The Assessing Officer threw out my DCF valuation because the actual results fell far short of the projections and taxed the premium under section 56(2)(viib) — can he do that?
It depends, and the Tribunal split the point. The Bangalore Bench held that where the assessee opts for the discounted cash flow method under rule 11UA(2), the Assessing Officer cannot switch to the net asset value method; following the Bombay High Court in Vodafone M-Pesa, he may scrutinise the report and make his own fresh valuation, but the basis must stay DCF. He must also judge the report on facts available at the valuation date, not on actual later results. But the onus of showing the projections were a reliable estimate rests on the assessee. The matter went back to the Assessing Officer.
Decided by the ITAT (Income Tax Appellate Tribunal, 'B' Bench, Bangalore — A.K. Garodia, Accountant Member and Laliet Kumar, Judicial Member) on 2019-01-09, reported as ITA No.1278/Bang/2018 (ITAT Bangalore). It bears on section 56(2)(viib) of the Income Tax Act 1961, in Assessment & Scrutiny and Cash Credits & Unexplained Money matters.
This is the working checklist for a section 56(2)(viib) valuation dispute, and it is even-handed enough to be cited by both sides. It fixes three propositions in one place: the choice of method under rule 11UA(2) belongs to the assessee and the officer cannot substitute NAV; hindsight is not a permissible test, so a shortfall against projections cannot by itself condemn the report; and the primary onus of establishing the projections, the discounting factor and the terminal value lies on the assessee, who alone is privy to the facts. The Tribunal also carves out start-ups, where no past data exists and projections rest on reasonable expectations rather than reliable estimates from history. Reach for it when the officer has thrown out a DCF report by comparing it with what actually happened.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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For assessment year 2014-15 the assessee company collected securities premium of Rs 2,45,02,463. In December 2013 it allotted 10,42,658 shares of Rs 10 face value at a premium of Rs 23.50 to eleven persons, for total consideration of Rs 3,49,29,043. Section 56(2)(viib) applied from that year. Asked to substantiate the premium, the assessee produced a chartered accountant's certificate dated 10 November 2013 valuing the shares by the discounted cash flow method at Rs 42 per share: actual revenue of Rs 1,933 lakh for financial year 2012-13, then estimated growth of 15 per cent, 25 per cent, 25 per cent, 15 per cent and 15 per cent over the following five years, with margins rising from 5 per cent to 9 per cent, cash flows discounted at 15 per cent giving a present value of Rs 549 lakh plus terminal value of Rs 1,322 lakh. The certificate itself said the projections were the management's estimates and gave no assurance on their accuracy. The Assessing Officer found no scientific basis for the projections, adopted net asset value instead, and compared projections with actuals — actual sales were 55.4 per cent, 30.7 per cent and 26.7 per cent of projections over three years and actual profit before tax was negative against projected profits. He added Rs 1,12,21,109 as the excess received from residents. The Commissioner (Appeals) confirmed. Before the Tribunal the Bench pointed out that revenue had fallen in each of the first six months of financial year 2013-14, and the assessee could give no basis for projecting Rs 1,270 lakh for the next six months.
The appeal was allowed for statistical purposes. The order of the Commissioner (Appeals) was set aside and the matter restored to the Assessing Officer for fresh decision in the light of the Bombay High Court's judgment in Vodafone M-Pesa Ltd v PCIT. The Tribunal set out its conclusions in three parts. First, the Assessing Officer can scrutinise the valuation report; if he is not satisfied with the assessee's explanation he must record his reasons and the basis for not accepting it, and only then may he make his own valuation or obtain a fresh report from an independent valuer and confront the assessee with it — but the basis has to be the DCF method and he cannot change the method the assessee has opted for. Second, in scrutinising the report only the facts and data available on the valuation date are to be considered, and actual future results cannot be a basis for deciding the reliability of the projections. Third, the primary onus of proving the correctness of the valuation report is on the assessee, who has special knowledge, is privy to the company's facts and has chosen the method; he must satisfy the officer about the projections, the discounting factor and the terminal value with empirical data, industry norms, scientific data or method and the applicable guidelines on DCF valuation. The Tribunal added that where the company is a start-up with no past data, projections may rest on expectations, which need only be shown to be reasonable after considering macro and micro economic factors.
