2025 (1) TMI 94 - AT - Income Tax

Assessee wins appeal against Section 68 addition for share premium from reputable investors including SEBI registered funds

PB Fintech Limited Versus ACIT, Circle-1 (1), Gurgaon.

ITAT Delhi allowed assessee's appeal against addition u/s 68 for bogus share transactions. The assessee received share premium from reputable investors ... Addition u/s 68 - bogus share transactions - share premium received by the assessee - onus to prove - HELD THAT:- As sufficient evidences were filed by the assessee with regard to establishing the identity of the investors, their credit worthiness and ultimately the genuineness of the transaction. In case of issues like investments through preferential shares, the initial onus is on the AO to allege that the transaction is somehow suspicious and for that, some independent inquiry should have been made rather than to point out shortcomings or lacunae alone in whatever evidences filed by the assessee to establish the genuineness of the transaction. It is pertinent to mention that the fact that certain share capital were received from PI Opportunities Fund-I and PI Opportunities Fund-II being SEBI registered venture capital funds. AO himself had deleted the addition and same go to show that the investors had taken a prudent call. Then Investors included Mrs. Renu Munjal of Hero Group which is the largest two-wheeler manufacturer of India, Samvardhana Motherson International Ltd. is an multinational manufacturer of automotive components with the market capitalization of over Rs. 1 crore. Makesense Technologies Ltd. is a company incorporated in 2010 which has professionals on board who include promoters of prominent recruitment portal, Naukri.com. Thus to doubt their investments in assessee company to be not genuine required, more than suspicion. Valuation of the shares - Valuation has been done by Resurgent India Ltd., a category-1 SEBI registered merchant banker and there was no effort of the Revenue authorities to cite any deficiency or discrepancy except for questioning the same on the basis of the fact that the report was prepared on the information provided by the assessee company. The law is now almost settled that the assessee’s choice of method of valuation of shares and the valuation report prepared by merchant banker cannot be disturbed merely on suspicion or by pointing out lack of data. Directions of the ld.CIT(A) for making additions in regard to premium received from PI Opportunities Fund-I and PI Opportunities Fund-II on the basis that the assessee company is not a venture capital undertaking, we are inclined to accept the contentions of the ld. counsel that under the provisions of section 56(2)(viib) of the Act, the term 'venture capital undertaking' has been defined in clause (b) of the Explanation to said section as being defined in section 10(23FB). The assessee, during the relevant assessment year, was a domestic company, not listed on any stock exchange in India and engaged in the business of providing insurance related services. Thus, the assessee qualified to be a 'venture capital undertaking' in terms of the provisions of section 10(23FB), implying thereby that the provisions of section 56(2) (viib) of the Act were not applicable in the present matter qua receipt of share capital/premium from SEBI registered Venture Capital funds. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether sums received as share capital/share premium from resident subscribers can be taxed as income of the recipient under section 68 when the recipient company furnishes identity, PAN, subscription agreements, share certificates and bank receipts but not the investors' bank statements and audited financials. 2. What is the scope of the first proviso to section 68 in a closely held company: whether the onus to establish the nature and source of funds rests on the company or also on resident subscribers, and what documents are requisite to discharge that onus. 3. Whether the valuation report prepared using Discounted Cash Flow (DCF) method by a SEBI-registered Category I merchant banker can be rejected by revenue solely on the ground that the valuer relied on information supplied by the assessee and projections differ from actuals. 4. If the DCF valuation is rejected, what is the proper alternative method of valuation under section 56(2)(viib) (e.g., NAV), and what procedure must the Assessing Officer follow in reassessing fair market value. 5. Whether the exemption under the Explanation to section 56(2)(viib) (i.e., recipient being a 'venture capital undertaking' as defined in section 10(23FB)) applies to exclude application of section 56(2)(viib) to amounts received from SEBI-registered venture capital funds. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxation under section 68 where recipient files identity documents but not investors' bank statements Legal framework: Section 68 taxes unexplained credits; the first proviso requires, in the case of closely held companies, that a resident contributor 'offer an explanation about the nature and source' of sums credited and that the AO find such explanation satisfactory. Precedent treatment: Revenue may require corroborative evidence to verify source/creditworthiness; but there is also recognition that mere procedural lacunae do not automatically justify rejection where primary documents probative of identity and genuineness are produced. Interpretation and reasoning: The Tribunal examined the documents actually placed on record - PAN, subscription agreements, ROC filings, share certificates, assessee's bank statement evidencing receipt, merchant banker valuation, email confirmations from investors and audited financials/ITR (where filed) - and found no suggestion that documents were fabricated. The Tribunal held that mere non-furnishing of investors' bank statements - documents to which the assessee does not itself have direct access - is not a ground, by itself, to discard all other satisfactory evidence of identity and genuineness. The Tribunal emphasised the AO's power to summon bank statements of investors if those were crucial and noted that some investors did supply documents directly to the AO. The Tribunal further held that where investors are prominent and regulated entities (including SEBI-registered funds and established corporates), higher prima facie credibility is attached and mere absence of investor bank statements does not justify treating receipts as unexplained. Ratio vs. Obiter: Ratio - the assessee can discharge the responsibility under section 68 by furnishing corroborative documentary evidence of identity and genuineness; mere absence of investors' bank statements, without independent indication of fabrication or suspicion, is not decisive. Obiter - observations on the AO's obligation to conduct independent inquiries when suspicion is asserted. Conclusion: For the majority of subscriptions (including those from SEBI-registered VC funds and certain resident corporates and individuals who furnished corroborative records), the Tribunal held the assessee had discharged its onus; additions under section 68 in respect of those subscriptions were not warranted. However, where resident investors failed to furnish any financials/ITR/bank statements (three specified resident investors in the facts), the Tribunal confirmed additions under section 68 in respect of sums received from them, as the assessee had not established their creditworthiness and source of funds. Issue 2 - Scope and operation of the first proviso to section 68 (onus and requisite documents) Legal framework: First proviso to section 68 deems explanations unsatisfactory in a closely held company unless the resident contributor explains nature and source and the AO finds such explanation satisfactory; AO's opinion is pivotal. Precedent treatment: AO can demand relevant documents to form an opinion; explanation must be judged on available evidence and may require bank statements, audited financials and ITR to substantiate creditworthiness where circumstances call for it. Interpretation and reasoning: The Tribunal recognised that where share subscriptions are substantial and investors themselves (or their representatives) do not provide bank statements/financials, the AO is entitled to expect such material to verify creditworthiness. The Tribunal accepted that the AO legitimately asked for investors' bank statements and audited financials. Nevertheless, it held that in absence of a palpable indicia of fabrication, the totality of other corroborative documents (PAN, ROC forms, subscription agreements, receipt entries, emails from investors to the AO and available audited accounts/ITRs) can satisfy the proviso in many cases. The Tribunal underscored that obligations are shared: the resident subscriber must explain source, and the AO must form a reasoned opinion; if the assessee has no access to investor bank statements, the AO may summon them rather than reject the evidence outright. Ratio vs. Obiter: Ratio - the first proviso requires investors to explain source, but the adequacy of that explanation is to be judged in the context of all documentary material; AO must make reasonable independent inquiries if bank statements are critical. Obiter - procedural guidance on sequencing of inquiries (AO to summon when required). Conclusion: Where resident investors do not provide any financial evidence and no satisfactory source is shown (three resident investors), addition under section 68 is sustainable. Where corroborative documents exist and no independent suspicion