2018 (10) TMI 1400 - AT - Income Tax

Addition u/s 68 made on account of allotment made of share by the assessee - assessee has submitted copy of the board resolution, ITR, audited financial statement, PAN, bank statement, confirmation, company master data, allotment letter and allotment return of share capital and further stated that source of source was also filed during the assessment proceedings - assessee did not get proper opportunity of producing the directors of the investors company before the assessing officer - Held that - AR repeatedly stated that assessee did not get proper opportunities of producing the directors before the AO and therefore now case of the assessing officer is that non production of the directors of the investor companies have made all the evidence produced by the assessee redundant, he repeatedly offered to produce the directors of the investor companies. We are of the opinion that assessee has submitted enough evidences to prove their identity, creditworthiness and genuineness of the transactions. Further if assessee produces the directors of the investor companies before the Lord assessing officer and they are examined by Ld. assessing officer, it will conclusively decide the whole issue. Accordingly, on the request of both the parties, we set aside the first issue covering ground number one of the appeal back to the file of the Learned AO with a direction to the assessee to produce the directors of the investor companies for examination before the assessing officer. The AO is also directed to examine them on the basis of documents submitted by the assessee. Accordingly, ground number one of the appeal of assessee is allowed with above direction. Addition u/s 56(2)(viib) on protective basis - as the assessee has received share capital of ₹ 20 crores of the face value of ₹ 10 each at a premium of ₹ 1990 per share therefore, AO held that the provision of section 56(2)(viib) are attracted - Held that - The assessee has claimed that its investment in coal mines in USA is based on certain proposals, due diligence report, coal lease agreement , agreement for transfer of lease rights, engineering service agreement, consulting agreement, approval from environment Ministry and approval of reserve Bank of India for making an overseas investment. Therefore the valuation report submitted by the assessee is required to be objectively evaluated based on these evidences. It is apparent that lower authorities have not given any credence to these details. It is further not possible to ascertain what happened in subsequent years to the business of the coal mine. It is neither found from the assessment orders or appellate orders or submission of the assessee about the cash flow generated by the coal mine business of the LLC. We set aside the whole issue of tax ability under section 56 (2)(viib) back to the file of the assessee for the reason that that original addition made by AO u/s 68 is also set aside to the file of the AO and further the lower authorities have failed to objectively evaluate the valuation report submitted by the assessee of a chartered accountant based on discounted cash flow method. The assessee is directed to show the details of the valuation made by the assessee on the basis of discounted cash flow methods along with the supporting evidences to substantiate the estimate of the cash flow for respective years. Based on the submission of the assessee, the learned assessing officer is directed to examine the same and decide the issue of tax ability under section 56(2)(viib) of the act after affording proper opportunity of hearing to the assessee. According to this, ground number two of the appeal of the assessee is allowed. Appeal filed by the assessee is allowed for statistical purposes.

Issues Involved:
1. Stay of demand for ?9,02,42,930.
2. Addition of ?20 crores under Section 68 of the Income Tax Act.
3. Addition of ?19.90 crores under Section 56(2)(viib) of the Income Tax Act on a protective basis.

Issue-wise Detailed Analysis:

1. Stay of Demand:
The assessee requested a stay of the demand for ?9,02,42,930 for the Assessment Year 2014-15. The tribunal reviewed the rival contentions and the orders of the lower authorities and decided not to grant the stay. The tribunal then proceeded to hear the main appeal.

2. Addition of ?20 Crores Under Section 68:
The assessee, a private limited company, filed its return declaring a loss of ?3,53,777. During the year, it raised share capital/premium of ?20 crores from seven companies. The Assessing Officer (AO) treated this as unexplained cash credit under Section 68, leading to an assessed income of ?19,96,46,233. The AO noted that the share capital was raised from companies with questionable creditworthiness, as evidenced by their low income and the nature of their bank transactions. Despite multiple opportunities, the assessee failed to produce the directors of the investor companies for verification.

The assessee argued that it had submitted all necessary documents to discharge its onus under Section 68, including board resolutions, ITRs, audited financial statements, PANs, and bank statements of the investor companies. The assessee contended that the AO's demand for producing the directors was unreasonable and that the AO should have issued summons under Section 131.

The tribunal observed that the assessee provided substantial documentary evidence but failed to produce the directors of the investor companies. Given the close nexus expected in a private limited company, the tribunal found it reasonable for the AO to demand the directors' presence. However, the tribunal noted that the final show cause notice was issued late, giving the assessee insufficient time to comply. Consequently, the tribunal set aside the issue to the AO, directing the assessee to produce the directors for examination.

3. Addition of ?19.90 Crores Under Section 56(2)(viib) on a Protective Basis:
The AO also made an addition of ?19.90 crores under Section 56(2)(viib) on a protective basis, contending that the share premium received exceeded the fair market value of the shares. The assessee justified the premium based on a valuation report using the Discounted Cash Flow (DCF) method, supported by documents related to an investment opportunity in a coal mine in the USA. The AO rejected the valuation report, citing discrepancies and disclaimers.

The tribunal noted that the valuation report was based on projected cash flows, which did not materialize due to project delays. The tribunal emphasized that variations between projected and actual cash flows should not invalidate the valuation report if it was prepared in good faith and based on reasonable assumptions. The tribunal directed the AO to re-examine the valuation report and the supporting evidence objectively.

Conclusion:
The tribunal dismissed the stay petition and set aside the additions under Sections 68 and 56(2)(viib) to the AO for re-examination, directing the assessee to produce the directors of the investor companies and substantiate the valuation report with supporting evidence. The appeal was allowed for statistical purposes.

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