The Tribunal found as a fact that the chartered accountant's certificate rested on management projections and that the assessee had not conclusively established that those projections were made on a scientific basis. It then went to the statute, rules 11U and 11UA, and the guidance of the ICAI research committee on DCF valuation, which treats cash flow projections as the first and most critical input of the model. Reasoning by analogy from Bharat Earth Movers, where a future liability capable of estimation with reasonable certainty was held not contingent, and from Rotork Controls, where a provision may be recognised only if a reliable estimate can be made of the obligation, the Tribunal held that a projection which is not shown to be a reliable estimate achievable with reasonable certainty cannot be recognised — and if the future cash flow cannot be recognised, the DCF method is not workable. On the competing question of method, the Tribunal preferred the Bombay High Court's judgment in Vodafone M-Pesa to the several Tribunal orders cited on both sides. That judgment holds that there is no immunity from scrutiny of the valuation report, that the officer may determine a fresh valuation himself or through an independent valuer and confront the assessee, but that the basis must remain the DCF method because the choice of method is the assessee's. From these two strands the Tribunal drew the balance it recorded: method belongs to the assessee, scrutiny belongs to the officer, the test is the data available at the valuation date, and the burden of establishing the inputs is the assessee's.
But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee.
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Handle my notice → Ask a CA on WhatsAppIt depends, and the Tribunal split the point. The Bangalore Bench held that where the assessee opts for the discounted cash flow method under rule 11UA(2), the Assessing Officer cannot switch to the net asset value method; following the Bombay High Court in Vodafone M-Pesa, he may scrutinise the report and make his own fresh valuation, but the basis must stay DCF. He must also judge the report on facts available at the valuation date, not on actual later results. But the onus of showing the projections were a reliable estimate rests on the assessee. The matter went back to the Assessing Officer. This was decided by the ITAT (Income Tax Appellate Tribunal, 'B' Bench, Bangalore — A.K. Garodia, Accountant Member and Laliet Kumar, Judicial Member) and bears on section 56(2)(viib) of the Income Tax Act 1961. It is reported as ITA No.1278/Bang/2018 (ITAT Bangalore). This is the working checklist for a section 56(2)(viib) valuation dispute, and it is even-handed enough to be cited by both sides. It fixes three propositions in one place: the choice of method under rule 11UA(2) belongs to the assessee and the officer cannot substitute NAV; hindsight is not a permissible test, so a shortfall against projections cannot by itself condemn the report; and the primary onus of establishing the projections, the discounting factor and the terminal value lies on the assessee, who alone is privy to the facts. The Tribunal also carves out start-ups, where no past data exists and projections rest on reasonable expectations rather than reliable estimates from history. Reach for it when the officer has thrown out a DCF report by comparing it with what actually happened. If it applies to you, the first step is this: Put the working papers behind the projections on record at assessment stage — past performance, industry data, macro and micro assumptions — because the onus of showing the estimate was reliable is on you.
