(viib), holding that later notification under Rule 11UA cannot invalidate a recognised method.){kind=link}
The Delhi High Court, in Pr. Commissioner of Income Tax–1 v. M/s Etawah Chakeri (Kanpur) Highway Private Limited, ITA 160/2026, decided on 4 August 2026, has upheld the assessee’s adoption of the Discounted Cash Flow (DCF) method for valuation of shares issued at a premium, even though the DCF method was formally incorporated into Rule 11UA of the Income Tax Rules, 1962 only after the date on which the shares were issued. The Court dismissed the Revenue’s appeal and affirmed the concurrent findings of the CIT(A) and the Income Tax Appellate Tribunal.
The assessee company, incorporated in December 2011, was awarded a National Highways Authority of India project for construction of the six-lane Etawah-Chakeri section of NH-2 under the Design, Build, Finance, Operate and Transfer model. On 29 August 2012, it allotted shares of face value ₹10 to its parent companies at a premium of ₹90 per share. The valuation was supported by a Chartered Accountant’s report dated 31 May 2012 applying the DCF method.
The Assessing Officer questioned the valuation and took the view that valuation was required to be undertaken under the Net Asset Value method prescribed under Rule 11UA. While examining the DCF computation as well, the AO substituted the expected return and cost-of-capital assumptions adopted by the valuer, resulting in a negative company valuation. The AO ultimately adopted ₹10 per share as the fair market value and made an addition of ₹90 crore under Section 56(2)(viib) read with Section 2(24) of the Income Tax Act, 1961.
The CIT(A) deleted the addition, holding that the valuation adopted by the assessee under the DCF method was justified and that the AO had erred in arriving at a negative DCF value. The ITAT subsequently affirmed the appellate order, observing that the DCF method was a recognised method of valuation and that its subsequent recognition in the Rules should not lead to rejection of the assessee’s valuation merely on a technical ground.
Delhi High Court on Recognised and Notified Valuation Methods
A significant aspect of the judgment is the Court’s distinction between a valuation method being “recognised” and being “notified.” The High Court observed that a method is recognised when it is accepted by experts and persons engaged in the relevant field, whereas it becomes notified when the legislature formally incorporates it into the statutory framework.
The Court noted that the DCF method was introduced into Rule 11UA with effect from 29 November 2012, only around three months after the assessee had issued its shares on 29 August 2012. The subsequent notification itself demonstrated that DCF was an established and recognised method of valuation. The Court found no justification for treating the same valuation methodology as valid when applied after 29 November 2012 but invalid merely because the assessee had adopted it shortly before the formal amendment.
NAV Method May Not Reflect Value of a Newly Incorporated Company
The High Court also recognised the practical limitations of the NAV method in the case of a newly incorporated company. It observed that the Assessing Officer could not ignore commercial and financial realities while examining the value of shares of a new enterprise.
In such circumstances, share value may depend upon future business potential and projections rather than merely the existing net assets of the company. The assessee’s explanation for adopting the DCF method was therefore considered valid in the facts of the case.
AO Must Identify Specific Flaws in the Valuation
The Court made an important observation regarding the permissible scope of scrutiny by the Assessing Officer. If the AO considers the valuation furnished by an assessee to be incorrect, the AO must identify identifiable defects or flaws either in the valuation report or in the methodology adopted.
In the present case, the AO had altered the expected rate of return adopted by the assessee’s valuer and substituted it with his own assessment. The High Court held that the AO could not effectively assume the role of an economist and determine the probable or expected rate of return in place of the assessee or the professional valuer.
According to the Court, while the AO may point out deficiencies in the valuation methodology, he cannot reject the valuation merely by substituting his own perception regarding the expected rate of return without establishing a valid flaw in the valuation exercise.
Procedural Rules Cannot Defeat Substantive Rights
The High Court further characterised the valuation methods prescribed under the Rules as procedural in nature. It held that procedural requirements should not be applied in a manner that defeats substantive rights unless there is a substantial breach or violation of law.
Accordingly, the fact that the DCF method was formally notified under Rule 11UA only after the assessee had undertaken the valuation did not, in the circumstances of the case, render the valuation invalid.
Verdict
The Delhi High Court found no reason to interfere with the concurrent findings of the CIT(A) and the ITAT and consequently dismissed the Revenue’s appeal.
The judgment underscores that valuation disputes under Section 56(2)(viib) cannot be decided purely on technical considerations divorced from accepted valuation practices. Where an assessee adopts a recognised valuation methodology supported by an expert report, the Assessing Officer must demonstrate concrete defects in the methodology or valuation assumptions before rejecting it. The formal notification of a recognised valuation method at a later date, by itself, was not considered sufficient to invalidate its earlier adoption in the facts before the Court.