FRATELLI WINES PVT. LTD.,NEW DELHI V. ACIT,CENTRAL CIRCLE-15, NEW DELHI

ITA 3124/DEL/2023

AI Insights

Fratelli Wines Pvt. Ltd. appealed against the order of the Commissioner of Income Tax (Appeals) which confirmed the addition of Rs. 11,24,20,617 as income from other sources under section 56(2)(viib) of the Income Tax Act, 1961. The addition was initially made by the AO who rejected the valuation reports submitted by the assessee for the preferential allotment of equity shares, substituting his own valuation based on the Net Asset Value (NAV) method. The Tribunal found that the AO had no authority to change the method of valuation opted by the assessee, which was DCF, and remanded the matter back to the AO for a fresh valuation using the same method.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 102472 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-04-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2018-2019
• Other Referred Cases: PCIT Vs. Cinestaan Entertainment Pvt. Ltd., I.A. Hydro-energy Pvt. Ltd. vs. PCIT, VVA Hotels Pvt. Ltd. vs. ITO, DCIT Vs. Hometrail Buildtech Pvt. Ltd., Intelligrape Software Pvt. Ltd. Vs. ITO, Agra Portfolio (P) Ltd. Vs. PCIT, VBHC Value Homes Pvt. Ltd. Vs ITO, Dy. CIT vs. Credtalpha Alternative Investment Advisors (P.) Ltd., Taaq Music Pvt. Ltd. vs. Income Tax Officer, Vodafone M-Pesa Ltd. v PCIT, Sodexo Facilities Management Services vs. DCIT, M/s MLR Auto Limited vs. JCIT, Abhirvey Projects (P) Ltd. vs. PCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Assessee Lawyers: SALIL AGGARWAL; .; ADOPTING DISCOUNTED CASH FLOW METHOD. THEREFORE
• Keywords: Set aside; Question of law; Depreciation; Fair market value; Cost of acquisition; Onus to prove; Valuation report; Revision of order
• Section: 148; 143(3); 250; 143(1); 263; 56; 68; 43; 13; 40(a)(ia)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘B’: NEW DELHI BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENT AND SHRI MANISH AGARWAL, ACCOUNTANT MEMBER ITA No.3124/Del/2023 (ASSESSMENT YEAR 2018-19) Fratelli Wines Pvt. Ltd. A-35, Brij Greens, Village-Satbari Chattarpur, New Delhi-110074 PAN-AABCF2756L Vs. Asst. Commissioner of Income Tax, Central Circle-15, New Delhi. (Appellant) (Respondent) Assessee by Shri Salil Aggarwal, Sr. Adv., Shri Shailesh Gupta, CA, Shri Uma Shankar, Adv. Shri Madhur Aggarwal, Adv. and Shri Mahir Aggarwal, Adv. Department by Shri Surender Pal, CIT-DR Date of Hearing 19/03/2025 Date of Pronouncement 16/04/2025 O R D E R PER MANISH AGARWAL, AM: This appeal is filed by the assessee against the order of Ld. Commissioner of Income Tax (Appeals) [CIT(A) in short] -28, New Delhi in appeal No. 26/10531/2017-18 dated 21.09.2023 for AY 2018-19 passed u/s 250 of the Income Tax Act, 1961 [the Act]. 2. Brief facts of the case are that assessee is a company engaged in the manufacturing of wines. The return of income was e-filed on 2 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT 26.10.2018 declaring NIL income. The case of the assessee was selected for complete scrutiny and the assessment was completed u/s 143(3) vide order dated 03.06.21 wherein an addition of Rs. 11,24,20,617/- was made u/s 56(2)(viib) of the Act and further disallowance of Rs. 10,328/- was made by invoking the provision of section 40(a)(ia) of the Act. The assessee has made preferential allotment of equity shares on two occasions where on first occasion, the allotment was made of 10,48,666 equity shares having face value of Rs. 10/- each at a premium of Rs. 140/- each and such offer was valid for one year. On the second occasion, the preferential allotment of equity shares was made at a premium of Rs. 172/- each for the face value of per equity share at Rs. 10/-. During the course of assessment proceedings, it was explained by the assessee that in terms of the special resolution passed in EGM on 22.11. 2016, an offer was made for preferential allotment of 10,48,666 equity shares, out of which 799332 equity shares were subscribed in FY 2016-17 relevant to AY 2017-18 and balance 2,49,334 equity shares were subscribed in the previous year relevant to assessment year before us in present appeal. Such offer was valid for one year. The premium was charged in terms of the valuation report dated 20.10.2016 which is based on the audited Balance Sheet of the assessee for financial year ended on 31.03.2016 and projections were made under DCF method of the going concern assumptions. 3. Thereafter in terms of the special resolution passed in EGM on 12.10.2016, again preferential allotment of 11,53,845 equity shares 3 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT was made at a premium of Rs. 172/- per equity shares having face value of Rs. 10/- each out of which 6,59,340 equity shares were subscribed in FY 2017-18 relevant to AY 2018-19 i.e. the year under appeal and balance 4,94,505 equity shares were subscribed in FY 2018-19 i.e. the next assessment year. Such offer was also valid for one year. The premium was charged in terms of the valuation report dated 08.09.2017 which is based on the audited Balance Sheet of the assessee for financial year ended on 31.03.2017 and projections were made under DCF method of the going concern assumptions. 4. Before the AO, the Assessee had filed two separate valuation reports as referred to above in support of the premium charge alongwith the copy of the special resolution and return of allotment before the Registrar of Companies. The Assessing Officer by raising doubts on the valuation made by the valuer has rejected such valuations and substituted the fair market value of shares at Rs. 49.50 per share which was stated to have been calculated in terms of rule 11UA(2)(a) of the Income Tax Rules, 1962 and made the addition of Rs. 11,24,20,617/- u/s 56(2)(viib) as Income from Other Sources in the hands of the assessee company. 5. Against such order, the assessee preferred an appeal before ld. CIT(A) who vide impugned order dated 21.09.23 has partly allowed the appeal of the assessee where the disallowance made u/s 40(a)(ia) was deleted and addition of Rs. 11,24,20,617/- made u/s 56(2)(viib) of the act was confirmed. Aggrieved by the order of ld. CIT(A), 4 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT assessee is in appeal before this tribunal by taking following grounds of appeal: “1. That having regard to the facts and circumstances of the case ld. Commissioner of Income Tax (A) erred in confirming the addition of Rs. 11,24,20,617/- made by ld.AO u/s 56(2)(viib) of the Income Tax Act and the addition so confirmed by the by ld. Commissioner of Income Tax (A) is arbitrary, against law and facts on record and is not sustainable on various legal and factual grounds. 2. That having regard to the facts and circumstances of the case, ld. Commissioner of Income Tax (A) erred in rejecting the valuation report as per rule 11UA submitted during assessment proceedings and also erred in confirming FMV @ Rs. 49.50 per share by drawing subjective, premeditated and preconceived inferences and the addition so made is not sustainable and is liable to be deleted. 3. The appellant craves leaves to add, alter, amend, or vary the above grounds of appeal at or before the time of hearing.” 6. Before us, the ld. AR argued that the assessee has followed the due procedure as prescribed in section 56(2)(viib) of the Act according to which the fair market of the unquoted equity shares was determined by following the method prescribed i.e. the DCF method. He further submitted that section 56(2)(viib) of the Act provided that addition could only be made where the consideration was received in excess of fair market value of such shares. The fair market value of the shares is to be determined in terms of the rule 11UA(2) where the fair market value of unquoted equity shares can be determined in the manner provided however, the choice of the method is at the option of the assessee. As per rule 11UA(2)(a), the valuation could be done on the basis of Net Asset Value (NAV) method or discounted cash flow method (DCF method). As per 11UA(2)(b), the fair market value of 5 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT unquoted equity shares could only be determined by a merchant banker or by an accountant. The assessee had opted the DCF method for determination of fair market value of shares and submitted the report of the accountant before the Assessing Officer which are placed in the paper book pages 93-97 and 100-105. Ld. AR further submitted that the choice of method for valuation of unquoted equity shares is at the option of the assessee therefore, the AO cannot tinkered with the same. He further submitted that the AO has not referred the matter for valuation to the person specified under the Rule 11UA in this regard and on his own had made the valuation of Rs. 49.50 per share based on NAV method. 7. The ld. AR further submitted that AO has no power to change the method of valuation adopted by the assessee unless he has obtained a report from the expert. For this, he placed reliance on the judgement of Hon’ble Jurisdictional High Court in the case of PCIT Vs. Cinestaan Entertainment Pvt. Ltd. in ITA No. 1007/2019 reported in 433 ITR 82. It is further submitted by the Ld. AR that part of the equity shares were subscribed and allotted in preceding assessment year as well as in subsequent assessment year. The assessment for immediately preceding year i.e. in AY 2017-18 was completed u/s 143(3) where the valuation was doubted by the AO however, the addition of Rs. 21,72,44,058/- was made u/s 68 of the Act by treating the entire share premium as unexplained. Against the said order, an appeal was filed by the assessee before the ld. CIT(A) who vide order dated 26.06.2020 had deleted the additions and allowed 6 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT the appeal of the assessee. It was further submitted by the ld. AR at bar that no appeal was preferred by the revenue against such order of ld. CIT(A) in preceding assessment year. Ld. AR further submitted that in subsequent assessment year i.e. in AY 2019-20, remaining 4,94,505 equity shares were also subscribed and allotted at a premium of Rs. 172/-. Such return was accepted by the department u/s 143(1) and no action u/s 148 or u/s 263 of the Act was proposed or taken by the department. Thus, by following the principal of consistency also in the year under appeal, no addition is required to be made on account of share premium received on the preferential allotment of equity shares. He prayed accordingly. 