Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order dated 05.07.2024 passed by the Income Tax Appellate Tribunal for Assessment Year 2016–17. The Tribunal had allowed the assessee’s appeal and deleted the addition of ₹30,37,53,712/- made under Section 56(2)(viib).

The assessee, A.H. Multisoft Pvt. Ltd., was engaged in providing software support and maintenance services and held a strategic 20% equity stake in South Asia FM Ltd., a company operating FM radio stations across India under the brand “Red FM”. South Asia FM Ltd. issued rights shares at ₹20 per share, which were fully subscribed by its shareholders based on a DCF valuation that was not disputed by the Revenue or the Reserve Bank of India.

To fund its subscription, the assessee issued rights shares to its own shareholders at ₹2,772 per share based on a DCF valuation report dated 21.09.2015 prepared by an independent Chartered Accountant, valuing the shares at ₹2,771.65 per share.

Issues Involved

Whether the Assessing Officer was justified in rejecting a DCF-based valuation report substantiating fair market value under Section 56(2)(viib) merely on the basis of generic disclaimers, and whether recomputation of fair market value based on book value was sustainable in law.

Petitioner’s Arguments (Revenue)

The Revenue contended that the assessee had overvalued its shares and had not followed a permissible valuation method under Rule 11UA. It was argued that the Assessing Officer had identified defects in the valuation methodology and that reliance on the assets of the investee company for DCF valuation of the assessee was impermissible. The Revenue further submitted that disclaimers in the valuation report rendered it unreliable.

Respondent’s Arguments (Assessee)

The assessee submitted that it had duly substantiated the fair market value of its shares through a DCF valuation prepared by an independent expert using a method expressly permitted under Rule 11UA. It was argued that the Assessing Officer failed to identify any error in the data or methodology and could not reject the valuation merely on the basis of standard disclaimers commonly found in professional valuation reports.

Court Order / Findings

The Delhi High Court upheld the findings of the Income Tax Appellate Tribunal and held that once the assessee substantiates the fair market value through an expert valuation report, the onus lies on the Assessing Officer to demonstrate specific errors in the methodology or data. Generic disclaimers do not render a valuation report unreliable.

The Court observed that the Assessing Officer had already computed the fair market value under Rule 11UA as negative. In such circumstances, once a higher value was substantiated by the assessee through an expert report, the same was required to be accepted in terms of the Explanation to Section 56(2)(viib).

The Court further held that valuation of the assessee’s investment in South Asia FM Ltd. using the DCF method was permissible under Rule 11UA(2)(b) and consistent with ICAI Valuation Standards. The contention that the assessee adopted a hybrid or impermissible method was rejected.

Important Clarification

The Court clarified that Section 56(2)(viib) allows acceptance of fair market value substantiated by the assessee, and the Assessing Officer cannot arbitrarily discard an expert valuation without pointing out concrete defects. Standard disclaimers recording reliance on management data are routine and do not invalidate a valuation.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court held that no substantial question of law arose for consideration and upheld the deletion of the addition made under Section 56(2)(viib), affirming that the DCF-based valuation substantiated by the assessee was required to be accepted.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769677379_PRINCIPALCHIEFCOMMISSIONEROFINCOMETAX1VsA.H.MULTISOFTPVT.LTD..pdf

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