Potent Foods Private Limted, Faridabad v. ITO Ward-2(1), Faridabad

2

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. 2. Facts of the case, in brief, are that the assessee is a company and filed its return of income on 28.08.2016

declaring income of Rs.1,47,120/-. The return was

processed under section 143(1) of the I.T. Act, 1961.

Subsequently, the case was selected for limited scrutiny

through CASS to verify whether the funds received in the

form of share premium are from disclosed sources and have

been correctly offered to tax. Accordingly, statutory notices

under sections 143(2) and 142(1) of the I.T. Act, 1961 were

issued and served upon the assessee calling for various

details. In response to the same, the assessee filed the

requisite details from time to time.

2.1. During the course of assessment proceedings the

A.O. noted that the assessee company during the impugned assessment year has allotted 57500 equity shares of Rs.10/- per share at a premium of Rs.70/- per share to four entities, the details of which are as under :

3

Pvt. Ltd., Sector 20-B, Faridabad, Haryana.

2.2. On being asked by the A.O. to justify the issue of

such shares at a premium of Rs.70/-, the assessee company filed various details such as Income Tax Return, Computation of Income, Audit Report, Balance Sheet, Bank statement, Return of Allotment of Shares, Confirmation of account from investor companies, their ITR, Computation of income, Audited Balance Sheet, Bank Statement, Share

4

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. Certificates, Memorandum and Articles of Association etc. However, the A.O. was not satisfied with the arguments

advanced by the assessee and noted that the share

premium so received by the assessee is nothing but an

accommodation entry and implies that the whole

transaction is a sham one. According to the A.O. the

investor companies could not furnish the requisite

information. The source of share premium remained not

only unsatisfactory but also valued at high premium

without any cogent basis. He, therefore, relying on various

decisions held that the share premium and share capital of

Rs.46,00,000/ received by the assessee during the year as

unexplained cash credit under section 68 of the I.T. Act,

1961 and added the same to the total income of the

assessee-company.

2.3. Before the Ld. CIT(A), the assessee explained that

the share capital/share premium received during the year has been fully explained by furnishing various documents before A.O. It was explained that the assessee has discharged its onus of proving their identity,

5

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. creditworthiness and genuineness. Relying on various decisions, it was argued that the addition made by the A.O.

being not in accordance with law, should be deleted.

2.4. However, the Ld. CIT(A) was also not satisfied

with the arguments advanced by the assessee and upheld the action of the A.O. by sustaining the addition under section 68 of the I.T. Act, 1961 by observing as under :

"9. The facts of the case along with detailed submission of the appellant have been gone through. It is relevant to mention here in the beginning that the appellant has been granted sufficient opportunities to explain the grounds of appeal during the appellate proceedings. Therefore, the grievance of the appellant that adequate opportunities have not been granted during the assessment proceedings has been resolved during the appellate proceedings. It is noted that the appellant has received share capital of Rs.5,75,000/- and share premium of Rs.40,25,000/- from the following entities (face value of Rs.10/- with share premium of Rs.70/- each):-

6

Pvt. Ltd., Sector 20-B, Faridabad, Haryana.

10.1 . The appellant has relied upon confirmed

ledger account, copy of ITR, audit report, balance sheet and bank account in respect of share capital/ share premium received during the year. In order to examine their genuineness and creditworthiness, the documents submitted by the appellants/ furnished by the by the appellant have been gone through by the undersigned. A brief description regarding financial and other relevant details regarding the share applicants and the appellant as noted from the perusal of these documents is under:

1) M/s Pearl Multicon Pvt. Ltd., 341/36A, 2^nd Floor, Mangal Sain Building, Bagh Kare Khan, Kishan Ganj, Delhi.

7

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. This entity has made payment of Rs.7.5 Lacs in the F.Y. 2015-16 to the appellant during the previous

year relevant to the assessment year under

consideration. The appellant has not furnished any

confirmation in respect of the said transaction.

Therefore, genuineness of such transaction is not

established.