8. On the other hand, ld. CIT-DR vehemently supported the orders of the lower authorities. Ld. CIT DR further submitted that the AO in para 4 of the assessment order has pointed out specific defects in the valuation reports submitted by the assessee wherein it is specifically observed that valuer has considered unrealistic terminal value of business as 10% of EBIDTA without any justifiable basis and also failed to disclose the discounting factor, growth rate of revenue, profit etc. Ld. DR thus prayed that additions made deserves to be confirmed. 9. We have heard the rival submissions and perused the material available on record. In the instant case, the assessee company has made preferential allotment of equity shares on two occasions, first, in FY 2016-17 where the shares were issued at a premium of Rs. 140/- each and in FY 2017-18 where the unquoted equity shares 7 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT were issued at a premium of Rs. 172/- each. On both the occasions, the face value of the equity shares of Rs. 10/- each. For the purpose of determination of the fair market value, the assessee has followed the DCF method and obtained the report of an accountant as provided in rule 11UA(2) of the Income Tax Rules, 1962. As per provision of rule 11UA(2), the determination of the fair market value of unquoted equity shares could be made by following two method which are at the option of the assessee. The relevant provision of rule 11UA(2) are as under: “2. Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:- (a) the fair market value of unquoted equity shares =[(A-L)(PE)] x (PV) where, A=book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L=book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (i) the paid-up capital in respect of equity shares; (ii)the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii)reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv)any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income- 8 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v)any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi)any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE=total amount of paid up equity share capital as shown in the balance-sheet; PV=the paid up value of such equity shares; or (b)the fair market value of the unquoted equity shares determined by a merchant banker [***] [Words ] as per the Discounted Free Cash Flow method. 10. From the perusal of the above rule, it is clear that it is at the option of the assessee to get the valuation done of unquoted equity shares for the purpose of section 56(2)(viib) of the Act by using any of the method as specified in clause (a) or clause (b) of Rule 11UA(2) of Income Tax Rules. Once the assessee has opted one of the prescribed methods of valuation of unquoted equity shares, AO has no right to change the same. In this regard, the Hon’ble Jurisdictional High Court in the case of Cinestaan Entertainment Pvt. Ltd. (supra) has held as under: “13. From the aforesaid extract of the impugned order, it becomes clear that the learned ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of fair market values as per prescribed methodology. The Appellant-Revenue had the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method. The Respondent-Assessee being a start-up company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, 9 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent- Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then Appellant-Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the Respondent-Assessee, accepted by the learned ITAT, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the Courts for interfering with the findings of a valuer is not satisfied in the present case, as the Respondent-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. 14. In view of the foregoing, we find that the question of law urged by the Appellant-Revenue is purely based on facts and does not call for our consideration as a question of law.” 11. In the instant case while rejecting the valuation report submitted by the assessee, the AO has not brought on record any alternate report of fair market value of shares obtained from the person authorized under rule 11UA(2) and simply proceeded to 10 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT determine the fair market value on NAV method which is not permissible as has been held by the Hon’ble Jurisdictional High Court in the case of Cinestaan Entertainment (Supra). Further the Hon’ble Himachal Pradesh HC in the case of I.A. Hydro-energy Pvt. Ltd. reported in 163 taxmann.com 408 has held as under: Section 56 of the Income-tax Act, 1961, read with rule 11UA of Income Tax Rules, 1962 – Income from other sources – Chargeable as (share premium, valuation of shares) – Assessment Year 2018-19 – Whether Assessing Officer has no jurisdiction to substitute NAV method of assessing valuation of shares, once assessee has exercised option of a DCF valuation method as per rule 11UA(2) – Held, yes [para 19] [in favour of assessee]. 