Man sells unlisted start-up shares for Rs 52 crore; tax dept issues notice for undervaluation; he wins case in ITAT Delhi
Nov 25, 2025
Synopsis
An investor in South West Delhi won a significant tax case. The Income Tax Appellate Tribunal quashed a Rs 52 crore addition to his income. This addition was based on the tax department's claim of undervaluation of unlisted startup shares. The investor had sold shares at Rs 7 lakh each, up from Rs 54,000 within 11 months.
On November 14, 2025, the Income Tax Appellate Tribunal (ITAT) provided relief to Mr. Vij from South West Delhi by removing the addition of Rs 52 crore alleged income from sale of shares in an unlisted start-up.
This income addition of Rs 52 crore was imposed by the tax officer based on the claim that Mr Vij undervalued the fair market value (FMV) of the shares he sold. This was despite Mr. Vij hiring an independent chartered accountant (CA) to calculate the valuation of these shares.
The main issue was that each share of the unlisted start-up was valued at Rs 54,000 and within just 11 months, their value skyrocketed to Rs 7 lakh per share. Consequently, the tax officer accused Mr. Vij of underreporting his income by declaring a lower value for the shares.
To tell you in brief, Mr. Vij is an individual investor in a start-up company and is also engaged in the trading shares in the derivative segment (F&O) of the capital markets. In the Assessment Year 2022, Mr. Vij reported income from house property, business, capital gains and income from other sources.
He filed his income tax returm (ITR )for AY 2022-23 on November 4, 2022, declaring a total income of Rs 32 crore (32,71,14,870). On April 22, 2021 he sold 801 shares of the start-up to an investor for Rs 54,960 per share. The short term capital gain arising out of the sale of these shares were duly reflected in his ITR.
Summary of events
Chartered Accountant Suresh Surana says that in the given case (ITA No. 1746/Del/2025), the taxpayer, an investor in a start-up company, sold 801 unlisted shares on April 22, 2021 and declared short-term capital gains based on a valuation report obtained under Rule 11UA, using the Net Asset Value (NAV) method.
Subsequently, in the same assessment year, he sold another 595 shares of the same company on 15 February 2022, this time relying on a separate valuation report adopting the Discounted Cash Flow (DCF) method, again as prescribed under Rule 11UA. Both valuations were conducted by independent expert valuers as per statutory requirements.
The Assessing Officer (AO), noticing a steep rise in share value within 10 months, rejected the first valuation report and substituted the sale consideration of the first tranche with the DCF-based FMV used for the later sale, thereby making a substantial addition under Section 50CA. The CIT(A) deleted the addition, and the Revenue appealed to the Tribunal.
The ITAT Delhi upheld the CIT(A)’s order and ruled entirely in favour of the taxpayer. The Tribunal observed that Rule 11UA explicitly permits both NAV and DCF as recognised valuation methods, and the choice of method lies with the assessee.
There is no statutory requirement that the same method must be used for all transactions within an assessment year, particularly where share valuations are obtained as on the specific dates of transfer, each reflecting different financial, operational and market realities.
According to Surana the Tribunal emphasised that the AO did not identify any defect in either of the valuation reports, did not examine the valuers, and did not demonstrate that the methodology adopted was erroneous, unreasonable, or manipulated.
The AO’s mere reliance on a difference in values over time was held to be insufficient because valuation methodologies inherently produce differing results, especially for start-ups experiencing rapid growth, fresh funding rounds and changing business projections factors which were substantiated through financial data and explanations submitted by the taxpayer.
According to Surana the Tribunal further held that the AO had no material evidence to show that the taxpayer had received any consideration over and above the reported sale price. Importantly, Section 50CA requires substitution of consideration only where the assessee’s declared value is below the FMV determined in accordance with the prescribed method; in this case, the FMV determined by expert valuers matched the taxpayer’s declared values.
Surana says: "Since the assesse had strictly followed statutory procedures and the AO had failed to establish any flaw in the prescribed valuation method or process, the addition under Section 50CA was held to be unsustainable in law. Accordingly, the Tribunal dismissed the Revenue’s appeal and confirmed the deletion of the addition."
On November 14, 2025, the tax department lost the case in ITAT Delhi, resulting in a win for Mr. Vij.
How are the gains from transfer of such unlisted shares taxed?
According to Surana, in this case the shares of the start-up company were unlisted shares, as the company is a private limited entity whose securities are not listed on any recognised stock exchange.
Surana says that in the relevant assessment year (AY 2022-23), the transfer of such unlisted shares gave rise to short-term capital gains, since the shares were held for less than 24 months.
According to Surana, under the law applicable for that year, short-term capital gains arising from the transfer of unlisted equity shares are taxable at the normal slab rates applicable to the taxpayer, as the concessional rate under section 111A applies only to listed securities.
Thus, gains from shares held for 24 months or less are treated as short-term capital gains and taxed at the applicable slab rates, whereas gains from shares held for more than 24 months are treated as long-term capital gains taxable at 20% with indexation.
Surana says that Section 50CA mandates substitution of the sale consideration with the fair market value (FMV) where unlisted shares are transferred below the FMV determined under the prescribed valuation rules.
Surana explains that in this case, the taxpayer had obtained independent valuation reports in accordance with Rule 11UA, using the NAV method for the April 2021 sale and the DCF method for the February 2022 sale. Since both methods are statutorily recognised and no defects were identified by the Assessing Officer in either report, the declared consideration was accepted and section 50CA could not be invoked.
