Assessing Officer Cannot Force NAV Method Over DCF Chosen by Assessee Under Rule 11UA

ORDER

Manish Agarwal, Accountant Member.- The captioned appeals are filed by assessee against the different orders, both dated 30.09.2025 passed by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld. CIT(A)”] in Appeal No. CIT(A), Delhi-4/10486/2019-20 and in Appeal No. NFAC/2017-18/10039641 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of different assessment order dated 12.12.2019 passed u/s 143(3) of the Act and assessment order 22.03.2021 passed u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act pertaining to Assessment Year 2017-18 & 2018-19 respectively.

2. Both the appeals are having common issues, therefore, they are decided by a common order.

3. First we take assessee’s appeal in ITA No.7675/Del/2025 for Assessment Year 2017-18.

4. Brief facts of the case are that the assessee is a Private Limited company, engaged in the business of mineral exploration activities principally for gold in southern India. The return of income for the year under appeal was declared on 13.11.2017, declaring total income of INR 3,03,350/-. The case was selected for limited scrutiny where one of the reasons is large share premium received during the year. It was observed that during the year under appeal, the assessee has issued 92090 equity shares having Fair Market Value (“FMV”) of INR 1.00 each at a total consideration of INR 12,12,54,726/- in 02 trenches. In first trench, 6922 equity shares of FMV of INR 1.00 each were issued at a premium of INR 1443.50 per share to M/s. Thriveni Earth Movers P. Ltd. on 07.06.2016. Further, 2285 equity shares of FMV @ INR 1.00 were issued on the same date at a premium of INR 1443.50 to M/s. Australian Indian Resources. Besides this, on 24.06.2016 further 2072 equity shares at a premium of INR 1443.50 were issued to Australian Indian Resources. In second trench on 12.10.2016, 35646 equity shares of FMV @ INR 1.00 each were issued at a premium of INR 1299.00 per share to M/s. Thriveni Earth Movers P. Ltd. and further on 13.01.2017, 45165 equity shares of FMV @ INR 1.00 were issued at a premium of INR 1299.00. Accordingly, in Two trenches, total 92090 equity shares were issued at a total value of INR 12,12,54,726/-. The AO asked the assessee to file the basis of valuation of the share, in response to which the assessee has filed two valuation reports of different dates, first report was dated 04.07.2016 prepared by Dharm Raj & Company, Chartered Accountants who had determined the FMV of share prices at INR 1300.00 per share and Second report was dated 30.11.2015 prepared by M/s Prem Nath Hegde and Company, Chartered Accountants, who determined the FMV per equity share at INR 1444.50. Both the valuation reports were prepared by following the Discounted Cash Flow method (“DCF method”). The AO thereafter, referred the limitations scope of work, as pointed out by the valuers in their report in para 6 of the order. Subsequently, the AO as per Net Asset Value method (“NAV”) under Rule 11UA(1)(c)(b) of the Income Tax Rules, 1962 had computed the valuation of equity share at INR 896.00 per share. The AO thereafter, in para 9.4 onwards has pointed out certain deficiencies in the valuation done by the valuers, where the AO has raised doubts about the projection made after considering the feasibility technical report. Based on such observations, the AO has rejected the valuation taken by the assessee and by substituting his own method for valuation (NAV method), has worked out the amount of excess premium charged of INR 3,64,46,682/- and made the addition of the same u/s 56(2)(viib) of the Act.

5. In first appeal, Ld.CIT(A) had discussed the issue in detail in para 4.5 of its order and confirmed the action of the AO.

6. Aggrieved by the order of Ld. CIT(A), the assessee is in appeal before the Tribunal by raising various Grounds of appeal mentioned in the appeal memo.

7. All the Grounds of appeal are with respect to the addition of INR 3,64,46,682/- made by AO of substituting the valuation per equity share at INR 1444.50 and INR 1300.00 per share as per the assessee (based on DCF method) to INR 896.00 per share which is based on the NAV method, thus they are taken together for consideration.