From its Balance sheet as on 31.03.2016, it is

noted that it has shown paid up capital Rs.6.58 Lacs

(Rs.5.68 Lacs as on 31.03.2015) with share premium of

Rs.3.24 Crore (Rs.2.80 Crore as on 31.03.2015). It has

shown accumulated profit for Rs.3,89,808/- as on

31.03.2016 (Rs.3,06,244/- as on 31.03.2015) in the

reserve and surplus account. It has made investment of

its fund mainly in shares of private limited companies

and loans and advances to others. It has NIL fixed

assets in its balance sheet. It has shown profit of

Rs.1,20,930/- as on 31.03.2016 (Rs.1,55,236/- as on

31.03.2015). The only source of income is from interest

and has not carried out any tangible business activities.

8

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. Copy of bank statement has not been made available. Therefore the source of the investment made was found

unverifiable. The return of income has been furnished

reflecting petty income of Rs.1,20,930/- income for A.Y.

2016-17. On the basis of these facts it can be safely

inferred that the above share applicant is paper

company, created just on papers having no business

worth or creditworthiness.

2) M/s Pearl Nestbuild Pvt. Ltd., 341/36 A, 2nd

Floor, Mangal Sain Building, Bagh Karf Khan, Kishanganj, Delhi.

This entity has made payment of Rs.13.50 Lacs in the F.Y. 2015-16 to the appellant during the previous year relevant to the assessment year under consideration. The appellant has not furnished any confirmation in respect of the said transaction. Therefore, genuineness of such transaction is not established.

9

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. From its Balance sheet as on 31.03.2016, it is noted that it has shown paid up capital Rs.9.24 Lacs

(Rs.8.34 Lacs as on 31.03.2015) with share premium of

Rs.3.14 Crore (Rs.2.72 Crore as on 31.03.2015). It has

shown accumulated profit for Rs.3,11,009/- as on

31.03.2016 (Rs.3,62,008/- as on 31.03.2015) in the

reserve and surplus account. It has made investment of

its fund mainly in shares of private limited companies

and loans and advances to others. It has NIL fixed

assets in its balance sheet. It has shown profit of

Rs.2,15,634/- as on 31.03.2016 (Rs.2,07,885/- as on

31.03.2015). The only source of income is from interest

and has not carried out any tangible business activities.

Copy of bank statement has not been made available.

Therefore, source of investment made could not be

verified. The return of income has been furnished

reflecting petty income of Rs.2,15,635/- income for A.Y.

2016-17. On the basis of these facts it can be safely

inferred that the above share applicant is paper

10

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. company, created just on papers having no business worth or creditworthiness.

3) M/s Rishi Credit & Industries Ltd., 13, 6^th Floor,

Bonfield Lane, Kolkata

This entity has made payment of Rs.15 Lacs in the F.Y. 2015-16 to the appellant during the previous year relevant to the assessment year under consideration. The appellant has not furnished any confirmation in respect of the said transaction. Therefore, genuineness of such transaction is not established. From its Balance sheet as on 31.03.2016, it is noted that it has shown paid up capital Rs.l Crore (Rs.l Crore as on 31.03.2015) with share premium of Rs.4.61 Crore (Rs.4.61 Crore as on 31.03.2015). It has shown accumulated loss for Rs. (-)814483/- as on 31.03.2016 (Rs.(-)894829/- as on 31.03.2015) in the reserve and surplus account. It has made investment of its fund mainly in shares of private limited companies and loans and advances to others. It has NIL fixed assets in its

11

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. balance sheet. It has shown profit of Rs.116274/- as on 31.03.2016 (Rs.186574/- as on 31.03.2015). The only

source of income is from interest and has not carried out

any tangible business activities. Copy of bank

statement has not been made available. Therefore,

source of investment made could not be verified. The

return of income has been furnished reflecting petty

income of Rs.116280/- income for A.Y. 2016-17. On the

basis of these facts it can be safely inferred that the

above share applicant is paper company, created just on

papers having no business worth or creditworthiness.

