
Burden on AO: To reject a valuation report, the AO must conduct a detailed scrutiny and record specific findings of error. A summary rejection is legally unsustainable.
Addition u/s 68 Deleted as Assessee Proved Identity and Creditworthiness of Investors.
Issue
Whether share premium received from a resident individual and a foreign company can be added as unexplained cash credit under Section 68, when the assessee has furnished sufficient details to prove the identity, genuineness, and creditworthiness of the subscribers.
Facts
The assessee allotted equity shares at a premium to one resident individual and one foreign company.
The AO treated the entire share premium as unexplained cash credit under Section 68 and added it to the assessee’s income.
The records showed that the assessee had submitted details establishing the nature and source of the money.
Specifically, proof of identity, genuineness of the transaction, and creditworthiness of both the resident and foreign subscribers were provided.
The AO had not raised any doubts or questioned these credentials during the assessment.
Decision
The court/tribunal ruled in favour of the assessee and deleted the addition.
It held that the initial onus lies on the assessee to prove the three ingredients of Section 68: Identity, Genuineness, and Creditworthiness.
Since the assessee had discharged this onus by providing the necessary details, the burden shifted to the AO to prove otherwise.
As the AO failed to discharge this shifted burden (by finding defects in the evidence), the addition under Section 68 could not be sustained.
Key Takeaways
Initial Onus Discharged: Once the taxpayer provides documents like PAN, bank statements, and ITRs of investors, the onus under Section 68 is primarily discharged.
AO Cannot Remain Passive: The AO cannot make an addition under Section 68 merely by rejecting the explanation. They must verify the documents and bring material on record to disprove the claim of genuineness or creditworthiness.
IN THE ITAT DELHI BENCH ‘G’
Savegenic E-Marketing (P.) Ltd.
v.
I.T.O. Ward – 4(1) New Delhi*
Ms. Madhumita Roy, Judicial Member
and Naveen Chandra, Accountant Member
and Naveen Chandra, Accountant Member
IT Appeal No. 3847 (Delhi) of 2024
[Assessment year 2015-16]
[Assessment year 2015-16]
OCTOBER 27, 2025
Mukesh Mittal and Arvind Jain, CAs for the Applicant. Manish Gupta, Sr. DR for the Respondent.
ORDER
Naveen Chandra, Accountant Member.- This appeal by the assessee is preferred against the order of CIT(A), Delhi dated 26.06.2024 for A.Y 2015-16.
2. The assessee has raised 10 substantive grounds of appeal. However, the sole issue argued before us pertains to the upholding of the addition of Rs 60,06,500/- made by the Assessing Officer on account of premium collected on allotment of shares u/s 68.
3. Briefly stated, the facts of the case are that M/s. Savegenie Emarketing Private Limited, the assessee Company, had allotted equity shares of Rs. 10/- each at a premium of Rs. 63.25 to the following persons in the financial year 2014-15 corresponding to Assessment year 2015-16:
| (a) | Upkar Agarwal- 11,500 Equity Shares of Face value Rs. 10/-. Total amount-Rs. 8,42,375/- (Including premium of Rs. 63.25 per equity share). |
| (b) | Savegenie E Commerce Pvt. Ltd.- (Foreign Company): 70,500 equity shares of Face Value -Rs. 10/-. Total amount Rs. 51,64,125 (including share premium of Rs. 63.25 per equity share). |
4. M/s. Savegenie E-marketing Private Limited, the present assessee, filed its return of income for the A.Y under consideration u/s 139(1) of the Income Tax Act, 1961 (‘Act’) on 11.09.2015, declaring NIL income. The case of the assessee was selected for Limited Scrutiny and the AO, during the assessment proceedings u/s 143(3) examined the allotment of shares at the premium and ultimately accepted the ROI vide his order u/s 143(3) dated 01.11.2017.
5. Subsequently the AO, issued a notice u/s 148 dated 30.03.2021, in response to which the assessee filed a return declaring a loss of Rs 39,79,952/- on 13.05.2021. The Assessing Officer reopened the assessment on the ground that for the year ending March 31, 2015, the assessee had issued 11,500 shares of face value with a premium of Rs. 63.25 to Shri Upkar Aggarwal though the Company did not have any intangible assets such as payments, copyrights, intellectual properties, rights which would command such premium for the shares. Further, the Assessing Officer noted that as per the balance sheet, the market value of each share was in negative as of March 31, 2014, as the net worth of the Company was negative. Share premium received in excess of market value worked out to Rs. 7,27,375/-, which the AO believed to have escaped assessment within the meaning of Section 147 of the Act. Further, the Ld. Assessing Officer noted that the assessee had issued a total of 82,000 equity shares the year at a premium of Rs. 73.25 per share (instead of the actual premium of 263.25 per share).
