2016 (9) TMI 1459 - AT - Income Tax

Additions u/s 68 - Share premium - AO found fault in the contention of the assessee that, considering the future cash flow for this proposed project, the assessee company valued its shares based on discounted cash flow method - AO has also found that shares were allotted without any benefit from the shareholders. - Held that - this Tribunal is of the considered opinion that as rightly found by the CIT(Appeals), these are colourable device exercised by the assessee to reduce the tax liability. By way of introducing cash credit in the name of share premium and share capital, the assessee-company is making attempts to reduce the tax liability. In the absence of the details of shareholders and the basis for valuation of share at ₹ 5400/- per share, the CIT(Appeals) has rightly confirmed the addition made by the Assessing Officer. Section 68 of the Act clearly says that when the Assessing Officer found credit in the books of account and the assessee could not offer any explanation or the explanation offered by the assessee is not satisfactory, then the entries found in the books have to be treated as income of the assessee. - Decided against the assessee.

Summary

Issues: Valuation of share premium under Section 68 of the Income-tax Act, 1961

Analysis:
The appeal was against the addition of share premium under Section 68 of the Income-tax Act, 1961. The Assessing Officer added ?90.18 lakhs towards share premium, questioning the valuation method used by the assessee company. The assessee valued its shares based on discounted cash flow method for a new venture in power generation. The Assessing Officer raised concerns about the uncertainty of future profitability and the lack of benefit from shareholders. The Tribunal noted discrepancies in the valuation and the absence of physical transfer of money or assets from shareholders to the company.

The Ld. counsel argued that without cash credit in the books, no addition should be made under Section 68. However, the Departmental Representative contended that the valuation lacked basis and was a means to introduce cash credit through share premium. The Tribunal observed that the valuation of shares at ?5400 per share, with a face value of ?10, was unsubstantiated. The Departmental Representative highlighted agreements with other entities as colorable devices for cash credit introduction.

The Tribunal found that the entries in the books lacked proper explanation and evidence of shareholder details and valuation basis. It concluded that the share valuation was a means to reduce tax liability, confirming the lower authorities' decision. Section 68 mandates treating unexplained credit entries in the books as the assessee's income. Consequently, the appeal was dismissed, upholding the addition of share premium by the Assessing Officer.

In summary, the judgment centered on the valuation of share premium under Section 68 of the Income-tax Act, emphasizing the need for proper documentation, valuation basis, and shareholder details to justify entries in the books and avoid tax evasion through colorable devices.