12. Similar view is expressed by the Hon’ble Madras High Court in the case VVA Hotels Pvt. Ltd. reported in 122 taxmann.com 106 (Madras) and by coordinate bench of ITAT, Delhi in the case of DCIT Vs. Hometrail Buildtech Pvt. Ltd. reported in 155 taxmann.com 178 and in the case of Intelligrape Software Pvt. Ltd. Vs. ITO in ITA No. 3925/Del./2018. 13. Regarding the argument of the assessee of consistency, it is seen that in the immediately preceding year, though the AO has rejected the method of valuation adopted by the assessee but finally additions were made u/s 68 of the Act by holding the share premium as unexplained and no addition was made u/s 56(2)(viib) of the Act. Thus, there was no observations of the appellate authority on this issue. Further in subsequent assessment year i.e. in AY 2019-20, since the assessment was not completed u/s 143(3), and the return was processed u/s 143(1) of the Act, it cannot be hold that the revenue has accepted the contention of the assessee. Thus the 11 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT principal of consistency is not applicable to the facts of the present case of assessee. 14. From the perusal of the order of the lower authorities, we find that both the AO and ld. CIT(A) has pointed out specific defects in the valuation reports submitted by the assessee. However, instead of getting a fresh report from the valuer after removing such errors, the AO changed the method of valuation from DCF method to NAV method. We have already held that the AO cannot changed the method of valuation from DCF method to NAV method. However, the assessee should meet out the errors and deficiencies as pointed out by the AO in para 4 of the order, but no effort was made on the part of the assessee to explain the deficiencies pointed out by the AO either before the AO or before the ld. CIT(A) and they remained unanswered by the assessee. Further from the perusal of these deficiencies, it is seen that they were not general in the nature but very specific and had direct impact on the estimation and projection of revenue of subsequent years under DCF method, thus needs to be answered by the assessee even when the DCF method is held to be the appropriate method for computing the fair market value of shares. 15. At this juncture, we may refer the judgement of hon’ble jurisdictional high court in the case of Agra Portfolio (P) Ltd. Vs. PCIT reported in 464 ITR 348 (Delhi) wherein the hon’ble court has remitted back the matter of valuation of unquoted shares to the file 12 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT of the AO with the directions that AO should adopt the method followed by the assessee and carry out the fresh valuation after independent examination of the facts. The relevant observations of the Hon’ble court are as under: “16. In our considered opinion, the language of Rule 11UA(2) indubitably places a choice upon the assessee to either follow the route as prescribed in clause (a) or in the alternative to place for the consideration of the AO a Valuation Report drawn by a merchant banker as per the DCF method. However, and as is manifest from a conjoint reading of Section 56(2)(viib) read along with Rule 11UA(2), the option and the choice stands vested solely in the hands of the assessee. 17. While it would be open for the AO, for reasons so recorded, to doubt or reject a valuation that may be submitted for its consideration, the statute clearly does not appear to empower it to independently evaluate the face value of the unquoted equity shares by adopting a valuation method other than the one chosen by the assessee. It is this aspect which was duly acknowledged by the Bombay High Court in Vodafone M-Pesa (supra). 18. We note that the view as taken by the Bombay High Court in the aforenoted judgment appears to have been consistently followed by Tribunals of different regions as would be evident from the discussion which ensues. We, in this regard, firstly take into consideration the judgment rendered by the Mumbai Bench of the ITAT in DCIT, Circle 13(2)(2), Mumbai vs. Sodexo Facilities Management Services [IT Appeal No. 2945(Mum) of 2022 dated 25.05.2023] where it was held as under:- \"18. On the other hand, Ld. Counsel for the assessee submitted that the AO has not accepted the method of valuation which was furnished by the assessee. The valuer computed the FMV by averaging the valuation as per PECV method as well as net asset value method. He submitted that when the legislation has conferred an option on the assessee to choose a particular method of the valuation, the AO cannot find fault in the said recognized method and adopting the method of his own choice. In support of this, he relied on the decision of the Hon'ble Jurisdictional High Court in the case of Vodafone M-Pesa Ltd. v PCIT (2018) 164 DTR 257/ 256 Taxman 240 (Bom)(HC). As far as the worth of food division is concerned, the Ld. Counsel for the assessee submitted that assessee has followed the method prescribed under section 50B(3) of the Act alongwith Explanation (2). He submitted that in the net worth computed by the assessee and in the AO, there is 13 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT only one difference. It was submitted that the assessee following the Explanation-2 below section 50B(3) of the Act has adopted written down value of the block asset in case of the depreciable asset as per the proviso to section 43 of the Act, which the AO has omitted. 