Method of Valuation Cannot Be Substituted by the AO, Choice Vesting Solely in the Hands of the Assessee – Delhi High Court

In a landmark decision, the Delhi High Court allowed an appeal filed by Agra Portfolio Pvt. Ltd., setting aside the Income Tax Appellate Tribunal’s (ITAT) order which upheld the Assessing Officer’s (AO) rejection of the Discounted Cash Flow (DCF) method for share valuation in favor of the Net Asset Value (NAV) method.

The Court In ITA 1385/2018 held that the method of valuation under Section 56(2)(viib) of the Income Tax Act, 1961, read with Rule 11UA of the Income Tax Rules, 1962, is a choice that rests exclusively with the assessee, not to be substituted by the AO.

Background and Appeal: The appeal arose from the valuation of shares in Assessment Year 2014-15. The appellant had initially valued its shares using the DCF method, which was rejected by the AO in favor of the NAV method, leading to a disputed valuation.

Authority of AO and Choice of Method: The Court observed that Rule 11UA(2) gives the assessee the option to choose between DCF and NAV methods. The AO’s role is to scrutinize the valuation report within the chosen method, not to substitute it.

Judicial Precedents: The Court relied on Bombay High Court’s decision in Vodafone M-Pesa Limited and other ITAT judgments, emphasizing that the AO cannot substitute the valuation method selected by the assessee.

Detailed Scrutiny of Valuation Report: While the AO can doubt or reject a valuation report, the statute doesn’t empower them to independently evaluate shares using a different method than chosen by the assessee.

Decision: Appeal Allowed: The Court allowed the appeal, setting aside ITAT’s order.

Remand to AO: The matter was remitted to the AO for fresh valuation using the DCF method.

Liberty to AO: The Court granted liberty to the AO to have the FMV determined independently by a valuer using the DCF method.

This judgment reinforces the principle that the choice of valuation method under the Income Tax Act lies with the assessee and cannot be unilaterally altered by the tax authorities.

Date of Decision: April 04, 2024

Agra Portfolio Pvt. Ltd. Vs. PR. Commissioner of Income Tax-1 & Anr.