2018 (7) TMI 121 - AT - Income Tax

Unexplained credits u/s 68 - unexplained credits - share premium account - Held that - Assessee filed a copy of valuation of shares done by the same CA dated 16.02.2007 in which the same auditor has valued the shares as per discounted cash flow method and arrived at the fair value per share at ₹ 154 in support of its stand. Thus, we now have three different valuations being ₹ 23 per share by Net Asset Method, ₹ 48 per share on the basis of Earnings Capitalisation Method and ₹ 154 per share as per discounted cash flow method. The assessee transferred the shares at ₹ 176 per share including the premium. Thus, the assessee has adopted a figure unsupported by any of the valuations also. It is also not known as to which valuation have been produced before the AO. However, it is noticed that neither the AO nor the assessee has applied the prescribed methods for determination of the fair value of the unquoted shares of the assessee company. We deem it fit to remit this issue back to the AO for a fresh examination. Since, the assessee s shares are not quoted, the AO would examine whether, the valuation of shares done by the assessee is in accordance with the law/rule and proceed to determine the correct value of share and income after affording adequate opportunity to the assessee. The assessee shall place all the materials in its support before the AO and comply to the AO s requirements as per law. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Validity of addition under Section 68 of the Income Tax Act for unexplained credits.
2. Applicability of Section 56(2) clause (viib) to share premium received from non-resident investors.
3. Genuineness of the share premium valuation and the transaction.
4. Compliance with statutory requirements and substantiation of share premium valuation.

Detailed Analysis:

1. Validity of Addition under Section 68:
The assessee, engaged in e-publishing and software-enabled services, was found to have unexplained credits of ?10,15,86,144 in its share premium account during the assessment year 2008-09. The Assessing Officer (AO) added this amount as unexplained credits under Section 68 of the Income Tax Act, asserting that the assessee failed to satisfactorily explain the source of these funds. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this addition, stating that the assessee could not justify the exorbitant share premium valuation.

2. Applicability of Section 56(2) Clause (viib):
The assessee argued that Section 56(2) clause (viib), which deals with the taxation of share premiums exceeding the fair market value, was not applicable as it came into effect from 1.4.2013 and was not retrospective. The CIT(A) acknowledged this but held that even prior to the amendment, Section 68 could be invoked for unexplained receipts without any basis.

3. Genuineness of the Share Premium Valuation and Transaction:
The assessee issued shares at a premium of ?166 per share against a face value of ?10 per share to a non-resident company, resulting in a total share premium of ?10.67 crore. The CIT(A) questioned the valuation, noting that the assessee's Chartered Accountant had valued the shares at ?48 per share based on the Net Asset Method. The assessee failed to provide documentary evidence to justify the higher valuation. The CIT(A) concluded that the assessee received substantial foreign remittance through a dubious transaction and upheld the AO's addition under Section 68.

4. Compliance with Statutory Requirements and Substantiation of Share Premium Valuation:
The assessee contended that the transaction was in compliance with statutory requirements, including filing returns with the Registrar of Companies and reporting to the Reserve Bank of India. The assessee provided Foreign Inward Remittance certificates and other documents to establish the identity and capacity of the investors and the genuineness of the transaction. However, the AO and CIT(A) found these explanations unsatisfactory, particularly regarding the valuation of the share premium.

Tribunal's Decision:
The Tribunal noted discrepancies in the valuation of shares provided by the assessee, with three different valuations: ?23 per share by Net Asset Method, ?48 per share by Earnings Capitalisation Method, and ?154 per share by Discounted Cash Flow Method. The Tribunal found that neither the AO nor the assessee had applied the prescribed methods for determining the fair value of the unquoted shares. Consequently, the Tribunal remitted the issue back to the AO for fresh examination, directing the AO to determine the correct value of the shares and the corresponding income after affording the assessee adequate opportunity to present its case. The Tribunal allowed the corresponding grounds of the assessee for statistical purposes.

Conclusion:
The Tribunal's decision highlights the importance of substantiating share premium valuations with credible evidence and adhering to prescribed valuation methods. The case was remanded to the AO for a fresh determination of the fair value of the shares and the genuineness of the transactions, ensuring compliance with statutory requirements and providing the assessee with an opportunity to present its case.