Valuation of shares by DCF method cannot be rejected, where there is no error in the methodology: Delhi HC
Principal Chief Commissioner of Income
Tax-1 vs. A.H. Multisoft Pvt. Ltd. (ITA No. 9/2025)
Facts:
1. A.H. Multisoft Pvt. Ltd. (Assessee) is engaged in software support and maintenance services. It held a 20% strategic stake in South Asia FM Ltd. (SAFL), a company with 39 FM broadcasting licenses branded as “Red FM”.
2. SAFL needed capital and issued a rights issue at ₹20/share (face value ₹10 + premium ₹10). The Assessee subscribed to 2.63 crore shares of SAFL, investing ₹52.6 crore. To fund this, the Assessee issued rights shares to its own shareholders: Arjun Rao (51%) and Max Flexi Services Pvt. Ltd. (49%).
3. The Assessee obtained a valuation from J.N. Sharma & Co., CA, valuing its shares at ₹2,771.65 each using the Discounted Cash Flow (DCF) method. Based on this, it issued 1,08,976 shares raising ₹30.48 crore.
4. The AO rejected the DCF-based valuation, citing disclaimers in the report, and instead applied book value, which was negative. As a result, the AO made an addition of ₹30.37 crore under Section 56(2)(viib) (taxing excess consideration over FMV).
Hon Delhi HC held as below:
1. We find no merit in the said contention. The Assessee had valued the unquoted equity shares held by the Assessee in SAFL by DCF method. The same is permissible under Rule 11UA(2) of the Rules
2. The learned ITAT had found that the disclaimers set out by the expert in the valuation report were general disclaimers and are common in all such reports furnished by experts as they are founded on the data as provided by the entity. The expert report could not be rejected on the ground of such disclaimers without the AO pointing out any material error in the data as used by the expert.
3. In view of the above, no substantial questions of law arise for consideration of this court in the facts of the present case. The appeal is accordingly dismissed.
The copy of the order is as under:
