2020 (12) TMI 1105 - AT - Income Tax

Scope of limited scrutiny - case of the assessee was selected for Limited Scrutiny and later on converted to Full Scrutiny without according an opportunity to the assessee and therefore in violation of principle of natural justice - additions of unsecured loan from the Directors and their relatives - HELD THAT - In the present case, the day on which case was converted into full scrutiny i.e. on 21.12.2016 the ld. AO on the very next day passed the order of assessment by making the addition which were beyond the scope of limited scrutiny. Further looking at the notices dated 3.05.2016 under Section 142(1) of the Act; notice dated 26.06.2016 u/s 142(1); notice dated 21.07.2016 u/s 142(1) and further notice dated 15.09.2016 u/s 142(1), it is apparent that AO started making roving enquiries on the issue which was not the subject matter of limited scrutiny. He even framed draft assessment order and then sought approval of Pr CIT for conversion in to Full scrutiny from Limited scrutiny. Non-adherence to CBDT instruction which are binding on the AO makes the order of the ld. AO illegal and without jurisdiction . Assessing Officer is duty bound to follow the instructions issued by the CBDT. Therefore, the CBDT circulars not followed by the ld. AO are not acceptable for making the addition which are in violation of that circular. In the present case only the additions of unsecured loan from the Directors and their relatives were not covered in the limited scrutiny aspect. Addition accordingly as well as loan are deserved to be deleted on this ground itself. Addition u/s 68 - Loan was taken from the Director of the company and same were supported by the confirmation, Income Tax Return and details of the source of funds available with the Director evidenced from the pass book. Assessing Officer without making any enquiry disbelieved the submission made by the assessee. In view of this, it is apparent that even on the merits assessee has clearly established the identity, creditworthiness and genuineness of the loans. Assessee in this case has discharged the basic onus cast up on it by producing the confirmation, Income Tax Returns, bank statements, details of source of funds in case of each of the depositors. The ld AO should have thrown back onus on assessee by making inquiries and proving otherwise. This has not been done. Thus the addition made as such on merits is also not sustainable. Addition made by the ld. AO and confirmed by the ld. CIT (Appeals) under Section 68 of the Act deserves to be deleted for the reason that ( 1) it was not part of reasons for limited scrutiny, ( 2) no enquiries made by the Assessing Officer on the basic onus discharged by assessee of loans. and (3) on the very next day of conversion of case from limited scrutiny to complete scrutiny assessment order is passed, (4) Framing of the draft assessment order and sent to PR CIT along with seeking approval for conversion of limited scrutiny case to complete scrutiny. Addition u/s 56 - Fair market value of the share on the basis of discounted cash flow method - Limited scrutiny for verification of large share premium received during the year survives as it was part of the reasons for which the case of the assessee was selected for limited scrutiny - On careful examination of Ru le 11UA of the Income tax Rules, 1962, the assessee can value the shares for determining its fair market value of unquoted equity share either at the book value of the assets as per the prescribed formula or as per the discounted free cash flow method. The assessee has justified the valuation of shares by adopting discounted free cash flow method and such method is one of the acceptable methods as per Rule 11UA and the ld. CIT (Appeals) did not find any fault in the same. AO was also supplied with the above evidences and did not comment against the same. Unless the valuation made by the assessee applying Discounted cash flow method is not found fault with by pointing out deficiencies and inadequacies, same cannot be rejected at threshold. In view of this, we do not find any merit in the addition. In view of this the addition made under Section 56(2)(viib) is devoid of any merit.

Summary

Issues Involved:

1. Validity of assessment order passed by AO contrary to Instruction No. 5/2016 and Instruction No. 20/2015.
2. Addition on account of share premium received under Section 56(2)(viib) of the Income Tax Act.
3. Addition on account of unsecured loans received from various parties.
4. Admission of additional evidence under Rule 46A of the Income Tax Rules.

Issue-wise Detailed Analysis:

1. Validity of Assessment Order:

The assessee challenged the action of the Assessing Officer (AO) in converting the case from limited scrutiny to full scrutiny without proper procedure and opportunity, alleging a violation of Instruction No. 5/2016 and Instruction No. 20/2015. The case was initially selected for limited scrutiny to verify large share premium received. The AO sought approval for complete scrutiny on 21st December 2016 and passed the assessment order on the next day, 22nd December 2016, adding ?1,04,85,120/- not covered under the limited scrutiny criteria. The Tribunal found that the AO did not follow the CBDT instructions, which are binding, making the order illegal and without jurisdiction. The Tribunal cited various judgments supporting the binding nature of CBDT instructions and concluded that the additions made were unsustainable.

2. Addition on Account of Share Premium:

The AO added ?34,05,360/- to the assessee's income, holding that the fair market value of shares was ?14.46 per share, whereas the assessee issued shares at a premium of ?45 per share. The assessee justified the premium based on a Chartered Accountant's valuation report using the Discounted Cash Flow (DCF) method, determining the fair market value at ?55 per share. The Tribunal noted that Rule 11UA of the Income Tax Rules allows valuation by either book value or DCF method. Since the assessee's valuation using the DCF method was not found faulty, the Tribunal ruled that the addition under Section 56(2)(viib) was devoid of merit and unsustainable.

3. Addition on Account of Unsecured Loans:

The AO made additions for unsecured loans received from various individuals totaling ?1,04,85,120/-. The assessee provided confirmations, Income Tax Returns, bank statements, and details of the sources of funds for each loan. The Tribunal found that the assessee had discharged its onus by providing sufficient evidence to establish the identity, creditworthiness, and genuineness of the transactions. The AO did not conduct further inquiries to disprove the assessee's claims. Hence, the Tribunal concluded that the additions were not sustainable on merits.

4. Admission of Additional Evidence:

The assessee argued that the CIT(A) erred in not accepting crucial additional evidence under Rule 46A, which was necessary for a fair adjudication. The Tribunal noted that the additional evidence was relevant and should have been considered to uphold the principles of natural justice. The failure to admit this evidence was deemed a procedural lapse.

Conclusion:

The Tribunal allowed the appeal partly, deleting the additions related to unsecured loans and share premium. The Tribunal emphasized adherence to CBDT instructions and proper procedural conduct by the AO. The Tribunal's decision underscored the importance of following due process and considering all relevant evidence. The appeal was partly allowed, providing relief to the assessee.