AO Cannot Reject The Prescribed Method Of Valuation, ITAT Deletes Addition Under Section 50CA

BACKGROUND

• The Assessee¹ is an individual, engaged in business of trading of shares.
• The Assessee transferred 801 shares in Cash Grail (P) Ltd (‘CGPL') to Vun Internet Partners in April 2021 at a sale consideration of INR 54,960 per share determined in accordance with Net Asset Value (‘NAV') method prescribed under Rule 11UA of the Income-tax Rules, 1962 (‘the Rules').
• Thereafter, in February 2022 the Assessee sold 595 shares of CGPL at INR 7,29,938/- per share to M/s Nepean Investments Trust–II based on the valuation determined using Discounted Free Cash Flow (‘DFCF') method prescribed under Rule 11UA.
• Rejecting the Assessee's claim, Assessing Officer (‘AO') contented that:
  1. AO noted the huge gap between the value of shares deriving from two different valuation methods, rejected the valuation of shares and substituted the sale consideration on sale of 801 shares with INR 7,12,664 per shares as against INR 54,960 per share.
  2. AO made addition of INR. 52.68 Crores under u/s 48 read with section 50CA of the Income-tax Act, 1961 (‘the Act') on the account of notional sale consideration assumed by the AO on the sale of 801 shares.
• Observations of CIT (Appeals):
  1. Rule 11UA allows the Assessee to follow either NAV or DFCF method for determining fair market value (‘FMV') of unlisted shares as on the date of transfer of shares.
  2. Prescribed rules do not restrict the Assessee from using the different methods for sale of unlisted shares on different dates.
  3. Further, AO cannot question, and bound to follow, the valuation method adopted by the Assessee for computing FMV of unlisted shares unless AO points out any error(s) in the said method by bringing cogent material on record. 
  4. CIT(A) relied on the decision² of Mumbai Tribunal and held that AO cannot question the method adopted by the Assessee and bound to follow the same unless a mistake in the method is demonstrated.
  5. Hence, CIT(A) deleted the addition made u/s 50CA by the AO and ruled decisively in favour of the Assessee.

TRIBUNAL'S OBSERVATIONS

• ITAT observed that both NAV and DFCF are prescribed methods under Rule 11UA and the choice of usage of method of valuation of shares always vested with the Assessee, which cannot be tinkered by the AO without pointing out any defect in the said valuation report from a third-party expert
• Further, ITAT observed that no defects were found by the AO in the two valuation reports and also failed to conduct any inquiry with the buyer of such shares and failed to bring any material on record to prove that anything over and above the sale price was received by the Assessee.
• ITAT upheld the detailed order of CIT(A) without finding any infirmity in the order and accordingly dismissed the ground raised by the Revenue.

AURTUS COMMENTS

• The ruling enforces the principle that where the Assessee has followed the prescribed methods to carry out valuation, difference in value of shares arising on account of following different valuation method should not result into any adverse tax implications.
• The onus to prove the error in the method adopted by the Assessee rests squarely on the Revenue.

Footnotes

1. Manish Vij - ITA No. 1746/Del/2025 

2. [2022] 134 taxmann.com 223 (Mumbai - Trib.)

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