9911796707
TMI Blog2018 (10) TMI 1400X X X X Extracts X X X X X X X X Extracts X X X X ..... or companies before the Lord assessing officer and they are examined by Ld. assessing officer, it will conclusively decide the whole issue. Accordingly, on the request of both the parties, we set aside the first issue covering ground number one of the appeal back to the file of the Learned AO with a direction to the assessee to produce the directors of the investor companies for examination before the assessing officer. The AO is also directed to examine them on the basis of documents submitted by the assessee. Accordingly, ground number one of the appeal of assessee is allowed with above direction. Addition u/s 56(2)(viib) on protective basis - as the assessee has received share capital of ₹ 20 crores of the face value of ₹ 10 each at a premium of ₹ 1990 per share therefore, AO held that the provision of section 56(2)(viib) are attracted - Held that:- The assessee has claimed that its investment in coal mines in USA is based on certain proposals, due diligence report, coal lease agreement , agreement for transfer of lease rights, engineering service agreement, consulting agreement, approval from environment Ministry and approval of reserve Bank of India for ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was made. Consequently, income was assessed at ₹ 19,96,46,233/- and additions of ₹ 19.90 crores was also made with respect to the addition of share premium on capital on protective basis u/s 56(2)(viib) of the Act. 3. Before us, claim of the assessee is that the first addition of ₹ 20 crores cannot be made as complete information was and assessee has discharged its onus u/s 68 of the act. The ld AR took us through various evidences filed to show that the assessee has completely discharged its onus. He also referred to several judicial precedents to show that merely non-production of director of Investor Company cannot result in addition u/s 68 of the act. He also hastened to add that assessee at anytime ready to produce the directors of the investor company for verification of them by the ld AO on the documents submitted by the assessee. 4. With respect to taxability u/s 56(2)(viib) of the Act, he submitted that same is based on the valuation report of Chartered Accountant for share issue price in accordance with law. Such valuation also does not exceed the Fair market value of such shares; therefore, there is no incidence of taxation. He submitted that valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the act has been made on account of allotment made of share by the assessee. The ld CIT(A) further confirmed the addition of ₹ 19.90 crores u/s 56(2)(viib) on protective basis. These are the only two issues in the appeal. 8. Brief facts of the case shows that the assessee is a company who filed its return of income as stated above and the case of the assessee was selected for scrutiny for verification of large share premium received during the year and low income in pursuance to high loans and advances and investment in shares. 9. During the course of hearing the ld AO noted that the assessee has issued share capital of ₹ 20 crores in the name of 7 companies. Therefore, the assessee was asked to furnish certain details about the identity and creditworthiness of the shareholders and the genuineness of the transactions. The ld AO discussed the issue vide his order as under:- The assesses filed its return digitally on 25.09.2014 declaring a loss off 3,53,777/-. The case was selected for scrutiny for the verification of large share capital/premium raised by the assessee during the year, which is reproduced as under:- Large share premium received during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4/- 2.58 2 M/s. Wens Industries Ltd. 22,73,670/- 24,69,039/- 19.28 3 M/s. Airson Mercantile pvt. Ltd. 9,12,420/- 2,88,957/- 10.03 4 M/s. Makamashi Enterprises Ltd. 4,46,710/- 3,85,480/- 5.68 5 M/s. Ankita Enterprises Pvt. Ltd. 1,93,070/- 13,49,859/- 57.60 6 M/s. Moral Sales Pvt. Ltd. 3,85,970/- 1,37,414/- 5.00 7 M/s. Aspire Sales Pvt. Ltd. 1,55,125 2.5 After analysis of above abstract, keeping in view the measure to income of so called share ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92616935 RTGSSDI 1 12721469 RT DR 800 X)3 7021 18.02.201 4 S92616935 Charges for RTGS Customer Payment DR 61 6960 19.02.201 M3 3909 SD1112721469CASH CR 450003 456960 19.02.201 4 M275725 By 21-27009 Harun T raders CR 449303 906260 19.02.201 4 M9475I959 RTGS SD1112881965 RT DR 899703 6560 19.02.201 4 S94751959 Charges for RTGS Customer Payment DR 56 i 6504 24.02.201 4 S6168545 CASH HAND CHARGE 2- 18.02.2014 DR 600 5904 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ASPIRE SALE CR 3500000 10017663 24.03.2014 S71082790 RTGS SD1119397209 STR YTON EXIM INDIA PVT LTD DR 5000000 5017663 24.03.2014 S71082790 Charges for RTGS Customers Payment SD 11193972009 DR 51 5017602 24.03.2014 S71088863 RTGS SD1119398027 STR YTON EXIM INDIA PVT LTD DR 5000000 17602 24.03.2014 S71088863 Charges for RTGS Customers Payment SD 1119398027 DR 51 17541 31.03.2014 Ml 68550 KAMSON 150300 CR 500000 517541 It is pertinent to mention here that a si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate of affairs i.e. the bank statement us had enough funds to give to the assesse as share application money. The funds were received either on the same day or a day before from some other concern. d) Their ITRs Profit Loss account did not reflect on their creditworthiness to support such investment e) The total combined income of all applicants is much less than the investment of any one of them f) The entities did not have assets to justify any business activity g) The assessee did not substantiate the source of money received in any of these share applicants nor did the financials of these applicants substantiate there creditworthiness. 4, The assessee is a Private Ltd Company so it cannot go for any Public issue of shares. Therefore, all the Share Applicants in the company must have had been persons known to the Directors/Principal Officer of the assessee company. In view of this, the AR vide note sheet dated 07.11.2016-. 21.111.2016 (order sheet) 02.12.2016 was requested; a) to provide the details of source of money received in investing entities alongwith documentary evidence b) to produce the directors of the entities from whom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated with the whole transaction. The various opportunities provided to the assessee through AR to produce the directors of its company are as under: Vide Show Cause Notice dated 07.11.2016; In reply to notices issued u/s 153(G), all the seven share holder companies has filed their replies along with copy of ITR but could not file the copy of bank account statement to reevaluate the bank statement furnished by you earlier and as such the creditworthiness of all share holder companies remained unexplained as yet. Therefore, you are requested to expenditure the personal deposition of the directors of the aforesaid companies along with details requisitioned by the notice u/s 133(6) issued from this office earlier. The all 7 Directors may be produced on 22.11.2016 or on the date convenient for your as well as Directors which prior intimation to the undersigned. Vide order Sheet entry dated 20.11.2016. Vide Final Show Cause notice date! 02. 12.2016: Please refer to show cause notice dated 07,11.2016, vide which you are requested as follows: In reply to notices issued u/s 133(6), all the seven share holder companies has filed their replies along with copy of IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scribers company with following documents/details: 1. Copy of account for the year, 3 years prior 2 years later, computation of income, Tax Audit Report, PAN Card. 2. Copy of relevant documents/Form in which intimation regarding the purchase of share is sent to the ROC. 3. Copy of resolution of the Board/AGM of the company authorizing the company to purchase shares of the assessee company. 4. Source of funds available to purchase the share of the company along with documentary evidence to substantiate the creditworthiness of the source. 5. The latest bank account of the company as well as the bank account from which payment made for purchase of shares. 6. Copy of contract note for purchase of shares of the company, Copy of share delivery note along with share purchase register. 7. Explanation in respect of purchase of shares at such a huge premium of the company whose asset is so little and no major project in its hand. 8. Also furnish notes on business wisdom of the Director to invest such a huge amount in premium out of such a meager income/ asset of share subscriber company. 9. Copy of share purchase register along with val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns whose money is it which is routed through such accounts - obviously of the person which is getting benefits of such money without having any liability against it. 10. The assessee company is private limited company. In the case of such companies, there is close and proximate relationship between the promoters/directors and the shareholders. The closely held companies are permitted to accept the subscriptions of share capital or deposits only from the general friends or relatives of the promoters/directors and such companies are not allowed to accept subscriptions; or deposits from the general public. As such, there should have been ho difficulty on the part of the assessee to produce somebody from the said entity, had the whole apparatus not been merely a conduit to plough back the unaccounted money of the assesseecompany in the garb of share application money. Even if the work setup is presumed to be correct, for the sake of argument, it is necessary to examine as to how the investor came to know of the requirements of funds by the assessee-company in the absence of a public issue or any advertisement by the assessee-company. For accepting the identity and the availabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and help in laundering of the money. Section 68 has to be proved on facts, therefore demonstration by assessee in such rebuttal presupposes not relying upon various decisions or orders but demonstrate by way of facts of producing such persons. Production of such persons was a farfetched requirement, the assessee did not even give a justification for non-production of such entities. Thus it is a case of clear human ingenuinity with the clear and contumacious intention to defraud the revenue. Amendment has been made to Sec 68 by Finance Act 2012 w.e.f AY 2013-14 which under consideration. The provision now reads as: 68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the (Assessing] Officer, satisfactory, the sum so credited ray; be charged to income- tax as the income of the assessee of that previous year: Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit u/s 68 of the IT Act on substantive basis and ₹ 19,90,00,000/- as per provisions of section 56(2)(viib) on protective basis in case addition u/s 68 is not upheld by appellate authorities. Consequently, the income of assessee was determined at ₹ 19,96,46,220/- against the loss of ₹ 3,53,777/- as disclosed in the return of income. 4. Aggrieved with' the aforesaid assessment by AO, assessee is in present appeal. The grounds of appeal taken by him are as under:- 1. The Ld. AO has erred in law and on facts in making an addition of ₹ 20 crore on account of share application money on illegal and untenable grounds. Hence, the addition, as such, must be deleted. 2. The Ld. AO has erred in law and on facts in making of an assessment u/s 143(3) without serving mandatory notice u/s 143(2) on the assessee; hence the assessment is bad and may be quashed. 3. The Ld. AO has erred in law and on facts in making of warranted deemed addition of ₹ 19,90,00,000/- on account of share premium based on untenable and illegal ground; hence the addition as such may be deleted. 4. The Ld. AO has erred in law and on facts in assessing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt account of the company. This issue was also put up before the Honorable BHC in the case of CIT vs Orchid Industries Ltd, INCOME TAX APPEAL NO. 1433 OF 2014 but the court in view of voluminous records produced in support of case upheld deletion of addition of share application money under section 68 of the Income Tax Investment by share subscriber company in unlisted share at huge premium in related/group company which are expediting accommodation entry affairs as happened in assesses case First of all, there is no reason as alleged to be an accommodation entry by the LD AO, this is out of general perception that he has jumped to this conclusion without there being any record available with him. Even this is not a case of any information from investigation unit or any other source. With regard to huge premium, this is submitted that this is an idea or good. business opportunity that fetch premium in the market. Here, the investment in USA which is considered as the best economy in the world d that too in the business of coal mines is sufficient to fetch good or huge premium fro i n the market. Further, again this is a purely business decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presumption that low return of income was sufficient to doubt the credit worthiness of the share holders. Hence, the claim of the AO that there is meager or no income is incorrect and not tenable. Total combined income of all applicants is much less than the investment of any one of them There is no law that income should be equivalent to investment. There is a difference between capital and income and capital is sum total of money invested by sftartnn'der, loan and profit earned over period of time. Investment - pf any concern is generally out of investor fund and profit earned over a period of time, loan and some times out of rotation of business. Hence, this issue is not relevant. The assesses didn't substantiate source of money received in any of their share applicant nor the financial of these applicant substantiate their creditworthiness. This is a general comment being made by the Ld AO without reference to any specific material which lead to such belief. The assessee in order to substantiate his claim has submitted whole lots of documents as stated above during the course of assessment proceedings. Even the hank state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the assessee had discharged the burden that lay on him. The court upheld the tribunal verdict holding that its conclusion was not unreasonable or perverse or based on no evidence, Since the conclusion is based on some evidence on which a conclusion could be drawn, it was held that no addition is warranted in this case. Further, we may submit as follows: 1 There is no information or report with the Ld AO from any source that there is any accommodation entry to the assessee. 2 Further, there is no evidence with the revenue that this is assesses's money which has been rounded up in the form of share application money UK assesses company. 3 There was no material to conclude that investor companies were paper companies they have been regularly assessed to tax paid good amount of tax. 4 The assesses had discharged primarily onus to prove the identity genuineness creditworthiness of said shareholders. 5 All the notices sent under section 133(6) to the investor company served and reply received as stated in the assessment order also. As the addition is under section 68, so it is necessary to understand and analysis the section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . If the Revenue has any doubt with regard to their ability to make w-e investment. Their returns may be reopened by the Department: 7. In any case what is clinching is the additional burden on the Revenue. It must show that even if the applicant does not have the means to make the investment, the investment made by the applicant actually emanated from the coffers of the assessee so as to enable it to be treated as the undisclosed income of the assessee. This has not been done in so far as the present case is concerned and that has been noted by the Tribunal also. 8. Under the circumstances, we are of the view that the Tribunal has not committed any error in deleting .the addition. 9. No substantial question of law arises Bhav Shakti Steel Mines (P) Ltd. v. CIT (2009) 179 Taxman 25. wherein the Honble Delhi High Court has observed as under:- .. In any event we also are also note that the Supreme Court in the case of CIT v. Lovely Export (P) Ltd. [2008] 216 CTR Page 195 considered the question as to whether the share application money can be regarded as undisclosed income under Section 68 of the Income Tax Act, 1961. The Supreme Court dismissing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer could not point out any discrepancy in the evidences relied upon by the assessee, He has neither brought out any direct or inferential evidence to contradict the contention of the assessee. Though, the share-applicants could not be examined by the AO, since they were existing on the file of the Income Tax Department and their income- tax details were made available to the AO, it was equally the duty of the AO to have taken steps to verify their assessment records and if necessary to-also, have them examined by the respective AOs having jurisdiction over them (share-applicants), which has not been done by him. Under the facts and circumstances of the case stated above, it is held that the addition of ₹ 70,00,000/- cannot be sustained and accordingly, the same is directed to be deleted CIT vs OASIS HOSPITALITIES (PVT.) LTD., 333 ITR 119 DHC In a batch of cases, the Court had to consider whether the addition made by the AO u/s 68 on account of unexplained share application money was justified. After a comprehensive review of all the important cases on s. 68, the following principles were laid down: ( i) S. 68 provides that if the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition cannot be made u/s 68 in the hands the assessee. ( vi) The Department is free to reopen the individual assessment in case of alleged bogus shareholders in accordance with law and, thus, not remedy- less. CIT vs FIVE VISION PROMOTERS PVT.LTD, DHC, 380 ITR 289 (Delhi) Coming to the core issue concerning the identity, creditworthiness and genuineness of the investor companies, it is seen that as far as the Table I investors were concerned, only 9 were searched and in their cases, the ITAT on a very detailed examination was satisfied that they not only existed, but that the Assessee had discharged the primary onus of proving their creditworthiness and genuineness. They had responded to the summons issued to them. The mere fact that some of the investors have a common address is not a valid-basis to doubt their identity or genuineness. Also, the fact that the shares of the Assessee were subsequently sold at a reduced price indeed not germane to the question of the genuineness of the investment in the share capital of the Assessee. The question of avoidance of tax thereby may have to be examined in the hands of the person purchasing the shares. Reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entries of share application money/premium of the aforesaid amounts from share applicants, is a private limited company different from the public limited companies wherein public are substantially interested and where the share application money comes out with an initial public offers and wherein shares are listed on stock exchange and are widely traded. In such cases, it is very difficult for the company to know of them closely and have no control/mechanism to verify the creditworthiness and the burden of proof in such case is difficult. But there is another class of companies which are closely held and in which public are not substantially interested and which are mostly family controlled closely held companies, and they raise their share capital and loans from their family members, relatives and friends and in these companies since share capital and loans are received from the close knit circles who are mostly known to the companies/promoters, the onus required u/s 68 of the Act is very heavy to prove the capacity of the share holders and lenders and genuineness of the transactions to satisfy cumulatively the ingredients of section 68 of the Act to the satisfaction of the AO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orthiness and genuineness, Hon'ble jurisdictional High Court in the case N.R. Portfolio Pvt. Ltd. (supra) has held that the bank accounts do not reflect the creditworthiness or even genuineness of the transaction. The beneficiaries, including the respondentassessee, did not give any share dividend or interest to the said entry, operators/subscribers. The profit motive is normal in case of investment, which should reflect from accounts. In the present case, no profit or dividend was declared on the shares during the year, rather, loss of ₹ 3,53,777/- has been declared. It is on record that though the appellant company was incorporated on 19.03.2004 but no business activity were carried out by it till the raising of share premium in the year under consideration. Even in the subsequent three years also, no profit or dividend was declared by appellant. Any person, who would invest money or give loan would certainly seek return or income as consideration. These facts are not adverted to and as noticed below are true and correct. They are undoubtedly relevant and material facts for ascertaining the creditworthiness and the genuineness of the transactions. It is further held by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition, as mentioned by AO, the case of appellant is covered by the 1st proviso of section 68 also. As per this proviso, in the case of a company, if the sums so credited consist of share application money, share capital, share premium or any such amount by whatever name called, the explanation ordered by such company shall be deemed to be not satisfactory, unless (a) the person, Japing a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sums so credited; and (b) such explanation in the opinion of Assessing Officer has been found to be satisfactory. In the case of appellant, it has failed to explain the nature and source of sums credited to its books of account in the names of share applicant companies, therefore, has been held that the said sums are unexplained, as per the main provisions of section 68 of the Act. The appellant could not prove the identity, creditworthiness and genuineness of transactions in the case of its own creditors, leave alone proving the nature and source of the funds received by its creditor companies as per the 1st proviso of section 68 of the Act. Not a single detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly that when the complete details are available of investors before ld AO, it is not necessary to produce the share holders directors and stated that Even otherwise mere non production of those shareholder cannot result in addition u/s 68 of the act when complete details were filed. He further submitted and promised that the assessee is ready to produce the directors of the company. He further argued that the ld AO should have issued summons u/s 131 of the Act to the directors of the investor companies in case if he wishes to make such a huge addition for only that reason. He further submitted that no independent enquiry has been made by the ld AO. He further stated that in reply notice u/s 133(6) of the 7 shareholders have filed their replies with the return of income. He further submitted that the ld AO has wrongly followed the decision of Hon'ble Delhi High Court in Sanraj Engineering Pvt. Ltd ITA 69/ 2016 wherein, the other decisions cited were not considered. He further referred to the provision of section 68 of the Act and proviso there to and stated that the assessee has furnished proper explanation about the nature and source of such credit, however, the ld AO has rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forms and return of allotment of shares. The ld AO issued inquiry letter to companies u/s 133 (6) of the act which were also replied to. The ld AO based n the bank statements found that the returned income of the companies is not commensuration with the amount of investments made in the assessee company and also the bank statements furnished by the assessee I only a one pager statement which shows that prior to transfer of moneys as share capital with the assessee, RTGS ( Real Time Gross Settlements) funds received from other accounts. Therefore according to ld AO source of sources of funds are not proved. Ld AO was also of the view that when the bank accounts of all the investors are in same branch of the bank, there is some doubt. So the ld AO asked assessee to produce the directors of the company. Assessee requested ld AO to issue summons u/s 131 of the act. The final show cause notice was issued by the dl AO on 20/12/2016 and assessee was asked to produce the directors by 26/12/2016. Naturally, assessee reiterated the same documentary evidence furnished by the assessee but did not produce the directors of the investors companies. The Ld AO made the addition u/s 68 of the act. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the transactions. Further if assessee produces the directors of the investor companies before the Lord assessing officer and they are examined by Ld. assessing officer, it will conclusively decide the whole issue. Accordingly, on the request of both the parties, we set aside the first issue covering ground number one of the appeal back to the file of the Learned AO with a direction to the assessee to produce the directors of the investor companies for examination before the assessing officer. The AO is also directed to examine them on the basis of documents submitted by the assessee. Accordingly, ground number one of the appeal of assessee is allowed with above direction. 16. Ground No. 2 is with respect to the addition u/s 56(2)(viib) of the Act on protective basis by the ld AO. As the assessee has received share capital of ₹ 20 crores of the face value of ₹ 10 each at a premium of ₹ 1990 per share therefore, the ld AO held that the provision of section 56(2)(viib) of the Act are attracted. He further made the addition of ₹ 19.90 crores of share premium u/s 56(2)(viib) of the Act holding vide para No. 2 of his order as under:- 2. Addition of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 112500 06. M/s. Moral Sales Pvt. 1000 0 10 1990 2000100 0 100000 07. M/s. Dashing Industries 5000 10 1990 10000000 50000 TOTAL 19,90,00,00,000 20,03,0O,000 0 00,000 The AR of the assessee asked vide notice u/s 142(1) dated 02.08.2016 and other notices to submit details of the share holders with name, PAN, Address and date of receipts. Justify this in view of section of 68 of the Act. Submit detail in as per below: Name and address of (he share holder I PAN Face value of each share Premium on each share No. of shares allotted fatal Value w allotte d Amount Receive d 1 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar. Discounted cash flow is always depended on current cash flow w of revenue which is Loss as per P L account. In this connection the assessee is required to show cause as to why share premium of ₹ 19,90,00,000/- shout a not he added back to the income of the assessee u/s 56(2) (viib) of the act read with rule 11UA (2)(b) of the income tax rules:- Vide reply dated 07.12.2016 the assessee has submitted that share premium was received by the assessee based on the cash flow done by the assessee. The report front' C.A. was taken by the assessee. The assessee has submitted its very summarized working of the valuation report. However, it is worthwhile to note that the report filed by the assessee also does not contained date of valuation where as the issue of the shares were at different dates during the financial year. Date of investment/allotment has been reproduced under the head date wise and party wise data at preceding page. The report which was submitted by the assessee without any annexures, exhibits as referred in the report. Before discussing the submissions of the assessee and my observations on it, it is required to understand the relevant provision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nture capital fund and venture capital undertaking shall have the meanings respectively assigned to them in clause (a), clause, (b) and clause (c) of Explanation 1 to clause (23FB) of section 10; Vide Notification No. 52/2012 [F.N ?.I42/19/20I2-SO(TPL)/SO 2805/1, Dated 29 November 2012 (herein also called New Notification ), Rule 11 U / 11 UA have been amended. The amendments are primarily to provide for a method of valuation in respect of premium taxation under section 56(2)(viib), The New Notification is made applicable from the date of publication of the Rule in official Gazette. The Notification was also gazette on 29 November 2012. The valuation rule 11 UA of income tax rule is described as under:- For the purposes of the above section. FMV is determined as per thy provisions of Rule 11 UA. The aforesaid Rule, inter alia provides that the FMV of unquqteu) equity shares determined on the valuation date shall be; ( A-L) x (pV) ( PE) Where: A Book value of the assets in Balance Sheet (as on the date of transfer receipt) as reduced by i. any amount of tax paid as deduction at source (TDS) or ii. any amount of tax paid as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should have provided valuation report at various dates from any accountant as per section 285 of the Act or from any merchant banker as per definition given in Security Exchange Board of India . As per 11UA the valuation should have been done on valuation date. The valuation date should have be considered on date of issuance of shares i.e. date of allotment. For the purpose of section 56 (2)(viib), shares will need to be valued on the date of issue of shares. Unlike section 56(2)(viia), there is no specific reference to the date of valuation which occurs in section 56(2)(viib). However, Explanation (aXii) makes it clear valuation needs to be done as of the date of issue of shares. This would make it imperative for the company to make available valuation, which is based on financial parameters and other factors of relevance as subsisting as of the date of valuation. It may not be proper for the company to rely on the last published Balance Sheet. To that extent, principles that govern obligation of the shareholders to support valuation of the company would stand on a footing different as compared to the obligation of the company under section 56(2)(viib).The report was not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion. Value of expert evidence, it was held, is directly proportionate to the accuracy of the facts and the cogency of reasons capable of objective verification. It is important to note that valuation should be based on facts - an expert opinion without data in support of the same is required to be ignored, since his opinion is valued not so much because of his experience and qualification, but because of its justification on facts, which he is able to prove for his opinion. Value of expert evidence, it was held, is directly proportionate to the accuracy of the facts and the cogency of reasons capable of objective verification. Merely filing some papers in supports of its transactions cannot be termed as genuine transactions. In the light of above discussion ₹ 19,90,00,000/- is added to the income of the assessee as income from other sources in the books of assessee. It is evidence from the above discussion that the assessee failed to justify the receipt of premium of ₹ 1,990/- per share. Since the share application money from these applicants already been added back u/s 68 of the Act and the same cannot be added back again. However, without prejudice to the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vate Limited 3.60 Crores d. Airson Mercantile Private Limited 2.25 Crores e. Mahamashi Enterprises Private Limited 2.25 Crores f. Moral Sales Private Limited 2.00 Crores g. Dashing Industries Private Limited 1.00 Crores TOTAL 20.00 Crores 4. The company t thereafter entered into an agreement/MOU with the promoters of coal mine project in US to subscribe the 60% equity ($.20 Units) for value of USD 30,50,000.00 in SPV company to be incorporated in US to undertake coal mining, [copy of MOU/agreement is enclosed in annexure]. 