2022 (11) TMI 1465 - AT - Income Tax

ITAT Delhi deletes additions under sections 56(2)(viib) and 68, remits expense disallowance for fresh examination

ITAT Delhi ruled in favor of the assessee on multiple grounds. The tribunal held that additions under section 56(2)(viib) for share premium were ... Addition u/s 56(2)(viib) representing share premium received on sale of shares - Substitution of value of shares - rejection of the valuation done by the assessee from prescribed expert as per the prescribed method - whether the premium charged by the assessee on the face value of share is in excess of the fair market value of share as on the date of sale, so as to, come within the mischief of section 56(2)(viib) of the Act.? - HELD THAT:- On a reading of section 56(2)(viib) of the Act, it becomes clear that fair market value of share as on date of sale has to be determined by applying the methodology provided under rule 11UA. A reading of rule 11UA(2)(b) would make it clear that the fair market value of equity shares has to be determined by applying the methodology as provided under clause (a) or clause (b), at the option of the assessee. Rule 11UA (2)(b) applicable to the relevant assessment year provided an option to the assessee to get fair market value of the shares determined by a merchant bank or an accountant. In the fact of the present case, admittedly, the assessee has got the fair market value of the shares determined through an accountant. Thus, the assessee has acted as per the mandate of section 56(2)(viib) read with rule 11UA. Whereas, the Assessing Officer has substituted fair market value determined by the assessee through his own valuation. As decided in M/s. Dayalu Iron & Steel Pvt. Ltd [2022 (7) TMI 625 - ITAT DELHI] as held that Income Tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee’s own business objective of projection of films and media entertainment, then such commercial wisdom cannot be questioned. Even the prescribed Rule 11UA (2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the Assessing Officer to tinker with such valuation. Here, in this case, Assessing Officer has not substituted any of his own method or valuation albeit has simply rejected the valuation of the assessee. If law provides the assessee to get the valuation done from a prescribed expert as per the prescribed method, then the same cannot be rejected because neither the Assessing Officer nor the assessee have been recognized as expert under the law. Revenue authorities have committed an error in rejected the valuation done by the assessee from prescribed expert as per the prescribed method. Thus addition made is unsustainable. Decided in favour of assessee. Disallowance of expenses - business was not fully functional - as assessee has not carried out any business during the year and the interest income is assessable under the head ‘income from other sources’, AO disallowed the expenses - HELD THAT:- As observed that the assessee is in the process of setting up of its business of beauty parlor. However, the business was not fully functional. Irrespective of that, the assessee had to incur certain expenditure to maintain its corporate status. From the details of expenses furnished before me, it is observed that the expenses incurred by the assessee relate to salaries, staff welfare, bank expenses, accounting charges, office expense, rent, audit fee, convenience expenses, electricity expenses, telephone expenses, ROC fees, preliminary expenses etc. While disallowing expenses, AO has not gone into the details to identify the items of expenditure which is ought to be incurred by the assessee for maintaining the corporate status. The nature of interest income has to be verified to come to a definite conclusion, whether it has any proximate nexus with assessee’s business. Since, these aspects have not been properly examined by the departmental authorities, remit the issue back to the Assessing Officer for fresh adjudication. This ground is allowed for statistical purposes. Addition u/s 68 by way of enhancement of income made by learned Commissioner - HELD THAT:- As it is a fact on record, all the entities investing in shares of the assessee are companies registered with ROC having active status. Documentary evidences, including, audit report, balance-sheet, confirmation, bank statement, Income Tax return copies etc. of the investors were submitted before the AO. Even, after thorough inquiry, AO did not find anything adverse or deficient in the documentary evidences furnished by the assessee, hence, accepted the investments to be genuine. As could be seen, without making any further inquiry independently, simply based on the documents available on record, Commissioner (A) has held that the investments made are not genuine, as, the creditworthiness and genuineness is not established. When the assessee has discharged the initial onus by furnishing all documentary evidences to establish the identity and creditworthiness of the investors and also furnished all documentary evidences to establish the genuineness of the transaction done through banking channel, merely on presumption and surmises the investments made cannot be treated as unexplained cash credit. Decided in favour of assessee. Penalty u/s 271(1)(c) - HELD THAT:- While deciding the quantum appeal of the assessee in the earlier part of the order, couple of additions have been deleted and the addition relating to disallowance of expenses has been restored back to the Assessing Officer. Thus, presently there is no surviving addition which formed the basis for imposition of penalty u/s 271(1)(c) of the Act. Decided in favour of assessee. Issues Involved:1. Addition under section 56(2)(viib) of the Income-tax Act, 1961.2. Disallowance of expenses.3. Addition under section 68 of the Income-tax Act, 1961.4. Penalty under section 271(1)(c) of the Income-tax Act, 1961.Detailed Analysis:1. Addition under section 56(2)(viib) of the Income-tax Act, 1961:The first issue concerns the addition of Rs.29,89,200/- under section 56(2)(viib), representing share premium received on the sale of shares. The assessee, a corporate entity promoting health clubs, beauty parlours, and yoga centres, had allotted shares at a premium. The Assessing Officer computed the fair market value of the shares at Rs.34.10 each, while the assessee's independent valuer determined it at Rs.50 per share using the Discounted Free Cash Flow (DCF) method. The Assessing Officer did not accept the assessee's valuation and added the amount to the income. The Tribunal noted that the fair market value should be determined as per the assessee's chosen method under rule 11UA and that the Assessing Officer cannot substitute his own valuation. The Tribunal cited several decisions, including M/s. Dayalu Iron & Steel Pvt. Ltd. and Cinestan Entertainment (P). Ltd., which support the assessee's right to choose the valuation method. Consequently, the Tribunal deleted the addition, deeming it unsustainable.2. Disallowance of expenses:The second issue involves the disallowance of expenses amounting to Rs.5,29,311/-. The Assessing Officer disallowed these expenses, arguing that the assessee had not carried out any business during the year and that the interest income should be assessed under 'income from other sources.' The Tribunal observed that the assessee was in the process of setting up its business and had incurred expenses to maintain its corporate status. The Tribunal remitted the issue back to the Assessing Officer for fresh adjudication, emphasizing the need to verify the nature of the expenses and the interest income's nexus with the business.3. Addition under section 68 of the Income-tax Act, 1961:The third issue pertains to the addition of Rs.22,50,000/- under section 68 by way of enhancement made by the Commissioner (Appeals). The Assessing Officer had accepted the investments in shares after thorough inquiry, but the Commissioner (Appeals) questioned the identity, genuineness, and creditworthiness of the investors. The Tribunal noted that all necessary documents were available and the Assessing Officer had found no deficiencies. The Tribunal held that the Commissioner (Appeals) had acted on presumptions without independent inquiry. Therefore, the Tribunal deleted the addition.4. Penalty under section 271(1)(c) of the Income-tax Act, 1961:The fourth issue relates to the penalty imposed under section 271(1)(c) based on the additions made in the quantum proceedings. Since the Tribunal had deleted some additions and remitted others for fresh adjudication, there was no surviving addition to form the basis for the penalty. Consequently, the Tribunal deleted the penalty imposed under section 271(1)(c).Conclusion:The appeal in ITA No. 170/Del/2022 was partly allowed, with the addition under section 56(2)(viib) deleted, the disallowance of expenses remitted for fresh adjudication, and the addition under section 68 deleted. The appeal in ITA No. 246/Del/2022 was allowed, resulting in the deletion of the penalty under section 271(1)(c).