The Income Tax Act grants the assessee the exclusive right to choose the valuation method for unquoted shares, and the Assessing Officer cannot substitute it without valid justification.

YASHWANT VARMA, J.

1. The assessee appellant has instituted the present appeal aggrieved by the judgment rendered by the Income Tax Appellate Tribunal1 dated 16 May 2018 and has raised the following questions for our consideration: -

• “A. Whether in view of the facts and circumstances of the case and in law, the Tribunal is right in upholding the rejection of the valuation report on the ground that the same was prepared without 1 ITAT any verification and upon only considering the figures supplied by the Appellant, while at the same time, ascribing no errors in the said figures? B. Whether in view of the facts and circumstances of the case and in law, the Tribunal has erred by deciding the appeal basis the conjecture/surmise that the possibility of tailoring of data could not be ruled out? C. Whether in view of the facts and circumstances of the case and in law, the Tribunal is right in holding that the AO was at liberty to substitute the method of valuation adopted by the Assessee (DCF Method) for his own preferred method of valuation (NAV Method)? D. Whether in view of the facts and circumstances of the case and in law, the Revenue can reject the report of an expert merchant banker and substitute its own valuation without referring it to the DVO or an expert on the subject? E. Whether in view of the facts and circumstances of the case and in law, the Tribunal erred by not considering that the Act does not give any scope for the AO to conduct his own valuation exercise, and in all cases where a particular valuation report was rejected, reference to DVO becomes mandatory? F. Whether the Tribunal erred in law by failing to consider that the even if allegations of non-cooperation are levelled against the Appellant, reference for valuation purpose could have been made to the DVO, as only the DVO has appropriate powers to declare whether the information furnished was erroneous / incorrect or if some further information was required?”

2. Upon hearing learned counsels, we formally admit the appeal on the aforenoted questions.

3. The ITAT has essentially upheld the additions made by the Assessing Officer2 in Assessment Year3 2014-15 consequent to the rejection of the Fair Market Value4 evaluation as submitted by the 2 AO 3 AY 4 FMV appellant as contemplated under Section 56(2)(viib) of the Income Tax Act, 19615 read along with Rule 11UA of the Income Tax Rules,

19626. The issue of valuation had arisen in the context of the appellant having allotted 3,15,000 equity shares of a face value of INR 10/- each at a premium of INR 40/- per share and for a total amount of INR 1,26,00,000 /-.

4. For the purposes of valuation of the shares offered for subscription, the appellant had placed reliance on a Valuation Report drawn by a merchant banker, M/s SPA Capital Advisors Ltd., and wherein the value of each share was pegged at INR 9.60/-. Consequent to the rejection of that Report, the AO independently determined the value of each share to be INR 40.40/- and thus quantified the disallowance under Section 56(2)(viib) at INR 1,27,26,000/-.

5. The principal grievance of the appellant is that even if the AO had deemed it fit to reject the Valuation Report drawn on the basis of Discounted Cash Flow Method7, it could not have substituted the means and the method of valuation of its own volition. It is this principal ground of challenge which was urged by Mr. Lalchandani, learned counsel who appeared in support of the appeal.

6. Doubting the veracity of Valuation Report, the AO is stated to have placed the appellant on notice under Section 142(1) asserting as follows:-

• “1. Please refer to your submission dated 07/09/2016 wherein you have submitted certificate of valuation of shares under rule 11UA.

5 Act 6 Rules 7 DCF Method On perusal of the valuation report the following facts have been noticed.

i) In its valuation report M/s SPA Capital Advisors Ltd. has given a disclaimer as under: "In preparing the Final Report, SPA has