TaxTMI 
TaxTMI 
2025 (8) TMI 1032
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.... a premium of Rs. 40 is not based on actual valuation and therefore genuineness of the same is not established. 3. On the facts and circumstances in the law, the Learned CIT(A) erred to hold that projection of financials as per the valuation report furnished by the assessee is not backed by any cogent evidence and the said report suffers from serious deficiencies and thus not reliable. 4. On the facts and circumstances in the law, the Learned CIT(A) further erred to hold that shares were overvalued at the time of allotment considering actual potential of company. 5. On the facts and circumstances in the law, the Learned CIT(A) erred to give aforesaid observation without considering the judicial pronouncements which inter-alia held that AO or the authorities are not the experts of the such matters and hence they cannot reject any expert certificate without cogent reasons and cogent evidences. 6. On the facts and circumstances in the law, the Learned CIT(A) erred to confirm the action of AO of addition to income on said grounds without realizing the purpose of such antiabuse provisions and Circular of CBDT without considering that shares were allot....
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....eference:- "1) The accompanying appeal is preferred against the order dated 15/02/2023, passed by the Learned Commissioner of Income Tax(Appeals) in Order on Original No. ITBA/NFAC/S/250/2022-23/1049799557(1) interalia ordering addition to Income of Rs. 32,26,000/- under provisions of section 56(2)(viib) of Income Tax Act, 1961. 2) The impugned order dated 15/02/2023 was served upon the appellant on 15/02/2023. The limitation for filling appeal is 60days, which expired on 16/04/2023. The appeal is filed on 05/07/2024 and as such a delay of 446days has occurred in filling of the appeal. Reason for late filing of Appeal- a) Assessee has submitted online Appeal to Income Tax Appeallate Tribunalon 10th April, 2023. Form of Appeal to the Appellate Tribunal having Acknowledgement no.1681223269 is attached herewith. b) Appeal Fees of Rs. 10,000/- was also paid by Assessee on 10/04/2023 which is before 60 days from the due date of filing Appeal which was 16/04/2023. c) But due to some technical reason the Appeal submitted online is not reflecting on the e-filing portal of Income Tax Appellate Tribunal. As during April 2023 peri....
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....ce value of Rs. 10, per share at a premium of Rs. 40 per share to the existing shareholders who were also Directors of the assessee-company. On further enquiries conducted by the Assessing Officer, the assessee provided the valuation of shares as per books of account taking into consideration the year of allotment. The Assessing Officer, taking cognizance of the information/ details furnished by the assessee-company, completed the assessment under section 143(3) of the Act after making addition of Rs. 32,26,100, on account of share premium under section 56(2)(viib) of the Act and demand of Rs. 15,85,100, was issued by the Assessing Officer accordingly. The Assessing Officer, while making this addition, held as under:- "In its submissions the assessee submitted Fair Market Value of shares as on 31.03.2013 as Rs. 33.87 per share. Assessee calculated value as follows:- Paid-up share capital as on 31.03.2013 Rs. 1,17,55,400 Free Reserves & Surplus as on 31.03.2013 Rs. 2,80,61,889 Net worth of the company Rs. 3,98,17,289 Total number of shares as at 31.03.2013 11,75,540 Fair Market Value of shares Rs. 3,98,17,289 / 1175540 shares = Rs. 33.87 per sh....
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....is a profit-making company since the start of business i.e. FY 2008-09 and is in profit since then and is a regular in filing its tax returns and paying taxes. And company also has substantial assets in the balance sheet and Goodwill earned since 2008-09 which is not valued and recorded in the books. Mere book value is not the absolute measure to value the company's market value, it depends on lot of factors such as standing of the company, profit earning capacity, business line of the company, and assets of the company. Valuation of the of shares are solely depend on the market value of the assets of the company and not book value of the company as the balance sheets are prepared only on historical cost methods and do not reflect the current market value of the company. 3. For assessment year 2014-15, the assessee company filed return of income on28.11.2014 declaring total income of Rs. 1,54,63,480/-. The case was selected for Limited scrutiny and order of assessment was passed u/s 143(3) of the Income-tax Act, 1961 ('the Act') vide order dated 21.12.2016 determining the income of the assessee atRs. 32,26,000/- The only addition /disallowance made by the asses....