19. We have heard rival submissions on the issue in dispute and perused the material on record. We find that computation of LTCG on the transfer of undertaking as the slump sale consists of two components. First component is sale consideration and the second component is the net worth or cost of acquisition. When the net worth of division is subtracted from the sale consideration, which results into LTCG on the slump sale. In the case of the assessee, the AO has taken FMV at Rs. 7,20,32,509/- which was worked out by the valuer following the PECV method, whereas the assessee has followed average value of PECV method as well as NAV method to justify the sale consideration actually received. We are of the opinion that ld Assessing Officer has not carried out valuation by an independent valuer and merely chosen a part of the valuation report submitted by the assessee. Therefore, we restore back the issue to the AO for referring the matter to a valuation expert by way of the issue of commission and thereafter, determining the FMV of the undertaking of the food division of the assessee.\" 19. Proceeding along similar lines, the Hyderabad Bench of the ITAT in Joint Commissioner of Income Tax vs. M/s MLR Auto Limited [IT Appeal NO. 115 (Hyd.) of 2021, dated 28-12-2023] had held as follows:- \"17.1. The conjoint reading of Section 56(2)(viib) and Rule 11U and 11UA makes it abundantly clear that in case assessee exercised his option for determination of the fair market value of the shares and exercise then such decision of the assessee shall be final and binding on the assessing officer. The option was given by the Act to the assessee either to apply the DCF method or net asset valuation method, this option is not available to the assessing officer. Rule 11UA provides the method of determining the FMV of a property other than the immovable property. Rule 11UA(2) reproduced hereinabove provides the method of providing the FMV of unquoted shares to be determined at the option of the assessee. 17.2. Once the assessee applied particular method of valuation, (in the present case DCF method), then it is the duty of the Assessing Officer / ld.CIT(A) to scrutinize the valuation report within the four corners or parameters laid down while making the valuation report under DCF method only. It is not permissible for the Assessing Officer to reject the method opted by the assessee and apply a 14 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT different method of valuation and the Assessing Officer can definitely reject the valuation report but not the method. In case, the AO rejected the valuation report, then the AO has to carry out a fresh valuation report by applying the same valuation method and determine the fair market value of the unquoted shares. 18.Therefore, in our view, the Assessing Officer was incorrect in concluding that the DCF method is \"quite unrealistic and inapplicable\" to the terms of the Income Tax Act. On the contrary, the DCF method is quite applicable and was required to be applied by the Assessing Officer to determine the FMV of the unquoted shares. .........\" 20. A more detailed discussion on the issue which confronts us in this appeal is found in the judgment rendered by the Mumbai Bench of the ITAT in Dy. CIT vs. Credtalpha Alternative Investment Advisors (P.) Ltd. [2022] 134 Taxmann.com 223/193 ITD 502 and the relevant parts whereof are reproduced hereunder:- \"15. Thus, the fair market value of the share shall be higher of the value as determined in accordance with the provisions of rule 11 UA or any other method, which can be substantiated by the assessee before the Assessing Officer. For the purpose of determining \"fair (2022) 94 ITR (Trib) 596 market value\" of unquoted shares provisions of rule 11 UA (2) applies which gives an option to the assessee to either value the shares as per prescribed formula given in clause (a) or clause (b) which provides for the determination of the fair market value based on discounted cash flow method as valued by a merchant banker or a chartered accountant (till 24th of May 2018). In the present case the assessee has valued the shares according to one of the \"options\"available to assessee by adopting discounted cash flow method. Therefore, such an option given to the assessee cannot be withdrawn or taken away by the learned Assessing Officer by adopting different method of valuation i.e., net asset value method. The method of valuation is always the option of the assessee. The learned Assessing Officer is authorised to examine whether assessee has adopted one of the available options properly or not. In the present case, the learned Assessing Officer has thrust upon the assessee, net asset value