Section 56(2)(viib) was introduced through the Finance Act, 201,,2 with the primary intention of curbing tax avoidance and the circulation of unaccounted money. The provision specifically targets private companies receiving excessive share premiums that are not supported by the fair market value of shares issued. This anti-abuse provision ensures that when a company issues shares at a price higher than the fair market value, the excess consideration received is taxed as income from other sources in the hands of the company. We act as a mechanism to prevent companies from introducing unaccounted funds disguised as share capital or premium from related or interested parties.
Scope and Applicability of Section 56(2)(viib)
Section 56(2)(viib) applies to closely held companies, typically those not listed on any recognized stock exchange. The provision becomes applicable when such companies receive any consideration for the issue of shares exceeding the fair market value. The fair market value is to be determined by the prescribed rules, particularly Rule 11UA(2) of the Income Tax Rules. This section applies to consideration received from any person, regardless of whether they are resident or non-resident. Before the Finance Act, 2023, the application of this section was limited to residents only. However, the amendment expanded its applicability to include non-resident investors as well. Therefore, the scope now encompasses both domestic and foreign investments in unquoted shares of closely held companies where the issue price exceeds the prescribed fair market value.
Exceptions and Carve-outs from Section 56(2)(viib)
While Section 56(2)(viib) is broad in its application, certain exceptions are specifically provided to promote investment and avoid undue hardship. These include situations where consideration is received from a venture capital company, a venture capital fund, or a specified fund. Furthermore, investments made by entities notified under Notification 29 of 2023 dated 24 May 2023 are also excluded. Another significant carve-out exists for startups that are officially recognized by the Department for Promotion of Industry and Internal Trade under the notification dated 19 February 2019. These exceptions reflect the legislative intent to encourage genuine investment, particularly in innovation-driven ventures, while still preventing tax abuse.
Explanation of Rule 11UA(2)
Rule 11UA(2) lays down the procedure for determining the fair market value of unquoted equity shares issued by closely held companies. The rule grants the taxpayer an option to choose one of the two prescribed methods for valuation. Clause (a) allows determination based on the book value of assets and liabilities, often referred to as the net asset value method. Clause (b) permits the use of the discounted cash flow method, which is based on projected future cash flows discounted to their present value. This flexibility enables taxpayers to select the method that best represents the intrinsic value of the shares, depending on the nature of the business and available data. The chosen method must be substantiated with a detailed valuation report prepared by a qualified merchant banker or a chartered accountant as prescribed.
Recent Amendments and Their Implications
The Finance Act, 2023, introduced significant changes to Section 56(2)(viib) by bringing non-resident investors under its ambit. This marks a departure from the earlier framework where closely held companies could raise funds at a premium from foreign investors without attracting tax under this section. Post amendment, if such companies issue shares at a value higher than the fair market value to a non-resident, the excess premium will also be subject to tax. This change was introduced to ensure uniform treatment for all investors and to prevent the misuse of differential valuation norms based on residency status. Consequently, private companies must now exercise greater caution while valuing shares offered to foreign investors.
Expansion of Angel Tax to Foreign Investments
With the expansion of Section 56(2)(viib) to include foreign investments, the concept of angel tax has become more relevant to international funding. Angel tax typically refers to the tax levied on the premium received over the fair market value of shares, a common feature in startup funding. By including non-resident investments, the amendment poses new challenges for Indian startups that rely heavily on foreign capital. If the valuation is not aligned with Rule 11UA, the differential amount could be taxed, thereby impacting cash flow and deterring international investors. This could potentially exacerbate the ongoing funding challenges, especially in a period already marked by a downturn in venture capital activity in the startup ecosystem.
Draft Amendments Proposed by CBDT
To align the valuation methodology with evolving market practices and stakeholder concerns, the Central Board of Direct Taxes has proposed several amendments to Rule 11UA. These include the introduction of five new valuation methods specifically for non-resident investors. These are the Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method. These methodologies are widely accepted in international financial markets and reflect the complexity and diversity of valuation requirements for different businesses. In addition, the draft proposes that the price at which shares are issued to notified entities may be considered the fair market value for other investors as well. Another significant proposal is the requirement that the merchant banker’s report must not be older than ninety days. A safe harbor limit of ten percent is also introduced, allowing a minor variance between issue price and fair market value without attracting tax. These proposed changes, once implemented, will have a considerable impact on how valuations are conducted for compliance purposes.
Interaction Between Income Tax and FEMA Regulations
A key challenge in the implementation of Section 56(2)(viib) arises due to the divergence between the valuation norms under the Income Tax Act and those under the Foreign Exchange Management Act. While FEMA regulations specify a minimum floor value for share issuances to foreign investors, the Income Tax Act imposes a ceiling value beyond which the premium is taxed. This inconsistency can create practical difficulties, especially when a company attempts to comply with both sets of regulations. A valuation acceptable under FEMA may still attract tax under the Income Tax Act if it exceeds the fair market value as per Rule 11UA. Therefore, companies are now required to establish more robust and dual-compliant valuation methodologies that satisfy the requirements of both the tax and foreign exchange laws. This often involves detailed financial modeling and expert valuation reports, along with comprehensive documentation to support the valuation basis.
Interaction Between Income Tax and the Companies Act
The Companies Act also mandates valuation requirements under Section 62(1)(c) read with Rule 13 of the Companies (Share Capital and Debenture) Rules, 2014. These rules stipulate that any preferential allotment of shares must be backed by a valuation report from a registered valuer. This creates another layer of compliance for companies, especially since the valuation methodology under the Companies Act may not always align with that under Rule 11UA of the Income Tax Rules. Under the Income Tax Act, the valuation is determined using either the net asset value or discounted cash flow methods, but the Companies Act allows for more flexibility depending on the transaction type. Consequently, companies must reconcile these methodologies and ensure that the chosen valuation is defensible under both laws. Failure to do so could lead to litigation or disallowance of tax exemptions, thus increasing the overall regulatory risk.
Judicial Interpretation and Precedents under Section 56(2)(viib)
The interpretation of Section 56(2)(viib) has evolved through various judicial decisions, which have clarified the scope and limitations of tax authorities while assessing share premium transactions. These decisions offer valuable insights into the acceptable standards of valuation, the role of the Assessing Officer, and the responsibilities of companies and valuers. They serve as guiding principles for both taxpayers and tax officials in the application of this provision.
CIT vs VVA Hotels Private Limited
In this case, the assessee had issued shares at a premium and determined the fair market value using the discounted cash flow method. The Assessing Officer rejected this method and instead used the net asset value method, arguing that the actual revenue of the assessee was different from the projected figures. The tribunal noted that the variation between the projected and actual revenue was marginal and that the Assessing Officer had not demonstrated any flaw in the method used by the assessee. It held that the Assessing Officer cannot substitute the method adopted by the assessee unless it is shown to be fundamentally flawed. The addition under Section 56(2)(viib) was consequently set aside. This decision reinforces the principle that valuation is inherently forward-looking and minor variations from projections do not automatically indicate manipulation or misrepresentation.
Brio Bliss Life Science Private Limited v Income Tax Officer
The assessee in this case adopted the discounted cash flow method for valuation of shares and received a premium accordingly. The Assessing Officer rejected the valuation because the projections did not match the actual financials and made additions towards the excess premium. The tribunal held that the discounted cash flow method is based on expected future performance and not actual results. Therefore, differences between projected and actual performance cannot be the sole reason to disregard the valuation. Furthermore, the tribunal emphasized that the Assessing Officer has no authority to change the valuation methodology if the one adopted by the assessee is among the prescribed methods. This judgment is significant in upholding the autonomy of the assessee in choosing the valuation approach and in recognizing the uncertainties inherent in business forecasting.
Agro Portfolio Private Limited v Income Tax Officer
In this case, the assessee issued shares at a premium supported by a valuation report based on the discounted cash flow method, prepared by a merchant banker. The Assessing Officer rejected the report and substituted his valuation, adding the differential amount as income. The tribunal upheld the Assessing Officer’s view on the basis that the merchant banker did not independently verify the assumptions provided by the company. It held that reliance solely on management inputs without any independent verification reduced the credibility of the valuation report. This case highlights the importance of thorough due diligence and documentation by valuers while preparing reports under Rule 11UA. It also signals to taxpayers that while the valuation method is their choice, the process must be transparent, credible, and capable of withstanding regulatory scrutiny.
Lessons from Judicial Decisions
These judicial precedents collectively illustrate that tax authorities cannot arbitrarily reject valuation reports or substitute their methods unless clear evidence of manipulation or inaccuracy exists. At the same time, they underline the need for credible and well-substantiated valuation reports. Companies must ensure that the projections used in the discounted cash flow method are realistic and backed by sufficient documentation. Merchant bankers or valuers must follow a systematic approach that includes verification of data, a clear rationale for assumptions, and a professional basis for conclusions. These judgments also clarify that actual financial performance cannot be the sole test to judge the validity of a valuation done at the time of share issuance, which is inherently forward-looking.
Practical Challenges in Conducting Share Valuations
Valuation under Section 56(2)(viib) is not just a regulatory formality but a complex exercise involving multiple technical and procedural issues. Companies and valuers face several practical challenges while undertaking share valuation to comply with tax regulations and to avoid disputes.
Compliance with Startup Notification Requirements
Startups that seek exemption from Section 56(2)(viib) must comply with the conditions laid down in the notification issued by the Department for Promotion of Industry and Internal Trade on 19 February 2019. One of the major conditions is that the aggregate amount of paid-up share capital and share premium after the proposed issue should not exceed the prescribed limit. Additionally, startups must not invest in assets such as land, luxury vehicles, or other non-business assets within seven years of incorporation. If any of these conditions are violated, the premium received will be treated as income in the year of default and taxed accordingly. Thus, startups must continuously monitor their compliance and maintain proper documentation to retain their exemption status.
Clawback Provisions and Income Recognition
The second proviso to Section 56(2)(viib) introduces a clawback mechanism. If a startup fails to comply with any of the conditions required for exemption under the DPIIT notification, the premium received on share issuance may be retrospectively taxed as income in the year of non-compliance. This retrospective taxation can have significant financial implications, especially if the funds have already been deployed. Companies must therefore maintain strict internal controls to ensure compliance over time and should consider obtaining legal and tax advice before raising funds at a premium.
Role and Responsibility of Valuers
Valuers play a critical role in the compliance framework of Section 56(2)(viib). They are responsible for preparing reports that form the basis of fair market value determination under Rule 11UA. While the rules permit reliance on management inputs, the valuer must independently assess the validity of the assumptions used. They must also ensure that the report includes detailed financial models, explanations of methodology, and references to industry data where applicable. Any failure in this regard can undermine the report’s credibility and expose the company to tax litigation. Valuers must also align their approach with the valuation standards issued by the Institute of Chartered Accountants of India wherever applicable, to maintain consistency and professional integrity.
Valuation Standards and Scope Limitations
The Institute of Chartered Accountants of India has issued detailed valuation standards to guide practitioners in conducting professional valuations. These standards cover various aspects, including data collection, methodology, documentation, and reporting. Companies relying on valuation reports for tax purposes must ensure that these standards are followed. However, many valuation reports include scope limitations, particularly in terms of the reliance on management representations without verification. While these limitations may be commercially acceptable, they could weaken the report’s evidentiary value in case of a tax assessment. Therefore, wherever possible, the valuer should independently test the data and assumptions used to build the financial model.
Comparing Projected and Actual Financials
One of the most common issues raised by tax authorities is the mismatch between projected and actual financial results. While projections are by nature uncertain, large deviations can trigger suspicion about the validity of the assumptions used. To mitigate this, companies should maintain detailed records explaining the basis of their projections. This may include market studies, industry reports, internal business plans, and historical performance data. Such documentation strengthens the defense that the valuation was done in good faith and based on reasonable expectations at the time of issuance. It is also advisable to conduct periodic reviews and re-evaluate projections to maintain consistency and accuracy across reporting periods.
Importance of Scientific Documentation
Scientific documentation is vital for defending valuation assumptions and justifying premium pricing. Companies must prepare a comprehensive information memorandum that outlines the business model, revenue streams, market positioning, and expansion plans. This document should support the projected financials used in the valuation model. In addition, industry-specific parameters such as capacity utilization for manufacturing companies, average daily rates in the hospitality sector, or footfall data in retail businesses should be used wherever applicable. The rationale for each assumption must be clearly explained and supported with data. This level of detail helps in demonstrating the bona fides of the valuation and can significantly reduce the risk of litigation.
Management Background and Sector Knowledge
The experience and qualifications of the company’s directors and investors are also relevant in supporting the valuation. A management team with a strong track record in the industry adds credibility to the projections. Similarly, a well-prepared sector analysis that explains the market opportunity, competition landscape, and expected growth rates provides context for the valuation assumptions. Companies should include such information in their valuation reports and information memoranda. This strengthens the narrative around the business’s potential and helps in justifying higher valuations even in the absence of strong historical financial performance.
Regulatory Discrepancies Between FEMA and the Income Tax Act
A significant challenge in the implementation of Section 56(2)(viib) arises from the lack of alignment between the Foreign Exchange Management Act and the Income Tax Act. Under FEMA, the valuation of shares for inbound investment by non-residents must not be lower than the fair market value as determined by the internationally accepted pricing methodologies. These include methods like net asset value, discounted cash flow, or comparable company analysis. The Income Tax Act, on the other hand, prescribes that the issue price must not exceed the fair market value determined under Rule 11UA. Therefore, what is considered acceptable under FEMA may still result in tax implications under the Income Tax Act if the share price is higher than the FMV determined using the income tax methodology. This misalignment poses serious difficulties for companies attempting to comply with both sets of laws simultaneously.
FEMA Valuation as the Floor and Income Tax as the Ceiling
Under FEMA, the objective is to prevent undervaluation of shares to ensure that foreign investments are made at fair value or higher, thereby protecting the interests of the Indian economy. Accordingly, the regulations impose a minimum floor for the share price. In contrast, the Income Tax Act attempts to curb the introduction of unaccounted money by ensuring that shares are not issued at an unreasonably high price. It does so by setting an upper ceiling on the share value to avoid tax avoidance. Consequently, a company issuing shares to non-residents may be forced to fix a price within a narrow corridor defined by the floor value under FEMA and the ceiling under income tax rules. This dual compliance often requires detailed financial analysis, valuation by qualified professionals, and robust documentation to justify the pricing to both regulatory authorities.
Risk of Scrutiny Due to Valuation Gaps
Due to the regulatory divergence, companies are increasingly facing scrutiny from tax authorities. A valuation accepted under FEMA may not automatically be accepted under the Income Tax Act. This creates a risk where a company complies with FEMA requirements, raises funds at a justifiable price, but still gets taxed under Section 56(2)(viib) due to exceeding the fair market value as determined under Rule 11UA. In such cases, the excess amount is treated as income from other sources, leading to additional tax liability. To avoid this, companies must ensure that the valuation methodology satisfies both FEMA and Income Tax expectations. It is advisable to engage both chartered accountants and merchant bankers during the valuation process, especially when foreign investments are involved.
The Role of Merchant Bankers in Valuation
Merchant bankers play a pivotal role in preparing fair valuation reports that align with Rule 11UA requirements. They are qualified professionals authorized to perform discounted cash flow valuations for Section 56(2)(viib) compliance. Their role involves analyzing financial projections, understanding the business model, and applying appropriate discounting rates to arrive at a fair market value. The report prepared by the merchant banker is a critical document that must be submitted to the tax authorities if questioned. The report must be detailed, internally consistent, and supported with appropriate assumptions and benchmarks. Moreover, the date of the valuation report must fall within the permitted time frame as specified by the latest regulatory guidelines. If the merchant banker’s report is more than ninety days old, it may be rejected by the tax authorities.
Importance of Choosing the Right Valuation Method
Rule 11UA allows two main methods for determining the fair market value of unquoted equity shares, namely the net asset value method and the discounted cash flow method. Each method has its own merits and applicability depending on the nature and stage of the business. For companies with a history of stable performance and asset-backed value, the net asset value method may be appropriate. However, for startups or growing companies where the value lies in future potential, the discounted cash flow method is more suitable. Choosing the wrong method can result in an undervaluation or overvaluation, which could lead to tax exposure or investor dissatisfaction. Therefore, the method must be chosen based on a careful evaluation of the company’s business model, financial health, and future growth prospects. The justification for selecting a particular method should be documented in the valuation report.
Safe Harbor Limits and Valuation Flexibility
In response to industry concerns about minor deviations between issue price and fair market value triggering tax, the Central Board of Direct Taxes introduced a ten percent safe harbor limit. This means that if the issue price of shares is within ten percent of the fair market value determined under Rule 11UA, the transaction will not be subject to tax under Section 56(2)(viib). This provision provides a practical relief to companies by acknowledging that valuation is not an exact science and allowing for some leeway. However, it is crucial to ensure that the safe harbor is calculated correctly and is supported by documentation. Any deviation beyond the prescribed limit will attract tax even if the difference is marginal. Companies must therefore apply careful judgment while pricing shares and prepare their valuations with precision.
Transfer Pricing Implications for Group Entities
In cases where share issuance is made to group entities or related parties, the pricing of shares assumes even greater significance. Transfer pricing regulations require that such transactions be conducted at arm’s length. If the issue price of shares deviates from what an independent third party would pay, the transaction may be subject to adjustment under transfer pricing laws in addition to Section 56(2)(viib). This dual exposure can create significant tax risks and compliance costs. To mitigate this, companies must ensure that the valuation report used for share issuance also satisfies the principles of transfer pricing. The report should contain sufficient benchmarking data, comparables, and justification for the pricing, especially when the transaction involves cross-border related parties. Coordination between the valuation team and the transfer pricing team is essential in such situations.
Treatment of Convertible Instruments
Section 56(2)(viib) is primarily focused on equity shares, but convertible instruments such as compulsorily convertible preference shares or debentures also require valuation scrutiny. Although the section does not explicitly cover these instruments, the tax authorities may examine such transactions closely, especially if the conversion ratio or price appears to result in a future allotment at a value exceeding the fair market value. Therefore, companies issuing convertible instruments must ensure that the conversion terms are clearly defined and are based on a fair valuation. It is advisable to perform a valuation of the equity shares as of the date of the issuance of convertible instruments and to justify the future conversion pricing. Ambiguities or uncertainties in the conversion mechanism can invite tax challenges under anti-abuse provisions or general principles of fair valuation.
Role of Startup Recognition in Tax Exemption
Startup recognition by the Department for Promotion of Industry and Internal Trade provides a crucial exemption from Section 56(2)(viib). However, obtaining and maintaining this recognition requires strict adherence to prescribed conditions. These include a limit on paid-up share capital and share premium, restrictions on certain asset classes, and a requirement that the startup is engaged in innovation or improvement of products or services. Once recognized, the startup can raise capital without triggering angel tax, even if the share issue price exceeds the fair market value. However, if the startup fails to comply with any of the conditions during its recognition period, the exemption can be withdrawn retrospectively. This would mean that the premium received earlier would become taxable in the year of non-compliance. Therefore, startups must proactively monitor their compliance, maintain updated records, and communicate regularly with regulatory authorities to ensure their recognition remains valid.
Consequences of Non-compliance
Failure to comply with Section 56(2)(viib) and its related provisions can lead to several adverse consequences. The most immediate is the addition of the excess share premium to the company’s income under the head of income from other sources. This addition increases the taxable income and results in additional tax outgo, which may not have been factored into the business’s financial planning. In some cases, it may even result in penalties and interest for underreporting of income. Moreover, non-compliance may attract unwanted scrutiny from the tax authorities, leading to lengthy assessments or audits. It may also impact investor confidence, especially if the funding is from institutional investors who require clean regulatory status. Therefore, companies must treat compliance with Section 56(2)(viib) as a critical governance issue and implement robust internal controls, periodic compliance checks, and legal reviews to mitigate risks.
Importance of Industry Benchmarks and Independent Research
One of the key factors that enhances the credibility of a valuation report is the use of industry benchmarks and independent research. These benchmarks provide a context for the assumptions made in the discounted cash flow method, such as revenue growth rate, operating margins, and discount rate. Independent research includes market reports, competitive analysis, and third-party studies that validate the company’s claims about its market size, customer base, or expansion potential. Incorporating these external references into the valuation report strengthens its defensibility and reduces the scope for arbitrary rejection by tax authorities. It also helps in convincing investors and regulators that the valuation is reasonable, fair, and aligned with market realities. Therefore, companies should invest time and resources in gathering and analyzing industry data while preparing for any equity issuance.
Periodic Valuation Updates and Internal Monitoring
Valuation is not a one-time exercise but an ongoing requirement, especially for companies planning multiple rounds of funding. The business environment changes rapidly, and the assumptions that hold in one quarter may not be valid in the next. Therefore, companies must update their valuations periodically, especially before issuing new shares or convertible instruments. An internal valuation committee or financial controller should be designated to monitor changes in the business performance, industry conditions, and regulatory updates. This proactive approach allows the company to react quickly to emerging risks, revise its financial models, and ensure continued compliance with tax and foreign exchange laws. It also helps in building a valuation history that supports the company’s growth narrative and establishes a consistent pricing framework for all stakeholders.
