2026 (1) TMI 1476 - AT - Income Tax

Unexplained share capital and premium: investor genuineness proved, valuation accepted, and income enhancement without notice quashed

Addition alleging unexplained share premium and share capital was rejected because the assessee proved identity, genuineness and creditworthiness of ... Addition u/s 68 - alleged unexplained share premium and share capital - Onus to prove - AO observed that the assessee the identity and creditworthiness of the investors are suspicious and need detailed enquiries - CIT(A) also confirmed the income of the assessee by invoking the section 56(2)(viib) HELD THAT:- The details clearly establishes that the assessee has fulfilled the ingredients of the section 68 of the Act by proving the initial burden cast upon him. Once the assessee proves the ingredients of section 68 of the Act, the burden shifts on the revenue. In the present case lower authorities have not brought anything on record to prove otherwise and in a such circumstances, the authorities are precluded from making any other addition on this count in the absence of contrary materials. We placed reliance on the judgment of the Supreme Court in the case of PCIT vs. Rohtak Chain Co. [2019 (10) TMI 931 - SC ORDER] wherein held that once the genuineness creditworthiness and identity of investors are established, no addition could be made as cash credit on the ground that the shares are issued at excess price. In the present case the assessee has provide the sufficient materials to prove the genuineness of the shareholders apart from giving the PAN Card bank account, name and ROC details. AO and CIT(A) has committed an error in rejected the valuation done by the assessee from prescribed expert as per the prescribed method. We delete the protective addition made by the AO and confirmed by the Ld. CIT(A).The ground raised by the assessee is allowed. Enhancement of income by CIT(A) - AR submitted that the CIT(A) enhanced the income without giving a mandatory notice required u/s 250(1) - HELD THAT:- CIT(A) has the power to enhance income in the appeal. In the present case no such notice was issued to the assessee. Therefore, the action of the Ld. CIT(A) in enhancing the income of the is found erroneous. Disallowance of business expenditure - business expenses incurred in a year when business activity was limited - assessee submitted that has running its business since the date it came existence but during the year, due to fall in business activities, the assessee could not carry on its business activities - HELD THAT:- In the case of M/s Saurashtra Cement and Chemical Industries Ltd. [1972 (8) TMI 19 - GUJARAT HIGH COURT] held that business is said to have commenced as an essential activity of that business is started. In our opinion once the business of the assessee is set up and the expenditure incurred thereafter deserves to be allowed as business expenditure. The business activity is a continuous process and it cannot be said that as soon as setting up of the business, the income will be generated and should yield income in all years. The assessee is entitled to get the disallowances of the business expenses. The ground raised by the assessee is allowed. Difference in receipts shown in the ITR as compared to Form 26AS - HELD THAT:- It is evident from the ITR that the assessee has shown receipts of Rs. 7,92,546/- on account of interest instead of Rs. 7,29,546/-, which was taken by the AO. This issue was not dealt with separately by the Ld. CIT(A). AO made the addition on the wrong amount, therefore addition is deleted. The ground raised by the assessee is allowed. Issues: (i) Whether the addition of Rs. 49,00,000/- under Section 68 (share capital and share premium) is sustainable; (ii) Whether the protective addition of Rs. 26,39,050/- under Section 56(2)(viib) based on Rule 11UA valuation can be sustained where the assessee furnished a DCF valuation by a prescribed valuer; (iii) Whether enhancement of income by the appellate authority without issuing mandatory notice under Section 250(1) is valid; (iv) Whether disallowance of business expenses of Rs. 5,76,679/- is justified; (v) Whether addition of Rs. 1,15,842/- on account of difference between ITR and Form 26AS is justified.Issue (i): Whether the addition of Rs. 49,00,000/- under Section 68 is sustainable.Analysis: Materials establishing incorporation details, PAN, ROC entries, audit reports, bank statements, share application forms and confirmations were placed on record for the subscribing companies; once the assessee discharged the initial onus under Section 68 by proving identity, genuineness and creditworthiness, the burden shifted to revenue to bring contrary material. Reliance was placed on binding precedents recognising commercial decision on share premium and prohibiting substitution of commercial judgment by tax authorities.Conclusion: Addition under Section 68 of Rs. 49,00,000/- is deleted and the issue is decided in favour of the assessee.Issue (ii): Whether the protective addition of Rs. 26,39,050/- under Section 56(2)(viib) can be sustained where the assessee opted for valuation under Rule 11UA(2) using DCF prepared by a prescribed valuer.Analysis: Rule 11UA(2) permits the assessee to determine FMV by prescribed methods including DCF carried out by a merchant banker or accountant. Valuation by DCF is projection-based and not susceptible to strict hindsight comparison with later actuals; where the assessee obtains valuation from a prescribed expert using a prescribed method, revenue lacks authority under the statute or rules to arbitrarily reject and substitute its own valuation without contrary material or enabling provision.Conclusion: Protective addition under Section 56(2)(viib) of Rs. 26,39,050/- is deleted and the issue is decided in favour of the assessee.Issue (iii): Whether enhancement of income by the appellate authority without issuing mandatory notice under Section 250(1) is valid.Analysis: Section 250(1) requires issuance of notice before enhancing assessment in appeal; absence of such notice renders enhancement procedurally infirm.Conclusion: Enhancement without issuing the mandatory notice is set aside and the issue is decided in favour of the assessee.Issue (iv): Whether disallowance of business expenses of Rs. 5,76,679/- is justified.Analysis: Expenditure incurred in the ordinary course of an established business, including fixed and inevitable expenses incurred during a period of reduced activity, falls within allowable business expenditure; commencement or temporary downturn does not automatically render such expenses disallowable.Conclusion: Disallowance of Rs. 5,76,679/- is deleted and the issue is decided in favour of the assessee.Issue (v): Whether addition of Rs. 1,15,842/- for mismatch between ITR and Form 26AS is justified.Analysis: The assessment proceeded on an incorrect figure taken from the return; correct amount shown in the ITR was established on record and the appellate authority had not separately adjudicated the ground; assessment adjustment based on wrong figure cannot stand.Conclusion: Addition of Rs. 1,15,842/- is deleted and the issue is decided in favour of the assessee.Final Conclusion: The aggregate effect of the decision is that all contested additions and enhancements challenged in the appeal are set aside and the assessee succeeds on the substantive issues decided, resulting in allowance of the appeal.Ratio Decidendi: Once an assessee discharges the initial burden under Section 68 by proving identity, genuineness and creditworthiness of share subscribers, revenue must produce contrary material to sustain additions; where Rule 11UA(2) prescribes valuation methods and the assessee obtains valuation from a prescribed valuer (including DCF), the valuation cannot be arbitrarily rejected or substituted by revenue in absence of statutory power or contrary material.