Option to choose a valuation method for valuing shares rests solely with the assessee: Delhi HC


Option to choose a valuation method for valuing shares rests solely with the assessee: Delhi HC





  1. The appellant had allotted 3,15,000 equity shares of a face value of INR 10/- each at a premium of INR 40/- per share and for a total amount of INR 1,26,00,000 /-.
  1. The appellant valued the shares as per Fair Market Valuation Option under Section 56(2)(viib) of the Income Tax Act, 19615 read along with Rule 11UA of the Income Tax Rules. The appellant had placed reliance on a Valuation Report drawn by a merchant banker, M/s SPA Capital Advisors Ltd., and wherein the value of each share was pegged at INR 9.60/-.
  1. The AO rejected that report and consequent to the same, the AO independently determined by opting for net asset method and arrived the value of each share to be INR 40.40/- and thus quantified the disallowance under Section 56(2)(viib) at INR 1,27,26,000/-.
  1. The principal grievance of the appellant is that even if the AO had deemed it fit to reject the Valuation Report drawn on the basis of Discounted Cash Flow Method, it could not have substituted the means and the method of valuation of its own volition.

Hon Delhi HC held as below:

  1. A perusal of Rule 11UA(2) would indicate that the assessee is enabled to determine the FMV of the unquoted equity shares either in accordance with the formula prescribed in clause (a) ie net asset method or on the basis of a report drawn by a merchant banker who may have determined the FMV as per the DCF Method.
  1. However, and as is manifest from a conjoint reading of Section 56(2)(viib) read along with Rule 11UA(2), the option and the choice stands vested solely in the hands of the assessee.
  1. We allow the instant appeal and set aside the order of the ITAT. The matter shall in consequence stand remitted to the AO which shall undertake an exercise of valuation afresh in accordance with the DCF method.
  1. We also accord liberty to the AO to determine the FMV of the shares bearing in mind the DCF Method by having the same independently determined by a Valuer appointed for the aforesaid purpose.


The copy of the order is as under: