CA Ignores ICAI’s Technical Guide on Share Valuation: ITAT finds CA Certificate Defective, upholds Tax on Excess Share Premium u/s 56(2)(viib) [Read Order]

The Income Tax Appellate Tribunal (ITAT) Bench at Rajkot has upheld the addition of ₹3.99 crore made under Section 56(2)(viib) of the Income Tax Act, 1961, holding that the assessee’s Discounted Cash Flow (DCF) valuation was defective and not in conformity with ICAI Valuation Guidelines.

The assessee, Kataria Snack Pellets Pvt. Ltd., had issued shares at a premium based on a DCF valuation report prepared by a Chartered Accountant (CA). The Assessing Officer (AO) noted that the report relied solely on projections provided by the management without any independent verification or supporting evidence.

Finding the valuation arbitrary and inflated, the AO adopted the Net Asset Value (NAV) method instead and made an addition of ₹3.99 crore under Section 56(2)(viib), treating the excess premium as income from other sources.

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Section 56(2)(viib) reads as follows:

Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:

Provided that this clause shall not apply where the consideration for issue of shares is received -

(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or

(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s findings, observing that the DCF report lacked credibility and failed to justify the high share premium charged.

Before the Tribunal, the assessee contended that once a valuation report is prepared by a qualified Chartered Accountant using the DCF method prescribed under Rule 11UA(2)(b), the AO cannot question the correctness of such a report or substitute his own method of valuation. It was argued that the projections represented management’s business expectations and should not be judged with the benefit of hindsight.

The Revenue argued that the CA’s report was merely a reproduction of management’s unverified assumptions without any professional due diligence or reference to industry benchmarks. It was submitted that the valuation was not in accordance with ICAI Valuation Standards and could not be relied upon.

The Tribunal comprising Dinesh Mohan Sinha (Judicial Member) and Dr. Arjun Lal Saini (Accountant Member) observed that the DCF method is based on scientific and verifiable assumptions concerning future cash flows and discount rates. However, in this case, the report neither disclosed the rationale for the projections nor demonstrated any independent analysis by the valuer.

The Bench noted that the Chartered Accountant failed to exercise professional skepticism and instead “merely accepted the management’s estimates at face value.” It referred to the legal maxim “Sublato Fundamento Cadit Opus” meaning “once the foundation is removed, the superstructure falls” and held that since the foundation of the DCF report was defective, the entire valuation collapsed.

Accordingly, the Tribunal held that the AO was justified in rejecting the DCF report and applying the NAV method. The addition of ₹3.99 crore under Section 56(2)(viib) was therefore upheld.

Dismissing the appeal, the ITAT Rajkot Bench ruled that a Chartered Accountant’s report cannot be accepted blindly when it lacks independent reasoning or evidentiary support. The decision reinforces that DCF valuations must be prepared with objectivity, adequate documentation, and adherence to professional standards prescribed by ICAI.

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