AO Cannot Substitute DCF Valuation with NAV Method Merely Pointing Out Defects Without Evidence: ITAT Chennai

Overview of the Case

In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Chennai, decided on an appeal filed by a microfinance company against the order passed by the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi under Section 250 of the Income Tax Act, 1961, pertaining to Assessment Year 2015–16. The core dispute revolved around an addition of Rs. 27,53,76,209/- made under Section 56(2)(viib) of the Income Tax Act, 1961, on account of alleged excess share premium received by the assessee during the relevant year.

The ITAT's order, pronounced on 10th March 2026, delivered a clear message: once an assessee legitimately opts for the Discounted Cash Flow (DCF) method for share valuation under the applicable rules, the Assessing Officer cannot arbitrarily discard it and replace it with the Net Asset Value (NAV) method without producing substantive and cogent evidence pointing to a fundamental defect in the adopted methodology.

Background: Asirvad Micro Finance Pvt. Ltd. Vs DCIT (ITAT Chennai)

Identity of the Assessee and Nature of Transaction

The assessee in this case is a company engaged in the microfinance business. For AY 2015–16, it filed its return of income on 30.09.2015, declaring a total income of Rs. 17,11,72,500/-. The case was subsequently selected for scrutiny.

During the year under consideration, the assessee issued 75,61,126 rights shares to Manappuram Finance Limited — another Non-Banking Financial Company (NBFC) — at a price of Rs. 83.32 per share, which included a share premium of Rs. 73.32 per share. The entire rights issue transaction, including the share premium rate, had been approved by the Reserve Bank of India (RBI).

Valuation Method Adopted by the Assessee

To justify the share premium, the assessee relied on the Discounted Cash Flow (DCF) method, which is a prescribed method under Rule 11UA of the Income Tax Rules. The valuation was duly certified by a Chartered Accountant. The assessee contended that the valuation was conducted in accordance with the rules and was based on estimated future cash flows of the business.

Action Taken by the Assessing Officer

Rejection of DCF Valuation

The Assessing Officer (AO) rejected the DCF-based valuation report on the following grounds:

  • The valuation was based entirely on data and projections submitted by the management of the assessee company.
  • The Chartered Accountant had explicitly stated in the certificate that no independent audit or due diligence was conducted on the figures provided by the assessee.
  • In the AO's view, the valuation lacked independent verification and therefore could not be accepted as reliable.

Substitution with NAV Method

After rejecting the DCF method, the AO independently applied the Net Asset Value (NAV) method and arrived at a per-share value of Rs. 48/-. The difference between this NAV-based value and the price at which shares were actually issued was treated as excess consideration over fair market value and added to the assessee's income under Section 56(2)(viib) of the Income Tax Act, 1961, resulting in an addition of Rs. 27,53,76,209/–.

Confirmation by CIT(A)

On appeal before the CIT(A)/NFAC, the addition was confirmed, and the assessee thereafter approached the ITAT Chennai.

Before proceeding to examine the facts, the Tribunal set out the relevant statutory text: