Sale of Unlisted Start-Up Shares Valid When Valuation Follows NAV/DCF Method; Delhi ITAT Deletes ₹52 Crore Addition
Pranav B Prem
The Income Tax Appellate Tribunal (ITAT), New Delhi Bench, has held that a taxpayer cannot be accused of undervaluing unlisted shares for capital gains purposes if the fair market value is determined in accordance with Rule 11UA using either the Net Asset Value (NAV) method or the Discounted Cash Flow (DCF) method. Deleting an addition of ₹52,68,21,209, the Tribunal ruled that once the prescribed valuation procedure has been followed, the Assessing Officer cannot substitute notional sale consideration unless clear defects are demonstrated in the valuation method itself. The ruling came from the Bench comprising C. N. Prasad (Judicial Member) and M. Balaganesh (Accountant Member).
Background
The respondent-assessee Manish Vij, an individual investor in a start-up company Cash Grail Pvt. Ltd. (CGPL), transferred 801 shares on 22 April 2021 to Vun Internet Partners for ₹54,960 per share, and reported short-term capital gains based on a valuation determined by an independent Chartered Accountant using the NAV method under Rule 11UA. On 15 February 2022, nearly ten months later, he transferred 595 shares of the same company to Nepean Investments Trust-II at a significantly higher value of ₹7,12,664–₹7,29,938 per share, supported by a valuation from a merchant banker applying the DCF method. The Assessing Officer noted the steep rise in valuation within a short period and held that the first tranche of shares had been sold at an undervalued price. Treating the later valuation as the benchmark for the earlier sale, the AO substituted the sale consideration for the first transaction and made the addition of ₹52.68 crore under Section 48 read with Section 50CA.
The assessee explained before the AO that the sharp increase in CGPL’s valuation was because the company had raised substantial funds from venture capital and foreign investors after the first sale, which drastically changed its financial position. The assessee supported his claim with valuation reports, explanations of market dynamics, details of investments raised, and media reports regarding funding rounds. However, the AO rejected the valuation reports without identifying any defect in the methodology adopted.
Findings of the Tribunal
The Tribunal upheld the detailed reasoning of the CIT(A), noting that Rule 11UAA read with Rule 11UA explicitly gives an assessee the option to adopt either NAV or DCF for determining FMV of unlisted shares as on the date of transfer. It further held that if shares are transferred on different dates, valuation must be undertaken separately for each date, and there is no bar on applying different valuation methods within the same assessment year.
The Tribunal emphasized that once the FMV is determined by applying either of the prescribed methods, such value is deemed to be the fair market value of the shares and the AO cannot disregard it unless cogent material is brought on record to show that the method has been wrongly applied or is fundamentally flawed. It found that the AO failed to demonstrate any mistake or defect in the valuation reports and merely rejected them on the premise that NAV and DCF resulted in different values. The Tribunal observed that valuation of a start-up using the DCF model depends on forward-looking assumptions and cannot be re-evaluated with the benefit of hindsight, particularly when independent valuers justified the basis of valuation.
Concluding that the assessee had duly followed the prescribed valuation methodology under Rule 11UA and correctly declared capital gains in the return of income, the Tribunal dismissed the Revenue’s appeal and affirmed the CIT(A)’s deletion of the ₹52.68 crore addition. The appeal was therefore dismissed in full.
Appearance
Assessee by: Shri Salil Aggarwal, Adv Shri Shailesh Gupta, CA Shri Shankar, Adv
Revenue by: Shri Mahesh Kumar, CIT (DR)
Cause Title: JCIT vs Manish Vij
Case No: ITA No. 1746/Del/2025
Coram: C. N. Prasad (Judicial Member), M. Balaganesh (Accountant Member).
