2025 (6) TMI 893 - AT - Income Tax

Assessee's valuation report wrongly rejected without proper consideration under section 56(2)(viib) share premium addition

Ashok Bricks Industries Private Limited Versus Asst. Commissioner of Income Tax

The ITAT Cuttack set aside the CIT(A)'s order confirming addition of share premium under section 56(2)(viib) as income from other sources. The CIT(A) had ... Income from other sources u/s 56(2)(viib) - share premium received from the shareholders - CIT(A) making addition and confirming the same respectively, simply because the valuation report could not be filed - CIT(A) rejected additional evidence in the form of valuation report submitted by the assessee HELD THAT:- CIT(A) had brushed aside the additional evidence in the form of valuation report submitted by the assessee, which goes to the root of the matter and has not commented upon the same. Therefore, in the interest of justice, the order of the Ld. CIT(A) is set aside and the matter is restored to his file to pass an order de novo after affording a reasonable opportunity of being heard to the assessee as well as to the AO as required under rule 46A of the I.T. Rules, 1962 as the appeal cannot be dismissed merely on technical ground of not filing an application for admission of additional evidence and the addition cannot be confirmed only for the reason that the assessee had not filed any application under rule 46A of the I. T. Rules, 1962. Hence, Ground Nos. 1 to 5 of the appeal are allowed for statistical purposes. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the Assessing Officer was justified in adding the entire share premium amount received on issue of shares as income under section 56(2)(viib) of the Income Tax Act, 1961, without providing the assessee a reasonable opportunity to submit a valuation report supporting the share valuation.(b) Whether the Commissioner of Income Tax (Appeals) was justified in dismissing the appeal by not admitting the valuation report submitted during appellate proceedings, solely on the ground that no application was made for its consideration as additional evidence under Rule 46A of the Income Tax Rules, 1962.(c) Whether the addition of share premium was legally sustainable when the assessee had filed the audited balance sheet and share allotment details as per the Companies Act, 1956, and the valuation report could not be filed due to reasonable cause, implicating principles of natural justice.(d) Whether the Assessing Officer and CIT(A) failed to provide justice in terms of Circular No. 14(XL-35) of 1955 dated 11.04.1955 and the legislative intent to provide reasonable justice.(e) Whether the assessment and appellate orders are illegal and violative of natural justice principles, warranting quashing.(f) Whether the credit for TDS deduction of Rs. 1,79,55,137/- was wrongly denied by the National e-Assessment Centre while computing tax liability.(g) Miscellaneous grounds relating to modification or withdrawal of grounds of appeal.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Addition of Share Premium and Non-admission of Valuation ReportLegal Framework and Precedents: Section 56(2)(viib) of the Income Tax Act provides that any share premium received by a closely held company in excess of the fair market value of shares as determined in accordance with prescribed rules is taxable as income from other sources. Rule 46A of the Income Tax Rules, 1962 governs the procedure for admission of additional evidence before the appellate authorities, requiring an application and justification for non-production during assessment proceedings.The Tribunal referred to several Supreme Court decisions including Sreelekha Banerjee vs. CIT, Kale Khan Mohammad Hanif vs. CIT, Roshan Di Hatti vs. CIT, Sumati Dayal vs. CIT, and CIT vs. P. Mohanakala, which emphasize the importance of adherence to procedural requirements and the burden of proof on the assessee to establish genuineness of transactions and valuation.Court's Interpretation and Reasoning: The Assessing Officer, upon finding that the assessee had issued shares at a premium of Rs. 454 per share, called for details and valuation evidence. The assessee failed to furnish the valuation report or other relevant documents despite multiple opportunities. Consequently, the AO added the entire share premium amount as income under section 56(2)(viib).The CIT(A) dismissed the appeal on the ground that the valuation report was submitted during appellate proceedings without an application for admission as additional evidence under Rule 46A. The CIT(A) relied on the non-responsive nature of the assessee and procedural non-compliance to reject the valuation report. The CIT(A) also relied on judicial precedents to uphold the addition.Key Evidence and Findings: The assessee had submitted a one-page valuation report dated 2.2.2017 only during appellate proceedings and did not file it during assessment despite repeated requests. No application under Rule 46A was filed to admit this report as additional evidence. The assessee also submitted audited balance sheets and share allotment details during assessment but did not produce valuation evidence to rebut the AO's addition.Application of Law to Facts: The Tribunal noted that while procedural compliance is important, the appellate authority should not dismiss an appeal merely on technical grounds without considering the substance of evidence that goes to the root of the matter. The valuation report directly addresses the issue of share premium valuation, which is central to the dispute.Treatment of Competing Arguments: The revenue argued for confirmation of the CIT(A)'s order based on procedural non-compliance and judicial precedents. The assessee argued that the valuation report was submitted with reasonable cause during appeal and should be considered to ensure justice.Conclusions: The Tribunal held that the CIT(A) erred in brushing aside the valuation report without adjudicating its merits. The appeal cannot be dismissed solely because the assessee did not file an application under Rule 46A. The matter was restored to the CIT(A) for de novo consideration after affording reasonable opportunity to the assessee and AO, in accordance with Rule 46A. Grounds 1 to 5 were allowed for statistical purposes.Issue (c) and (d): Filing of Audited Balance Sheet and Share Allotment Details; Principles of Natural Justice and Legislative IntentLegal Framework and Precedents: The Companies Act, 1956 governs share allotment and accounting treatment of share premium. Circular No. 14(XL-35) of 1955 emphasizes the intention of the legislature to provide reasonable justice and fair opportunity to taxpayers. Principles of natural justice require that parties be given fair hearing and opportunity to present evidence.Court's Interpretation and Reasoning: The assessee contended that since audited financial statements and share allotment details were filed during assessment, these should suffice to justify the share premium. The inability to file the valuation report due to reasonable cause should not prejudice the assessee. The Tribunal observed that the CIT(A) and AO did not adequately consider these submissions and failed to uphold natural justice by dismissing the valuation report on procedural grounds.Key Evidence and Findings: Audited balance sheets and share allotment details were on record. The valuation report, though filed late, was relevant and material evidence. The procedural lapse in filing an application for additional evidence was not accompanied by any explanation or justification by the assessee.Application of Law to Facts: The Tribunal emphasized that the principles of natural justice and legislative intent require that the assessee be given a fair opportunity to substantiate the valuation of shares. The mere procedural lapse should not result in dismissal of relevant evidence without consideration.Treatment of Competing Arguments: Revenue stressed adherence to procedural rules and cited precedents rejecting belated evidence. The assessee highlighted the substantive merit and fairness considerations.Conclusions: The Tribunal directed the CIT(A) to reconsider the matter afresh, providing the assessee an opportunity to justify the valuation and the share premium amount, thereby aligning with principles of natural justice and legislative intent.Issue (e): Legality and Natural Justice of Assessment and Appeal OrdersThe Tribunal found that the assessment and appeal orders were passed without affording the assessee adequate opportunity to present crucial evidence, which is contrary to natural justice. The dismissal of the appeal on purely procedural grounds without examining the valuation report's merits was held to be unjust. Consequently, the orders were set aside and remanded for fresh adjudication.Issue (f): Non-allowance of TDS CreditLegal Framework: Credit for Tax Deducted at Source (TDS) is governed by provisions under the Income Tax Act, which entitle the deductee to claim credit for tax deducted and deposited by the deductor.Court's Interpretation and Reasoning: The assessee contended that TDS of Rs. 1,79,55,137/- was deducted and deposited but was not allowed as credit while computing tax payable in the assessment order, which is illegal and against natural justice.Application of Law to Facts: The Tribunal observed that the issue was intertwined with the overall assessment and appeal proceedings and required fresh consideration in light of facts and submissions.Conclusions: The Tribunal set aside this issue to the CIT(A) for fresh adjudication after considering the facts and relevant submissions, allowing Ground No. 6 for statistical purposes.Issue (g): General GroundsThe Tribunal noted that Ground No. 7 was general and did not require separate adjudication.3. SIGNIFICANT HOLDINGSThe Tribunal held that:'The appeal cannot be dismissed merely on technical ground of not filing an application for admission of additional evidence and the addition cannot be confirmed only for the reason that the assessee had not filed any application under rule 46A of the I. T. Rules, 1962.'It established the core principle that procedural non-compliance should not override substantive justice, especially when evidence goes to the root of the matter.The Tribunal emphasized the necessity to afford reasonable opportunity to the assessee and the Assessing Officer to present and examine valuation evidence, thereby upholding the principles of natural justice and legislative intent embodied in Circular No. 14(XL-35) of 1955.Further, the Tribunal clarified that the denial of TDS credit without proper adjudication is illegal and requires reconsideration.Accordingly, the Tribunal set aside and remanded the assessment and appellate orders for fresh consideration on all substantive issues, allowing the appeal partly for statistical purposes.