Assessee's Choice Prevails: Delhi High Court Upholds Right to Select Valuation Method

Introduction

The Hon’ble Delhi High Court (‘HC’) in the case of Agra Portfolio Pvt. Ltd v. Principal Commissioner Of IT & Another[i], ruled in favour of Agra Portfolio Pvt. Ltd. (‘Assessee’), setting aside the decision made by the Income Tax Appellate Tribunal (‘ITAT’). The HC held that the method of valuation is always the Assessee’s choice, and the assessing officer (‘AO’) has no statutory power to arbitrarily choose a different method.

Brief Facts

• The fair market value (‘FMV’) valuation report (‘VR’) submitted by the Assessee under s. 56(2)(viib) of the Income-tax Act, 1961 (‘IT Act’), was rejected by the AO. This report, drawn by a merchant banker (‘MB’) according to r.11UA(2) of the Income Tax Rules,1962 (‘IT Rules’), determined the FMV of shares using the discounted cash flow method (‘DCF Method’).

• Following the rejection of the VR, the AO independently determined the value of each share, substituting the DCF Method used by the MB with a method of his own preference, and placed the Appellant on notice under s. 142(1) of the IT Act.

• Dissatisfied with the explanations and answers provided by the Assessee in response to the notice, and questioning the basis of the valuation, the AO conducted a 'best judgement assessment' under s. 144 of the IT Act. The AO held that the shares were liable to be valued at the price he determined, as opposed to the price adopted by the Assessee. This decision was reaffirmed by the Commissioner of Income Tax (Appeal) and subsequently by the ITAT.

• Aggrieved by the adverse order and inferences drawn by the AO, and its reaffirmation by the ITAT, the Assessee approached the HC with the primary issue discussed herein.

Issue

Was the AO at liberty to substitute the method of valuation adopted by the Assessee (DCF Method) with a valuation method of his own accord and preference?

Held

The HC set aside the order passed by the ITAT, reaffirming that the method of valuation is always at the discretion of the Assessee, who possesses unique knowledge and facts pertinent to the company.  The IT Act does not permit the AO to reject the method adopted by the assessee and replace it with a different method. While the AO may reject the VR itself, any subsequent valuation must utilize the same method initially chosen by the Assessee.

Our Analysis

The decision of the HC reaffirms provisions established under s. 56(2)(viib) of the IT Act r/w r. 11UA of the IT Rules, which dictate that the Assessee's choice in determining the FMV of shares shall be final and binding on the AO. The IT Act and established jurisprudence discourage and restrict the AO from independently choosing a valuation method other than the one selected by the Assessee. While the AO can statutorily reject the VR submitted by the Assessee, he is not authorized to disregard the established principles of law or to find fault with the recognized method in order to adopt a method of his own choosing.

End Note

[i] 2024 SCC Online Del 2391 dated 04.04.2024.

Authored by Anshi Bhatia, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.