2023 (12) TMI 1091 - AT - Income Tax

Addition u/s 56(2)(viib) read with Rule 11UA - assessee issued shares at the face value of Rs. 10 with the premium at 990.00 per share - FMV determination - CIT(A) deleted the above additions - HELD THAT - As per section 56(2) (viib) of the Act, the amount exceeding the Fair Market Value of shares has to be treated as income. As per the Explanation, the Fair Market Value shall be as per the value determined in accordance with the method prescribed or as substantiated by the company based on the value of the shares, goodwill etc. whichever is higher. The working provided as per Rule 110A(2) has 2 limbs either FMV of unquoted equity share as per formula (A-L) (PV) / (PE) or as p the FMV worked out for the unquoted shares determined by merchant banker as per discount free cash flow method. It is at the option assessee to choose between two. In the present case, the assessee opted for the second option for working out the fair market value shares duty supported by report of a Chartered Accountant. As also observed by the CIT(A) that AO has not provided any sound reasoning or not brought on record any material to counter the argument or to negate the submissions of the appellant. He has only taken the book value for the fair market value, though it is at the option of the appellant. Since appellant has adopted the higher value, therefore, it cannot be denied the working without any reasoning. Considering the factual position in this case and valuation report etc. It has been rightly held by the Ld. CIT(A) that that there is no case by the AO to take the FMV @ Rs. 25/- per share, on the basis of book value, disregarding the projected value, especially when it is provided in the Act that fair market value can be taken by the assessee to its option and at a higher amount. CIT(A) committed no error in deleting the addition. Accordingly, the Ground No.1 of the Revenue is dismissed. Addition u/s 68 after making addition u/s 56(2) - CIT(A) deleted addition - HELD THAT - AO conducted the probe regarding share application money and the assessee provided due confirmation from each of the parties along with ITR which has been neither doubted nor proved as bogus. The assessee also provided the share application Form and its allotment with ROC. As found by the Ld. CIT(A) that the out of total share application money received by the assessee during the year under consideration, the AO made addition u/s 56 (2)(viib) for a sizable portion and for the balance amount the provisions of Section 68 has been invoked. When the AO considers the very same applicants u/s 56(2)(viib), then the AO cannot question their identity, creditworthiness and the genuineness of the transaction, that too when the assessee has satisfied the initial burden cast upon him u/s 68 of the Act. In our considered opinion, CIT(A) has rightly deleted the addition made by the AO u/s 68 of the Act with requires no interference at the hands of the Tribunal. Accordingly, ground No.2 of the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of the addition of Rs. 4,40,14,425/- made by the AO under Section 56(2)(viib) read with Rule 11UA.
2. Deletion of the addition of Rs. 11,28,575/- made by the AO under Section 68.

Issue 1: Deletion of Addition under Section 56(2)(viib) read with Rule 11UA

The assessee issued 45,143 shares at a premium of Rs. 990 per share during the Financial Year 2012-13. The AO questioned the justification of this premium and, after examining the balance sheets and profit & loss accounts for subsequent years, concluded that the premium was not justifiable. The AO calculated the fair market value of the shares at Rs. 25 per share based on the book value, resulting in an addition of Rs. 4,40,14,425/- under Section 56(2)(viib).

The Ld. CIT(A) deleted this addition, noting that the assessee's valuation was supported by a Chartered Accountant's report using the Discounted Cash Flow (DCF) Method, which is permissible under the law. The Tribunal upheld the Ld. CIT(A)'s decision, stating that the AO did not provide sound reasoning or material to counter the assessee's valuation. The Tribunal emphasized that the higher value as per the DCF Method, chosen by the assessee, was valid and should not be disregarded without proper justification. Thus, the Tribunal dismissed Ground No. 1 of the Revenue.

Issue 2: Deletion of Addition under Section 68

The AO made an addition of Rs. 11,28,575/- under Section 68, claiming that the assessee failed to prove the creditworthiness and genuineness of the share application money received. The AO cited various judicial pronouncements to support the addition, arguing that the assessee did not discharge its onus of proving the identity and creditworthiness of the investors.

The Ld. CIT(A) deleted this addition, noting that the assessee provided confirmations, ITRs, and share application forms, which were not doubted by the AO. The CIT(A) also observed that the AO accepted a sizable portion of the share application money under Section 56(2)(viib) without questioning the identity and creditworthiness of the investors. The Tribunal agreed with the CIT(A), stating that the AO's actions were inconsistent and that the assessee had satisfied the initial burden of proof under Section 68. Consequently, the Tribunal dismissed Ground No. 2 of the Revenue.

Conclusion

The Tribunal dismissed the appeal filed by the Revenue, upholding the Ld. CIT(A)'s deletion of the additions under both Sections 56(2)(viib) and 68. The order was pronounced in open Court on 22nd December, 2023.