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2024 (4) TMI 836
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....erred in law as well as on facts in confirming addition of Rs. 67,20,000/- u/s 68 of the Act and enhancing the income by Rs. 28,80,000/- u/s 251(1) of the Acton account of alleged unexplained share premium and share capital despite furnishing all the documentary evidence for establishing identity, creditworthiness of the investors and the genuineness of the transaction. 2. That the Ld. CIT (A) has erred in law as well as on facts in enhancing the income of appellant u/s 251(1) by a sum of Rs. 60,54,400/-under the head income from other sources by applying section 56(2)(viib) of the Acton protective basis and rejecting the valuation report furnished under Rule 11UA(2)(b) of Income Tax Rules, 1962 i.e., Discounted Cash Flow Method. 3. That the Ld. CIT(A) has grossly erred in law as well as on facts in sustaining addition u/s 68 of the Act and enhancing the income of appellant on protective basis u/s 56(2)(viib) r.w.r 11UA of IT rules without appreciating the fact that the case was selected for limited scrutiny for the reason that "Large share premium received during the year (verify applicability of sec 56(2)(viib)" which restrict the scope of assessing authorities ....
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....x Rules ('Rules' for shrot). Aggrieved by the impugned orders of the Ld. CIT(A), the Assessees have preferred the above captioned appeals on the common grounds mentioned above. 5. The Ld. Counsel for the assessees summarizing the issues involved in the above five appeals, filed a chart showing common issues involved in the captioned Appeals which reproduced as under:- S. No. Particulars ITA No. 84/Del/2021 M/s Shanta Blankets (P) Ltd. ITA No. 87/Del/202 1 M/s Zhilmil Electronic (P) Ltd. ITA No. 88/Del/20 21 M/s Vidhi cinemas (P) Ltd. ITA No. 98/Del/2021 M/s Gopesh Fabrics (P) Ltd. ITA No.99/Del/2021 M/s Pingash Marketing (P) Ltd. 1 Addition made by the Ld.AO u/s 68 of the Act. Rs. 67,20,000/- Rs. 70,00,000/- Rs. 51,00,000/- Rs. 93,00,000/- Rs. 96,00,000/- 2 CIT(A) u/s 68 of IT Act on account of share capital invested by investor companies. AO) + Rs. 28,80,000/-(enhanced by CIT(A) Total Rs. 96,00,000/- 3 Enhancement of income u/s 251(1) r.w.s 56(2)(viib) -income by CIT(A) on protective basis. Rs. 60,54,400/- Rs. 52,50,000/- Rs. 34,00,000/- Rs. 62,00,000/- Rs. 64,00,000/....
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....arl Durobuild (P) Ltd. PB 95-119) M/s Radha Ballabh Builders (P) Ltd. (PB 120-143) / M/s Luck Good Industries Ltd. (PB 144-168) Rishi Credit & Industries (P) Ltd. (PB 169-193). M/s Beta Nirman (P) Ltd. (PB 64-88) M/s Nu Ruchi Barter (P) Ltd. (PB 89-121) Rivet Health Club (P) Ltd. (PB 122-148). M/s Gangashiv Contractors (P) Ltd. (PB 111-138) / M/s RSM Constructions (P) Ltd. (PB 165-189) M/s Best Infracon (P) Ltd. (PB 200-224) M/s Pearl Homebuild (P) Ltd. (PB 225-250) M/s Herculese Builders (Coimbatore)( P) Ltd. (PB 139-164) M/s Triketa Multitrade (P) Ltd. (PBN 190-199) M/s Best Infracon (P) Ltd. (PB 200-224) M/s Om Shivam Contractors (PB 160-185) / M/s Rishi Credit and Industries Pvt. Ltd. (PB 186211)/ M/s Texcity Construction s Kovai (P) Ltd. (PB 225-248) M/s Cee Aar Decors (P) Ltd. (PB 134-1959) / M/s Sigma Tech services (P) Ltd (PB 212-224) M M/s Viratsons Multitrade (P) Ltd. (PB 249-279) 9 Information sought by the Ld. AO u/s 133(6) or summon issued u/s 131 of the Act. f Yes-133(6) -Could not be complied Yes-133(6) Partly complied-Pg 3 of AO Yes-133(6) Complied by one investor company-Pg 3 of AO Yes-133(6) comp....
