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2022 (9) TMI 96 - AT - Income TaxAddition u/s 68 - assessee has failed to offer satisfactory explanations with regard to nature and source of amounts received by the assessee - specific method for valuing preference shares - assessee has not substantiated share premium amount - addition alternatively u/s 56(2)(viib) - HELD THAT - AO has made detailed enquiries with MFPL, being the subscriber of the preference shares and it has duly replied to all the queries posed by the AO - it has also furnished various evidences available with it. We notice that the AO did not disprove the submissions and evidences so furnished by MFPL. It is well established proposition of law that the initial onus to prove the cash credit is placed upon the assessee, i.e., the assessee has to prove three main ingredients, viz., the identity of the creditor, credit worthiness of the creditor and the genuineness of the creditor. CIT(A) has given a specific finding that the assessee has discharged the initial onus placed upon the assessee u/s 68 of the Act - AO has failed to disprove the onus discharged by the assessee, in which case, the AO could not have made the addition u/s 68 of the Act. Accordingly, we are of the view that the Ld CIT(A) was justified in deleting the addition made u/s 68 of the Act. Addition made u/s 56(2)(viib) - The provisions of Rule 11UA(1)(c) do not prescribe any specific method for valuing preference shares. The valuation of preference shares under Discounted Free cash flow method is one of the recognized methods and there is nothing in the provisions that the said method should not be used. Hence we are of the view that the Ld CIT(A) was justified in deleting the addition made u/s 56(2)(viib) of the Act. Accordingly, we confirm the order passed by Ld CIT(A).
Issues Involved:
1. Addition under Section 68 of the Income Tax Act. 2. Addition under Section 56(2)(viib) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Addition under Section 68 of the Income Tax Act: The Revenue challenged the deletion of an addition of Rs. 8.71 crores made by the Assessing Officer (AO) under Section 68 of the Income Tax Act. The assessee, engaged in real estate, issued 348,400 12% redeemable preference shares at Rs. 250/- per share, aggregating Rs. 8.71 crores. The AO questioned the nature and source of this amount, despite the assessee providing various supporting documents, including a valuation report and audited accounts from the subscriber, M/s. Magi Fin Stock Pvt. Ltd. (MFPL). The AO's reasons for rejecting the explanations included: - Different business engagements and locations of the assessee and subscriber. - Low turnover and profit of MFPL. - The timeline discrepancies regarding the resolution and valuation report. - Lack of due diligence by MFPL before investing. The AO assessed the amount as unexplained cash credit under Section 68, relying on precedents like CIT Vs. Durga Prasad More and Sumati Dayal Vs. CIT. The Learned CIT(A) deleted the addition, noting that the assessee had adequately discharged the burden under Section 68 by providing sufficient evidence of the transaction's genuineness, the identity, and creditworthiness of the subscriber. The CIT(A) referred to various case laws, including CIT-vs- Orchid Industries Pvt. Ltd., to support the decision. The tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not disprove the evidence provided by MFPL and that the initial onus to prove the cash credit was adequately discharged by the assessee. 2. Addition under Section 56(2)(viib) of the Income Tax Act: The AO alternatively assessed the amount under Section 56(2)(viib), arguing that the valuation method used by the Chartered Accountant (Discounted Free Cash Flow method) was not prescribed for valuing preference shares under Rule 11UA. The AO contended that the share premium amount was not substantiated. The CIT(A) disagreed, stating that Rule 11UA(1)(c) does not prescribe a specific method for valuing preference shares and that the Discounted Free Cash Flow method is a recognized method. The CIT(A) found the valuation report appropriate and held that the deeming provisions of Section 56(2)(viib) were not applicable. The tribunal confirmed the CIT(A)'s order, noting that the provisions of Rule 11UA(1)(c) allow for the use of the Discounted Free Cash Flow method for valuing preference shares and that the method used by the assessee was valid. Conclusion: The tribunal dismissed the Revenue's appeal, confirming that the additions under Sections 68 and 56(2)(viib) were rightly deleted by the CIT(A). The decision emphasized the adequacy of the evidence provided by the assessee and the appropriateness of the valuation method used for the preference shares. The order was pronounced in the open court on 15.07.2022.
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