2019 (3) TMI 158 - AT - Income Tax

Tribunal Upholds Tax Decision on Share Premium & Bad Debts

The Tribunal upheld the Assessing Officer's decision to tax the excess share premium over fair market value under Section 56(2)(viib) of the Income Tax ... Addition of share premium u/s 56(2)(viib) r.w.r. 114A(2)(a) - valuation adopted by the assessee using the DCF Method - HELD THAT:- The assessee contention that the AO has taken the lower of the valuation, whereas he is required to adopt the higher valuation is not correct. The valuation adopted by the assessee using the DCF Method has not withstood the scrutiny of the AO. The assessee has not been able / failed to furnish the details that went into and formed the basis for the projections made by the assessee. As pointed out by the CIT(A), there is absolutely no correlation between the figures adopted by the assessee in its projections and the actual figures reported. Since the very basis for the DCF valuation was itself not substantiated by the assessee, the AO has adopted the NAV Method to determine the valuation. In the case of Agro Portfolio Pvt. Ltd. [2018 (5) TMI 1088 - ITAT DELHI] are similar to that of the assessee in the case on hand and we are of the considered view that the findings rendered therein are applicable to the present case before us. We uphold the action of the AO in determining the share premium collected in the assessee’s hand u/s 56(2)(viib) r.w.r. 114A(2)(a) of the Rules and the action of the CIT(A) in upholding the AO’s action / addition. Grounds of assessee’s appeal are dismissed. Claim for write off of bad debts - HELD THAT:- CIT(A) rendered a finding that these amounts are expended towards advertisement expenses incurred for and on behalf of the franchisees, which was to be reimbursed by them to the assessee. The assessee’s explanations that the franchisees were unable to reimburse the aforesaid expenses incurred by the assessee on their behalf due to insufficient / tight cash flow position and therefore the same has to be written off as advertisement expenses; in the view of the CIT(A); does not qualify to be “Revenue” to be written off as bad debts. We find that the findings rendered by the CIT(A) has not been controverted by the assessee before us. No further documents / details were furnished by the assessee. In this factual matrix of the case, as discussed above, we uphold the action of the factual findings rendered by the authorities below in disallowing the assessee’s claim for write off of reimbursable “advertisement expenses” incurred by the assessee as bad debts. Issues Involved:1. Addition of share premium under Section 56(2)(viib) of the Income Tax Act.2. Disallowance of bad debts claimed by the assessee.Issue-wise Detailed Analysis:1. Addition of Share Premium under Section 56(2)(viib) of the Income Tax Act:The assessee, a company engaged in vocational training, issued shares at a premium to its parent company. The Assessing Officer (AO) taxed the share premium under Section 56(2)(viib) of the Income Tax Act, determining the fair market value (FMV) of the shares using the Net Asset Value (NAV) Method, which was lower than the value determined by the assessee using the Discounted Cash Flow (DCF) Method. The AO added the difference to the income of the assessee, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].The Tribunal examined the following contentions by the assessee:- The provisions of Section 56(2)(viib) were misconstrued.- The price agreed upon between a willing buyer and seller should be considered the FMV.- The shares were issued to the parent company, making the price irrelevant.- The DCF Method, based on future cash flows, was a valid method and should not have been disregarded.- The Revenue authorities do not have the power to evaluate the method of valuation once chosen by the assessee.- The AO should have adopted the higher of the values determined by any method.The Tribunal found that:- Section 56(2)(viib) was correctly applied to tax the excess share premium over the FMV.- The AO was justified in rejecting the DCF Method due to unsubstantiated projections and adopting the NAV Method.- The AO's approach was validated by the ITAT Delhi Bench decision in Agro Portfolio Pvt. Ltd., which held that the AO could reject the DCF Method if the projections were not substantiated.The Tribunal upheld the AO's and CIT(A)'s decisions, dismissing the assessee's grounds related to the addition of share premium.2. Disallowance of Bad Debts Claimed by the Assessee:The assessee claimed a deduction for bad debts amounting to Rs. 46,70,166/-, which was disallowed by the AO on the grounds that the assessee did not produce evidence of efforts to recover the amounts from its franchisees. The CIT(A) upheld the disallowance, noting that the amounts were for advertisement expenses incurred on behalf of the franchisees and not included in the assessee's income.The Tribunal examined the assessee's contentions that:- The amounts were shown as revenue and reflected in the books.- Any recovered amounts would be offered to tax.The Tribunal found that:- The expenses were for advertisement on behalf of the franchisees and were not included in the assessee's income.- The assessee failed to provide evidence to substantiate the claim that the amounts were revenue.The Tribunal upheld the disallowance of the bad debts, dismissing the assessee's related grounds.Conclusion:The Tribunal dismissed the assessee's appeal, upholding the AO's and CIT(A)'s decisions regarding the addition of share premium under Section 56(2)(viib) and the disallowance of bad debts. The judgment emphasized the importance of substantiating valuation methods and the inclusion of claimed expenses in the assessee's income.