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....gro Food Products Pvt. Ltd. in reported [2023] 148 taxmann.com 26. * Order of Tribunal in the matter of Abhirvey Projects Pvt. Ltd. Vs. ACIT in ITA No. 9400/Del/2019 for Assessment Year 2015-16. * Copy of Judgment of Hon'ble Apex Court in the matter of Pr. Commissioner of Income Tax- Vs. Rohtak Chain Co. Pvt. Ltd. in reported [2019] 110 taxmann.com 59. * Copy of Judgment of Hon'ble Apex Court in the matter of Pr. Commissioner of Income Tax- Vs. BharatSecurities . Pvt. Ltd. in reported [2020] 113 taxmann.com 32. * Copy of Judgment of Hon'ble High Court of Madhya Pradesh in the matter of Pr. Commissioner of Income Tax- Vs.Chain House International Pvt. Ltd. In reported [2018] 98 taxmann.com 47." 7. Per contra, the Ld. Departmental Representative submitted that the assessees have not produced the original confirmation, confirmations have not been produced in some of the cases and in some of the cases there is no documentary evidence such as confirmation, ITR, Balance sheet, Bank Account etc. The assessees have not provided requisite documents to satisfy the ingredients of Section 68 of the Act, thus, the assessees have not discharged ....
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....ty Constructions (P) Ltd. (PB 182-208). 2. M/s Zhilmil Electronics (P) Ltd. ITA No. 87/Del/2021 A.Y 2016-17 S. No. Particulars M/s Vidhi Cinemas (P) Ltd 1 Name of the investor company and amount of share capital and share premium invested for which the addition was made. 1. M/s Beta Nirman (P) Ltd. (Rs. 6,00,000/-). 2. M/s Nu Ruchi Barter (P) Ltd. (Rs. 24,00,000/-). 3. M/s Rivet Health Club (P) Ltd. (Rs. 21,00,000/-) 2 Evidences furnished in the PB 1. M/s Beta Nirman (P) Ltd. (PB. 64-88) M/s Nu Ruchi barter (P) Ltd.. (PB 89-121) 4.M/s Gopesh Fabrics (P) Ltd. ITA No. 98/Del/2021 A.Y 2016-17 Sr. No. Particulars M/s Gopesh Fabrics (P) Ltd. 1 Name of the investor company and amount of share capital and share premium invested for which the addition was made 1. M/s Gangashiv Contractors (P) Ltd. (Rs. 18,00,0000/- on 8.8.2014) 2. M/s Herculese Builders (Coimbatore) (P) Ltd. (Rs. 21,00,000/-) 3. M/s RSM Constructions (P) Ltd. (Rs. 21,00,000 on 23. 12.2014, 18.12.2014, 22.07.2014) 4. M/s Triketa Multitrade (P) Ltd. (Rs. 27,00,000/-) 5. M/s Best Infracon (P) Ltd. (Rs. 3,00,000/- on 22.7.2014) 6. M/s Pearl Hom....
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....are active in the MCA website and credentials could be very well be verified by the Department. It is the case of the Assessees regarding the creditworthiness of the shares applicants, those companies are having sufficient capital and reserves to make the investment in the assessee company, which can be corroborated from the audited financial statements, the monies have been directly paid to the assessee company by account payee checks out of the bank balances available in their respective bank accounts, thus genuineness of the transactions cannot be doubted. 11. It is the case of the Department that some of the documents were not filed by the assessee in relation to aforesaid investors however, Ld. CIT(A) appreciated the documents, but did not agree with the Assessee despite there was nothing brought on record contrary to the documents brought to the record by the Assessee. The Assessees Representative contended that AY 2016-17 was the first year of assessment under faceless scheme and due to technical glitches sometimes despite uploading the documents it could not reach. The IT department also found faults and so upgraded their website later. The assessee can only submit the d....