8. Before us, Ld.AR vehemently argued that the assessee has valued its share in terms of the method provided as per section 56(2)(viib) r.w. Rule 11UA(ii) of Income Tax Rules,1962 (the Rules) which provides the method of determination of FMV of unquoted equity shares with the formula prescribed in clause (a) or on the basis of Report drawn by a merchant banker who determined the FMV as per DCF method. In clause (a) of section 11UA(ii), the assessee has an option to follow either NAV method or DCF method. He further submits that the shares were valued as per DCF method where the projection were made by considering the future prospects of the business and after considering various other factors effecting the future growth of the business. sLd.AR submits that the projections were based on factors like growth of the company, economic and market conditions, business conditions, feasibility report regarding availability of mineral etc. and they cannot be evaluated purely on the arithmetical proposition under DCF method. As per ld. AR valuation under DCF method has always been done at approximation and on assumption of various factors. He, therefore, submits that the allegations of the AO with respect to the estimation/projections deserves to be ignored and the valuation done by the assessee be accepted more particularly, when choice of the selection of either of the method [DCF or NAV method as per 11UA(2)] is at the discretion of the assessee which cannot be changed by the AO nor no other formula is provided in the Rules. Ld. AR further submits that both the valuation reports were prepared and certified by the reputed firms of Chartered Accountants after considering all the factors and such reports are available in the Paper Book at pages 151 to 162. Ld. AR further drew our attention to the documents relied upon by the valuers for determination of the fair market value including the project-wise details, summary of cash flow statement etc. which are placed at Pages 178 to 276 of the Paper Book. He thus, prayed that the addition deserves to be deleted.

9. On the other hand, Ld. Sr. DR vehemently supported the orders of the lower authorities and submits that the AO as well as Ld. CIT(A) has discussed this issue at length, more particularly, ld. SR Dr drew our attention to the order of Ld. CIT(A) where in Ld. CIT(A) in para 4.5.13 has specifically observed that though option of method of valuation has been conferred upon the assessee and not on the AO. However, where the methodology adopted by the assessee has been rendered impregnably immune to the related checks which AO is duty bound particularly since this issue is mandated of the impugned scrutiny proceedings. She further submits that where the assessee has failed to support the credibility of the valuation report and failed to reply the tangible defects and deficiencies pointed out in the valuation report, the AO is at liberty to substitute the FMV based on his own method. Accordingly, Ld. Sr. DR submits that when the AO has raised the doubts about the genuineness of shares premium receipt and further pointed out defects in the projection/estimation of the resources taken for valuation under DCF method which have not been answered by the assessee by bringing on record any cogent material and evidences, therefore, the AO has rightly rejected the valuation reports adopted by the assessee and substituted its own valuation based on NAV method which deserves to be accepted and addition so made be sustained. She prayed accordingly.

10. Heard the contentions of both the parties at length and perused the material available on record. The solitary issue in appeal before us is with respect to FMV of the shares issued during the year under appeal. As per the assessee, Two Valuation reports were obtained from independent Chartered Accountants at the time of allotment of shares on every occasion where the valuation was done based on DCF method as prescribed under Rule 11UA(2) of Rules. Whereas the AO after raising substantial doubts about the projection made in DCF method and rejecting both the reports, has substituted the FMV calculated by him as per NAV method and made the addition.

11. It is observed that the assessee is engaged in the business of mining mainly of gold in Southern part of India. During the year, assessee has raised share capital at a premium and for these purposes, has obtained two independent valuation reports from two firms of Chartered Accountants placed at pages 151 to 162 of the Paper Book wherein study report and feasibility report, both for Jonnagiri Gold Mines projects placed at PB pages 178 to 244, were considered. Further the assessee has filed copy of the mining area allotted to it in terms of Mining lease Agreement executed on 21.10.2013 between the Government of Andhra Pradesh and the assessee company according to which the mines were allotted for exportation of the mineral within the defined allotted area. The said Lease Deed is placed at pages 245 to 262 of the Paper Book. The assessee further provided cash flow statement which is based on the primarily resource statement of Golden-Jonnagiri which is placed at page 263 of the Paper Book and as per the said report, assessee has projected the production in subsequent years and sale value of gold was estimated by taking per gram value of gold @ INR 2797.20 irrespective of the fact that the price of gold varies does not remain static and varies on say to basis as per the International market price. The AO in the assessment order while challenging the projections made by the assessee under DCF method, has raised various objections which are summarized in paras 9.6 to 10 of its order. It is further observed that Ld.CIT(A) while confirming the action of the AO, has referred the Technical Guide on Share Valuation -2009 issued by the technical committee of ICAI, wherein in para 4.6, the detailed discussion on discounted cash flow statement is provided. Thereafter, Ld. CIT(A) in paras 4.5.11 to 4.5.21 has discussed the deficiencies pointed out by the AO in detail and replies of the assessee and concluded that the FMV determined by the assessee based on DCF method is not correct and thus, confirmed the valuation done by AO as per NAV method. The relevant observations are contained in paras 4.5.11 to 4.5.21 of the order of ld. CIT(A).

