ITAT Hyderabad Sends Share Premium Valuation Dispute Back to AO: DCF Method Allowed, But Proof Is Essential

1. Background of the Dispute

The case of Payswiff Technologies Private Limited Vs DCIT (ITAT Hyderabad) concerns the application of Section 56(2)(viib) of the Income Tax Act 1961 and the valuation rules in Rule 11UA(2) of the Income-tax Rules, 1962, in the context of share premium received by a closely held company.

For AY 2021-22, the assessee, Payswiff Technologies Private Limited, a company engaged in software-related consultancy and digital payment solutions, filed its return of income on 07.01.2022 declaring a loss of Rs. 12,94,39,906.

During scrutiny, the Assessing Officer (AO) examined the share capital structure and noticed that the assessee had allotted equity shares in the relevant year at two distinct premium prices:

  • 36,842 equity shares at Rs. 950 per share to Sesireddy Investment Advisors Private Limited, aggregating to Rs. 3,49,99,900; and
  • 1,06,348 equity shares at Rs. 1,348 per share to various investors, aggregating to Rs. 14,33,57,104.

The assessee’s position was that the fair market value (FMV) of the shares had been computed using the Discounted Cash Flow (DCF) method, which is one of the prescribed methods under Rule 11UA(2).

The AO, however, did not accept the assessee’s valuation and instead adopted the Net Asset Value (NAV) method. On this basis, he determined the FMV at Rs. 149.69 per share, leading to an addition of Rs. 15,69,22,893 under Section 56(2)(viib).

The matter finally reached the ITAT Hyderabad, which has passed the order dated 30th September, 2026, allowing the appeal for statistical purposes and restoring the issue to the AO for fresh consideration.

2. AO’s Approach: DCF Rejected, NAV Applied

2.1 Basis for Rejection of DCF by the AO

In response to the AO’s show-cause notice, the assessee asserted that:

  • FMV had been worked out by an independent valuer using the DCF method in accordance with Rule 11UA(2); and
  • Once DCF had been adopted, the AO had no authority to recompute FMV under the NAV method.

The AO, after considering the submission and the financials, concluded:

  • The assessee had very low operational revenues and cash flows.
  • The value determined through DCF was significantly higher than the value that would emerge under the NAV method.
  • The assessee had not produced any independent valuation report before him.
  • The assessee also failed to submit detailed supporting analysis or working of projections that formed the basis of the DCF computation.

On this reasoning, the AO:

  • Discarded the DCF valuation claimed by the assessee;
  • Applied the NAV method as per Rule 11UA;
  • Calculated FMV at Rs. 149.69 per share; and
  • Treated the difference between issue price (Rs. 950 / Rs. 1,348) and Rs. 149.69 as income under Section 56(2)(viib), making an addition of Rs. 15,69,22,893.

3. Findings of CIT(A): Addition Upheld

The assessee challenged the assessment before the CIT(A), NFAC, Delhi. The primary grounds urged were:

  • Once the assessee had chosen DCF under Rule 11UA(2)(b), the AO could not substitute it with NAV;
  • FMV determined under DCF was supported by independent valuation; and
  • There was no legal basis to recompute the FMV using a different method for the purpose of Section 56(2)(viib).

3.1 Reasoning Adopted by CIT(A)

The CIT(A) sustained the AO’s action, broadly on the following basis:

  • The FMV of Rs. 950 and Rs. 1,348 per share claimed under DCF rested on future projections that were not backed by credible, verifiable assumptions or authenticated datasets.
  • Though the assessee claimed to have a valuation report, the CIT(A) observed that:
    • The projections were not supported by empirical evidence;
    • When compared with subsequent years’ actual performance, the company had continuous losses and negative cash flows, which contradicted the DCF projections.
  • Therefore, the FMV claimed on DCF was held to be unreliable, and the NAV-based value adopted by the AO was confirmed.

The CIT(A) also rejected the assessee’s objection on the computation of book profit under Section 115JB, where the share premium addition was factored into MAT computation.

4. Assessee’s Submissions Before ITAT

Before the ITAT Hyderabad, the assessee, represented by its counsel, attacked both the valuation approach and the manner in which authorities dealt with the matter.

4.1 Core Contentions

The assessee’s main arguments were: