Mumbai ITAT deletes Rs 36.54 crore angel tax addition against Catwalk Worldwide in DCF valuation dispute.

May 15, 2026 : The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled in favour of footwear company Catwalk Worldwide Limited, setting aside an addition of more than Rs. 36.54 crore made by the Income Tax Department under Section 56(2)(viib) of the Income Tax Act, 1961. The Tribunal held that tax authorities cannot reject a valuation conducted under the Discounted Cash Flow (DCF) method merely because the company’s future financial performance did not match projected figures.

The case arose from the assessment proceedings for the Assessment Year 2017-18, where the Assessing Officer had questioned the high share premium collected by Catwalk Worldwide Limited during a strategic investment transaction involving Sara Soule Pvt. Ltd. The company had allotted over 7 lakh shares at a face value of Rs. 10 each along with a premium of Rs. 518 per share.

The Income Tax Department invoked Section 56(2)(viib), commonly referred to as the “angel tax” provision, which empowers authorities to tax excess share premium received by closely held companies if the issue price exceeds the fair market value of shares. According to the Assessing Officer, the valuation report submitted by the company under the DCF method was unreliable because the actual financial performance in later years substantially differed from the projections used by the valuer.

The assessing authority observed that the company’s projected profit figures were “much more on higher side” than the actual profits achieved in subsequent years. The officer also alleged that the valuer had failed to conduct adequate research before preparing the report. On that basis, the Department discarded the DCF valuation and attempted to apply the Net Asset Value (NAV) method instead, arriving at a significantly lower valuation of Rs. 133.84 per share.

Even after referring to the Bombay High Court ruling in Vodafone M-Pesa Ltd., the Assessing Officer recalculated the valuation under the DCF method by replacing projected financial figures with actual profits earned in later years. This exercise resulted in a negative valuation of the company’s shares, following which the Department added the entire share premium amount of Rs. 36.54 crore to the company’s taxable income.

Before the Tribunal, Catwalk Worldwide argued that the Income Tax Act and Rule 11UA of the Income Tax Rules expressly permit companies to choose either the NAV method or the DCF method for valuation of unquoted shares. The company contended that once a prescribed method had been selected and a valuation report was prepared by a qualified chartered accountant, the Assessing Officer had no authority to substitute projections with actual figures or adopt another valuation methodology altogether.

The company further explained that several unforeseen economic developments adversely affected its business after the valuation date, including demonetisation in November 2016, implementation of the Goods and Services Tax regime in 2017, and growing competition from e-commerce platforms. It also pointed to one-time accounting adjustments and write-offs worth over Rs. 17 crore undertaken during due diligence by investors, which materially impacted the actual profit figures.

The Tribunal extensively relied upon earlier judicial precedents, particularly the Delhi High Court judgment in Cinestaan Entertainment Pvt. Ltd., which had held that valuation under the DCF method cannot be rejected solely because future projections do not ultimately materialise. The ITAT reiterated that valuation is based on future expectations, assumptions, market conditions, and commercial prudence, all of which are inherently uncertain.

Quoting settled legal principles, the Tribunal observed that “valuation is not an exact science” and that authorities cannot apply a “hindsight view” to invalidate projections used in DCF valuation. It further noted that “the Assessing Officer cannot disturb the valuation by comparing the projections adopted by the assessee with actuals.”

The Bench comprising Judicial Member Amit Shukla and Accountant Member Arun Khodpia also highlighted that the investment in question was made by an unrelated third-party strategic investor and not by a closely related entity. According to the Tribunal, this aspect was significant because Section 56(2)(viib) was introduced as an anti-abuse provision to prevent laundering of unaccounted money through inflated share premiums.

The Tribunal clarified that once an assessee exercises its statutory option to adopt the DCF method under Rule 11UA, the Assessing Officer cannot arbitrarily switch to the NAV method unless there is cogent evidence demonstrating perversity or manipulation in the valuation exercise. It further held that replacing projected financial data with actual subsequent figures fundamentally defeats the purpose of DCF valuation, which is based on future earning potential and not retrospective analysis.

In a significant observation likely to impact future angel tax litigation, the ITAT held that tax authorities cannot sit in judgment over the “commercial wisdom” of investors who choose to invest in companies based on anticipated future potential. The Tribunal observed that business decisions and investments inherently involve risk assessment and future expectations, particularly in growth-oriented businesses.

Allowing the appeal, the Tribunal set aside the orders passed by the Assessing Officer and the Commissioner of Income Tax (Appeals), and directed deletion of the entire addition of Rs. 36.54 crore made under Section 56(2)(viib) of the Income Tax Act.

The ruling is expected to provide substantial relief to startups, growth-stage companies, and private businesses facing scrutiny over share premium valuations under the angel tax framework. The judgment reinforces the principle that DCF valuation must be assessed based on information available at the time of valuation and not by applying retrospective financial outcomes. It also strengthens judicial safeguards against arbitrary rejection of professionally certified valuation reports by tax authorities.

Case Reference : Case Title: Catwalk Worldwide Limited v. Assistant Commissioner of Income Tax

Case Citation: ITA No. 6291/Mum/2025

Court: Income Tax Appellate Tribunal, Mumbai Bench “C”

Bench: Justice Amit Shukla (Judicial Member) and Arun Khodpia (Accountant Member)

Date of Judgment: May 15, 2026

Assessment Year: 2017-18

Relevant Provisions: Section 56(2)(viib), Section 143(3) of the Income Tax Act, 1961 and Rule 11UA of the Income Tax Rules, 1962