For assessment year 2014-15 the assessee company collected securities premium of Rs 2,45,02,463. In December 2013 it allotted 10,42,658 shares of Rs 10 face value at a premium of Rs 23.50 to eleven persons, for total consideration of Rs 3,49,29,043. Section 56(2)(viib) applied from that year. Asked to substantiate the premium, the assessee produced a chartered accountant's certificate dated 10 November 2013 valuing the shares by the discounted cash flow method at Rs 42 per share: actual revenue of Rs 1,933 lakh for financial year 2012-13, then estimated growth of 15 per cent, 25 per cent, 25 per cent, 15 per cent and 15 per cent over the following five years, with margins rising from 5 per cent to 9 per cent, cash flows discounted at 15 per cent giving a present value of Rs 549 lakh plus terminal value of Rs 1,322 lakh. The certificate itself said the projections were the management's estimates and gave no assurance on their accuracy. The Assessing Officer found no scientific basis for the projections, adopted net asset value instead, and compared projections with actuals — actual sales were 55.4 per cent, 30.7 per cent and 26.7 per cent of projections over three years and actual profit before tax was negative against projected profits. He added Rs 1,12,21,109 as the excess received from residents. The Commissioner (Appeals) confirmed. Before the Tribunal the Bench pointed out that revenue had fallen in each of the first six months of financial year 2013-14, and the assessee could give no basis for projecting Rs 1,270 lakh for the next six months. The matter was decided on 2019-01-09 by the ITAT (Income Tax Appellate Tribunal, 'B' Bench, Bangalore — A.K. Garodia, Accountant Member and Laliet Kumar, Judicial Member). On those facts the ITAT held as follows. The appeal was allowed for statistical purposes. The order of the Commissioner (Appeals) was set aside and the matter restored to the Assessing Officer for fresh decision in the light of the Bombay High Court's judgment in Vodafone M-Pesa Ltd v PCIT. The Tribunal set out its conclusions in three parts. First, the Assessing Officer can scrutinise the valuation report; if he is not satisfied with the assessee's explanation he must record his reasons and the basis for not accepting it, and only then may he make his own valuation or obtain a fresh report from an independent valuer and confront the assessee with it — but the basis has to be the DCF method and he cannot change the method the assessee has opted for. Second, in scrutinising the report only the facts and data available on the valuation date are to be considered, and actual future results cannot be a basis for deciding the reliability of the projections. Third, the primary onus of proving the correctness of the valuation report is on the assessee, who has special knowledge, is privy to the company's facts and has chosen the method; he must satisfy the officer about the projections, the discounting factor and the terminal value with empirical data, industry norms, scientific data or method and the applicable guidelines on DCF valuation. The Tribunal added that where the company is a start-up with no past data, projections may rest on expectations, which need only be shown to be reasonable after considering macro and micro economic factors.
The Tribunal found as a fact that the chartered accountant's certificate rested on management projections and that the assessee had not conclusively established that those projections were made on a scientific basis. It then went to the statute, rules 11U and 11UA, and the guidance of the ICAI research committee on DCF valuation, which treats cash flow projections as the first and most critical input of the model. Reasoning by analogy from Bharat Earth Movers, where a future liability capable of estimation with reasonable certainty was held not contingent, and from Rotork Controls, where a provision may be recognised only if a reliable estimate can be made of the obligation, the Tribunal held that a projection which is not shown to be a reliable estimate achievable with reasonable certainty cannot be recognised — and if the future cash flow cannot be recognised, the DCF method is not workable. On the competing question of method, the Tribunal preferred the Bombay High Court's judgment in Vodafone M-Pesa to the several Tribunal orders cited on both sides. That judgment holds that there is no immunity from scrutiny of the valuation report, that the officer may determine a fresh valuation himself or through an independent valuer and confront the assessee, but that the basis must remain the DCF method because the choice of method is the assessee's. From these two strands the Tribunal drew the balance it recorded: method belongs to the assessee, scrutiny belongs to the officer, the test is the data available at the valuation date, and the burden of establishing the inputs is the assessee's. In the words reproduced by the source cited on this page: "But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee."
It was decided by the ITAT on 2019-01-09 and is reported as ITA No.1278/Bang/2018 (ITAT Bangalore). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 56(2)(viib), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The appeal was allowed for statistical purposes. The order of the Commissioner (Appeals) was set aside and the matter restored to the Assessing Officer for fresh decision in the light of the Bombay High Court's judgment in Vodafone M-Pesa Ltd v PCIT. The Tribunal set out its conclusions in three parts. First, the Assessing Officer can scrutinise the valuation report; if he is not satisfied with the assessee's explanation he must record his reasons and the basis for not accepting it, and only then may he make his own valuation or obtain a fresh report from an independent valuer and confront the assessee with it — but the basis has to be the DCF method and he cannot change the method the assessee has opted for. Second, in scrutinising the report only the facts and data available on the valuation date are to be considered, and actual future results cannot be a basis for deciding the reliability of the projections. Third, the primary onus of proving the correctness of the valuation report is on the assessee, who has special knowledge, is privy to the company's facts and has chosen the method; he must satisfy the officer about the projections, the discounting factor and the terminal value with empirical data, industry norms, scientific data or method and the applicable guidelines on DCF valuation. The Tribunal added that where the company is a start-up with no past data, projections may rest on expectations, which need only be shown to be reasonable after considering macro and micro economic factors. It arises in Assessment & Scrutiny and Cash Credits & Unexplained Money matters, on section 56(2)(viib) of the Income Tax Act 1961, and was decided by Income Tax Appellate Tribunal, 'B' Bench, Bangalore — A.K. Garodia, Accountant Member and Laliet Kumar, Judicial Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Object at once if the officer moves to net asset value: under rule 11UA(2) the choice of method is the assessee's, and Vodafone M-Pesa holds the officer to the DCF basis. Meet any hindsight comparison head on: the report is to be tested on the facts and data available at the valuation date, not on actual later results. If the company is a start-up with no past data, say so and frame the projections as reasonable expectations supported by macro and micro factors, which the Tribunal expressly allows.