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....tement for the period from 1.4.2014 to 31.3.2015 83-84 Ledger account of the bank book in the books of the appellant company 85 Valuation Report under Rule 11UA(2)(b) of the Income Tax Rules, 1962 from ! the Chartered Account as per Discounted Cash Flow Method. 86-89 13. On going through the order of A.O and Ld.CIT(A) it is found that the authorities have just brush aside the documents produced by the assessee and without making any enquiry about authenticity of the documents furnished and without bringing any material or making enquiry came to conclusion that the assessee company is not worth enough to fetch the share premium of Rs. 76,00,000/-. The authorities below without verifying the veracity of the documents from the publically available data on the web site of MCA IT Department. Once the assessee provided the names, addresses and Pan, particulars and ROC details of the investors. The Ld. A.O ought to have made further enquiry. Once the assessee furnishes the documents to prove the identity, creditworthiness and genuineness of the transaction. The same cannot be denied in the absence of material contrary brought by the Assessing Officer. 14. ....
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....and submitted that such a provision cannot be invoked on a normal business transaction of issuance of shares unless it has been demonstrated by the Revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the ld. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in which such deeming provisions are triggered. It is a trite law well settled by the Constitutional Bench of Supreme Court, in the case of Dilip Kumar & Sons (supra) that in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory, and if there are two views possible in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares have....
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....nation-For the purposes of this clause, - (a) the fair market value of the shares shall be the value - (i) as may be determined in accordance with such method as may be prescribed: or ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;" Further, as per clause (i) of the Explanation as reproduced above, the FMV is to be determined in accordance with such method as may be prescribed. Clause (ii) admittedly is not applicable on the facts of the assessee's case. The method to determine the FMV is further provided in Rule 11UA(2). The relevant extract of the applicable rules is reproduced below: "11UA. [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- (2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquote....
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.... cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee's own business objective of projection of films and media entertainment, then such commercial wisdom cannot be questioned. Even the prescribed Rule 11UA (2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the Assessing Officer to tinker with such valuation. Here, in this case, Assessing Officer has not substituted any of his own method or valuation albeit has simply rejected the valuation of the assessee. 33. Section 56(2) (viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting such deeming provision. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Assessing Officer has to accept the same and in case he is not satisfied, then we do not we find any e....
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.... projection of future revenue that valuer may fairly make on the basis of such information." ii) Rameshwaram Strong Glass Pvt. Ltd. v. ITO [2018-TIOL1358-ITAT- Jaipur] "4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assessee we have to bear in mind the DCF Method and is essentially based on the projections (estimates) only and hence these projections cannot be compared with the actual to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figure is beyond its control. At the time of making a valuation for the purpose of determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where there is no commencement of production or of the business, does not mean that its share cannot command any premium. For such cases, the concept of start-up is a good example and as submitted the income tax Act also recognized and encouraging the start-ups." iii) DQ (International) Ltd. vs. ACIT ....
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.... method has to be adopted and accordingly, we notice that the department is in appeal against Ld. CIT(A) and in our considered view, Ld. CIT(A) has properly rejectee the method adopted by the AO and proceeded to accept the DCF method adopted by the assessee Therefore, we are inclined to dismiss the ground raised by the department. 20. Coming to the findings of Ld. CIT(A), we notice that Ld. CIT(A) has accepted the DCF methoc adopted by the assessee and he analyzed the factual performance of the assessee subsequent to issue o: shares. The valuation of shares are for that matter any valuation is itself is a projection of future events oi activities and no doubt it has to be done with some accuracy, however no person in the world at the time o: projecting events or result to project with 100% of accuracy and actual events are highly volatile ant highly dependent on so many factors. Assessee has projected based on the fact that software of wallet and association of ICICI bank will increase the market share and accordingly, they have projected the figure; and further the valuer has adopted the projection figures provided by the assessee and it is left to the wisdom of valuer to....