5. Company thereafter applied for permission from RBI through HDFC for making overseas direct investment (ODI) (Copy of ODI approved attached. 6. RBI permission for USD 30,50,000.00 was received and UIN NDJAZ20140175 was allotted. 7. SPV in the name of M/s Stryton Minerals Resources, LLC was incorporate in US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral Government in this behalf. Explanation. -For the purposes of this clause, - ( a) the fair market value of the shares shall be the value- ( i) as may be determined in accordance with such method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, whichever is higher; ( b) venture capital company , venture capital fund and venture capital undertaking shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of 94[Explanation] to clause (23FB) of section 10;] Rule 11UA(2) of Income Tax Rules 1962, contains the prescribed method which is being produced as follows: Determination of fair market value. 11UA. 7-[l)] ***** 11 UA(2) Notwithstanding anything contained in sub-clause (b) of clause ( c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son to apply DCFM as the assessee is investing in a USA COMPANY which will deal in coal mines hence the future of this business is quite bright and highly potential and under such circumstances, the only method applicable is DCFM method. AO's Contention That the Ld AO has not accepted this valuation on the following grounds:- 1. Date of valuation is missing 2 The future cash -flow is not matching the projection 3 Valuation should be on different date of issue of shares. 4 Annexure and exhibits are not there. The detailed replies are as follows: 1 The date of valuation is missing In this regard, it is submitted that it is not missing; It is very well stated on the covering letter, refer page no 360 of paper book. 2 The future cash flow is not matching the projection. As, far as not matching of cash flow with actual projection is concerned, it is submitted that the amount invested by assessee in USA Company was much less and there was a need to invest more over there; hence the project is delayed. Furthermore, it is not necessary that whatever is planned is actually materialized. As far as basis of DCF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibes a rule, it has to be strictly and mandatorily followed and further if the statute has conferred a power to do an act and has laid down the method in which that povYends- ctr'fte exercised, it necessarily prohibits the doing of the act in any other manner than that has been prescribed. In support of this contention, the assessee has relied upon various decisions as follows: 1. Bharat Hari Singhania 207 ITR 1, SC: In this case, the Hon'ble Supreme Court of India was dealing with the validity of rule ID of Wealth Tax Rules which prescribed break up method for valuation of unquoted equity shares for the purposes of valuing the net wealth of the assets of the assessee therein and the Hon'ble Supreme Court laid down the following principles which are relevant to the case before us: ( a) Rule 11UA described for the valuation of unquoted equity shares has necessarily be followed and WTO has no option either to follow or not to follow the same and the question whether the rule is mandatory or directory does not arise. ( b) Valuation officer is as much bound by rules of valuation made under the Act as anybody else is. Since Rule ID uses the word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otment. In view of facts, law and legal precedents, it is prayed that the addition as ugh may be deleted. 6.1 I have considered the facts of the issue, basis of addition made by AO and submissions of the appellant. As it is dear from the facts that total one lakh shares of ₹ 10/- each were issued by appellant company during the year and against it, the premium of Rs, 1,990/- per share was charged which was disproportionately high looking, to the performance of appellant. The appellant company was incorporated on 19.03.2004 but till the year under consideration, no business activity was carried out by it. Even in the subsequent three years also, no business receipts/profit could be shown by appellant. In' such .situation*, what was the basis that the shares of appellant company were valued so high that it could fetch the premium of ₹ 1,990/- on the share of ₹ 10/- each. It has been explained by appellant that it came across an opportunity to invest in a MET COAL MINE in USA in the month of October, 2013 and therefore, entered into the agreement/MOU with the promoters of COAL MINE and: for this purpose, a new company in the name of M/s. Stryton M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the report is based. 7.4 Our report is based on the financial projections provided to us by management of the company and thus the responsibility for the forecast and assumptions of which they are based is solely that of the management of the company and we do not provide any confirmation or assurance on achievability or these projections. We have relied on data from external sources also and these sources are considered to be reliable. We, therefore, assume no liability of the accuracy of future data. 7.5 The valuation analysis contain in this repot represents the valuation only on the data that is specifically stated in this report. 8. Opinion on the valuation of the business: - Based on the analysis of the business of the company, in our opinion the fair value for issue of shares will be at ₹ 2035.53 or ₹ 2036100 per share. 