2023 (11) TMI 83 - HC - Income Tax

Addition u/s 68 - assessee s alleged failure to explain as to why the subject shares which had a face value of Rs. 10/- were issued at a premium of Rs. 90/- per share - Requirement for carrying out due diligence - CIT(A) deleted addition as confirmed by ITAT - HELD THAT - The only issue that arose before the AO concerned due diligence which, according to us, the CIT(A) correctly answered by observing that the persons who had loans converted into share capital were either directors of the respondent company or directors of a group of companies and therefore, there was no requirement for carrying out due diligence. Valuation of the subject shares - According to the AO, the share premium was arrived at in a collusive manner - As per the valuation carried out by the chartered accountant of the respondent/assessee in terms of Rule 11UA, which permitted utilization of DCF Method, the value of subject shares as on 31.07.2012 was Rs. 101 per share. Assessee had factored in only Rs.90 per share as share premium component, the rest being the face value.Thus, total value of per share was Rs. 100 which was well below the value arrived at as per the valuation report. Given this position, the CIT(A), in our view, correctly observed that it was not a sham transaction contrary to conclusion arrived at by the AO. Whether Sub Rule (2) of Rule 11UA would be applicable even to those transactions which occurred prior to 29.11.2022? - We are in agreement that no such distinction could have been drawn. Once the amended rule kicked-in, it would apply to transactions which were carried out both before and after the amended Rule became operable. We may note in this particular case that the loans were converted into share capital after 29.11.2022.The conversion of loan to equity occurred pursuant to Board of Directors Resolution, passed on 06.03.2013. It is in this backdrop that the CIT(A) deleted the addition. The Tribunal via the impugned order sustained the deletion of the addition. Revenue said Tribunal lost sight of the fact that the addition was made under Section 68 of the Act and therefore, the discussion with regard to the provisions of Section 56(2) of the Act was not called for in the instant matter - We are unable to agree with this submission of revenue for the reason that although the addition was sought to be made u/s 68 it was in fact the AO, who had referred to Rule 11UA and Section 56(2) of the Act. AO proceeded to enquire into the receipt of share premium by the respondent/assessee by adverting to parameters contained in Section 56(2) - AO in fact had asked for a valuation report. Although the respondent/assessee, was remiss in not providing the valuation report to the AO, it had submitted the same to the CIT(A), who examined the said report in great detail. The valuation, as observed above, was carried out under the DCF Method, which is permissible under clause (viib) of Rule 56(2) read with the Rule 11UA. Decided in favour of assessee.

Summary

Issues:
- Delay in re-filing the appeal
- Challenge to the order passed by the Income Tax Appellate Tribunal regarding deletion of addition under Section 68 of the Income Tax Act, 1961

Delay in Re-filing the Appeal:
An application was filed seeking condonation of a 435-day delay in re-filing the appeal. The delay was condoned based on the reasons stated in the application.

Challenge to Tribunal's Order:
The appeal pertained to Assessment Year 2013-14 and focused on the deletion of an addition under Section 68 of the Income Tax Act. The key issue before the Tribunal was the sustainability of the deletion of the addition of Rs. 4,08,60,000. The Assessing Officer had added this amount due to alleged failure to explain the issuance of shares at a premium. The respondent had converted loans into share capital, with detailed transactions and utilizations provided.

The Commissioner of Income Tax (Appeals) found that loans and deposits were converted into share capital, except for amounts returned to a specific entity. The AO raised concerns about the valuation of shares and share premium, referencing Rule 11UA and Section 56(2) of the Act. The respondent submitted a valuation report using the Discounted Cash Flow Method, which was accepted as additional evidence by the CIT(A).

The CIT(A) concluded that the transaction was genuine, rejecting the AO's view of a collusive share premium valuation. The Tribunal upheld the deletion of the addition, noting that the amended Rule 11UA would apply to transactions pre and post its enactment. The AO's reference to Section 56(2) and Rule 11UA justified the CIT(A)'s analysis, leading to the dismissal of the appeal.

In conclusion, no substantial question of law arose for consideration, and the appeal was closed with parties instructed to act based on the digitally signed copy of the order.