Still good law. A citator search returns 31 later decisions and the order is applied as settled practice by the Bangalore Bench. In M/s Flutura Business Solutions Private Ltd v ITO (ITAT Bangalore, 30 June 2020) the Bench set out that 'In the case of Innoviti Payment Solutions Pvt. Ltd. Vs. ITO (supra), this judgment of Hon'ble Bombay High Court was followed and the matter was restored back to the file of AO for a fresh decision with a direction that AO should follow DCF method only and he cannot change the method opted by the assessee', and then held 'In the present case also, we decide this issue on similar line and restore the matter back to the file of AO for a fresh decision with similar directions' — an adoption as the operative ground, in the assessee's favour. The same course is taken in Signure Technologies (3 July 2020), VBHC Value Homes (12 June 2020), Taaq Music (28 September 2020), Town Essential (30 June 2021), UKN Hospitality (30 June 2021), 3P Technologies (25 August 2021), Waterline Hotels (13 September 2022) and Finwizard Technology (28 March 2024). Nothing overruling or doubting it was found. Note that the order itself splits the point: the AO may still examine the assumptions underlying the DCF working, only not substitute the method. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The harvested text is clipped: about 12,000 characters from the middle are missing, covering the remainder of the rules 11U and 11UA extracts and the start of the Tribunal's discussion of the ICAI guidance. The opening facts, the parties' arguments, the Tribunal's reasoning from paragraph 10 onwards and the full operative order are present, so the holding is safe, but the intermediate reasoning has been read only in part. The batch line lists rule 11UA(2), which is not a section of the Act and so is not carried in the sections list, though it is central to the order. No reporter citation is available from the source, so the appeal number is given instead. The assessment year was 2014-15 and the order remits the matter, so it decides no final figure. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed for statistical purposes. The order of the Commissioner (Appeals) was set aside and the matter restored to the Assessing Officer for fresh decision in the light of the Bombay High Court's judgment in Vodafone M-Pesa Ltd v PCIT. The Tribunal set out its conclusions in three parts. First, the Assessing Officer can scrutinise the valuation report; if he is not satisfied with the assessee's explanation he must record his reasons and the basis for not accepting it, and only then may he make his own valuation or obtain a fresh report from an independent valuer and confront the assessee with it — but the basis has to be the DCF method and he cannot change the method the assessee has opted for. Second, in scrutinising the report only the facts and data available on the valuation date are to be considered, and actual future results cannot be a basis for deciding the reliability of the projections. Third, the primary onus of proving the correctness of the valuation report is on the assessee, who has special knowledge, is privy to the company's facts and has chosen the method; he must satisfy the officer about the projections, the discounting factor and the terminal value with empirical data, industry norms, scientific data or method and the applicable guidelines on DCF valuation. The Tribunal added that where the company is a start-up with no past data, projections may rest on expectations, which need only be shown to be reasonable after considering macro and micro economic factors.
TaxSphere, “Innoviti Payment Solutions (P) Ltd v ITO”, https://taxnotice.vittsphere.com/caselaw/case/innoviti-payment-solutions-p-ltd-v-ito/ (validity last checked 2026-08-29)
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The department says my DCF projections never came true. Is that enough to tax my share premium?
The officer has reopened my scrutiny assessment because the audit party disagreed with what he allowed. Is that a fresh look or a change of opinion?
We issued shares to our foreign parent at a premium the Transfer Pricing Officer says is too low. Can he tax the shortfall as income under the transfer pricing provisions?
Can the AO switch my valuation from DCF to NAV because the NAV figure suits him better?
