The Delhi High Court has affirmed that the Discounted Cash Flow (DCF) method is a valid technique for the valuation of unquoted equity shares under Rule 11UA(2)(b) of the Income Tax Rules, 1962. This decision came while dismissing an appeal filed by the Income Tax Department challenging the Income Tax Appellate Tribunal's (ITAT) decision in favor of the software firm A.H. Multisoft Pvt. Ltd.
The core dispute arose when A.H. Multisoft issued shares to its existing shareholders for raising capital to subscribe to a rights issue of South Asia FM Ltd. (SAFL)—a company that holds significant FM broadcasting licenses under the Red FM brand.
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To determine the Fair Market Value (FMV) of its shares, the company relied on a valuation report prepared using the DCF method. The valuation report was submitted by an expert Chartered Accountant, estimating the FMV at ₹2,771.65 per share. Based on this, the company issued shares at ₹2,772 (including premium). However, the Assessing Officer (AO) rejected this valuation, citing disclaimers in the report and instead applied the book value method, which showed a negative FMV. As a result, the AO made an addition of ₹30.37 crore to the company’s income under Section 56(2)(viib) of the Income Tax Act, 1961.
"The Assessee had valued the unquoted equity shares held by the Assessee in SAFL by DCF method. The same is permissible under Rule 11UA(2) of the Rules." — Delhi High Court
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The ITAT overruled the AO's decision, stating that the disclaimers in the valuation report were general in nature and did not invalidate the methodology or data. The onus to prove any error in the report rested with the AO, which he failed to discharge. The High Court agreed with ITAT’s reasoning.
The Court emphasized that Section 56(2)(viib) allows FMV to be determined by any method prescribed or any method substantiated by the company to the AO's satisfaction. In this case, since the FMV was properly backed by a valuation report and the DCF method is a recognized method under Rule 11UA, the company's valuation was held valid.
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Furthermore, the Court noted there was no allegation of malafide intent, and the funds raised were transparently used to subscribe to shares of SAFL, which itself was valued using the same DCF method accepted by regulatory authorities including RBI.
"The expert report could not be rejected on the ground of such disclaimers without the AO pointing out any material error in the data as used by the expert." — Delhi High Court
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Rejecting the Revenue’s argument that a mixed method was used, the Court clarified that DCF alone was adopted for valuing the SAFL stake, and the resulting share price was valid. The valuation was even consistent with ICAI Valuation Standard 301, which supports DCF-based valuation of subsidiaries or business segments.
In conclusion, the Delhi High Court dismissed the Revenue's appeal, ruling in favor of A.H. Multisoft Pvt. Ltd. and thereby reinforcing the legitimacy of the DCF method for determining FMV of unquoted shares under the income tax framework.
Case Title: Principal Chief Commissioner of Income Tax-1 v. A.H. Multisoft Pvt. Ltd.
Case No.: ITA 9/2025
