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Delhi Quashes ₹168 Crore Section 56(2)(viib) Addition for Hero Fincorp Over DCF Valuation
The ) has delivered a major relief to by deleting a ₹168.30 crore addition made under , related to valuation. The bench, comprising Accountant Member S. Rifaur Rahman and Judicial Member Raj Kumar Chauhan, ruled that the Revenue cannot reject a Discounted Cash Flow (DCF) valuation merely by comparing with subsequent actual financial results. In a parallel finding, the Tribunal also deleted a ₹1.16 lakh under for lack of mandatory by the Assessing Officer.
The Share Warrants and the DCF Valuation
Hero Fincorp issued 57,65,905 share warrants on , at ₹10 face value plus a premium of ₹510.30 per warrant, convertible into equity shares within 18 months. The company obtained a on , adopting the DCF method with business for –2021. During assessment for , the Assessing Officer contrasted these with actual results for —finding projected turnover of ₹2,577.81 crore against actual ₹1,814.03 crore, and projected profit of ₹621.74 crore against actual ₹247.93 crore. Concluding the DCF method was unrealistic, he shifted to the , fixing at ₹228.41 per share instead of ₹520.30, and added the difference of ₹168.30 crore as under Section 56(2)(viib).
Contention Over
The assessee argued that the valuation was prepared before the warrants were issued and must be judged on , not in . It highlighted its historical growth—revenue surged 147% in and 158% in —and pointed out that later years actually outperformed : saw 67% growth against projected 39%, and saw 47% growth against 33%. The Revenue countered that the were self-serving and that the valuer, being paid by the assessee, lacked independence.
Legal Precedents on Valuation
The relied on decisions in and , which hold that an cannot be rejected on general grounds without pinpointing material errors. The Tribunal reiterated that DCF valuation is not an exact science and cannot be invalidated based solely on subsequent actuals. It also found that the authorities below had overlooked Hero Fincorp’s robust past performance and better-than-projected results in later years.
Key Observations
“These , when seen in the light of past growth do not appear to be exorbitant and aggressive as has been held by authorities below,” the bench noted. It further stated: “observations made by Assessing Officer solely on the basis of financial results for one year do not convey correct position and approach of the authorities below in challenging the is devoid of any merit.”
On the issue, the Tribunal held that the Assessing Officer must record before rejecting the assessee’s . Since no such was recorded, the of ₹1,16,450 was also deleted.
Decision and Implications
The allowed the appeal, deleting both the ₹168.30 crore addition under Section 56(2)(viib) and the ₹1.16 lakh under . The ruling reinforces that share valuation using recognized methods like DCF cannot be disturbed by the Revenue based on , provided the are reasonable based on . This provides valuable clarity for closely held companies issuing shares at a premium.
