Section 56(2)(x) Under the Income-tax Act, 2025: A Practical Guide to FMV Defence in Faceless Assessment

Section 56(2)(x) Equivalent Under the Income-tax Act, 2025: Defending Fair Market Value Before the Assessing Officer

The Income-tax Act, 2025 has carried forward the substantive charging structure that made Section 56(2)(x) of the 1961 Act one of the most litigated provisions in Indian direct tax. The successor provision in the 2025 Act — housed in the Income from Other Sources chapter — continues to tax the recipient where property (including unlisted shares) is received without consideration or for consideration lower than fair market value, with the difference between FMV and consideration deemed to be income. The mechanics have been cleaned up. The audit and litigation exposure has not diminished.

For a Bangalore CA-Valuer combination, this provision is where documentation, methodology, and drafting all come together. A well-defended valuation report withstands assessment scrutiny; a poorly documented one triggers reassessment under the successor to Section 148 (Section 280 of the 2025 Act) two years later. Here is the defence framework I now use across client engagements.

The recurring triggers

• Share issuance at premium — a private company issues shares to non-resident or resident investors at a premium; the AO alleges the premium exceeds FMV and taxes the excess.
• Share transfer at less than FMV — shares transferred between related parties or as part of family restructuring; the AO alleges consideration was below FMV.
• Gift of unlisted shares — shares gifted outside the “relative” definition; the AO taxes the FMV as income in the recipient’s hands.
• Property transfer for inadequate consideration — immovable property transferred at below stamp duty value or FMV; the differential is taxed.
• Buyback pricing — post the October 2024 shift, the amount received on buyback is taxed as deemed dividend; where the buyback price is disputed as excessive, valuation challenges follow.

The FMV computation framework under the 2025 Act

The successor provision preserves the FMV computation methodology from the 1961 Act and Rule 11UA of the 1962 Rules — with the Rules themselves updated to align with the 2025 Act numbering. For unlisted equity shares, the two methods available are:

• Net Asset Value (NAV) method — book-value based; formula-driven; low judicial defence value but administratively simple.
• Discounted Cash Flow (DCF) method — valuation based on projected free cash flows discounted to present value; higher defensive value if properly documented; requires certification by a Category I Merchant Banker or Chartered Accountant.

The choice between NAV and DCF is at the taxpayer’s option for share issuance under the successor to Rule 11UA(2), but the AO reserves the right to challenge the reasonableness of DCF assumptions. This is where most disputes originate.

Where AOs challenge — and where the defence must be strongest

From assessment orders I have reviewed across the Delhi and Bangalore zones through 2025 and 2026, the recurring challenge patterns are:

• Revenue projection optimism — projected growth rates materially above industry benchmarks, unsupported by contemporaneous evidence.
• Discount rate reasonableness — WACC or cost of equity assumptions that appear low relative to the risk profile of the business.
• Terminal value dominance — where more than 70-75% of value comes from terminal value, AOs question the reasonableness of the terminal growth rate.
• Comparable set selection — comparable companies that do not genuinely match the target’s stage, sector, or geography.
• Non-operating asset treatment — cash and investments included or excluded inconsistently with the underlying method.

The valuation defence framework — five documentation layers

1. Business plan contemporaneity. The revenue projections in the DCF must be traceable to a board-approved business plan dated before the valuation date. A business plan drafted specifically to support the valuation invites challenge.
2. Assumption documentation. Every material assumption — growth rate, EBITDA margin, capex intensity, working capital as a percentage of revenue, terminal growth — should be linked to either historical performance or documented industry benchmarks with source citations.
3. Discount rate build-up. WACC or cost of equity should be built up from published risk-free rates, defensible equity risk premium, and beta derived from a documented comparable set. The build-up should be reproducible.
4. Peer benchmarking cross-check. The DCF value should be cross-checked against a market approach (comparable company multiples or comparable transaction multiples). Where the DCF value diverges materially from market benchmarks, the divergence should be explained in the report.
5. Sensitivity analysis. The report should include sensitivity of value to key variables — growth rate, discount rate, terminal value assumptions. This demonstrates the analytical rigour a Tribunal expects.

Drafting for faceless assessment — practical tactics

Faceless assessment has changed how the valuation defence gets communicated to the AO. In-person explanations no longer exist; the written submission is everything. Three practical tactics that work:

• Structure the submission around the AO’s specific concerns, not a generic defence of the report.
• Include a one-page valuation summary at the front — assumptions, methodology, result — so the Assessment Unit officer can grasp the position in three minutes.
• Attach the underlying working papers as annexures, cross-referenced from the summary.

Recent ITAT trends worth citing in 2026

• Tribunals have been increasingly deferential to DCF valuations where the report shows methodological rigour and contemporaneous business plan support.
• Where the AO has substituted his own valuation without reasoned engagement with the taxpayer’s report, orders have been set aside for lack of application of mind.
• The Bombay and Delhi Benches have consistently held that the DCF method, once opted for by the taxpayer, cannot be summarily rejected by the AO without demonstrating specific defects.
• For share issuance to non-residents, additional discipline is required under FEMA Rule 21 pricing guidelines — cross-compliance failures weaken the valuation defence.

Closing action list

• Contemporaneity is the single most important defence layer — document assumptions when you make them, not later.
• Choose method deliberately — NAV is safer procedurally but weaker on value; DCF requires more defence discipline.
• Build the WACC from published sources with citations preserved in the file.
• Cross-check DCF against market benchmarks in every report.
• Draft assessment submissions to the AO’s specific concern, not to a template.
• Preserve the record for appellate review — first-instance defence is now permanent record for any subsequent litigation.

The successor to Section 56(2)(x) under the Income-tax Act, 2025 is a well-established provision with well-established defensive frameworks. Taxpayers who invest in valuation documentation discipline before the trigger arises rarely lose these matters at first appeal. Taxpayers who invest only after the notice lands are almost always negotiating from a weaker position than they need to be.