6. The assessee had, during the course of assessment proceedings, submitted that the valuation for allotment of equity shares was made as per Section 56(2)(vii)(b) read with sub-rule (2) of Rule 11UA of the Income Tax Act on Discounted Cash Flow (DCF) method on the basis of a valuation report from a Chartered Accountant firm. The AO rejected the valuation report of the computation of fair value of an equity share and treated the entire share premium collected during the year, amounting to Rs. 60,06,500/- as unexplained cash credit under section 68 of the IT Act 1961 and added back to the assessee’s total income for the year under consideration vide his order u/s 147 r.w. 144B dated 30.03.2022.
7. Aggrieved, the assessee went in appeal before the ld. CIT(A) who confirmed the same.
8. Aggrieved further, the assessee is in appeal before us.
9. Before us, the ld. counsel for the assessee vehemently stated that the assessment order neither referred to the provisions of section 68 of the Income Tax Act, 1961 nor did it explain how section 68 was attracted in the instant case. As required by the second proviso in section 68 of the Income Tax Act, 1961, the assessee had submitted details about the nature and source of the share application money paid by the resident individual Mr. Upkar Agarwal, aggregating Rs. 8,42,375/-, to whom 11,500 Equity Shares of the Face value Rs. 10/- (with premium of Rs 63.25 per equity share) were allotted during the previous year.
10. The ld. counsel for the assessee further contended that the second proviso in section 68 of the Income Tax Act, 1961, is not applicable to non-resident assessee, being a foreign company, which has paid share application money including share premium and to whom share capital was allotted during the previous year. It is the say of the ld AR that the CIT(A) erred in upholding the addition made by the Assessing Officer u/s 68 of the Act as assessee has fulfilled all the conditions mentioned in section 68 and nature and source of share application money was explained and established during the assessment proceedings in case of resident individual Mr. Upkar Aggarwal who has paid share application money including share premium and to whom share capital was allotted during the previous year.
11. The ld. counsel for the assessee continued by saying that as per section 56(2)(viib) read with sub-rule (2) of Rule 11UA, the assessee has an option to determine the fair market value of shares to be issued either on NAV method (sub-rule (2)(a)) or the DCF Method (sub-rule (2)(b)), and the Assessing Officer cannot substitute his own value in place of value so determined.
12. The ld. counsel for the assessee submitted that the assessee has made allotment of equity shares as per DCF method on the basis of the valuation report by Chartered Accountant Firm. The valuation was done on the basis of the Discounted Cash Flow Methodology and was proper and bonafide as per the Act and no infirmities or otherwise have been identified/brought on record by the Assessing Officer with regard to the valuation report based on Discounted Cash Flow Methodology. The copy of the valuation report was furnished to the Ld. Assessing Officer at the time of the assessment.
13. Accordingly, the ld. counsel for the assessee concluded by saying that the Assessing Officer has erred in not accepting the valuation report by the competent authority (CA) as prescribed u/s 56(2)(viib) read with Rule 11UA and in making the additions u/s 68 ignoring the Rules and Act. The Id. counsel for the assessee relied upon various judicial decisions as follows:
| 1. | Pr. CIT v. Cinestaan Entertainment Private Limited [2021] 433 ITR 82 (Delhi)/ITA 1007/2019 & CM APPL. 54134/2019 | 01-03-2021 |
| 2. Rameshwaram | Strong Glass Pvt. Ltd. v. ITO (Jaipur – Trib.)/[2018-TIOL1358-I Jaipur) |
| 3. | DQ (International) Ltd. v. Asstt. CIT (Hyderabad – Trib.)/(ITA 151/Hyd/2015) |
| 4. | Vodafone M-Pesa Ltd. v. Pr. CIT (Bombay)/164 DTR 257, Bombay High Court |
14. Per contra, the ld. DR relied upon the orders of the authorities below.
15. We have heard the rival submissions and have perused the relevant material on record. There is a settled law on the issue that as per Secton 56(2)(viib) of the Act read with Rule-11 UA of the Income tax Rules, 1962, every assessee has an option to conduct valuation of shares and determine its Fair Market Value either by DCF method or NAV method, and that the Assessing Officer cannot substitute his own value in place of the value so determined without pointing out any error, mistake or wrong approach in making the valuation. The hon’ble Delhi High Court in the case of Cinestaan Entertainment Pvt Ltd. (supra) on 1 March, 2021 as follows:
13. From the aforesaid extract of the impugned order, it becomes clear that the learned ITAT has followed the dicta of the Hon’ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of fair market values as per prescribed methodology. The Appellant-Revenue had the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method. The Respondent-Assessee being a start-up company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent-Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then Appellant-Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the Respondent-Assessee, accepted by the learned ITAT, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the Courts for interfering with the findings of a valuer is not satisfied in the present case, as the Respondent-Assessee adopted a recognized method of valuation and Appellant-Revenue is unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process.
16. Considering the facts of the case in totality, in light of the decision of the above hon’ble Delhi Court and the coordinate benches [supra], we hold that it is not legally permissible for the AO to reject the valuation adopted by the assessee on the basis of DCF method without pinpointing any specific inaccuracies or short comings in the DCF valuation report. Furthermore, as the AO has rejected the valuation report under Rule 11-UV of the Income Tax Rules without specific findings with regard to its error/mistake or wrong approach, no addition can be envisaged under section 56(2)(viib) of the Act.
