Facts of the Case

The assessee, Agra Portfolio Pvt. Ltd., allotted 3,15,000 equity shares of face value ₹10 each at a premium of ₹40 per share during AY 2014-15, aggregating ₹1,26,00,000. For determining Fair Market Value (FMV) under Section 56(2)(viib) of the Income Tax Act, 1961 read with Rule 11UA, the assessee relied on a valuation report prepared by a merchant banker adopting the Discounted Cash Flow (DCF) method.

The Assessing Officer (AO) rejected the valuation report on grounds including lack of independent verification, unrealistic projections, and insufficient justification of assumptions. The AO thereafter independently adopted the Net Asset Value (NAV) method and determined a different FMV, resulting in addition of ₹1,27,26,000 under Section 56(2)(viib).

Issues Involved

  1. Whether the AO can reject a valuation report prepared under the DCF method due to alleged deficiencies.
  2. Whether the AO is empowered to substitute the valuation method chosen by the assessee with another method (NAV).
  3. Whether rejection of a merchant banker’s report permits the AO to conduct an independent valuation exercise using a different methodology.

Petitioner’s Arguments (Assessee)

  • Section 56(2)(viib) read with Rule 11UA expressly grants the assessee the option to choose the valuation method.
  • Even if the AO doubts the valuation, he cannot replace the method with another of his own preference.
  • The statute permits scrutiny of the valuation report but not substitution of methodology.
  • Reliance was placed on judicial precedents, including the Bombay High Court decision in Vodafone M-Pesa Ltd., affirming that the AO must adhere to the method selected by the assessee.

Respondent’s Arguments (Revenue)

  • The assessee failed to substantiate the assumptions, projections, and figures underlying the DCF valuation.
  • The AO is empowered to determine FMV independently where the assessee fails to justify the valuation to the satisfaction of the department.
  • Rejection of the valuation report justified adoption of another method to compute the correct FMV.

Court Order / Findings

  • Rule 11UA(2) clearly confers upon the assessee the exclusive option to select the valuation method (DCF or NAV).
  • The AO may scrutinize or even reject the valuation report, but cannot adopt a different method of valuation.
  • The statute does not empower the AO to substitute the chosen methodology with one of his own.
  • If the valuation report is rejected, the AO must undertake fresh valuation using the same method selected by the assessee, including through an independent valuer if necessary.

Important Clarification

  • The decision does not bar the AO from examining the correctness, assumptions, or data underlying the valuation.
  • The AO may appoint an independent valuer or seek further evidence.
  • However, the foundational valuation methodology chosen by the assessee must be respected.
  • The ruling reinforces that valuation disputes under Section 56(2)(viib) are to be resolved within the framework of the selected method, not by switching methods.

Link to download the order – https://www.mytaxexpert.co.in/uploads/1772270152_AGRAPORTFOLIOPVT.LTD.VsPR.COMMISSIONEROFINCOMETAX1ANR..pdf 

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