2023 (12) TMI 1393 - AT - Income Tax

Addition made 56(2)(viib) on account of share premium received of allotment of shares - valuation of the Shares made by Technical Expert as required under Rule 11DA of the Income Tax Rules - HELD THAT - The assessee has taken the DCF method for valuation of share which is followed by the Rule 11UA the Rule. However, there is no dispute between the parties that Rule 11UA(1) is not applicable on the facts and circumstances of the present case which is a provision of general nature whereas Rule 11UA(2) is a specific provision providing for the valuation of the unquoted equity shares. After going through the relevant Section and the Rules, in our opinion, the matter of valuation of unquoted equity shares, has been completely left to the discretion of the assessee. It is his option whether to choose NAV Method (Book Value) under clause (a) or to choose DCF Method under clause (b) and the AO cannot adopt a method of his own choice. We relied on the order of Crown Chemicals 2022 (12) TMI 1552 - ITAT MUMBAI , Hometrail Buildtech (P.) Ltd 2023 (9) TMI 797 - ITAT DELHI and Nabh Multitrade Pvt. Ltd., 2020 (10) TMI 928 - ITAT JAIPUR We find that the assessee valued the share amount to Rs. 158/- per share and allotted share is Rs.100 which is much less than the NAV which is not contravening of section 56(2) of the Act. Further, all the investment in equity shares are accumulated from the directors and son of director. So, the addition in related to contravening of section 56(2) is not justified. Accordingly, we set aside the appeal order. Addition u/s 68 - non-furnishing of the identity and PAN of the creditors - HELD THAT - The assessee was unable to substantiate its claim before the revenue authorities. Accordingly, we remit back the matter to the file of the CIT(A) for adjudication afresh.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues presented and considered in this judgment are:

• Whether the addition of share premium under Section 56(2)(viib) of the Income Tax Act was justified.
• Whether the valuation of shares using the Discounted Free Cash Flow (DCF) method was correctly applied and whether the Assessing Officer (AO) had the authority to reject it.
• Whether the addition of Rs. 15,00,000 as unexplained credit under Section 68 was justified.
• Whether the disallowance of Rs. 4,72,088 under Section 40A(2)(b) for depreciation on non-existent assets was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition under Section 56(2)(viib)

• Relevant Legal Framework and Precedents: Section 56(2)(viib) of the Income Tax Act deals with the taxation of share premium received by a company that exceeds the fair market value of the shares. Rule 11UA of the Income Tax Rules provides methods for determining the fair market value, including the NAV and DCF methods.
• Court's Interpretation and Reasoning: The court examined whether the DCF method used by the assessee was appropriate and whether the AO had the authority to substitute his own valuation. The court referenced precedents, including the ITAT Mumbai Bench decision in Crown Chemicals Pvt. Ltd., which stated that the AO does not have the power to substitute his own valuation when the DCF method is used.
• Key Evidence and Findings: The assessee provided a valuation report using the DCF method, valuing shares at Rs. 158.93 per share, while they were issued at Rs. 100 per share. The AO rejected this valuation, claiming it was disproportionate given the company's financial position.
• Application of Law to Facts: The court found that the assessee's valuation method was in line with Rule 11UA, and the AO's rejection lacked material basis. The addition under Section 56(2)(viib) was not justified as the shares were issued at a value lower than the DCF valuation.
• Treatment of Competing Arguments: The court considered the AO's argument that the premium was excessive but sided with the assessee, emphasizing the validity of the DCF method and the lack of authority for the AO to alter it.
• Conclusions: The court set aside the addition of Rs. 1,71,22,500 under Section 56(2)(viib), allowing the assessee's appeal on this ground.

Issue 2: Addition under Section 68

• Relevant Legal Framework and Precedents: Section 68 addresses unexplained cash credits, requiring the assessee to prove the identity, creditworthiness, and genuineness of the transactions.
• Court's Interpretation and Reasoning: The court noted the lack of evidence provided by the assessee to substantiate the identity and creditworthiness of the creditors.
• Key Evidence and Findings: The assessee failed to provide PAN and address details for the creditors, leading to the AO's addition of Rs. 15,00,000 as unexplained credit.
• Application of Law to Facts: The court found that the assessee did not meet the burden of proof required under Section 68, justifying the AO's addition.
• Treatment of Competing Arguments: The assessee's arguments were insufficient to counter the AO's findings due to lack of evidence.
• Conclusions: The court remitted the issue back to the CIT(A) for fresh adjudication, allowing the appeal partly for statistical purposes.

Issue 3: Disallowance under Section 40A(2)(b)

• Relevant Legal Framework and Precedents: Section 40A(2)(b) relates to disallowances for payments to related parties that are excessive or unreasonable.
• Court's Interpretation and Reasoning: The court noted the lack of evidence for the existence of assets on which depreciation was claimed.
• Key Evidence and Findings: The assessee claimed depreciation on non-existent assets, which the AO disallowed.
• Application of Law to Facts: The court found the disallowance justified due to the absence of evidence supporting the existence of the assets.
• Treatment of Competing Arguments: The court dismissed the assessee's arguments due to lack of substantiation.
• Conclusions: The court remitted the issue back to the CIT(A) for fresh adjudication, allowing the appeal partly for statistical purposes.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "Even the prescribed Rule 11UA(2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the Assessing Officer to tinker with such valuation."
• Core Principles Established: The court reinforced the principle that the AO must adhere to the valuation method chosen by the assessee under Rule 11UA unless there is clear evidence of perversity or incorrect data.
• Final Determinations on Each Issue: The appeal regarding Section 56(2)(viib) was allowed, with the addition set aside. The issues under Sections 68 and 40A(2)(b) were remitted back for fresh adjudication.

The judgment highlights the importance of adhering to prescribed valuation methods and the burden of proof on the assessee to substantiate claims regarding unexplained credits and related party transactions.