2025 (1) TMI 94 - AT - Income Tax

Addition u/s 68 - bogus share transactions - share premium received by the assessee - onus to prove - HELD THAT - As sufficient evidences were filed by the assessee with regard to establishing the identity of the investors, their credit worthiness and ultimately the genuineness of the transaction. In case of issues like investments through preferential shares, the initial onus is on the AO to allege that the transaction is somehow suspicious and for that, some independent inquiry should have been made rather than to point out shortcomings or lacunae alone in whatever evidences filed by the assessee to establish the genuineness of the transaction. It is pertinent to mention that the fact that certain share capital were received from PI Opportunities Fund-I and PI Opportunities Fund-II being SEBI registered venture capital funds. AO himself had deleted the addition and same go to show that the investors had taken a prudent call. Then Investors included Mrs. Renu Munjal of Hero Group which is the largest two-wheeler manufacturer of India, Samvardhana Motherson International Ltd. is an multinational manufacturer of automotive components with the market capitalization of over Rs. 1 crore. Makesense Technologies Ltd. is a company incorporated in 2010 which has professionals on board who include promoters of prominent recruitment portal, Naukri.com. Thus to doubt their investments in assessee company to be not genuine required, more than suspicion. Valuation of the shares - Valuation has been done by Resurgent India Ltd., a category-1 SEBI registered merchant banker and there was no effort of the Revenue authorities to cite any deficiency or discrepancy except for questioning the same on the basis of the fact that the report was prepared on the information provided by the assessee company. The law is now almost settled that the assessee s choice of method of valuation of shares and the valuation report prepared by merchant banker cannot be disturbed merely on suspicion or by pointing out lack of data. Directions of the ld.CIT(A) for making additions in regard to premium received from PI Opportunities Fund-I and PI Opportunities Fund-II on the basis that the assessee company is not a venture capital undertaking, we are inclined to accept the contentions of the ld. counsel that under the provisions of section 56(2)(viib) of the Act, the term 'venture capital undertaking' has been defined in clause (b) of the Explanation to said section as being defined in section 10(23FB). The assessee, during the relevant assessment year, was a domestic company, not listed on any stock exchange in India and engaged in the business of providing insurance related services. Thus, the assessee qualified to be a 'venture capital undertaking' in terms of the provisions of section 10(23FB), implying thereby that the provisions of section 56(2) (viib) of the Act were not applicable in the present matter qua receipt of share capital/premium from SEBI registered Venture Capital funds. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in this judgment are:

• Whether the additions made under section 68 of the Income Tax Act, 1961, on account of share premium received by the assessee, are justified.
• Whether the provisions of section 56(2)(viib) of the Act apply to the share premium received by the assessee and the correctness of the valuation method used.
• Whether the assessee qualifies as a 'venture capital undertaking' and is thus exempt from certain provisions under section 56(2)(viib).
• Whether the disallowance of Employee Stock Option Plan (ESOP) expenses as capital in nature is justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Additions under Section 68

• Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act deals with unexplained credit entries in the books of accounts. The burden of proof lies on the assessee to explain the nature and source of such credits.
• Court's Interpretation and Reasoning: The court emphasized the need for the assessee to provide adequate evidence to establish the identity, genuineness, and creditworthiness of the investors.
• Key Evidence and Findings: The assessee provided PAN, addresses, and other documentation of investors but failed to provide bank statements and financials of the investors, which the court found essential.
• Application of Law to Facts: The court held that the assessee did not discharge its burden under section 68, as it failed to prove the creditworthiness of the investors.
• Treatment of Competing Arguments: The court rejected the assessee's argument that the evidence provided was sufficient, emphasizing the necessity of bank statements and financials.
• Conclusions: The court upheld the additions made under section 68, confirming the lack of evidence to prove the creditworthiness of the investors.

Issue 2: Application of Section 56(2)(viib) and Valuation Method

• Relevant Legal Framework and Precedents: Section 56(2)(viib) deals with the taxation of share premium received by a company in excess of the fair market value of the shares.
• Court's Interpretation and Reasoning: The court scrutinized the Discounted Cash Flow (DCF) method used by the assessee for share valuation, which was rejected by the tax authorities.
• Key Evidence and Findings: The valuation report was based on projections provided by the assessee, which the court found unreliable due to significant deviations from actual performance.
• Application of Law to Facts: The court directed the Assessing Officer (AO) to use the Net Asset Value (NAV) method for valuation instead of the DCF method.
• Treatment of Competing Arguments: The court acknowledged the assessee's contention regarding the valuation method but found the DCF method unsupported by reliable data.
• Conclusions: The court ordered a reassessment of the share value using the NAV method and directed appropriate additions under section 56(2)(viib).

Issue 3: Qualification as a Venture Capital Undertaking

• Relevant Legal Framework and Precedents: The definition of a 'venture capital undertaking' under section 10(23FB) and its implications on section 56(2)(viib).
• Court's Interpretation and Reasoning: The court examined whether the assessee met the criteria to be considered a venture capital undertaking.
• Key Evidence and Findings: The court found that the assessee was not a venture capital undertaking as per the statutory definition.
• Application of Law to Facts: The court concluded that the assessee did not qualify for exemption under section 56(2)(viib) as a venture capital undertaking.
• Treatment of Competing Arguments: The court rejected the assessee's claim of exemption, emphasizing the statutory definitions and requirements.
• Conclusions: The court upheld the applicability of section 56(2)(viib) to the assessee.

Issue 4: Disallowance of ESOP Expenses

• Relevant Legal Framework and Precedents: The treatment of ESOP expenses as capital or revenue in nature.
• Court's Interpretation and Reasoning: The court examined the nature of ESOP expenses and their treatment under tax laws.
• Key Evidence and Findings: The court found that the expenses were capital in nature and thus not allowable as a deduction.
• Application of Law to Facts: The court upheld the disallowance of ESOP expenses.
• Treatment of Competing Arguments: The court found no merit in the assessee's argument for treating ESOP expenses as revenue expenses.
• Conclusions: The court confirmed the disallowance of ESOP expenses as capital in nature.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The assessee has not discharged the onus to establish the credit worthiness of the resident investors."
• Core Principles Established: The necessity of providing comprehensive evidence, including bank statements and financials, to prove the creditworthiness of investors under section 68.
• Final Determinations on Each Issue:
  
  • Additions under section 68 were upheld due to insufficient evidence of creditworthiness.
  • The DCF valuation method was rejected, and the NAV method was directed for reassessment under section 56(2)(viib).
  • The assessee was not considered a venture capital undertaking, and thus, section 56(2)(viib) applied.
  • ESOP expenses were confirmed as capital in nature and disallowed.