2025 (3) TMI 1042 - AT - Income Tax

Addition u/s 56(2)(viib) - whether the valuation of shares at a premium of Rs. 90/- per share is representative of the fair market value? - HELD THAT - DCF method could be applied for valuation purposes for the assessments pending at that time. Besides the Circular stated that Rule would apply from the date of its publication. This assessment was pending on that date. The benefit of the DCF method of valuation was thus even otherwise available to the Assessee as per the Circular. Rule 11UA(2)(b) provides for the acceptance of the valuation made by Chartered Accountant as an acceptable mode for determining the fair market value of shares. Assessee has filed a report of CA Sh. V.P. Tyagi which certifies the fair market value higher than Rs. 100/- at Rs. 106/- per share. We notice that the attempt of the AO to locate and establish discrepancies or errors in that report of the Chartered Accountant is not based on any acceptable principle or approved standards. The discrepancies as pointed out by the AO are not relevant in the context of capital restructuring in the case of group companies. Valuation by itself is a specialized exercise which can be disputed only on the basis of the findings of another expert as recognized in law for that purpose. The valuation as proposed by the DCF method cannot therefore be faulted. There is no over valuation of shares over the fair market value. Accordingly the invocation of the provisions of Sec.56(2)(viib) of the Act by the AO being erroneous cannot be upheld. Addition u/s 68 - addition of share capital amount as collected by way of premium from the Subscribing Companies - We are of the view that the proviso provides for the scrutiny and assessment of the funds of the immediate subscribing Company. The proviso does not extend that power to scrutinise the financial capacity of the secondary source which has provided funds to the Subscribing Companies. Also the fact that the investments as made by the Subscribing Companies were out of funds which they possessed at the beginning of the year and no fresh infusion of funds by the Subscribing Companies during the assessment year under consideration and the source of funds are all proceeds of investments made in earlier years in the course of business and have been recalled/encashed was corroborated by the Subscribing Companies in his statement recorded on oath. Therefore with these facts remaining uncontroverted no addition could have been even otherwise validly made u/s 68 of the Act by the AO. invocation of the proviso to Sec.68 of the Act by the AO was therefore erroneous and not justified. The basic ingredients of Sec.68 of the Act of identity creditworthiness and genuineness of the transactions are in the circumstances of the case apparently beyond doubt. Disallowance made u/s. 14A r/w rule 8D - HELD THAT - It is the finding of the Assessing Officer that the Assessee has made fresh investment during the year under consideration. It is also the finding that the assessee sold shares out of the opening investments. Therefore the AO held that the assessee might have incurred expenditure for earning dividend income. These findings were not rebutted with evidences by the Assessee before us and only asserted that no expenditure was incurred to earn dividend income. No good reason to reverse the findings of the authorities below. Hence the disallowance made by the AO U/s 14A r.w. Rule 8D2(iii).

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the invocation of Section 56(2)(viib) of the Income Tax Act, 1961, concerning the share premium received by the assessee being in excess of the fair market value of the shares, was justified.
• Whether the application of Section 68 of the Act, treating the share application/premium received as undisclosed income, was appropriate.
• Whether the disallowance made under Section 14A read with Rule 8D of the Income Tax Rules, 1962, was valid.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Invocation of Section 56(2)(viib)

• Relevant legal framework and precedents: Section 56(2)(viib) deals with the taxation of share premium received in excess of the fair market value. The fair market value can be determined using the Net Asset Value (NAV) method or the Discounted Cash Flow (DCF) method as per Rule 11UA of the Income Tax Rules.
• Court's interpretation and reasoning: The Tribunal accepted the assessee's argument that the DCF method could be applied as the assessment was pending when the rule came into effect. The Tribunal noted that the DCF method was a valid option for determining fair market value, and the valuation report by the Chartered Accountant was binding.
• Key evidence and findings: The assessee provided a valuation report by a Chartered Accountant, which indicated a fair market value of Rs. 106 per share. The AO's objections to the valuation were not based on any accepted principle or approved standards.
• Application of law to facts: The Tribunal found that the AO's rejection of the DCF method and the valuation report was erroneous. The valuation was in accordance with the law, and there was no overvaluation of shares.
• Treatment of competing arguments: The Tribunal dismissed the AO's objections regarding the valuation method and upheld the assessee's use of the DCF method.
• Conclusions: The addition made under Section 56(2)(viib) was directed to be deleted.

Issue 2: Application of 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 Tribunal held that the proviso to Section 68 allows scrutiny of the immediate subscribing company's funds but does not extend to secondary sources. The funds were from the opening balance of the subscribing companies, and there was no fresh infusion of capital.
• Key evidence and findings: The subscribing companies were existing assessees, and their tax returns were accepted without objections. The funds used were from recalled loans and deposits, not new capital.
• Application of law to facts: The Tribunal found that the AO's invocation of Section 68 was not justified as the basic ingredients of identity, creditworthiness, and genuineness were beyond doubt.
• Treatment of competing arguments: The Tribunal rejected the AO's approach of probing into the secondary sources of funds and upheld the assessee's explanation.
• Conclusions: The addition under Section 68 was directed to be deleted.

Issue 3: Disallowance under Section 14A

• Relevant legal framework and precedents: Section 14A read with Rule 8D deals with disallowance of expenditure incurred in relation to income not includible in total income.
• Court's interpretation and reasoning: The Tribunal noted that the assessee made fresh investments and sold shares, suggesting expenditure was incurred to earn dividend income.
• Key evidence and findings: The assessee did not provide evidence to rebut the findings of the authorities regarding expenditure incurred.
• Application of law to facts: The Tribunal upheld the disallowance as the assessee failed to demonstrate no expenditure was incurred.
• Treatment of competing arguments: The Tribunal found no reason to reverse the findings of the authorities below.
• Conclusions: The disallowance under Section 14A was sustained.

3. SIGNIFICANT HOLDINGS

• Core principles established: The Tribunal reinforced that procedural rules, such as the choice of valuation method, apply to pending assessments. It clarified the scope of Section 68, limiting scrutiny to the immediate source of funds.
• Final determinations on each issue: The Tribunal directed the deletion of additions under Sections 56(2)(viib) and 68, while sustaining the disallowance under Section 14A.