2024 (5) TMI 585 - AT - Income Tax

Addition u/s 56(2)(viia) - purchase of shares at price more than its fair market value - HELD THAT - The value-weightage of the assets belonging to the entity issuing capital has to be duly incorporated and the appellant cannot hide behind the facade of some ns which are themselves subject to litigation and some kind of loan restructuring. The hypothecation of prime real estate assets in this case does not obviate the robustness of asset hence financial heft of the company. In such a scenario the prime real estate as in the case of the appellant has to be weighed in to determine proper share valuation. Such shares will not be at throw away prices by any entity just like that unless there is some mechanism of consideration. This is more so when the appellant has not entered into a distress fransaction also though the same is not recognized in the extant schema of section 56(2) read with rule 11UA. Thus the AO was well within his rights to question the valuation reports as they were not in line with the method of valuation adopted basis the assets valuation owned by the concerned entity as detailed above. The addition by the AO on share issued valuation basis on account of share premium component is confirmed as upheld based on the position of the law and relevant rule in this regard on basis of recognition of the receipts in particular specific head. Appeal of assessee dismissed.

Summary

Issues Involved:
1. Addition u/s 56(2)(viia) for investment in shares of M/s Gain E. Commerce Pvt. Ltd.
2. Addition u/s 56(2)(viia) for investment in shares of M/s Kanti Commercial Pvt. Ltd.
3. Addition of Sundry Debtors/Investments as unexplained investments.
4. Scope of Limited Scrutiny.

Summary:

1. Addition u/s 56(2)(viia) for investment in shares of M/s Gain E. Commerce Pvt. Ltd.:
The assessee purchased 50,000 shares of Gain E Commerce Pvt Ltd at Rs 950 per share, while the fair market value was Rs 966.50 per share. The difference of Rs 8,25,000/- was added by the AO u/s 56(2)(viia) of the Act. The CIT(A) upheld the AO's action, stating that the provisions of Section 56(2)(viia) were correctly applied as the shares were received at inadequate consideration.

2. Addition u/s 56(2)(viia) for investment in shares of M/s Kanti Commercial Pvt. Ltd.:
The assessee purchased 18,000 shares of Kanti Commercial Pvt Ltd at Rs 3000 per share, while the fair market value was Rs 3113.30 per share. The difference of Rs 20,39,400/- was added by the AO u/s 56(2)(viia) of the Act. The CIT(A) confirmed this addition, agreeing with the AO's valuation based on the balance sheet and rejecting the assessee's valuation report.

3. Addition of Sundry Debtors/Investments as unexplained investments:
The AO treated sundry debtors of Rs 98,56,165/- as fictitious, based on the assessment for AY 2014-15 where the assessee was found to be a mere name lender. The CIT(A) upheld this addition, noting the absence of basic commercial activities and expenses commensurate with the business, indicating sham transactions.

4. Scope of Limited Scrutiny:
The assessee challenged the expansion of the scope of limited scrutiny. The CIT(A) dismissed this ground, stating that the AO sought replies only pertaining to the issues as per the scrutiny selection criteria and it was necessary to reach a lawful conclusion.

Conclusion:
The ITAT upheld the CIT(A)'s order, dismissing the appeal of the assessee on all grounds. The CIT(A) had provided detailed findings and relied on various case laws, which were not controverted by the assessee. The additions made by the AO u/s 56(2)(viia) and for unexplained investments were confirmed. The appeal was dismissed in its entirety.