Surana says that it is pertinent to note that as on date, the tax treatment of unlisted shares continues to follow the same broad framework. Gains from shares held for 24 months or less are treated as short-term capital gains and taxed at the applicable slab rates, whereas gains from shares held for more than 24 months are treated as long-term capital gains taxable at 12.5% without indexation.
Surana says: "The deeming provisions of section 50CA also remain in force and continue to apply where unlisted shares are transferred below FMV as per the prescribed valuation methodology."
ITAT Delhi says this
ITAT Delhi in its judgement (ITA No. 1746/Del/2025) dated November 14, 2025 said that the income tax department’s representative relied entirely on the order of the tax officer (AO).
ITAT Delhi said that they found that none of the aforesaid observations and findings of the CIT (A) were controverted by the revenue (income tax department) by bringing any contrary evidence on record.
ITAT Delhi said: “We find that the CITA had passed an elaborate order duly considering and appreciating all the contentions of the assessee. Hence we do not find any infirmity in the order of the CITA. Accordingly, the grounds raised by the revenue are dismissed. In the result, the appeal of the revenue is dismissed. Order pronounced in the open court on 14/11/2025.”
CIT (A) order which was upheld by ITAT Delhi
CIT (A) said that Rule 11UAA read with rule 11UA it gives the option to an assessee to follow either NAV method or DCF method for determining fair market value of unlisted shares as on the date on which the shares of an unlisted company are transferred.
The language of the rules allows the assessee to follow either of the two methods. Further, when the assessee follows either of the method for first sale of unlisted shares during a year, the said rule does not restrict the assessee to use the same method for all the subsequent sale of unlisted shares on different dates.
The rule only requires the assessee to obtain a valuation report as on the date on which unlisted shares are transferred. Hence, if the unlisted shares are sold multiple occasions on different dates, the assessee has to obtain multiple valuation reports, each as on the date of said transfer.
In each occasion, the valuation of unlisted shares in terms of rule 11UA can be determined by assessee according to either the NAV or the DCF method and there is no bar on the assessee using different methods in same AY on sale of the same company's unlisted shares.
Once value of shares had been determined by adopting any of two methods, i.e. NAV or DCF, then such value shall be deemed to be FMV of unlisted shares and AO cannot question the same. AO is bound to follow the same unless, the AO shows mistake/errors in the said method adopted by the assessee by bringing cogent material on record.
On this regard, the ruling was based on the decision of the Hon'ble ITAT, Mumbai vide its order dated January 19, 2022 in the case of Creditalpha Alternative Investment Advisors (P.) Ltd Vs DCIT.
In the present case, the appellant(Mr. Vij) has sold 595 shares at Rs 7,29,938 per share on February 15, 2022 and 801 shares at Rs 54,960 per share on April 22, 2021.
As required under Rule 11UAA rs 11UA of Income Tax Rules, 1962, the appellant had obtained a valuation report from AARK & Co. LLP, Chartered Accountants, determining the value of shares at Rs 54,960 per share as on April 20, 2021 using NAV method and valuation report from Share India Capital Services Put ld determining value of shares at Rs 7,12,664 per share as on December 31, 2021 as per DCF method.
During the assessment proceedings, the AO rejected the valuation of shares at Rs 54,960 per share on April 22, 2021 and substituted the aforesaid value of 801 shares with Rs 7,12,664 per share, by holding that obtained two different valuation report from two different valuers who used different methods.
CIT (A) said: “However, as mentioned above the AO cannot question the method adopted by the assessee and AO is bound to follow the same unless he shows a mistake in the method adopted by the assessee. The AO did not demonstrate that the methodology adopted by the appellate is not correct. The AO had simply rejected the valuation report filed by assessee without mentioning as to what was found incorrect in the valuation reports submitted by the assessee.”
CIT (A) said that the appellant (Mr. Vij) adopted a recognized method of valuation and the AO has not brought on record any facts which show that the appellant adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process.
CIT (A) order: “In view of the above facts and circumstances, I am of the opinion that the appellant has followed the prescribed procedure for determining the valuation of unlisted shares of Cashgrail (P) Ltd. As on 22.04.2021 & 15.02.2022 and declared the corresponding capital gains in the return of income. Therefore, the addition u/s 50CA of Rs 52,68,21,209/- is deleted and the grounds nos 1, 2, 3 & 4 are treated as allowed.”
When is Section 50CA attracted?
According to Surana, Section 50CA is attracted when an assessee transfers unlisted shares or unquoted securities for a consideration that is lower than the fair market value (FMV) determined in accordance with the prescribed valuation rules under Rule 11U and Rule 11UA of the Income-tax Rules, 1962.
In such circumstances, the FMV so determined is deemed to be the full value of consideration for the purpose of computing capital gains under section 48. The provision applies irrespective of whether the assessee is the buyer or seller, and irrespective of the accounting treatment adopted, so long as the transaction involves unlisted or unquoted equity shares and the declared sale consideration is less than the statutorily computed FMV.
Surana says: "The section is therefore triggered in cases of undervaluation of consideration in the transfer of unlisted shares, and mandates substitution of the FMV to ensure accurate taxation of capital gains."
[The Economic Times]
