2024 (9) TMI 1192 - AT - Income Tax

Addition u/s 68 - No documentary evidence for establishing identity, creditworthiness of the investors and the genuineness of the transaction provided - addition of the entire share premium and share capital - CIT(A ) upheld the additions made by AO and enhanced income of the assessee u/s 251(1) read with 56(2)(viib) - HELD THAT - Enhancement made by the CIT(A) u/s 251(1) r.w.s. 56(2) (viib) of the Act, the Ld. CIT(A) has not accepted the Valuation Report submitted by the Assessee as per Rule 11UA of the Rules. During the assessment proceedings the assessees have submitted the Valuation Report duly signed by the auditor by following NAV/DCF Method as required under Rule 11UA(2) of the Rules. The Valuation Reports are produced before us along with the paper book. Both the lower authorities have failed to follow the Rule 11UA of the Act, as per which the option to choose the valuation of the shares lies with the assessee and the same is binding on the Income Tax Authorities. Assessees having the choice to opt for one of the methods enumerated in the above provision and the appellant has chosen to opt for clause (b) in most of the abovementioned cases for valuation of unquoted equity shares and based on the same, the value of the share had been computed. Accordingly, the new shares were issued and allotted to the investors during the captioned assessment year. During the assessment proceedings, computation of Fair Market Value of shares as per Rule 11UA(2) was submitted before the Ld.AO to justify that the shares issued by the appellants were at Fair Market Value (FMV) which was computed in accordance with Rule 11UA(2) of the Income Tax Rules, 1962. But the AO has not given any reasoning for rejecting the valuation of shares nor have they furnished any material to the contrary which justified the rejection of the valuation of shares. When the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same. It has been hitherto an uncontroverted legal position that where a statute requires to do a certain thing in a certain way, the thing must be done in that way only. Other methods or modes of performance are impliedly and necessarily forbidden. The aforesaid settled legal proposition is based on legal maxim Expressio unis est exclusio alterius , meaning thereby that if a statute provides for a thing to be done in particular manner, then it has to be done in that manner and in no other and following other course is not permissible. The assessees have issued the shares at fair market value computed in accordance of the rules and no err has found in the method applied by the assessees The Ld CIT(A) has enhanced the value u/s 56(2) of the Act purely on the conjecture basis. The assessees have filed the document to prove the identity, creditworthiness and genuineness of the transaction of each shareholder and discharged their burden as requirement u/s 68 of the Act. The addition of income made u/s 68 of the Act as well as the enhancement of income u/s 56(2)(viib) of the Act are liable to be deleted and deleted accordingly. Assessee appeal allowed.

Summary

Issues Involved:
1. Addition under Section 68 of the Income Tax Act, 1961.
2. Enhancement of income under Section 251(1) read with Section 56(2)(viib) of the Income Tax Act, 1961.
3. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

1. Addition under Section 68 of the Income Tax Act, 1961:
The appellant challenged the addition of Rs. 95,00,000/- under Section 68 of the Income Tax Act, 1961, which was confirmed by the CIT(A). The Assessing Officer (AO) had added the entire share premium and share capital to the income of the assessee company, treating it as unexplained income under Section 68. The assessees provided names, addresses, PAN numbers of the investors, and entries in the ROC website, along with various documents to prove the identity, creditworthiness of the investors, and genuineness of the transaction. The Tribunal found that the assessees had furnished all necessary documents, including the certificate of incorporation, MOA/AOA, auditor's report, balance sheet, profit and loss account, bank statements, and documents related to investor companies. The Tribunal held that the AO and CIT(A) had erred in not considering these documents and not making further inquiries. The Tribunal referred to the Hon'ble Supreme Court's decision in CIT Vs. Lovely Export Pvt. Ltd., which held that if the share capital money is received from alleged bogus shareholders whose names are given to the AO, the Department is free to proceed to reopen their individual assessments but cannot regard it as undisclosed income of the assessee company. The Tribunal concluded that the addition under Section 68 was not justified and deleted it.

2. Enhancement of Income under Section 251(1) read with Section 56(2)(viib) of the Income Tax Act, 1961:
The CIT(A) had enhanced the income of the appellant by Rs. 76,00,000/- under Section 251(1) read with Section 56(2)(viib) on a protective basis, rejecting the valuation of shares as determined as per NAV method provided under Rule 11UA(2)(a) of the Income Tax Rules, 1962. The Tribunal observed that the fair market value of shares has to be determined by applying the methodology provided under Rule 11UA, and the assessees had chosen the DCF method, which is one of the prescribed methods. The Tribunal referred to several judicial pronouncements, including the Coordinate Bench's decision in Cinestan Entertainment Pvt. Ltd. Vs. ITO, which held that the AO cannot reject the valuation done by the assessee on its own whims and that the valuation done by a prescribed expert as per the prescribed method should be accepted. The Tribunal found that the CIT(A) had not provided a mandatory opportunity of hearing to the assessee and had not considered the valuation report submitted by the assessee. The Tribunal concluded that the enhancement of income under Section 56(2)(viib) was not justified and set it aside.

3. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act, 1961:
The CIT(A) had initiated penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961. The Tribunal, having found that the additions under Section 68 and the enhancement under Section 56(2)(viib) were not justified, impliedly indicated that the initiation of penalty proceedings under Section 271(1)(c) was also not sustainable. The Tribunal did not explicitly address this issue in detail, but the deletion of the additions and enhancement would naturally lead to the conclusion that the penalty proceedings under Section 271(1)(c) could not stand.

Conclusion:
The Tribunal allowed the appeals of the assessees, deleting the addition under Section 68 and setting aside the enhancement of income under Section 251(1) read with Section 56(2)(viib). The initiation of penalty proceedings under Section 271(1)(c) was also impliedly not sustained due to the deletion of the primary additions. The Tribunal emphasized the importance of following the prescribed methods for valuation and the necessity for the AO to make further inquiries when the assessee has provided substantial documentary evidence.