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....holders and not to any other person outside the family who controls the company. 7. During the course of assessment, in reply to the query raised by the assessing officer, the company has submitted the book value of the shares is Rs. 33.87 and submitted the calculation to arrive at the Book value of the company as given below: "That the Book value of the share was considered of as at 31.03.2013 and calculated as follows: Paid up Share Capital as on 31.03.2013 Rs. 1,17,55,400.00 Free Reserves & Surplus as on 31.03.2013 Rs. 2,80,61,889.00 Net worth of the company Rs. 3,98, 17,289.00 Total Number of shares as at 31.03.2013 11,75,540 Book Value of the Shares Rs. 3,98,17,289 / 11,75,540 = Rs. 33.87 per share" That the shares are issued @ 50/- per share which is more than the Book value of the shares as on the date of issue of the shares." But the assessing officer has treated the Book value as Fair Market value of the shares and added Rs. 32,26,000/-, difference of Rs. 16.13/share (Issue price Rs. 50/-(-) Book Value Rs. 33.87) on 2 lakh shares under sec. 56(2)(viib) of the Income Tax Act, 1961 as Income from ....
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.... never intended to be made applicable on genuine, bonafide and purely commercial transactions. In the case of the assessee also the shares are issued to raise funds required for the ongoing business from the existing shareholders and promoters only. 12. 1. CBDT also in its various circulars made it clear that the provisions of sec 56(2) should be interpreted in very strict manner. Para 13.2 and 13.4 of CBDT Circular no. 1/2011 dated 6th April, 2011: stating that the provisions of 56(2)(vii) are anti abuse provisions which were applicable only if an individual or an HUF is the recipient. These provisions were introduced as a counter evasion mechanism to prevent laundering of unaccounted income. The provisions were intended to extend the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. 2. Paragraph no. 155 of Finance Minister's Budget 2012-13 Speech clarifying scope of provisions of section 56(2)(viib). The finance minister clarified in his speech above provisions were introduced as a series of measures to deter t....
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....ous court rulings which are reproduced herein below for your honors referral: i) ITO v.K.P. Varghese (131 ITR 597); "The object and purpose of sub-section (2), as explicated from the speech of the Finance Minister, was not to strike at honest and bona fide transactions where the consideration for the transfer was correctly disclosed by the assessee but to bring within the net of taxation those transactions where the consideration in respect of the transfer was shown at a lesser figure than that actually received by the assessee, so that they do not escape the charge of tax on capital gains by understatement of the consideration. This was real object and purpose of the enactment of sub-section (2) and the interpretation of this sub-section must fall in line with the advancement of that object and purpose. We must, therefore, accept as the underlying assumption of subsection (2) that there is understatement of consideration in respect of the transfer and sub-section (2) applies only where the actual consideration received by the assessee is not disclosed and the consideration declared in respect of the transfer is shown at a lesser figure than that actually received....
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....be dropped as there is no concealment or inaccurate particulars stated." 8. The learned CIT(A), considering the entire details submissions filed by the assessee, however, dismissed the appeal of the assessee by following observations:- "DECISIONS & REASONS: 7. I have considered the facts of the case and submissions of the appellant. I have also perused the assessment order passed by the AO. There has been short delay of 6 days in presentment of the instant appeal. The appellant has explained the cause for the delay. After considering the submissions of the appellant, the said delay is condoned and the appeal is admitted for adjudication on merits. 8. It is observed that the appellant has issued 2,00,000 shares each of face value Rs. 10/- to its existing shareholders on a premium of Rs. 40/- per share. Thus, the issue price per share stands at Rs. 50/-. As the appellant did not furnish any report on the valuation of the fresh issue of shares at the issue price of Rs. 50/- per share, the A.O. had directed the appellant to furnish the working of the "book value" per share. In response, the appellant furnished the details before the A.O. disclosing the "bo....
