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TMI Blog2025 (2) TMI 1136X X X X Extracts X X X X X X X X Extracts X X X X ..... ross-examine the investors, despite having their details. This is contrary to the principle laid down in the case of Clavecon India P. Ltd. [2023 (12) TMI 625 - ITAT DELHI] where it was held that if the AO doubts the creditworthiness, he must conduct independent inquiries before making an adverse inference. The rejection of share applicants' creditworthiness solely on the basis of their low-income levels is not legally sustainable. Since no business activity had commenced during the relevant year, the application of Section 68 in this case is wholly unwarranted. Accordingly, the addition under Section 68 deserves to be deleted in its entirety. Alternative addition u/s 56(2)(viib) - AO's action of ignoring the DCF method without any proper basis and replacing it with the NAV method is arbitrary, contrary to legal precedents, and unsustainable in law. Accordingly, the alternative addition under Section 56(2)(viib) of the Act is unjustified and deserves to be deleted. Disallowance of expenses - As per AO since no business operations were carried out, the expenses could not be allowed as business expenditure - AO noted that the financial cost was related to borrowings used for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The revenue sources disclosed were only interest income and miscellaneous receipts. The AO observed that the assessee had received Rs. 95,00,000/- as share application money from five subscribers, namely: Smt. Kokilaben Navnitlal Patel - Rs. 20,00,000/- Smt. Sheetal Thadani alias Sheetal Brijesh Patel - Rs. 20,00,000/- Smt. Vaishali Dhaval Patel - Rs. 20,00,000/- Shri Brijesh Navnitlal Patel - Rs. 15,00,000/- Shri Dhaval Navnitlal Patel - Rs. 20,00,000/- 4. The AO noted that these individuals had taken loans from M/s. Aerolam Insulations Pvt. Ltd., a company with substantial losses in the year under consideration. Further, the creditworthiness of these shareholders was not found satisfactory as they had meagre incomes in their Income Tax Returns. The AO issued summons under section 131 of the Act to the shareholders but found that their explanations regarding the source of investment were unsatisfactory. Consequently, the AO invoked section 68 of the Act, treating the share application money as unexplained cash credit and added Rs. 95,00,000/- to the assessee's income. Additionally, the AO rejected the DCF method of share valuation adopted by the assessee and applied th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors ignoring their genuine sources of funds for making investment in the shares of appellant. It be so held now and addition be deleted. 5. The addition u/s 68 made half heatedly by Id AO on suspicion without proper inquiry on the documentary evidences furnished is against the sanction of law. The same ought to be deleted in toto by Id NFAC/ CIT(Appeals) in view of the settled legal position. The same be deleted now. 6. The Ld. National Faceless Appeal centre [NFAC] / CIT (APPEALS) further grievously erred both in law and on facts in confirming action of Id AO for making / proposing alterative addition of Rs. 70,99,350/- in respect of share premium u/s 56(2)(viib) ignoring the very purpose of said provisions and since the addition u/s 68 is wrongly made which ought to be deleted, section 56(2)(viib) ought not to be invoked. It be so held now and alternative addition proposed by ld AO be held to be untenable. 7. Without prejudice to the above, both the lower authorities erred in law and on facts in not appreciating that the valuation of shares made as per prescribed method under rule 11UA on the basis of DCF method could not be altered as done by ld AO and hence the valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. ( HC of Himachal Pradesh) ITA No. 4 of 2024. 8. The Departmental Representative (DR), on the other hand, relied on the order of CIT(A) and stated that the assessee failed in proving creditworthiness of the Shareholders. 9. We have carefully considered the rival submissions, perused the material available on record as well as the judicial precedents relied upon by the assessee and we find that the assessee submitted confirmations, bank statements, and ITRs of all share applicants, thereby discharging its initial burden of proof. As held by Hon'ble High Court of Delhi in the case of CIT vs. Vrindavan Farms (P) Ltd. (supra), once the assessee submits basic documentary evidence, the onus shifts to the AO to make further inquiries and bring contrary material on record. In the present case, the AO merely rejected the documents without conducting further verification, which is contrary to this principle. 9.1. From the financial statements of the company, it is observed that the company has not yet commenced its operations whereas it has earned other income of Rs. 2,60,308/- during the Financial Year (FY) 2012-13 which mainly include interest income of Rs. 2,12,309/- As decided b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 11UA(2) lies with the assessee,. We have noted the judicial precedents relied on by the assessee which collectively held that the AO does not have the discretion to substitute the DCF method with the NAV method unless there is an apparent defect or non-compliance in the application of the chosen method and the AO had no jurisdiction to substitute the NAV method of assessing the valuation of shares, once the assessee had exercised option of a DCF method as per Rule 11UA(2) of the Rules. In the present case, the AO's action of ignoring the DCF method without any proper basis and replacing it with the NAV method is arbitrary, contrary to legal precedents, and unsustainable in law. Accordingly, the alternative addition under Section 56(2)(viib) of the Act is unjustified and deserves to be deleted. 9.5. Before we conclude we deal with the ground relating to the disallowance of Rs. 1,97,068/- The assessee claimed expenses amounting to Rs. 1,97,068/- against its income, which primarily consisted of interest income of Rs. 2,12,309/- and other miscellaneous income of Rs. 2,999/-. The AO disallowed these expenses on the ground that since the assessee did not carry out any business activit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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