appears, absence of investor bank statements alone will not justify rejection. Issue 3 - Admissibility of DCF valuation by a merchant banker and standard for rejection Legal framework: Section 56(2)(viib) taxes consideration received in excess of fair market value; fair market value may be determined by accepted valuation methods; valuation reports by qualified merchant bankers are statutory/technical evidence entitled to presumption of correctness. Precedent treatment: Valuation by an independent SEBI-registered merchant banker is to be given due weight; AO can only discard a valuation on demonstrable flaws, fundamental errors or apparent mistakes - not merely on suspicion or discrepancies between projections and actuals. Interpretation and reasoning: The Tribunal noted that valuation by a category-I SEBI-registered merchant banker is a technical exercise and must be presumed correct unless fundamental infirmities are shown. The Tribunal observed that merely because the valuer relied on information provided by management or because projected figures varied from actual subsequent performance, the valuation report cannot be lightly rejected. The Tribunal criticised the lower authorities' wholesale rejection of DCF without demonstrating the valuation to be fundamentally erroneous. The Tribunal further held that even if DCF were rejected, AO must adopt a reasoned alternative (NAV) rather than default to face value without analysis. Ratio vs. Obiter: Ratio - merchant banker valuation prepared on accepted methodology attracts presumption of correctness; AO must point out specific fundamental defects to justify rejection. Obiter - commentary on the limited scope for AO to 'tinker' with valuation methodology. Conclusion: The Tribunal set aside the lower authority's blanket rejection of the DCF valuation on mere reliance-on-management grounds and directed that AO cannot simply take face value; if DCF is rejected, AO must compute FMV by NAV or other appropriate method with reasoned calculation. Issue 4 - Proper alternative valuation method and procedural direction if DCF rejected Legal framework: Section 56(2)(viib) requires fair market value determination; recognized valuation methods include DCF and NAV among others, depending on circumstances. Precedent treatment: Where one method is rejected on cogent grounds, AO should compute FMV using another appropriate method with reasoned calculation rather than treating face value as FMV. Interpretation and reasoning: The Tribunal held that the AO erred in applying face value as FMV after rejecting DCF. The Tribunal accepted the approach that NAV could be the appropriate alternative and directed the AO to verify and, if necessary, compute FMV by NAV (or other appropriate method) and make additions accordingly, ensuring reasoned computation. Ratio vs. Obiter: Ratio - AO must adopt and demonstrate a reasoned alternative FMV computation (e.g., NAV) if the submitted valuation is rejected; arbitrary adoption of face value is impermissible. Obiter - guidance that AO's alternative computation should be fact-based and recorded. Conclusion: AO directed to re-evaluate FMV by NAV or other reasoned method before making addition under section 56(2)(viib); face-value valuation was unacceptable as a default. Issue 5 - Applicability of 'venture capital undertaking' exemption under section 56(2)(viib)/section 10(23FB) Legal framework: Explanation to section 56(2)(viib) excludes application where consideration is received by a venture capital undertaking from specified venture capital entities; the term 'venture capital undertaking' is defined by reference to section 10(23FB) (and accompanying regulatory definitions). Precedent treatment: If recipient qualifies as a venture capital undertaking per the statutory/regulatory definition (domestic, unlisted company engaged in permitted activities), the section 56(2)(viib) exclusion applies vis-à-vis consideration from eligible VCFs. Interpretation and reasoning: The Tribunal analysed the statutory/regulatory definitions and found the recipient company to meet the definition of 'venture capital undertaking' (domestic, unlisted, engaged in permitted activities). Consequently, amounts received from SEBI-registered venture capital funds fell within the proviso/exclusion and could not be taxed under section 56(2)(viib). Ratio vs. Obiter: Ratio - where the recipient qualifies as a 'venture capital undertaking' under section 10(23FB)/regulatory definitions, the proviso to section 56(2)(viib) excludes receipt from SEBI-registered VC funds from the section's scope. Obiter - none material. Conclusion: The exemption under the Explanation applied in respect of subscriptions from SEBI-registered VC funds; additions under section 56(2)(viib) were not sustainable as regards those funds.