4) M/s Zeya Developers Pvt. Ltd.

This entity has made payment of Rs.10 Lacs in the F.Y. 2015-16 to the appellant during the previous year relevant to the assessment year under consideration. The appellant has not furnished any confirmation in respect of the said transaction. Therefore, genuineness of such transaction is not established. Further the appellant has not furnished any document such as ITR, balance sheet, profit and loss account, bank account etc.

12

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. in respect of M/s Zeya in order to establish its identity, creditworthiness and genuineness.

5) M/s Potent Foods Pvt. Ltd. (The appellant)

Further it is noted from the particulars of the appellant that it has shown Nil revenue receipts as on 31.03.2015 and 31.03.2016 in its profit and loss account. It has shown other income in the form of interest of Rs.1663218/- (Rs.2072296/-- as on 31.03.2015). Net profit of Rs.1,47,115/- (Rs.2,70,219/- as on 31.03.2015) has been reflected in the profit and loss account. In its balance sheet as on 31.03.2016 it has been shown share capital of Rs.29.56 Lacs as on 31.03.2016 (Rs.23.81 Lac as on 31.03.2015) with share premium of Rs.2.08 Crore as on 31.03.2016 (Rs.1.68 Crore as on 31.03.2015). It has shown accumulated profits of Rs.532022/- (Rs.430366/- as on 31.03.2015).The earning per share have shown at Rs.0.34 per share. The funds at its disposal have been invested in the shape of loan/ advances to various other entities. There are no significant assets. It has furnished

13

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. its return of income for Rs.1,47,116/- for A.Y. 2016-17. These financial results do not support the receipt of such

large premium of Rs.70/- on the face value of Rs.10/-

on each share as the appellant does not have any

business worth to justify receipt of share premium(seven

times in the face value of the shares). On going through

the past financial results of the appellant it is noted that

there are no business activities carried out in the prior

years also. In the absence of fixed assets of any type, it

is difficult to presume the genuineness of any business

existence of the appellant. The submission of the Ld. AR

that the appellant was negotiating with other companies

to start business activities has remained

unsubstantiated as no corroborating details have been

furnished. During the appellate proceedings it has been

gathered that till date no business activities have been

commenced.

From the above facts it can be safely concluded

that though these are companies registered with ROC,

having PAN, having bank accounts, filing their Income

14

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. Tax Returns etc. but in fact these are just existing of papers. All the share applicants have been found

audited by the common auditors, common directors and

even common addresses. In fact transactions have been

routed through banking channels to hide the real

transactions. Therefore, the claim of the appellant £hat

it has proved the identity, creditworthiness and

genuineness of transaction in respect of credits by

furnishing copy of ITR, bank account, balance sheet,

confirmations is not proved. Mere filing of ITR, PAN and

transaction through banking channel is not enough to

prove identity, genuineness and creditworthiness of the

cash credits, It is also important to note that these

alleged share applicants are corporate entities set up for

earning of profits, however it has been gathered that

these have not received any income from these

transactions with the appellant in last so many years.

This fact along with other surrounding facts also

strengthens and corroborates the lack of genuineness in

their existence. There is no satisfactory explanation on

15

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. record on what basis the investors have applied for allotment of shares at such high premium of Rs.70/-

each against face value of Rs.10/- each share. It is

beyond human probability that anyone will invest and

pay such high premium without having any net worth of

the investee company or having any future prospects of

earning by the investee company. In case of private

placement of shares, a higher onus is required to be

established on the assessee since the information is

within his personal knowledge. Mere filing of names,

addresses, copies of ITRs, balance sheets, ROC record

is not enough to establish the identity and

creditworthiness and genuineness in respect of share

applicants. These are paper documents which are

prepared in each and every case of the corporate entity

(real or paper entity) but are not adequate enough to

show their actual identity, creditworthiness and

genuineness particularly in view of the above facts.

