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TMI Blog2025 (3) TMI 1042X X X X Extracts X X X X X X X X Extracts X X X X ..... as pointed out by the AO are not relevant in the context of capital restructuring in the case of group companies. Valuation by itself is a specialized exercise which can be disputed only on the basis of the findings of another expert as recognized in law for that purpose. The valuation as proposed by the DCF method cannot, therefore, be faulted. There is no over valuation of shares over the fair market value. Accordingly the invocation of the provisions of Sec.56(2)(viib) of the Act by the AO being erroneous cannot be upheld. Addition u/s 68 - addition of share capital amount as collected by way of premium from the Subscribing Companies - We are of the view that the proviso provides for the scrutiny and assessment of the funds of the immediate subscribing Company. The proviso does not extend that power to scrutinise the financial capacity of the secondary source which has provided funds to the Subscribing Companies. Also the fact that the investments as made by the Subscribing Companies were out of funds which they possessed at the beginning of the year and no fresh infusion of funds by the Subscribing Companies during the assessment year under consideration and the source of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication / premium received treating the same as undisclosed and in sustaining an addition of Rs. 14, 93, 00, 000/-; and iii. making an addition of Rs. 37, 064/- under section 14A read with Rule 8D of the Income Tax Rules, 1962. All the actions being erroneous, unlawful and untenable it is prayed that the same must be quashed with directions for appropriate relief." 3. Brief facts are that the Assessee Company, which is engaged in the business of trading in shares, filed its return of income on 30.09.2013 declaring a total income of Rs. 3, 89, 400/-. The assessment was completed on 29.03.2016 by the AO u/s. 143(3) of the Act determining the income at Rs. 14, 97, 26, 462/-. The AO during the course of the assessment proceedings for the year under appeal found that the Assessee had received share capital with premium amounting to Rs. 14.93 crores from two entities viz. M/s King Merchandise (P) Ltd. and M/s BGS Credit (P) Ltd.(Subscribing Companies hereafter). Form No. 2 filed with ROC in this connection revealed that 11, 85, 000 shares were issued on 31.07.2012 to M/s King Merchandise (P) Ltd. and 3, 08, 000 shares on 10.10.2012 to M/s BGS Credit (P) Ltd. These shares had a fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comes to more than Rs. 100/- at which it has issued shares. In this regard, filing of this manipulative valuation report is being highlighted. EBITDA (Earnings Before Interest, Tax & Depreciation) has been assumed at fantastic and unreasonable figures as on 23.02.2016, whereas by that time actual of EBITDA were available. While making valuation under DCF method, first preference is given to historical data for being used as a launching pad But it has not been done in assessee's case. However, for the sake of record and comparison actual of EBITDA for the above period are given as under on the basis of ITRs of the assessee available with the undersigned: EBITDA (Total Income shown in ITR+Dep.Intt. 2010-11(AY 2011-12) 2011-12 (AY 2012-13) 2012-13 (AY 2013-14) 2013-14 (AY 2014-15) 2014-15 (AY 2015-16) 1206136 (Loss of Rs. 4, 36, 154 and Speculative Income of Rs. 3, 78, 981) 7, 08, 000 2, 93, 343 6, 22, 716 Therefore, having made fantastic assumptions in the said valuation report the assessee has made a crude manipulative attempt to justify FMV of its shares in the face of the above actuals. In this regard, a comparison is also being drawn in respect of ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company as on 31.03.2012 comes to Rs. 19.04 as per the provisions of Rule 11UA of the I.T.Rules. The assessee has received Rs. 100/- per equity share as against Rs. 19.04. Thus an amount of Rs. 80.96 per share has been received in excess of FMV by the assessee during the financial year 2012-13. During the year the assessee has issued 1493000 equity shares. Thus an amount of Rs. 12, 08, 73, 280/- (1493000x80.96) has been received by the assessee as share premium in excess of FMV of the shares. Considering the above facts, an amount of Rs. 12, 08, 73, 280/- is added to the total income of the assessee under the provisions of section 56(2)(viib) r/w section 2(24)(xvi) of the I.T.Act, 1961 and read with Rule 11UA of the I.T. Rules, 1962. As the assessee has concealed/furnished inaccurate particulars of its income, provisions of penalty u/s 271(1)(c) of the I.T. Act, 1961 are attracted in its case. [Addition : Rs. 12, 08, 73, 280/-]" 3.1 Additionally, the AO examined the accounts of the two subscribing companies M/s King Merchandise (P) Ltd. and M/s BGS Credit (P) Ltd. and finding that they had availed funds in the preceding years from five Calcutta based companies opined that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credits introduced as share capital/share premium in the books of accounts of assessee, in respect of which the assessee has failed to satisfactorily explain the nature and source of such credits. As the assessee has concealed / furnished inaccurate particulars of its income, provisions of penalty u/s 271(1)(c) of the IT Act, 1961 are attracted in its case." 3.2 With the above observations, the AO ultimately made the addition u/s. 68 of the Act and added a sum of Rs. 14, 93, 00, 000/-, being the higher amount as emerging through the application of the aforesaid two sections with the following observations:- "4. The addition of Rs. 12, 08, 73, 280/- made in para 2 is on account of excess of consideration received for shares over FMV of such shares and addition of Rs. 14, 93, 00, 000/- u/s 68 is with respect of the same amount of Rs. 14, 93, 00, 000/- shown as having been received as share capital / share premium. Adding both these amounts to the declared income would lead to double addition. Therefore, for removal of doubts, it is clarified that only Rs. 14, 93, 00, 000/- shall be added to the declared income, which would however, represent both the additions made in para 2 as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the share premium as charged was fully justified in the context of the calculations made as per the applicable Rule 11UA(2) which had come into force in this year. It is the contention of the Ld. Counsel that the AO was wrong in discarding that value on the ground that the said Rule itself had come into force after the date of allotment of shares to the two companies on 29.11.2012 and so the older system of valuation by the Net Asset Value method as per Rule 11UA(1) of the Act was alone applicable. In this context the AO referred to Notification No. 52/2012dated 29.11.2012 of the Board. The Ld. Counsel pointed out that since change in the Rules was procedural in nature and the assessment was pending as on the date of Notification of new Rule it was applicable to the pending assessments. In support of this contention, the Ld. Counsel referred to the Supreme Court's decision in CWT vs. Shravan Kumar Swarup (1994) 218 ITR 886 (SC), where the Lordships held that the Rules being procedural in nature and not substantive would apply to all pending cases. It is also submitted that the Circular itself provided for the Rule to come into force from 29.11.2012. Therefore it is contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per sub-clause (b) of Rule 11UA(2). Ld. Counsel submitted that the Authorities below had erred in invoking Sec.56(2)(viib) of the Act, which was intended to prevent laundering of black money through the manipulation of fair market value of shares. It is submitted that in the present case, there was no involvement of any external funds, and the monies involved came from the reserves of the Subscribing Companies as at close of the preceding year. 4. The Ld. Counsel also strongly objected to the invocation of the proviso to Section 68 of the Act. It was submitted that the right to examine the source of capital invested in a private Company was limited to examining the funds of the Subscribing Companies. The AO did not have the authority to probe further into the source of the secondary Companies providing funds to the Subscribing Companies. The two subscribing Companies had not received any share capital from external sources during the year. Instead, they had called back the loans and deposits from their clients in the preceding year itself, and the payments made to the Appellant Company were out of the opening balance of their Reserves. The Ld. Counsel reiterated that the two S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situation in the present case, where the identity of the Subscribing Companies is clear, and the transactions are transparent which have been duly confirmed by them. 4.5 Regarding Agro Portfolio (P) Ltd. vs. ITO (2018) 94 taxmann.com 112 (Delhi-Trib.) it is submitted that the data concerning the share valuation was not supported by any evidence. It is in the absence of evidence that the rejection of the DCF method occurred in that case. However, in the present case, the report of the valuer is duly supported by relevant data justifying the value as worked out by the valuer. The objections by the AO in this regard were misconceived and erroneous. 4.6 The Ld. Counsel further submitted that the decisions relied upon by the Ld. CIT(A) are inapplicable to the facts of the present case. The decision in CIT vs. Durga Prasad More (1971) 82 ITR 540 (SC) is distinguishable on facts as it was based on dubious evidence as to the Assessee's conduct. In the present case, there is no dispute regarding the existence, creditworthiness or genuineness of the transactions of the Subscribing Companies. Also the decisions cited by the Ld. CIT(A) in CIT vs. Nova Promoters & Fin lease (P) Ltd. (2012) 34 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the valuation of shares at a premium of Rs. 90/- per share is representative of the fair market value. According to the Appellant the valuation of fair market value of the shares has been made on the basis of the Discounted Cash Flow (DCF) method which had been introduced as an alternative to the valuation based on Net Asset Value method during the assessment year under consideration. However, according to the AO, the same could not have been adopted for valuation purpose because the shares in question had been subscribed and allotted on 29.09.2012 which was before the date of the coming into effect of the DCF method, in the Rules. Ld. Counsel for the Assessee, however, contends that the option to the Assessee to adopt DCF method was available because the assessment in this case was pending on that date which was completed later on 29.03.2016. Ld. Counsel has cited the decision of the apex Court in CWT vs. Shravan Kumar Swarup (supra) in this behalf. We agree with the submission of the Ld. Counsel for the Assessee and hold that the DCF method could be applied for valuation purposes for the assessments pending at that time. Besides, the Circular stated that Rule would apply fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated by Shri Ashwani Kumar Bhatia who is the Director of M/s Kings Merchandise (P) Ltd and M/s BGS Credit (P) Ltd., the Subscribing Companies, in his statement recorded on oath which is placed at pages 23 to 26 of the paper book. Therefore with these facts remaining uncontroverted no addition could have been even otherwise validly made u/s 68 of the Act by the AO. We also noticed from the assessment orders placed on record that the AOs of the respective Subscribing Companies have not raised any objection to their returns of income relating to this year. As noticed earlier, in the case of M/s BGS Credit Pvt. Ltd. there is a scrutiny assessment order on record for the assessment year 2012-13. Considered holistically, in our view, invocation of the proviso to Sec.68 of the Act by the AO was, therefore, erroneous and not justified. The basic ingredients of Sec.68 of the Act of identity, creditworthiness and genuineness of the transactions are, in the circumstances of the case, apparently beyond doubt. There is no undisclosed income which could be charged u/s 68 of the Act. The addition as made by the AO u/s. 68 of the Act is also, therefore, directed to be deleted. Consequently Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X
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