ITAT Delhi Deletes ₹15 Crore Share Premium Addition, Says AO Cannot Reject Company's DCF Valuation

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has recently held that an Assessing Officer cannot reject a company's chosen Discounted Cash Flow (DCF) method for valuing shares merely because its actual financial performance differs from projections.

Allowing MI Industries (India) Pvt. Ltd.'s appeal in part, the tribunal observed, “We are therefore of the considered view that rejection of DCF method adopted by the assessee by the AO is unwarranted and against the law.”

A bench of Judicial Member Satbeer Singh Godara and Accountant Member Naveen Chandra held that while the provision applies on a receipt basis, no addition could be sustained because the shares had been issued at a value below their fair market value determined under the DCF method.

The dispute arose after the company received about ₹15.05 crore as share premium during the assessment year. The Assessing Officer treated the entire amount as taxable income, and the Commissioner of Income Tax (Appeals) upheld the addition.

Before the tribunal, the company argued that the provision could not be invoked because the shares had been allotted before it came into force. Alternatively, it submitted that the shares had been valued using the DCF method prescribed under Rule 11UA. Based on a techno-economic feasibility report prepared by Dun & Bradstreet, a chartered accountant determined the fair market value at ₹400.89 per share, while the shares were issued at ₹110 per share.

The Revenue argued that the provision applied because the consideration was received during the relevant assessment year. It also defended the rejection of the DCF valuation on the ground that the company's actual cash flows differed from the projections.

Rejecting that approach, the tribunal held that Rule 11UA allows an assessee to choose either the Net Asset Value or the DCF method, and the Assessing Officer cannot insist on a different valuation method. It also noted that the Assessing Officer had not identified any defect in the valuation methodology and had merely questioned the projections.

“We are therefore of the considered view that rejection of DCF method adopted by the assessee by the AO is unwarranted and against the law.”, the court ruled.

The tribunal further held that the Assessing Officer had wrongly taxed the entire share premium without first determining the fair market value of the shares.

Since the fair market value exceeded the issue price, there was no excess premium liable to tax, and the addition was deleted. It, however, rejected the company's argument that the provision was inapplicable because the shares had been allotted before it came into force, holding that it operates on a receipt basis

For Assessee: Somya Jain, C.A.

For Revenue: Dayainder Singh Sidhu, CIT-DR