TaxTMI 
TaxTMI 
2025 (12) TMI 302
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....ovides "enforcing the attendance of any person, including any officer of a banking company and examining him on oath"? 2. Whether the Appellate Tribunal is right in law in deleting the addition made u/s. 56(2)(viib) of the Income Tax Act, when the assessee failed to substantiate the fair market value and then the Assessing Officer as per Section 56(2)(viib), determine the value of fair market value of shares as per Rule 11U and 11UA of the IT Rules, 1962? 3. Whether ITAT is right to rely on the decision of the High Court of Madras in assessee's own case in A.Y.2007-08, even though it has no relevance to the facts of the case for the instant assessment year? 4. Whether ITAT is right in law in deleting the aforesaid additions was perverse having regard to the evidence and the material on record? 5. Whether the Appellate Tribunal is right in law in remitting the disallowance made on lease rent paid by the assessee company to its Director which is violation of 'specified person' as per Section 40(A)(2)(a) & 40(A)(2)(b) of the Income Tax Act? 2.2. By the same order dated 20.01.2020, T.C.A.Nos.15 and 16 of 2020 were admitted on the follo....
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....he case was selected under CASS and scrutiny proceedings were pending as on the date of search i.e. 2.9.2014. Subsequently, notice under Section 153A of the Act was issued to the Assessee and, in response, the Assessee filed the return of income on 16.6.2015 admitting the total income of Rs. 53,91,56,590/- and showing the book profit of Rs. 53,26,44,742/-. AO completed the assessment under Section 143(3) read with Section 153A by arriving at a taxable income of Rs. 91,95,16,024/- and issued assessment order on 30.12.2016. 3.2. For AY 2014-15, the Assessee filed its return of income on 16.6.2015 admitting a total income of Rs. 39,19,53,000/- and book profit of Rs. 38,45,80,227/-. The case was selected for scrutiny under CASS and a notice under Section 143(2) of the Act was issued on 19.3.2016. Consequent to search, notice under Section 153A was also issued to the Assessee on 11.7.2016 and, in response thereto, the Assessee filed the return of income on 19.11.2016 admitting the total income of Rs. 39,19,53,010/- and declaring the book profit of Rs. 38,45,80,227/-. Subsequently, notices were issued and assessment was completed making additions/disallowances, vide assessment order d....
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....32 of the Act in the business premises of the assessee on 2.9.2014. The additions were made by the Assessing Officer and confirmed by the CIT(A). On appeal before the ITAT, the additions were deleted mainly on the consideration that they were made based on statements of one Mahendra Kumar Sethia which are very vague and could not be made the basis to make additions in respect of three assessment years. Hence, these appeals by the revenue. 4.2. The order of the Assessing Offer passed in these three cases would reveal that the additions were made against receipt of share application money/share premium during the previous years, viz., 2010-2011 to 2014-2015, from its Managing Director, M.Kiran Kumar, and various companies. The share application money/share premium was received from Kothari Credit India Private Limited. The statement of Mahendra Kumar Sethia recorded on oath under Section 132(4) of the Act on 28.11.2013 and another statement on oath under Section 131 of the Act was recorded on 9.1.2014. These statements were made the basis for additions made under Section 68 of the Act pertaining to the three assessment years. 4.3. It is also revealed that the Assessing Officer ....
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....upon the assessee to prove the genuineness of the share application money/share premium beyond shadow of doubt and it could not discharge its onus by merely submitting that the transactions are through banking channels and that investors are shown as share holders of the books and shares are allotted. The Assessing Officer was of the view that it was incumbent upon the assessee to produce the alleged investors and make them give a statement to the effect that the investments are genuine, however, the assessee failed to establish the genuineness of the transaction. The assessee did not seek cross-examination of Mahendra Kumar Sethia and other person. 4.7. Importantly, the Assessing Officer took into consideration that similar additions were made for assessment year 2007-2008, being unexplained share application money/share premium under Section 68 of the Act. The Assessing Officer heavily relied upon the findings of the ITAT recorded in the appeal relating to the assessment year 2007-2008 and then concluded that the same set of circumstances which were existing during 2007-2008 exist for the assessment years under consideration. 4.8. The CIT(A) affirmed the findings rendered b....
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....s." 4.11. It is clear from the aforesaid provision that the authorities mentioned therein are having the same powers as are vested in a court under the Code of Civil Procedure, 1908, which ostensibly includes enforcing the attendance of any person, including any officer of a banking company and examining him on oath. Irrespective of the evidentiary value to be attached to such a statement recorded under Section 131 of the Act, in the attending facts and circumstances of the given case, it cannot be accepted as a proposition of law that the statement recorded under Section 131 of the Act is not admissible for the reason that the authority is not empowered to administer oath and, therefore, has no evidentiary value. 4.12. The first substantial question of law in T.C.A.Nos.14, 15 and 16 of 2020 is answered in favour of the revenue. 5.1. However, the incidental question that would stem up would be whether it is a substantial question of law. This question arises for consideration because, though the ITAT held that the statement recorded under Section 131 of the Act has no evidentiary value, it then proceeded to evaluate the evidence of Mahendra Kumar Sethia. Had it been a case....
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....ng that the explanation of the assessee is not satisfactory. On the other hand, the legal principle enunciated by the Supreme Court, as noticed supra by us, is that so long as the proof and identity of the investor and the payment received from him is through a doubtless channel like that of a banking channel, the receipt in the hands of the assessee towards share capital or share premium does not change its colour. The money so invested in the assessee-company would still be the money available and belonging to the investors. The consistent principle followed is that the investors' sources and creditworthiness cannot be explained by the assessee. If the Department has a doubt about the genuineness of the investors capacity, it is open to it to proceed against those investors. Without taking such a course of action, the Assessing Officer and the Tribunal are proceeding on conjectures that the assessee has, in fact, ploughed back the money. The very approach of the Assessing Officer and the Tribunal are completely opposed to settled legal principles enunciated and they have arrived at conclusions contrary to the legal principles on the subject. Further, they are finding....
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....at the person making such payment had enough resources in his hands to make such payment. It is always possible to transact through banking channels and still manipulate the original character of the amount as to whom it belonged and how it was earned. Therefore, we cannot decide this appeal only on the ground that the payments objected in this case have been effected through banking channels ...' 3.13 The same set of circumstances which were existing during the AY 2007-08 is existing for the AY under consideration as well. It may be appropriate to see the case in the background of searches conducted on the entry operators who have very categorically admitted having given accommodation to the assessee company. As held by the Hon'ble ITAT, merely caring out the transactions through banking channels would not lend credibility to the transactions." 6.4. The legal principles which were enunciated by the Supreme Court in the case of CIT v. Lovely Exports P. Ltd [(2009) 319 ITR 5 (SC)], are as below: "In this context, it is apt to take note of the crisply worded order of the Supreme Court in the case of CIT v. Lovely Exports P. Ltd. reported in (2008) 216 CTR....
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....d any confusion that mere explanation about the nature and source of sum so credited may not be claimed to be accepted as such, without any scrutiny of the nature and source of the transaction and nothing more. This power was available with the Assessing Officer even before the insertion of the proviso as aforesaid. The use of the words "any sum is found credited in the books" in Section 68 of the Act, on its plain reading, clearly indicates that the provision is not restricted, but is very widely worded. It does not restrict the authority of the Assessing Officer from making any enquiry as regards the true nature and source. It cannot be said that merely because a sum is credited as receipt of share application money, or that the payment was received through credible transaction, or that the applicants are otherwise companies, by itself, would bring the enquiry to an end. 6.8. Thus, the proviso inserted wide the Finance Act, 2012, on its true construction, only seeks to clarify the legal position with regard to the scope and ambit of power of enquiry under Section 68 of the Act, lest it is understood as limited in nature. In taking this view, we find support from a decision of ....
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....nciated by the Supreme Court in the case of CIT v. Lovely Exports P. Ltd (supra) and followed in the case of the assessee in relation to the assessment year 2007-2008. 6.12. For the aforesaid reasons, the third substantial question of law raised in all these appeals is answered against the revenue and in favour of the assessee. 7.1. Apropos of the fourth substantial question of law as to whether the ITAT acted perversely in deleting the addition without having regard to the evidence on record, we find that the ITAT has recorded its finding after scrutiny of the evidence of Mahendra Kumar Sethia and it is not a case where the entire evidence of the said person was omitted from consideration. The ITAT considered the relevant piece of evidence as unreliable. Following are the relevant findings recorded in that regard: "10. We have carefully gone through the statement said to be recorded from Shri Mahendra Sethia. The assessee claims that a copy o the statement was not furnished to them. However, the Assessing Officer has extracted the statement in his order. Even though Shri Mahendra Sethia claims that accommodation entry was given to the assessee-company, it is not his....
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....2. It is obvious from this answer to question No.21 that by way of various layers of purchases and sales, the money was brought into the books of M/s Kothari Credit India Pvt. Ltd. He also presumed that the money might have been originally received by cash by any one of the layers. But, no concrete statement was made that money was received from the assessee-company at any stage. Moreover, no material is available on record to suggest that either the assessee-company paid money to M/s Kothari Credit India Pvt. Ltd. or to Shri Mahendra Sethia, which was invested in the form of share premium in the assessee-company. In the absence of any material evidence, this Tribunal is of the considered opinion that there cannot be any addition on presumption and assumption under Section 68 of the Act. Moreover, as rightly submitted by the Ld.counsel for the assessee, the Assessing Officer made addition under Section 56(2)(viib) of the Act in respect of the so-called excess amount. In other words, the Assessing Officer has admittedly treated the transaction as genuine and also admitted the capacity of the person for making investment in the shares of the assessee-company. Therefore, the addition ....
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.... The principle which has been applied by the ITAT is that the judicial satisfaction means the Assessing Officer has to take into consideration the well established method of valuation of shares, including the assets, as explained in Explanation 2 to Section 56(2)(viib) of the Act and it cannot be arbitrary. It has further proceeded on the principle that the Assessing Officer has to take note of the judicial and established principles in arriving at his satisfaction. The relevant provision contained in Section 56(2)(viib) of the Act is reproduced herein below: "56. Income from other sources. .. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head 'Income from other sources', namely :- ... (viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: ....
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....ding the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor of the company appointed under the laws relating to companies in force; and (B) in relation to a company, not being an Indian company, the balance sheet of the company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor of the company, if any, appointed under the laws in force of the country in which the company is registered or incorporated; (c) "merchant banker" means category I merchant banker registered with Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992); (d) "quoted shares or securities" in relation to share or securities means a share or security quoted on any recognized stock exchange with regularity from time to time, where the quotations of such shares or securities are based on current transaction made in the ordinary course of business; (e) "recognized stock exchange" shall have the same meaning as assigned to it in clause (....
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....i) in case the artistic work is received by any other mode and the value of the artistic work exceeds rupees fifty thousand, then assessee may obtain the report of registered valuer in respect of the price it would fetch if sold in the open market on the valuation date; (c) valuation of shares and securities,- (a) the fair market value of quoted shares and securities shall be determined in the following manner, namely,- (i) if the quoted shares and securities are received by way of transaction carried out through any recognized stock exchange, the fair market value of such shares and securities shall be the transaction value as recorded in such stock exchange; (ii) if such quoted shares and securities are received by way of transaction carried out other than through any recognized stock exchange, the fair market value of such shares and securities shall be,- (a) the lowest price of such shares and securities quoted on any recognized stock exchange on the valuation date, and (b) the lowest price of such shares and securities on any recognized stock exchange on a date immediately preceding the valuation date when such shares and s....
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....erence shares; PV = the paid-up value of such equity shares; PE = total amount of paid-up equity share capital as shown in the balance sheet; (c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation. (2) Notwithstanding anything contained in sub-clause (b) or sub-clause (c), as the case may be, of clause (c) of sub-rule (1): - (A) the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of the Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares, as shall be determined under sub-clause (a), sub-clause (b), sub-clause (c) or sub-clause (e), at the option of the assessee, where the consideration received by the assessee is from a resident ; and under sub-clauses (a) to (e) at the option of the assessee, where the consideration r....
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....rom such fair market value does not exceed the aggregate consideration that is received from a venture capital fund or a venture capital company or a specified fund: Provided that the consideration has been received by the undertaking from a venture capital fund or a venture capital company or a specified fund, within a period of ninety days before or after the date of issue of shares which are the subject matter of valuation. Explanation.-For the purposes of this clause,- (i) "specified fund" shall have the same meaning as assigned to it in clause (aa) of Explanation to clause (viib) of sub-section (2) of section 56; (ii) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the same meaning assigned to them in clause (b) of Explanation to clause (viib) of sub-section (2) of section 56. Illustration: If a venture capital undertaking receives a consideration of fifty thousand rupees from a venture capital company for issue of one hundred shares at the rate of five hundred rupees per share, then such an undertaking can issue one hundred shares at this rate to any other investor within a period of n....
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....an ninety days prior to the date of issue of shares which are the subject matter of valuation, such date may, at the option of the assessee, be deemed to be the valuation date: Provided that where such option is exercised under this sub-rule, the provisions of clause (j) of rule 11U shall not apply. (4) For the purposes of clause (A) or clause (B) of subrule (2), where the issue price of the shares exceeds the value of shares as determined in accordance with - (i) sub-clause (a) or sub-clause (b) of clause (A), for consideration received from a resident, by an amount not exceeding ten per cent of the valuation price, the issue price shall be deemed to be the fair market value of such shares; (ii) sub-clause (a) or sub-clause (b) or sub-clause (d) of clause (A), for consideration received from a non-resident, by an amount not exceeding ten per cent of the valuation price, the issue price shall be deemed to be the fair market value of such shares. Explanation.-For the purposes of this sub-rule, 'issue price' means the consideration received by the company for one share." 8.4. Where the valuation is based on value, on the date of....
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....not considered by the Assessing Officer, thought it just, fair and appropriate that the issue should be reconsidered with reference to the relevant aspects and remanded the issue for an exercise de novo by the Assessing Officer, while setting aside the orders of the Assessing Officer and the CIT(A). 9.4. The decision taken to remand for consideration afresh does not prejudice the revenue. We are not at all satisfied with the submission of learned counsel for the revenue that it involves any question of law as such. Since the amount paid towards rent was to the Director of the assessee company, in view of the provisions contained in Section 40A(2)(a) read with Section 40A(2)(b) of the Act, unless a categoric finding is recorded, taking into consideration all relevant aspects, that the expenditure is excessive or unreasonable, disallowance should not be made. 9.5. We are, therefore, of the opinion that no question of law as such arises for consideration and the issue is, accordingly, answered in the manner that no question of law arises for consideration. FIFTH AND SIXTH SUBSTANTIAL QUESTIONS OF LAW IN T.C.A.Nos.15 AND 16 OF 2020 10.1. The ITAT has proceeded on an admitte....