9. Disclaimer:- Our report completely based on the information, documents and explanations provided by the management of Stryton Exim India Pvt. Ltd. While conducting the valuation reliance has been placed upon the information provided by the company and information obtained from the other sources. The report is st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng somewhere in future and earn the profit and give dividend to appellant. Thus, the basis given by appellant is full of uncertainty and based on external factors which has become true also when the subsidiary company in USA could not start its business or earn income in next three year . of the year under consideration which is subject matter of valuation report. In-.such'- situation, the valuation made by appellant of shares for receiving the premium at such a high rate is nothing but manufacture and manipulation of accounts to justify the said valuation. In view of this, the conclusion drawn by AO that the fair market value of shares determined by appellant is not genuine and correct and therefore, the premium of ₹ 19.90.0. 000/- is directly hit by section 56(2)(viib) of IT Act and taxable as per the said provision, is valid and justified. Since the AO has made this addition alternatively on the ground that in case substantive addition of ₹ 20, 00.000/- u/s-.section 68 of IT Act is not upheld by appellate authority, the provisions of section . 56(2)(viib) would become operative and the addition of ₹ 19,90,00,000/- would be liable to be made to its income. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncorrect. He further stated that when the basis of the report itself has not been examined by the lower authorities say was wrongly rejected on the basis of superficial arguments. He therefore stated that if the arguments of the revenue authorities are accepted then the slightest variation between the discounted cash flow method of valuation of shares with the actual performance of the company, will result in addition under section 68 of the income tax act in case of a company. He therefore submitted that that is not the intention of the law. He further extensively referred to the various documents submitted before the commissioner appeals to substantiate the valuation report. 19. The ld DR vehemently supported the orders of the lower authorities and submitted that according to provisions of section 56(2)(viib) of the act applicable from 01.04.2013 applies to the assessee. He further stated that the investment also does not available into the exception. He further submitted that the fair market value stated by the assessee was devoid of any merit and just camouflage to siphon of money from India. He therefore, submitted the addition is rightly made by the ld AO. 20. We have c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see further submitted the permission obtained by it from reserve Bank of India for making an overseas direct investment in a foreign LLC. Therefore it is claimed by the assessee that the premium has been justified based on the profitability of the coal mine as well as based on the overseas direct investment made by the assessee which has been approved by the reserve Bank of India. Therefore the claim of the assessee is that the valuation is justified firstly based on the report of the chartered accountant and secondly on the basis of the permission of the reserve Bank of India. The learned assessing officer as well as the learned commissioner appeals rejected the valuation report submitted by the assessee for the sole reason that projections shown by the assessee in the project report of the cash flow did not materialize in subsequent years. It was also the reason for rejection of these reports as the chartered accountant who valued the shares of the company has given a proper disclaimer while certifying the valuation. On careful consideration of the reasons given by the learned assessing officer the assessee has clearly stated that the valuation report is properly dated and furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is decided, ground no 2 cannot be adjudicated as outcome of ground no 1 will decide whether the ground no 2 of the appeal is required to be adjudicated or not. In view of this, we set aside the whole issue of tax ability under section 56 (2)(viib) of the act back to the file of the assessee for the reason that that original addition made by the learned assessing officer under section 68 of the act is also set aside to the file of the learned assessing officer and further the lower authorities have failed to objectively evaluate the valuation report submitted by the assessee of a chartered accountant based on discounted cash flow method. The assessee is directed to show the details of the valuation made by the assessee on the basis of discounted cash flow methods along with the supporting evidences to substantiate the estimate of the cash flow for respective years. Based on the submission of the assessee, the learned assessing officer is directed to examine the same and decide the issue of tax ability under section 56(2)(viib) of the act after affording proper opportunity of hearing to the assessee. According to this, ground number two of the appeal of the assessee is a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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