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.... Th funds were raised by way of issue of equity shares to the aforesaid equity partners and by raisin premium on such shares over and above the face value of Rs. 10/-per share. The details and quantum of premium received from each of the equity partners are as under: Sl No . Name of equity partner Date of Issue No. of shares Premium (Rs.) per share Amount of premium (Rs.) 1 Sh. Anand Mahindra 06.01 .2015; 23.02 .2015 4,15,385 1949 80,95,8 5,365/- 2 Sh. Rakesh Jhunjhunwala 19,207 2602 4,99,80 ,793/- 3 Sh. Radhakishan Damini 19,207 2602 90,95,4 6,200/- Total 4,53,799 26. The assessee before issuing the shares had got the share valued by Chartered Accountant, i.e., 'Accountant' as provided under Rule 11UA(2) by using the 'DCF Method' which is one of the prescribed method in Rule HUA(2)(b) r.w.s. 56(2)(viib). Based on the said valuation report dated 15.12.2014, the assessee company had issued the shares to the aforesaid equity partners on premium. The Ld. Assessing Officer has discarded the valuation report of the CA mainly on t....
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.... rules adopted by the Valuer. Before us, learned counsel, Mr. Dinodia, first of all had harped upon the spirit and intention of the Legislature in introducing such a deeming provision and submitted that such a provision cannot be invoked on a normal business transaction of issuance of shares unless it has been demonstrated by the Revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the Id. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in which such deeming provisions are triggered. It is a trite law well settled by the Constitutional Bench of Supreme Court, in the case of Dilip Kumar & Sons {supra) that in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory, and if there are two v....
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....e based on various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the Ld. Counsel, for instance: - (I) Securities & Exchange Board of India &Ors [2015 ABR 291 - (Bombay HC)] 48.6 Thirdly, it is a well settled position of law with regard to the valuation, that valuation is not an exact science and can never be done with arithmetic precision. The attempt o....
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.... delete the addition made u/s 68 of the Act and also set aside the order of the CIT(A) in enhancing the income of the appellant u/s 251(1) of the Act by invoking Section 56(2) (viib) of the Act. Accordingly, we allow the Assessee's Grounds of Appeal No. 2 to 5. 19. In the result, I.T.A. No. 6173/DEL/2019 is allowed. 14 The ratio laid down in the aforesaid decision of the Tribunal squarely applies to the facts of the present captioned appeals. 15. In so far as enhancement made by the Ld. CIT(A) u/s 251(1) r.w.s. 56(2) (viib) of the Act, the Ld. CIT(A) has not accepted the Valuation Report submitted by the Assessee as per Rule 11UA of the Rules. During the assessment proceedings the Assessees have submitted the Valuation Report duly signed by the auditor by following NAV/DCF Method as required under Rule 11UA(2) of the Rules. The Valuation Reports are produced before us along with the paper book. Both the lower authorities have failed to follow the Rule 11UA of IT Rules, 1962 as per which the option to choose the valuation of the shares lies with the assessee and the same is binding on the Income Tax Authorities. For the sake of convenience, relevant provisions of Rule....
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....ndment) Rules, 2018 w.e.f. 24.3.2018) as per Discounted Free Cash Flow Method'. 16. As per the aforesaid Rule, the 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. The 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 ....
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....change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent-Assessee is not correct. The AO has simply rejected the valuation of the Respondent- Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then Appellant-Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the Respondent-Assessee, accepted by the learned ITAT, is a conclusion of fact dronen on the basis of....