2022 (10) TMI 217 - AT - Income Tax

Addition u/s 68 or 56(2) - Unexplained cash credit u/s 68 - Bogus share transactions - genuineness and creditworthiness of the transactions were not proved - CIT(A) has considered the facts of the share valuation u/s 56(2)(viib) and came to a conclusion that the addition of the fair market value is correct - HELD THAT - Both the revenue authorities have has different opinion one being addition u/s 68 and other U/sec 56(2)(viib) - AO has called for various details and assessee has substantiated with the material information and judicial decisions which cannot be disputed and the A.O. was satisfied with the applicability of section 56(2)(viib) - CIT(A) has not upheld the addition u/s 68 but u/s 56(2)(viib) of the Act that shows that there is no doubt on the investors as well as genuineness of the transaction and the shares were issued at a premium considering the fair market value(FMV). We find that the valuation aspect of the shares is made on the Discounted cash flow method (DCF) and these facts are mentioned by the A.O. and it clearly indicates that the assessee has submitted the working of cash flow statement for F.Y 2014-15 to 2018-19 and the AO has not made adverse comments that the cash flow statements are false and not in accordance with the accounting principles. The cash flow statements are estimates of business and also it is not the case of the revenue that future results of the assessee is wayward compared to the projections. At this stage, there is no point in referring back to the old track record and to examine the future projections of the company. There cannot be a direct relation of assets base of the assessee company with financial future cash flows from business operations as the assessee is engaged in the business of trading in shares and derivatives transactions. The projected future financials are prepared by the management persons, who understands the business operations and the duty of the valuer is to perform due diligence of such estimates and apply the relevant criteria based on the business of the assessee. Therefore we are of the considered view that the rejection of valuation of shares as per the DCF method is also without any evidence on record. Accordingly, we set aside the order of the CIT(A) and direct the assessing officer to delete the addition and allow the grounds of appeal.

Summary

Issues Involved:
1. Increasing the income by Rs. 99,00,000 by treating the amount of share capital received as unexplained cash credit under Section 68 of the Act.
2. Making an addition of Rs. 9,00,90,000 by treating the amount of share premium received as unexplained cash credit under Section 68 of the Act.

Detailed Analysis:

Issue 1: Increasing the Income by Rs. 99,00,000
The assessee company, engaged in share trading and derivative transactions, filed its return of income electronically for the AY 2015-16. During scrutiny, the AO found that the assessee had issued 9,90,000 shares at a face value of Rs. 10 each with a premium of Rs. 91 each. The AO required the assessee to explain the basis for the valuation of shares. The assessee submitted a share valuation certificate as per Rule 11UA and provided a discounted cash flow (DCF) statement for FY 2014-15 to 2018-19. However, the AO was not satisfied with the explanations, noting that the company lacked strong financial or commercial strength and had no fixed assets to justify the premium. Consequently, the AO treated the share capital as unexplained cash credit under Section 68 and assessed the total income accordingly.

Issue 2: Making an Addition of Rs. 9,00,90,000
The AO also questioned the creditworthiness and genuineness of the share subscribers. Despite the company providing details, the AO concluded that the share premium could not be justified and treated it as unexplained cash credit under Section 68. The CIT(A) upheld the AO's decision but applied Section 56(2)(viib), which taxes any money received from a resident on the issue of shares to the extent it exceeds the fair market value (FMV) of the shares issued. The CIT(A) relied on judicial decisions, including the Innoviti Payment Solutions Pvt Ltd and TUV Rheinland NIFE Academy Pvt Ltd cases, to support the AO's rejection of the DCF valuation method used by the assessee.

Tribunal's Findings:
The Tribunal noted that the CIT(A) upheld the addition under Section 56(2)(viib), not under Section 68, indicating no doubt about the investors' genuineness and the transactions. The Tribunal found that the AO had called for various details, and the assessee had substantiated its claims with material information and judicial decisions. The AO was satisfied with the applicability of Section 56(2)(viib) but made the addition under Section 68. The Tribunal observed that the valuation of shares was made using the DCF method, and the AO did not find the cash flow statements false or against accounting principles. The Tribunal concluded that the rejection of the DCF valuation was without evidence and directed the AO to delete the addition.

Conclusion:
The Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition, allowing the assessee's appeal. The judgment emphasized the importance of substantiating share valuations with credible methods and the necessity for the AO to provide concrete evidence when rejecting such valuations.