2023 (9) TMI 797 - ITAT DELHI

Addition u/s 56(2)(viib) - difference between the financial projections and actual projections submitted by the assessee - recognized method of valuation rejected - CIT(A) deleted addition concluding that DCF Method is the correct method for valuation of shares - HELD THAT:- There is no dispute that the valuation of the assessee is supported by valuation report from a technical expert who has adopted DCF method, which is one of the recognized methods u/r 11UA of the Rules. Therefore, AO erred in rejecting the method.

On a perusal of the relevant sections read with the Rules, we are of the view that the action of the AO in substituting the method of valuation is beyond jurisdiction. DCF Method is based on projections which are based on factors like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors.

These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after a certain period of time.

Valuation of an unquoted equity share, in terms of Rule 11UA of the Rules can, at the option of the assessee, be determined as per either NAV Method or as per DCF Method, which means that the option is given to the assessee and once the assessee has exercised an option, the AO is bound to follow the same unless by bringing cogent material on record, the AO establishes perversity in the method adopted by the assessee.

As decided in M/S. CINESTAAN ENTERTAINMENT PVT. LTD [2021 (3) TMI 239 - DELHI HIGH COURT] 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. - Decided against revenue.