2019 (12) TMI 1572 - AT - Income Tax

Revision u/s 263 by CIT - Unexplained source of cash deposits not acknowledged by the AO - HELD THAT - Details were submitted for verification of source of cash deposits such as Return of Income Computation of Income Unsecured Loan taken during the relevant year details of source of cash deposits Balance Sheet for F.Y. 2012-13 cash book of F.Y. 2013-14 and balance sheet of 2013-14 etc. of all the investors who were asked by the AO by notice dated 03.03.2016 and 07.11.2016 and also during the course of hearing. All the required details have already been submitted during the scrutiny assessment proceedings vide various submissions and same were also acknowledged by the AO. Valuation of shares as per DCF Method - It is widely followed method for valuation of unquoted equity shares. This method involves projection of future cash flows. Techno economic viability stata report was also obtained based on the said projection and conserving the profitability of the project. Thus the projection was drawn as per the assessee after stating various aspects of the whole nature and other factors related to project. The actual figures may differ from the projections due to various factors and circumstances of the market in real time. On the entirety of the aspects we rely upon the decision of Shree Salasar Overseas Pvt. Ltd. 2011 (11) TMI 686 - ITAT JAIPUR it was held as that details were filed before the Assessing Officer vide a letter in which it was mentioned that such expenses were being allowed in earlier year. Hence this was not a case where there was no enquiry. AO had called for explanation on both the ground by issuance of notice and subsequently the assessee had also submitted all the details in order to satisfy the queries raised during the investigations done by the AO which clearly shows that the AO had undertaken the exercise of examining of both the above issues. It appears that since the AO was satisfied with the assessee s explanation he accepted the same. Even the commissioner conceded the position that AO made the enquiries but the grievances of the commissioner was that the AO should have made further enquiries rather accepting the assessee s explanation therefore it could not be said that it was a case of lack of enquiry. Pr.CIT has not pointed out any specific deficiency in the enquiry that was not made in the show cause notice as well as in the order u/s.263 of the Act - We hold that the order passed by ld.Pr.CIT u/s.263 of the Act for the above stated reasons is hereby set-aside and quashed - Decided in favour of assessee.

Summary

Issues Involved:
1. Examination of cash deposits by shareholders.
2. Valuation of shares issued at a premium.

Detailed Analysis:

1. Examination of Cash Deposits by Shareholders:

The Principal Commissioner of Income Tax (Pr.CIT) issued a show cause notice stating that 30 shareholders had deposited cash totaling ?2,94,89,700/- in their bank accounts before making payments to the assessee company for purchasing shares. The Pr.CIT felt that this issue was not examined by the Assessing Officer (AO) during the course of assessment proceedings, indicating a lack of enquiry on the AO's part.

The assessee argued that all supporting details regarding the source of cash deposits by the investors were submitted during the assessment proceedings and were duly verified by the AO. The paper book contained detailed lists of shareholders, share premium details, and sources of cash deposits by all 30 shareholders, spanning pages 29 to 229. The assessee provided comprehensive documentation, including returns of income, balance sheets, and cash books for the relevant financial years, which were submitted in response to notices from the AO dated 03/03/2016 and 07/11/2016.

The Tribunal noted that the AO had indeed called for and received detailed information regarding the source of cash deposits. The AO's enquiries and the assessee's responses were documented, indicating that the AO had conducted a thorough examination. The Tribunal concluded that the AO had undertaken the necessary enquiries and that the Pr.CIT's assertion of a lack of enquiry was unfounded.

2. Valuation of Shares Issued at a Premium:

The Pr.CIT observed that the shares of the company were issued at ?50 per share based on a valuation report from a Chartered Accountant (CA). The Pr.CIT questioned the basis of the projected financial results used in the valuation, suggesting that they were not reflective of the real trend of the business and lacked supporting details.

The assessee contended that the share premium was accepted based on the Discounted Cash Flow (DCF) Method, a widely followed method for valuing unquoted equity shares. The DCF method involves projecting future cash flows, and the assessee had obtained a Techno-Economic Viability Study Report from the State Bank of India (SBI), which had thoroughly verified the projections. The assessee argued that the projections were drawn after considering various aspects of the business and industry, and the actual figures could differ due to market conditions. The Tribunal noted that the DCF method is an accepted valuation method under Rule 11UA of the Income Tax Rules, and the AO had accepted the valuation during the assessment proceedings.

The Tribunal referenced multiple judicial precedents to support the view that inadequate enquiry by the AO does not justify revision under section 263 if the AO had indeed made enquiries and was satisfied with the explanations provided. The Tribunal emphasized that the Pr.CIT had not identified any specific deficiencies in the AO's enquiries.

Conclusion:

The Tribunal concluded that the AO had conducted adequate enquiries regarding both the cash deposits by shareholders and the valuation of shares issued at a premium. The Pr.CIT's order under section 263 was set aside and quashed, as the Tribunal found no basis for the Pr.CIT's assertion of a lack of enquiry or inadequate enquiry by the AO. The appeal of the assessee was allowed, and the order was pronounced in the open court on 13-12-2019.