Case Law Interpretations and Judicial Trends
Various courts and tribunals in India have played a significant role in interpreting the provisions of Section 56(2)(viib), especially concerning the method of valuation, applicability to genuine transactions, and fairness of share pricing. In several cases, judicial bodies have held that when valuation is supported by appropriate methods such as DCF or NAV certified by qualified professionals, the assessing officer cannot arbitrarily reject the valuation. The courts have emphasized that valuation is inherently based on future projections and estimates, which carry a degree of subjectivity and must not be judged with hindsight.
In the case of M/s Cinestaan Entertainment Pvt. Ltd. v. ITO, the Delhi ITAT ruled that if valuation is conducted based on a recognized method and backed by due diligence, it should not be disregarded merely due to differing opinions on future forecasts. In another key ruling, Vodafone M-Pesa Ltd. v. PCIT, the ITAT accepted DCF valuation and observed that minor deviations from projected results do not amount to a falsified valuation. Judicial precedents like these reinforce the principle that the taxpayer’s choice of method, if bona fide and compliant, must be respected unless proved otherwise.
Impact on Startups and Angel Investors
Section 56(2)(viib), often dubbed the ‘Angel Tax’ provision, has generated concern within the startup ecosystem. Initially aimed at curbing money laundering through inflated share valuations, the provision unintentionally created hurdles for startups raising capital from angel investors at fair market terms. This led to significant pushback from industry stakeholders.
In response, the government announced relaxations through notifications, exempting DPIIT-recognized startups from the applicability of this section, subject to certain criteria. The exemption is valid if aggregate paid-up share capital and share premium do not exceed a prescribed limit and details of investors and valuations are duly submitted. This move aimed to balance the need to curb abuse while facilitating a conducive environment for entrepreneurial growth.
However, startups continue to face practical challenges in availing exemptions, such as procedural delays and frequent changes in compliance requirements. Despite reforms, the tax uncertainty around share valuation remains a bottleneck for early-stage companies and angel investors.
Recent Developments and CBDT Circulars
To address concerns and bring clarity, the Central Board of Direct Taxes (CBDT) has issued various circulars and notifications. In 2019, a significant notification provided relief to startups by exempting them from the applicability of Section 56(2)(viib) if they meet certain prescribed conditions. The eligibility is based on the aggregate amount of paid-up capital and share premium, the nature of the investor, and the amount of investment received.
Further, the Finance Act, 2023, and later amendments introduced provisions allowing valuation based on price matching with listed comparable companies or other investors under similar terms. These changes attempt to align the tax regime with global practices and bring more certainty to investment-related valuations.
The CBDT has also clarified the tax treatment in the event of downward revision of valuations or share premium adjustments. Although the tax administration intends to ensure fair and transparent capital infusion, frequent updates have led to interpretative issues for taxpayers and professionals.
Suggestions for Reform and Best Practices
To enhance clarity, consistency, and ease of compliance, several reforms have been suggested by professionals and industry experts. These include:
- Standardizing valuation methodologies and providing illustrative examples in the Income Tax Rules.
- Recognizing the role of professional judgment in projections and avoiding retrospective scrutiny.
- Implementing a centralized portal for start-up exemption applications to reduce administrative delays.
- Providing a safe harbor range for valuation estimates to avoid penalizing minor differences.
- Issuing binding advance rulings or valuation approvals for certainty in tax treatment.
From a practical standpoint, companies are advised to maintain robust documentation to support their valuation methodology, including board resolutions, financial models, investor pitch decks, and valuation reports from registered professionals. Clear communication of the valuation basis with investors and auditors also ensures smoother tax assessments.
Conclusion
Section 56(2)(viib) is a significant anti-abuse provision within the Indian tax regime, intended to prevent unaccounted money from entering companies through inflated share premiums. While its objectives are legitimate, its broad application has led to unintended consequences, especially for startups and genuine investors. Valuation, being a subjective and forward-looking exercise, must be approached with a balanced view that acknowledges professional judgment and business realities.
Recent relaxations, judicial interpretations, and stakeholder feedback indicate a progressive shift towards easing compliance and encouraging bona fide investments. However, continuous engagement between tax authorities, professionals, and businesses is necessary to evolve the law in line with economic realities. Companies must proactively align with recognized valuation methods, maintain transparency, and adopt a compliance-first approach to mitigate risks under this provision.