12. From the above discussion, moot question come for our consideration, whether the AO has the power under the statute to change the method of valuation from DCF method as adopted by the assessee to the NAV method, the answer is “No”. The Rule 11UA(2) specifically provided that it is the choice of the assessee to select any of the methods prescribed whether it is ‘NAV method’ or ‘DCF method’. There is no provisions which could empower the AO to change the method once selected by the assessee for the determination of the FMV of its shares. However, nowhere in the Rules or the Act, it is provided that where the AO has raised doubts about the valuation done by the assessee based on any of the prescribed methods what could be the recourse available with the AO.

13. In such scenario and in our considered opinion, the best way is to obtain independent Valuation Report from the Authorized valuers who can determine the FMV based on the method adopted by the assessee.

14. In the instant case, the AO has been able to demonstrate that the methodology adopted by the assessee for determining the FMV of the shares is incorrect where the approximation of future projections was without any cogent basis and no cogent material was brought on record in support of the same. Though herein above, we have referred the material based on which the valuation was done by the valuer however, the feasibility reports filed by the assessee to the valuer contained various defects which were pointed out by the AO in paras 9 & 10 of his order which remained unanswered by the assessee. In such scenario, we are of the opinion that both the Valuation Reports filed by the assessee suffers defects and therefore, cannot be accepted. At the same time, the valuation done by the AO based on NAV method cannot taken as the basis for determination of the FMV. Thus, in the larger interest of justice and to conclude, we direct the AO to obtain fresh reports from the approved valuer based on DCF method for determination of FMV of the shares of the assessee on both the occasions when the shares were allotted at premium and decide the issue in accordance with law.

15. The judgements relied upon by the assessee as placed before us where the crux is that the AO cannot change the method of valuation adopted by the assessee and further where the projections are based on some cogent and logical material, the valuation done by DCF method cannot be doubted. However, as observed above in the instant case, both the lower authorities have successfully demonstrated that the valuation done by the assessee as per DCF method suffers serious defects which remained unanswered by the assessee. Even before us, no explanation was tendered in respect of such deficiencies. Accordingly, these judgements are no help for the assessee and are distinguishable. With this observation, all the Grounds of appeal raised by the assessee are allowed for statistical purposes.

16. In the result, appeal of the assessee is allowed for statistical purposes.

17. Now we take assessee’s appeal in ITA No.7676/Del/2025 for Assessment Year 2018-19.

18. In the above-mentioned paras, we decided the appeal of the assessee in ITA No.7675/Del/2025 for Assessment Year 2017-18 where we hold that the AO cannot change the method of valuation adopted by the assessee and further hold that the projections under DCF method should be based on some cogent and logical material. The valuation done by DCF method cannot be changed however, as observed above in the instant case, both the lower authorities have been able to demonstrate that the valuation done by the assessee on DCF method suffers serious defects which remained unanswered by the assessee. Even before us, no explanation was tendered in respect of such deficiencies. In the present appeal filed by the assessee, both the parties fairly admitted that the facts are identical to the facts in ITA No.7675/Del/2025 for AY 2017-18, thus, the aforesaid observations in ITA No.7675/Del/2025 for AY 2017-18 which are Mutatis Mutandis applicable to the facts of this appeal filed by the assessee. In view of the above, all Grounds of appeal raised by the assessee are allowed for statistical purposes.

19. In the result, appeal of the assessee is allowed for statistical purposes.

20. In the final result, both captioned appeals of the assessee in ITA No.7675 & 7676/Del/2025 for AY 2017-18 & 2018-19 respectively, are allowed for statistical purposes.