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....are by following "Projected Discounted Cash Flow Method". Then, the average of the three has been taken to be Rs. 48.31 as the fair market value per share. It is observed that the Chartered Account has not given any detailed justification for the working of share price and merely taken the figures as per convenience for making the Table I and Table III. As per rule 11UA(2)(b), the appellant is entitled to obtain a report an the fair market value of unquoted shares determined by a merchant banker or a chartered account as per the "Discounted Free Cash Flow method and not as per any other method. The prescribed method is, therefore, either the "book value method" which was accepted by the A.O. during the assessment being the only working furnished by the appellant or the Discounted Free Cash Flow method which is now being sought by the appellant for admission in appeal. Upon careful perusal of the Table III, it is observed that the appellant has furnished the valuation as "Projected Discounted Cash Flow method" and there is no proper explanation in the said report about the "Free Cash" available or projected in this regard. The valuation report is not at all supported by any technica....
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....ction 56(2)(viib) of the Act. Before the learned CIT(A), the report of prescribed authority was submitted about the working of premium on shares. The learned CIT(A) also, without giving any opportunity to explain further, more specifically the manner and method adopted by the competent authority in the projected discounted cash flow method, held it to be unreliable and confirmed the action of the Assessing Officer to make addition under book value method. Thus, there is violation of principles of natural justice, as no opportunity was given to the assessee to defend the report of the competent authority and also the action of the learned CIT(A) is invalid as he is not the experts of the said field nor he is ascribed authority under the relevant Rule. During the course of hearing, detailed written submissions were furnished by the learned Counsel for the assessee, a copy of which is placed on record. The contents of the written submissions are enumerated below:- "In the last hearing which was held on 10/02/2025, there were some points which were not communicated hence we are submitting below the detailed facts of the case in addition to our earlier submission. It is therefo....
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....s abolished by the Finance Act,2024. That is from Assessment Year 2025-26 companies will no longer be taxed on premiums received above fair market value for issuance of shares. Facts for the same are as follows- 1. During the above mentioned Assessment Year, Assessee issued 2,00,000 shares to its existing shareholders for Rs. 50. Face value of the shares issued is Rs. 10 and premium per share is Rs. 40 per share. Total amount received by Assessee from Shareholders is Rs. 1,00,00,000. Out of which amount transferred to Share Capital was Rs. 20,00,000 and to Share Premium was Rs. 80,00,000. 2. Percentage of shareholding of the shareholders holding more than 5% of shares are as follows- Sr.No. Name of Shareholder No. of shares held as on 31/03/2013 % held 1. Avinash Bhute 1,05,000 8.93 2. Nitin Bhute 2,62,000 22.29 3. Prashant Bhute 2,14,400 18.24 4. Rahul Bhute 1,68,690 14.35 Total 7,50,090 63.81 3. Details of shareholders from whom amount of Rs. 1,00,00,000 was raised is as follows- Sr.No. Name No. of shares allotted Total amount received 1. A....
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.... the company- Particulars F.Y. 2012-13 F.Y. 2013-14 F.Y.2014-15 F.Y.2015-16 A. Share Capital 1,17,55,400 1,37,55,400 1,37,55,400 1,37,55,400 B. Reserves & Surplus 2,80,61,889 4,67,07,194 5,86,40,997 6,93,37,797 C. Total(A+B) 3,98,17,289 6,04,62,594 7,23,96,397 8,30,93,197 * From above table it is clear that after raising the Share Capital, there is consistent increase in the Networth of the company. * For enhancing the CC limit, the Financial Institution always insists to increase own funds. b. CC Limit * CC limit utilised by the company during following year is as follows- Particulars F.Y. 2012-13 F.Y. 2013-14 F.Y.2014-15 F.Y.2015-16 CC Limit utilised 5,71,02,927.12 15,94,09,894.42 9,36,58,067.33 7,42,09,051.1 * As Networth of the company increased in above mentioned Financial Years, hence CC limit has also been increased. * Due to inflow of funds either from major shareholders or by Financial Institution, the financial health of the company is improved. c. Turnover * Comparison of Turnover and Profit after Tax of the Ass....