method rejecting discounted cash flow method for only reason that there is a deviation in the actual figures from the projected figures. It is an established fact that discounted cash flow method is always based on future projections adopting certain parameters such as expected generation of cash flow, the discounted rate of return and cost of capital. In hindsight, on 15 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT availability of the actual figures, if the future projections are not met, it cannot be said that the projections were wrong. To prove that the projections were unreliable, the learned Assessing Officer must examine how the valuation has been done. In a case future cash flow projections do not meet the actual figures, rejection of discounted cash flow method is not proper. If projected future cash flow and actual result matches, such situation would always be rare. For projecting the future cash flow certain assumptions are required to be made, there needs to be tested and then such exemptions becomes the base of estimation of such projected future cash flows. If there are no assumptions, there cannot be an estimate of future projected cash flows and then discounted cash flow method becomes redundant. For exercise of valuation, assumption made by the valuer and information available at the time of the valuation date are relevant. As the exercise of valuation must be viewed as on the date of the valuation looking forward and cannot be reviewed in retrospect. Further, the valuation is always made based on review of historical data and projected financial information provided by the management. Further report of expert will always include limitation and responsibilities but that does not make his report incorrect. Of course, if there are errors in the working of projected cash flow, estimating the projected revenue and projected expenditure as well as in adoption of cost of equity and discount factor, the learned Assessing Officer is within his right to correct it after questioning the same to the assessee. The learned Assessing Officer can also question the basic assumptions made by the valuer. If they are unreasonable or not based on historical data coupled with the management expectation, the learned Assessing Officer has every right to question it and adjust the valuation so derived at. However, if he does not find any error in those workings, he could not have rejected the same. Further the reason given by the learned Assessing Officer that the net asset value method and the discounted cash flow method for valuation of the shares of the company gives a wide variation between them, we do not find any reason to find fault with the assessee in such cases. Both these methods have different approaches and methodologies therefore there are bound to be differences, but it does not give any authority to the learned Assessing Officer to pick and choose one of the method and make the addition. It is the assessee who has to exercise one of the options available under the provisions of the law for valuing the shares. The learned Assessing Officer needs to examine that method. Naturally, if the discounted cash flow method and net asset value method gives the same result, where would have been the need to prescribe the two methods in the law. In view of above facts, we do not find any 16 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT infirmity in the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition of Rs. 69,000,000 made by the learned assessing officer u/s 56 (2) (viib) of the act. Accordingly, ground Nos. 3 and 4 of the appeal of the learned Assessing Officer are dismissed.\" 21. We deem it apposite to lastly take note of the following pertinent observations as appearing in a decision rendered by the ITAT Bench at Bangalore in Taaq Music Pvt. Ltd. vs. Income Tax Officer [2020] SCC Online ITAT 9482:- \"11. The law provides that, the fair market value may be determined with such method as may be prescribed or the fair market value can be determined to the satisfaction of the Assessing Officer. The provision provides an Assessee two choices of adopting either NAV method or DCF method. If the Assessee determines the fair market value in a method as prescribed the Assessing Officer does not have a choice to dispute the justification. The methods of valuation are prescribed in Rule 11UA(2) of the Rules. The provisions of Rule 11UA(2)(b) of the Rules provides that, the Assessee can adopt the fair market value as per the above two methods i.e., either DCF method or fair market value of the unquoted equity shares determined by a merchant banker. The choice of method is that of the Assessee. The Tribunal has followed the judgment of Hon'ble 2020 SCC OnLine ITAT 9482 Bombay High Court rendered in the case of Vodafone M-Pesa Ltd. v. Pr. CIT (supra) and has taken the view that the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the Assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the Assessee. The decision of ITAT, Delhi in the case of Agro Portfolio Ltd. 171 ITD 74 has also been considered by the ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd.(supra). 12. In view of the above legal position, we are of view that the issue with regard to valuation has to be decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd., Vs ITO (supra) i.e., (i) the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. (ii) For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future 17 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT cannot be a basis to decide about reliability of the projections. The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation. The order of ld. CIT(A) is accordingly set aside and this issue is remanded to the AO for decision afresh, after due opportunity of hearing to the Assessee.\" 22. Accordingly, and for all the aforesaid reasons, we allow the instant appeal and set aside the order of the ITAT dated 16 May 2018. The Questions of Law as framed, namely, Question A and C are answered in the negative and in favor of the appellant assessee. In light of the answers rendered in respect of the aforenoted two questions, the additional questions which are framed would not merit an independent examination. The matter shall in consequence stand remitted to the AO which shall undertake an exercise of valuation afresh in accordance with the DCF method. 23. We also accord liberty to the AO to determine the FMV of the shares bearing in mind the DCF Method by having the same independently determined by a Valuer appointed for the aforesaid purpose. 16. The Hon’ble jurisdictional high court in the case of PCIT Vs. Abhirvey Projects (P) Ltd. reported in [2024] 163 Taxmann.com 408 under identical facts has also expressed the same view and made following observations: “2. Today and before us, it is undisputed that the Assessing Officer [\"AO\"] while rejecting the valuation report which had been submitted by the respondent assessee had proceeded to frame the order on the basis of actual figures which had obtained. It was the aforesaid procedure adopted which fell for adverse comment of the Commissioner of Income Tax (Appeal) [\"CIT(A)\"] as well as Income Tax Appellate Tribunal [\"ITAT\"]. It becomes pertinent to observe that an estimation would to some extent be based on an approximate evaluation. That estimation would not be liable to be questioned on the basis of actual facts or figures. Ultimately, 18 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT the correctness of an estimation would have to be tested on the basis of a legitimate and valid assessment. 3. In our considered opinion, while the ITAT was therefore justified in upholding the view taken by the CIT(A), it would have been appropriate for it to have remitted the matter to the AO for the purposes of examining the issue afresh and in light of Section 56(2)(viib) of the Income Tax Act, 1961 [\"Act\"]. 4. In view of the aforesaid, we set aside the impugned order of the ITAT dated 27 December 2022 and remit the matter to the desk of the AO who shall proceed to undertake a valuation afresh bearing in mind the provisions made in Section 56(2)(viib) and ensuring that while the DCF Method is adhered to, if in case the data which has been provided by the respondent assessee is found to warrant further examination, it would be open to the AO to enlist the services of an appropriate valuer. All rights and contentions of respective parties in respect of any such exercise undertaken or assessment made on merits are kept open.” 17. Under these circumstances, keeping in mind the reports of the valuer submitted by the assessee where the valuation was done in terms of the DCF method prescribed under the rules and also considering the fact that as per rule 11UA(2) option for selection of method for valuation is on the assessee who had exercised the same by selecting one of the prescribed methods. Thus, AO is directed to follow the same method and decide a fresh on the line indicated by the coordinate bench of ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd. (supra) where the bench has laid down following parameters for making valuation by the AO: (i) the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. (ii) For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections. 19 ITA No.3124/Del/2023 Fratelli Wines Pvt. Ltd. vs. ACIT The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation. 18. In view of above discussion and on the facts and in the circumstances of the case and by respectfully following the judgement of the hon’ble jurisdictional high court in the case of Abhirvey Projects (P) Ltd (supra) and Agra Portfolio (P) Ltd., we remand back the issue of valuation of unquoted equity share to the file of the AO for determination of fair market value afresh as per DCF method on the basis of parameters laid down by the coordinate bench of ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd.(supra). Accordingly, both the grounds of appeal of the assessee are partly allowed for statistical purposes. 19. In the result, appeal of the assessee is partly allowed. Order pronounced on 16/04/2025. Sd/- Sd/- (MAHAVIR SINGH) (MANISH AGARWAL) VICE PRESIDENT ACCOUNTANT MEMBER Dated: 16/04/2025 PK/Sr. Ps Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "