2022 (11) TMI 581 - AT - Income Tax

Addition an account of investment in share u/s 69 - HELD THAT - The investment of Rs. 50 lakhs by way of share application money is out of deposits by the assessee in API Industries Private Limited made in earlier year (i.e. financial year 2011-12) by way of account payee cheque and therefore addition if any can be only made in financial year 2011- 12. It was only out of this deposit made by the assessee in the immediately previous financial year(financial year 2011-12) that the shares were issued by API industries Private Limited to the assessee. Accordingly the source of Rs. 50 lakhs has been fully explained by the assessee. The counsel for the assessee submitted that all these facts were submitted before CIT(Appeals) however the same omitted to be considered in the appellate order. In response the Ld. DR drew our attention and submitted that the cheque was received by API industries Ltd however whether the same was credited/encashed in financial year 2011-12 is yet to be verified. Therefore it cannot be concluded that a transaction in question pertains to financial year 2011-12 and not the impugned assessment year under consideration. Addition u/s 56 of the Act as per Rule 11UA of the Income Tax Rules - HELD THAT - Assessee has submitted that the source of investment of Rs. 50 lakhs in the shares of API industries Ltd stands fully explained since such allotment was made out of deposits held with the said company from the previous year. Further all transactions were made by way of account payee cheques and hence there is no doubt about the genuineness of the same. We also observe that the assessee had submitted that the Ld. CIT(Appeals) has not considered the submission of the assessee to the effect that firstly there was an arithmetical error committed by the AO while computing the value of shares of API industries Private Ltd and secondly Ld. CIT(Appeals) has erred in facts and in law in not considering the fact that the company has gone into liquidation and accordingly the valuation of Rs. 26.39 per share of a company which is in financial distress is clearly excessive and unreasonable. As in the interest of justice we are restoring the matter to the file of Ld. CIT(Appeals) so that he may consider the above submissions made by the assessee and verify whether the shares were allotted to the assessee out of deposits held by the assessee in API industries Private Limited from previous financial year. Further Ld. CIT(Appeals) may also verify the correct valuation of shares as per Income Tax Rules taking into consideration the fact that the company was in financial distress and in the subsequent year it had also gone into liquidation. The assessee may furnish any supporting documents in support of the same during the course of appellate proceedings.

Summary

Issues:
1. Addition of investment in shares of API Industries Pvt Ltd under section 69 of the Income Tax Act.
2. Addition under section 56 of the Act as per Rule 11UA of the Income Tax Rules.
3. Passing of assessment order under section 144 of the Income Tax Act.

Issue 1:
The AO added a sum of Rs. 50 lakhs on account of investment in equity shares of API Industries Pvt Ltd as unexplained under section 69 of the Act due to lack of information from the assessee. Ld. CIT(A) upheld this addition as the appellant failed to establish the source of investment clearly, despite claiming it was from a deposit with API Industries. The appellant's argument that the investment was from a previous year's deposit was not considered, leading to the confirmation of the addition.

Issue 2:
Another addition of Rs. 81,95,000 was made under section 56 of the Act based on the valuation of shares of API Industries Pvt Ltd at Rs. 26.39 per share, as per Rule 11UA of the Rules. The appellant contested this valuation, providing different valuations ranging from Rs. 2.13 to Rs. 13 per share. However, Ld. CIT(A) upheld the addition, stating that the appellant's varying valuations did not establish a clear source, and the AO's valuation was correct. The appellant argued that the valuation was excessive due to the company's financial distress and subsequent liquidation.

Issue 3:
The appellant challenged the passing of the assessment order under section 144 of the Act. However, the tribunal set aside the matter to Ld. CIT(A) for reconsideration. The tribunal directed Ld. CIT(A) to review the submissions regarding the source of investment and the correct valuation of shares, considering the company's financial situation and subsequent liquidation. The appellant was given the opportunity to provide supporting documents during the appellate proceedings.

This judgment addresses the issues of unexplained investment in shares and the valuation of shares under different sections of the Income Tax Act. The tribunal directed a reconsideration by Ld. CIT(A) to verify the source of investment and the correct valuation of shares in light of the company's financial distress and liquidation, providing the appellant with an opportunity to present supporting documents.