AO does not have power to change method for share valuation opted by assessee

Facts of the Case:

  • The assessee is engaged in the business of manufacturing of energy drinks. During relevant year under consideration assessee issued shares having face value of Rs. 10 at premium of Rs. 622.
  • For valuation of shares, assessee opted DCF method as per Rule 11UA(2)(b).
  • According to assessing officer the method opted by assessee was non-realistic hence invoked the provisions of section 56(2) (viib) and added the premium received by the assessee under the head income from other source.

Contention of the assessee:

  • Assessee relying on provision laid in Rule 11UA(2)(b) contended that, opting a method for valuation of shares is the choice of the assessee AO cannot challenge the method of valuation.
  • Assessee further clarified that the product which is being developed by the assessee has the substantial value and will able to raise good funds from the international market in the future. Hence the assumption made by the assessee is realistic and DCF is appropriate method for valuation.

Contention of the Department:

  • Assessing officer contended that the method of valuation opted by the assessee is irrational and assessee should have opted NAV method for valuation of its shares.
  • Assessing officer further contended that as per NAV method maximum value of share premium shall not exceed Rs. 65 therefore amount in excess of Rs 65 shall be taxable under head income from other source under section 56(2)(viib).  


  • As per the decision of ITAT, AO can scrutinize the valuation report and if the AO is not satisfied by the explanation of the assessee, he has to record the reasons for not accepting the valuation report.
  • After recording appropriate reason AO can go for own valuation or can obtain fresh report from independent valuer, but the method opted by assessee cannot be changed.
  • For scrutinizing valuation report, facts and data available on the date valuation to be considered hence actual result cannot be the basis to decide about reliability of projections.

Source: [2020 120 238 (Bangalore-Trib.)

Valencia Nutrition Ltd. V Deputy Commissioner of Income tax

Harmeet Singh
Audit Associate
ShineWing India