2014 (11) TMI 1300 - AT - Income Tax

Appeals allowed: s.68 and s.56(2)(viib) additions deleted; FMV of unquoted shares to follow Rule 11UA methods

People Care Hospitals Private Limited Versus ITO, Ward- 2 (1), Faridabad AND Geranium Barkers Pvt. Ltd Versus ITO Ward-1 (3), Faridabad AND Riven Health Club Pvt. Ltd. Versus ITO Ward- 2 (2), Faridabad

ITAT (Delhi, AT) allowed the appeals, deleting additions made under s.68 and enhancement under s.56(2)(viib). The tribunal held that fair market value of ... Addition of income made u/s 68 - unexplained share premium and share capital - CIT(A) upheld the additions made by AO and enhanced income of the assessee u/s 251(1) read with 56(2)(viib) - HELD THAT:- As per Rule11UA of the Rules fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be determined under clause (a) or clause (b), at the option of the assessee. Assessees having the choice to opt for one of the methods enumerated in the above provision and the appellant has chosen to opt for clause (b) in most of the abovementioned cases for valuation of unquoted equity shares and based on the same, the value of the share had been computed. Accordingly, the new shares were issued and allotted to the investors during the captioned assessment year. During the assessment proceedings, computation of Fair Market Value of shares as per Rule 11UA(2) was submitted before the Ld.AO to justify that the shares issued by the appellants were at Fair Market Value (FMV) which was computed in accordance with Rule 11UA(2) of the Income Tax Rules, 1962. But the AO has not given any reasoning for rejecting the valuation of shares nor have they furnished any material to the contrary which justified the rejection of the valuation of shares. When the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same. It has been hitherto an uncontroverted legal position that where a statute requires to do a certain thing in a certain way, the thing must be done in that way only. Other methods or modes of performance are impliedly and necessarily forbidden. The aforesaid settled legal proposition is based on legal maxim 'Expressio unis est exclusio alterius', meaning thereby that if a statute provides for a thing to be done in particular manner, then it has to be done in that manner and in no other and following other course is not permissible. The assessees have issued the shares at fair market value computed in accordance of the rules and no fault has been found in the method applied by the assessees. The Ld CIT(A) has enhanced the value u/s 56(2) of the Act purely on the conjecture basis. The assessees have filed the document to prove the identity, creditworthiness and genuineness of the transaction of each shareholder and discharged their burden as requirement u/s 68 of the Act. The addition of income made u/s 68 of the Act as well as the enhancement of income u/s 56(2)(viib) of the Act are liable to be deleted and deleted accordingly. Appeals of the assesses are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether sums credited as share capital/share premium can be treated as unexplained income under section 68 of the Act where the assessee furnishes documents to establish identity, creditworthiness of investors and genuineness of transactions. 2. Whether the Assessing Officer and Commissioner (Appeals) could reject a valuation of unquoted equity shares prepared by a merchant banker/accountant under Rule 11UA(2)(b) (Discounted Cash Flow method) and, by applying section 56(2)(viib) read with Rule 11UA, enhance the assessee's income on a protective basis. 3. Scope of limited scrutiny selection (CASS) confined to verification of 'whether the funds received in the form of share premium are from disclosed sources' and its effect on the powers of the assessing authorities to make s.68 additions or s.56(2)(viib) enhancements. 4. Whether enhancement of income under section 251(1) by application of section 56(2)(viib) requires adherence to principles of natural justice (opportunity of hearing) and correct application of Rule 11UA. 5. Legitimacy of initiating penalty proceedings under section 271(1)(c) where additions under section 68/56(2)(viib) are in dispute and where onus as per section 68 is claimed to be discharged by the assessee. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of addition under section 68 where identity, creditworthiness and genuineness are documented Legal framework: Section 68 places onus on assessee to prove identity, creditworthiness and genuineness of share subscriptions/amounts credited. If onus discharged, amount cannot be treated as undisclosed income merely because AO suspects otherwise; Revenue may, if needed, proceed against third parties. Precedent treatment: The Tribunal followed coordinate-bench and High Court reasoning (noted decisions) which hold that once assessee furnishes names, PAN, ROC particulars and documents (certificate of incorporation, MOA/AOA, audited financials, bank statements, confirmations), AO cannot treat share application amounts as income under s.68 without contrary material or independent enquiry. The judgment expressly follows the ratio in prior Tribunal decisions (e.g., Dayalu Iron & Steel; Cinestaan-related decisions) and Supreme Court dicta emphasising Revenue's option to proceed against purported investors but not to treat amounts as assessee's undisclosed income where onus is met. Interpretation and reasoning: The Court reviewed the documentary record supplied (incorporation documents, auditor reports, balance sheets, bank statements, confirmations, ROC verifications) and found no material contradicting assessee's proofs. The AO/CIT(A) merely brushed aside documents without making enquiries (e.g., under s.133/131) or producing contrary material. Reliance on publically available MCA data and investors' confirmations supports that identity/creditworthiness/genuineness were established. Ratio vs. Obiter: Ratio - where assessee produces prescribed documentation proving identity, creditworthiness and genuineness, the AO cannot make addition under s.68 absent contrary material or independent enquiries. Obiter - observations on Revenue's option to reopen/assess investors individually do not affect the ratio. Conclusion: Addition under section 68 deleted where documentary proof satisfies statutory onus and authorities failed to bring contrary material or make necessary enquiries. Issue 2: Rejection of Rule 11UA(2)(b) valuation (DCF) and invoking section 56(2)(viib) Legal framework: Section 56(2)(viib) deems excess consideration over fair market value as income; Explanation provides that FMV shall be determined by prescribed methods. Rule 11UA(2) gives the assessee an option to determine FMV either by NAV (clause (a)) or by valuation by merchant banker/accountant using DCF (clause (b)). Precedent treatment: The decision follows coordinate-bench jurisprudence (Cinestaan Entertainment, Dayalu Iron & Steel, Vodafone M Star bench references) holding that (i) valuation is not an exact science and DCF is inherently projection-based; (ii) if assessee obtains valuation under a prescribed method from a prescribed expert, AO lacks power to substitute his own valuation or reject report absent demonstrable basis; (iii) rejection based on hindsight comparison of projections with actuals is impermissible. These precedents were followed, not distinguished or overruled. Interpretation and reasoning: The Tribunal reasoned that Rule 11UA(2) confers an express option on the assessee to adopt DCF; where such valuation (by a qualified valuer) is produced, AO/CIT(A) must accept it unless they demonstrate that the method or its application is demonstrably erroneous. Mere discrepancy between projected and actual performance, or AO's view of commercial prudence, does not justify rejection. Valuation is technical and best left to experts; the deeming provision must be strictly construed. Authorities below had rejected valuation without furnishing alternate FMV or material to impugn the valuer's methodology/assumptions. Ratio vs. Obiter: Ratio - an assessee's valuation of unquoted shares under Rule 11UA(2)(b) by a qualified valuer using DCF is binding on the tax authority unless the authority demonstrates the valuation is based on a fundamentally erroneous methodology or wrongful assumptions affecting the root of valuation. Obiter - policy observations on discouraging Revenue from substituting commercial judgment for business decisions. Conclusion: Rejection of the DCF valuation was improper; section 56(2)(viib) enhancement set aside where requisite Rule 11UA valuation was produced and not successfully impeached by Revenue. Issue 3: Effect of limited scrutiny scope (CASS) on AO's powers Legal framework: Limited scrutiny under CASS is selection for specific verification (here: whether funds in form of share premium are from disclosed sources). The statutory powers remain, but scope of enquiry is constrained by selection purpose and must be exercised fairly and within statutory limits. Precedent treatment: The Tribunal noted that the limited scrutiny selection restricts the scope to source verification; however, statutory enquiries may still require AO to make enquiries to verify or falsify the documents produced. Precedents emphasise that AO must make positive enquiries where necessary rather than reject documents summarily. Interpretation and reasoning: The Court observed that a limited scrutiny aimed at verifying disclosed sources requires the AO to investigate authenticity of documents and corroborate investor credentials rather than simply disbelieving the supplied material. Where assessee furnishes ROC-verifiable particulars and confirmations, the AO must bring contrary material to displace those proofs. Ratio vs. Obiter: Ratio - limited scrutiny does not license mechanical rejection of documentary proof; AO must undertake necessary enquiries to substantiate any adverse inference. Obiter - the confines of CASS were described but did not form the central ratio. Conclusion: Limited scrutiny selection did not justify the summary additions under s.68 or rejection of valuation without enquiry; authorities erred in not verifying available public records or seeking confirmations. Issue 4: Procedural requirements under section 251(1) and opportunity of hearing when enhancing income by invoking section 56(2)(viib) Legal framework: Section 251(1) governs revision by CIT(A) of assessment and requires compliance with principles of natural justice; enhancement of income requires opportunity to be heard on new grounds adopted by CIT(A). Precedent treatment: Prior cases cited hold that enhancement without giving mandatory hearing is unsustainable. The Tribunal relied on authorities noting that CIT(A) must consider valuation reports produced before it and provide hearing before invoking s.56(2)(viib) to enhance income. Interpretation and reasoning: The Tribunal found CIT(A) enhanced income under s.251(1) by applying s.56(2)(viib) without properly considering or hearing the assessee on the valuation produced under Rule 11UA; such procedural lapse undermined validity of enhancement. Ratio vs. Obiter: Ratio - enhancement under section 251(1) on new legal/valuation grounds requires adherence to right to be heard; failure to provide such opportunity renders enhancement unsustainable. Obiter - comments on merits of valuation were linked to substantive issue. Conclusion: Enhancement under section 251(1) r.w.s.56(2)(viib) set aside for failure to follow procedural requirements and for ignoring the Rule 11UA valuation submitted by the assessee. Issue 5: Initiation of penalty proceedings under section 271(1)(c) Legal framework: Penalty under s.271(1)(c) requires that addition be sustained and misreporting/false particulars be proved; if addition is deleted, initiation of penalty is generally unsustainable. Precedent treatment: The Tribunal did not record a detailed separate penalty analysis but indicated that where additions under s.68/56 are deleted because assessee discharged onus and valuation stood, penalty initiation would be prima facie inappropriate. Interpretation and reasoning: Given deletions of substantive additions and the absence of material showing deliberate concealment or furnishing of false particulars, penalty proceedings lack foundation. Ratio vs. Obiter: Primarily obiter in the present judgment (penalty ground noted but not finally adjudicated in detail); nevertheless, indicative ratio - penalty cannot subsist where impugned additions are deleted and there is no evidence of mala fide concealment. Conclusion: Penalty proceedings initiated under section 271(1)(c) not sustained in circumstances where statutory onus under s.68 met and Rule 11UA valuation accepted. Overall Conclusion The Court deleted additions made under section 68 and set aside enhancement under section 56(2)(viib) read with Rule 11UA (and consequent enhancement under section 251(1)), holding that (i) assessee discharged onus under section 68 by producing prescribed documents; (ii) valuation under Rule 11UA(2)(b) by DCF prepared by prescribed valuer cannot be rejected merely on hindsight comparison with actuals or on revenue's commercial disagreement; and (iii) enhancement without providing mandatory hearing and without valid reasons to reject the prescribed valuation was improper. The Tribunal followed and applied established coordinate-bench and higher-court principles on valuation, deeming provisions and statutory procedure.