17. Furthermore, we are of the considered view that the statute in section 56(2)(viib), in the impugned assessment year 2015-16, provided that any consideration received by the assessee company from non-resident for issue of shares, cannot be taxed as income from other sources u/s 56(2)(viib) of the Act. Since, in the instant case, around 85% of the shares subscription was made by Savegenie E Commerce Pvt. Ltd., a foreign company, no addition is called for u/s 56(2)(viib) of the Act with respect to shares issued to Savegenie E Commerce Pvt. Ltd.
18. We further find that after rejecting the valuation of shares as adopted by the assessee, the AO has abruptly added the amount of premium collected u/s 68 of the Act without assigning any reason for doing so. We are further at loss to understand the mind of CIT(A) when he inexplicably sustained the same. At one point, the CIT(A) states that section 56(2)(viib) was rightly invoked to tax the excessive share premium whereas the facts shows that no addition was made under section 56(2)(viib) and on the other hand upheld the addition u/s 68 without any discussion.
19. With regard to additions u/s 68, the assessee had taken a plea that it is protected by the second proviso in section 68 of the Act which provides for furnishing of source of source in case of share application in a private company fron resident subscribers only and not from the non-resident subscribers. We however are not convinced with the assessee’s argument. To elaborate, the provision of section 68 is reproduced below:
Cash credits.
68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year :
Provided that where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by such assessee shall be deemed to be not satisfactory, unless,—
(a) the person in whose name such credit is recorded in the books of such assessee also offers an explanation about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:
Provided further that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—
(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:
Provided also that nothing contained in the first proviso or second proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.
20. The substantive provision of the section 68 of the Act enjoins and casts a duty on the assessee to offer explanation about the nature and source of the cash credit in its books. The scope of the nature and source of credit is wide and it does not differentiate between the location of source i.e., whether foreign or domestic source. Whereas clause (a) of the 2nd proviso to section 68, requires that, in cases of share application money, share capital, share premium or any such amount received by a private limited company, the assessee’s explanation will not be satisfactory unless the subscriber, who is a resident, also offers an explanation about the nature and source of such sum so credited. Thus, the 2nd proviso puts statutory responsibility on the assessee to explain the source of source where the subscriber is a domestic person. Insofar as the share application money, share capital, share premium in private companies comes from the non-resident, the Statute does not proscribe the assessee to explain the source of source where the subscriber is a non-resident. The 2nd proviso to section 68 only requires that the subscriber who is a resident, is mandatorily required to provide explanation regarding its source of funds for subscribing into the shares of the private limited company. If the assessee’s argument that nonresidents subscribers are excluded from justifying their share subscription amount, is accepted, it would tantamount to bypassing the substantive provisions of section 68 and creating a legal hole where any person may form a private company under the law and allot shares to non-resident person, whose source of share application money can not be legally examined for its veracity. There cannot be any such situation envisaged that it is a legislative intent to allow any person to route their unaccounted income through non-resident subscribers. In view of the discussion above, the assessee’s contention that the shares subscriber being a non-resident, is exempted from the rigours of the provisions of section 68 of the Act is rejected.
21. Coming back to the issue of meeting the statutory requirements for invoking the provisions of section 68 of the Act, it is a trite law that the initial onus lies with the AO to seek explanation for the nature and source of credit in the books. We do not find anywhere in the assessment order that the AO has carried out any exercise to establish that the explanation offered by the assessee was not satisfactory. We find in the fact of the matter, that the assessee has, in the instant year, explained both in the original assessment as well as in the re-assessment proceedings, that it has received share capital with premium from two person only i.e. ,a) Upkar Agarwal, a resident individual of Rs. 8,42,375/- and (b) Savegenie E Commerce Pvt. Ltd, a foreign company of Rs. 51,64,125/-. The assessee, on his part gave details of the identity of the subscribers, genuineness of the transaction and creditworthiness of the subscribers. We find that the assessing officer never raised any doubts or questioned the identity, genuineness of the transaction and creditworthiness of the subscribers. The AO, without making any or further enquiries, just added the share subscription amount under section 68 of the Act. There are plethora of decision of the Courts that once the initial onus of the assessee is discharged, the onus shifts to the AO to establish the non-fulfillment of the three conditions of identity, genuineness of the transaction and creditworthiness. We find from the assessment order that no such onus was discharged by the AO to show that the assessee has offered no explanation or the assessee’s explanation is not satisfactory. In such a scenario, we are unable to sustain the addition u/s 68 of the Act. We therefore, set aside the findings of the ld. CIT(A) and direct the Assessing Officer to delete the addition of Rs. 60,06,500/-. The ground no 3 to 8 are allowed.
22. The ground no 1 and 9 are general in nature. Ground 2 regarding the validity of reopening u/s 148 was not argued and hence the same is not adjudicated upon. Ground 10 regarding initiation of penalty is premature.
23. In the result, the appeal of the assessee in ITA No. 3847/DEL/2024 is allowed.