10.2 The AO has confronted the appellant about

lack of identity, creditworthiness of the share

16

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. applicants, lack of genuineness of transactions and lack of business worth of the appellant to receive such large

share premium vide show cause notice dated

07.12.2018 u/s 142(1) of the Act. No explanation has

been furnished. In the circumstances it is noted that the

initial burden which was upon the appellant, has not

been discharged as the explanation furnished by the

appellant regarding the identity, creditworthiness of the

share applicants and genuineness of the transactions

has not been found as satisfactory.

10.3 At this stage it is relevant to make reference

to the provisions of section 68 of the Act read with the first proviso. The onus was on the appellant to offer a satisfactory explanation about the source and nature of the sum found credited in its books of accounts maintained for the previous year under consideration. Further as per the proviso to section 68 of the Act, the onus was on the appellant to furnish the satisfactory explanation regarding the source and nature of such sum in the hands of the such share applicants. From the

17

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. above analysis in respect of the share applicants and the appellant, it is noted that the above share

applicants' entities are not doing any tangible business

activities to support the availability such large funds at

their disposal to make such investment with the

appellant. In the view of the above facts, it is noted that

real identity, creditworthiness of the share applicants

and genuineness of the above transactions has not been

established from the above documents. The above

entities have been found to have been existing only on

papers without having any real or physical worth to

support the alleged investments made with the

appellant and are in the nature of shell companies.

10.4. In view of the above detailed facts, the

reliance of the Ld. AR on the case laws referred above does not help its case as facts of this case are entirely different from the referred cases. It is relevant to mention here that many of the decisions as relied by the appellant relate to the period prior to insertion of proviso to section 68 of the Act i.e. prior to 01.04.2013 and

18

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. therefore, are not applicable to the facts of the present case.

10.5 It has been held by Hon'ble Delhi High Court

in the case of Navodaya Castle Pvt. Ltd. in ITA No.320/2012 that certificate of incorporation, PAN etc. are relevant for the purpose of identification but have their limitation when there is evidence and material to show that the subscriber was a paper company and not a genuine investor. The SLP against the ruling of the Hon'ble High Court has been dismissed by the Hon'ble Supreme Court (2015) 230 Taxman 268. Further, it has been held by Hon'ble Delhi High Court in the case of Youth Construction Pvt. Ltd. 357 ITR 197 (Delhi) that mere proof of identity without genuineness and creditworthiness is not enough for share application. Further, it has been held by the Hon'ble Delhi High Court in the case of N.R. Portfolio Pvt. Ltd. 87 DTR 0162 (Del) that the onus to prove the three factum is on the assessee as the facts are within his knowledge. Mere furnishing names address and PAN particulars or

19

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. relying on entries in the ROC website is not enough. If upon verification or during the proceedings, the AO

cannot contact the share applicant or information

becomes unverifiable or there are further doubts in

pursuit of such details, onus shifts back to the assessee

to explain the same. Further reliance is put on the

decisions of the Hon'ble Supreme Court in the case of

PCIT vs. NRA Iron & Steel Pvt. Ltd., 2019, 103

Taxmann.com 48 (SC), the Hon'ble Delhi High Court in

the case of PCIT vs. NDR Promoters Pvt. Ltd. in ITA No.

49/2018 dated 17.01.2019, and the Hon'ble ITAT Delhi

'G' Bench in the case of ITO (Exemption) vs. M/s

Synergy Finlease Pvt. Ltd., in ITA No. 4778/Del/2013

dated 08.03.2019. The case laws relied by the

appellant are not found applicable to the facts of the

present case.

10.6 After going through the ratio of decisions as

referred above, it noted that the facts of the present case are similar to the facts of the above cases. The appellant has failed to prove identity, creditworthiness and

20

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. genuineness of transaction in respect of credits of Rs.46,00,000/-. Nothing has been brought on record to

justify the rate of premium charged @ Rs.70/- against

face value of Rs.10/-. Once it is proved that credits have

not been explained then, there is no duty upon the AO to

point out the source from which the money was received

by the assessee. Reliance is put on the decision of the

Hon'ble Apex Court in the case of A. Govindarajulju

Mudaliaar v. CIT (1958) 34 ITR 807, Commissioner of

Income-tax vs Independent Media (P.) Ltd. 210

TAXMANN 14 (Delhi) (2012).

