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2021 (3) TMI 459 - AT - Income TaxAddition u/s 68 or 56- Bogus share premium and share capital - assessee could not substantiate with evidence to his satisfaction regarding the credit worthiness of the share applicants and the genuineness of the transaction is doubtful - CIT(A) deleted the addition made u/s. 68 on the ground that such share capital was not received by the assessee during the year, but, was received in F.Y. 2013-14 relevant to assessment year 2014-15 and the assessee has only allotted the shares during the year however, confirmed the addition made by the AO u/s. 56(2)(viib) - HELD THAT - As assessee has valued its shares at ₹ 82.07 as per the valuation certificate issued by the chartered accountant. Although the said valuation report was submitted before the AO to justify that the shares issued by the assessee was at fair market value, it was computed in accordance with Rule 11UA(a) of IT Rules, 1962, however, I find, the AO rejected the same holding that the assessee is not having any worth of receiving any share premium. He has ignored the various assets shown by the assessee in the balance sheet such as cash and cash equivalent of ₹ 6,18,035/-, -short-term loans and advances of ₹ 2,38,07,381/- and other current assets of ₹ 1,16,534/-. The AO did not apply the formula provided in Rule 11UA and did not make any attempt to compute the value of shares of the assessee in accordance with Rule 11UA of IT Rules, 1962 which has been upheld by the ld. CIT(A). When the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same. See A.K. ROY VERSUS STATE OF PUNJAB 1986 (9) TMI 412 - SUPREME COURT Thus as assessee has issued the shares at fair market value computed in accordance with Rule 11UA(a) of the IT Rules 1962 and no fault has been found in the method applied by the assessee and the lower authorities have made the addition u/s. 56(2)(viib) purely on presumptions and surmises. Therefore such action of the lower authorities being not in accordance with law is unsustainable - set aside the order of the CIT(A) and direct the AO to delete the addition - Decided in favour of assessee.
Issues Involved:
1. Addition under Section 68 of the Income Tax Act. 2. Addition under Section 56(2)(viib) of the Income Tax Act. 3. Valuation of shares under Rule 11UA of the Income Tax Rules. Detailed Analysis: 1. Addition under Section 68 of the Income Tax Act: The Assessing Officer (AO) made an addition of ?48 lakhs under Section 68, citing that the assessee could not substantiate the creditworthiness of the share applicants and the genuineness of transactions. The AO noted that the companies involved appeared to be shell companies with no real business activities. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, stating that the share capital was received in the Financial Year 2013-14, relevant to the assessment year 2014-15, and no credits were introduced in the books during the year under consideration. Thus, no addition under Section 68 could be made for the assessment year 2015-16. The Revenue did not appeal against this finding. 2. Addition under Section 56(2)(viib) of the Income Tax Act: The AO did not make a separate addition under Section 56(2)(viib) since the addition was already made under Section 68. However, the CIT(A) confirmed the addition of ?42 lakhs under Section 56(2)(viib), stating that the assessee had no business worth to justify the premium charged on the shares. The CIT(A) rejected the valuation report furnished by the assessee under Rule 11UA, deeming it baseless, and relied on the case of Agro Portfolio Pvt. Ltd. vs. ITO to substantiate the decision. 3. Valuation of Shares under Rule 11UA of the Income Tax Rules: The assessee argued that the valuation of shares was done in accordance with Rule 11UA, which provides the formula for determining the fair market value (FMV) of unquoted equity shares. The assessee provided a Chartered Accountant's valuation certificate supporting the share price of ?80 per share (?10 face value + ?70 premium). The AO rejected this valuation, stating that the assessee had no worth to receive any share premium and ignored the assets shown in the balance sheet. The CIT(A) upheld this rejection. Tribunal's Findings: The Tribunal found merit in the assessee's argument that the valuation of shares should be done as per Rule 11UA. The Tribunal noted that the AO and CIT(A) did not follow the statutory procedure and rejected the valuation report on assumptions and presumptions without applying the formula provided in Rule 11UA. The Tribunal emphasized that when the statute provides a specific procedure, it must be followed. The Tribunal distinguished the case from Agro Portfolio Pvt. Ltd., where the shares were valued based on the discounted cash flow method, and the assessee failed to substantiate the basis of projections. In the present case, the shares were valued as per Rule 11UA(a), and no fault was found in the method applied by the assessee. Conclusion: The Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition made under Section 56(2)(viib). The appeal filed by the assessee was allowed. Pronouncement: The decision was pronounced in the open court on 12.02.2021.
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