Geomysore Services (India) Pvt. Ltd. v. ITO – ITAT on DCF Valuation under Section 56(2)(viib)

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) in Geomysore Services (India) Pvt. Ltd. v. Income Tax Officer examined an important issue relating to the valuation of unquoted equity shares under Section 56(2)(viib) of the Income-tax Act, 1961. The dispute centered on whether the Assessing Officer (AO) could disregard the assessee’s valuation based on the Discounted Cash Flow (DCF) method and substitute it with the Net Asset Value (NAV) method while determining the fair market value (FMV) of shares issued at a premium. The Tribunal pronounced its decision on 29 June 2026.

The assessee, engaged in mineral exploration activities, had issued equity shares at a substantial premium after obtaining valuation reports prepared under the DCF method by independent Chartered Accountants. During assessment, the AO rejected the DCF valuation, questioned the assumptions and future projections adopted by the valuers, and instead computed the FMV using the NAV method, resulting in an addition under Section 56(2)(viib). The first appellate authority affirmed the assessment.

The Tribunal held that Rule 11UA gives the assessee the option to adopt either the DCF method or the NAV method for valuation of unquoted equity shares, and the AO has no statutory authority to replace the method chosen by the assessee with another prescribed method. However, the Tribunal also observed that the valuation reports submitted by the assessee suffered from serious deficiencies because the future projections and assumptions were not adequately supported by cogent material, and the objections raised by the AO remained substantially unanswered.

Instead of accepting the AO’s NAV valuation, the Tribunal directed that the matter be restored for obtaining a fresh valuation from an approved valuer using the DCF method itself, thereby ensuring that the statutory method selected by the assessee is preserved while permitting an independent examination of the correctness of the valuation. Both appeals for Assessment Years 2017-18 and 2018-19 were accordingly allowed for statistical purposes.

Key Takeaways

The ruling reiterates that:

• The assessee has the statutory choice to adopt either the DCF or NAV method under Rule 11UA.
• The Assessing Officer cannot substitute the assessee’s chosen valuation methodology merely because he prefers another prescribed method.
• Nevertheless, DCF valuation must be supported by realistic, credible and evidence-based projections.
• Where significant defects exist in the valuation exercise, the appropriate course is to obtain an independent valuation under the same prescribed methodology rather than replacing the valuation method itself.
• The decision provides valuable guidance on the scope of scrutiny under Section 56(2)(viib) and the evidentiary standards applicable to DCF-based share valuations.

Why This Judgment Matters

This decision is significant for closely held companies, start-ups, investors, Chartered Accountants, valuation professionals and tax litigators dealing with share premium taxation. It clarifies the limits of the Assessing Officer’s powers while emphasizing the importance of maintaining robust documentation and well-supported financial projections when adopting the DCF valuation method.