10.7. The AO has confronted the appellant through

a detailed show cause on 07.12.2018 before making the addition. Various adverse findings have been confronted to the appellant during the assessment proceedings. Adequate opportunities of being heard have been provided during in the appellate proceedings. Therefore, there is no merit in such ground of appeal taken by the appellant. Further reliance is placed upon the decision of Hon'ble Supreme Court in the case of CIT vs Durga

21

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. Parsad More 82 ITR 540 where it has been held that the apparent must be considered as real until it is shown

that there are reasons to believe that apparent is not

real. In this case enough material has been brought on

record to show that the apparent is not real. Further

reliance is placed upon the decision Hon'ble Supreme

Court in the-case of Sumati Dayal vs. CIT (1995) 214

ITR 802 (SC). After going through the ratio of decisions

as referred above, facts of the case, element of human

probability and surrounding circumstances, it is noted

that the appellant has failed to prove identity,

creditworthiness and genuineness of transaction in

respect of share capital and share premium of

Rs.46,00,000/-.

Under the facts it is held that the AO was justified

in making addition of Rs.46,00,000/- u/s 68 of the Act.

The same is hereby confirmed u/s 68 of the Act read

with proviso. Ground No. 3,4,5 and 6 of the appellant

are dismissed.

22

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. 2.4. The Ld. CIT(A) further held that the assessee failed to prove on record any evidence to justify the basis of

share premium charged in excess of its face value and held

that the share premium received in excess of the face value

should be held as income of the appellant under section 56

(2) (viib) of the of the I.T. Act, 1961 on protective basis. The

relevant observations of the Ld. CIT(A) reads as under :

"10.8 It is further noted that the appellant has failed to bring on record any evidence to justify the basis of share premium charged in excess of its face value inspite of being given opportunity on this account on 03.02.2020 during the appellate proceedings. No valuation report justifying the premium charged in respect of such shares was furnished by the appellant. In the circumstances, the share premium received in excess of the face value is also held as income of the appellant u/s 56(2)(viib) of the Act on protective basis. Accordingly income of the appellant is enhanced by Rs.40,25,000/- for the A.Y. 2016-17 u/s 251(1) of the Act. It is found that the appellant has furnished

23

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. inaccurate particulars of its income in respect of the amount of Rs.40,25,000/- in terms of section 271(l)(c) of

the Act, therefore, penalty proceedings u/s 271(l)(c) are

being initiated for furnishing inaccurate particulars of

the income on the above account. Accordingly, notice

u/s 274 read with section 271(l)(c) of the Act, is being

issued separately to the appellant. The AO is directed to

give appeal effect on this account and issue demand

notice u/s 156 of the Act after computing tax and

interest payable under relevant provisions of the Act. 3. Aggrieved with such order of the Ld. CIT(A), the assessee is in appeal before the Tribunal by raising the

following grounds :

1. On the facts and in the circumstances of the case as

well as in law the learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs.46,00,000/-, received by the appellant on account of share capital and securities premium thereon, made by Ld Assessing officer under section 68 of the act which is bad in law and liable to be set aside.

24

Pvt. Ltd., Sector 20-B, Faridabad, Haryana.

2. On the facts and in the circumstances of the case as well as in law the learned Commissioner of Income Tax (Appeals) grossly erred in upholding the action of learned Assessing Officer of treating Rs.46,00,000/- as unexplained cash credit under section 68 of the Act without appreciating the fact that appellant had furnished the enough material to prove the identity, veracity and genuineness of the transaction at the Assessment proceedings or Learned Commissioner of Income Tax (Appeal).

3. On the facts and in the circumstances of the case as well as in law the learned Commissioner of Income Tax (Appeals) grossly erred in upholding the exteriors consideration of the LD AO and not considered the evidences which was filed before the assessing authorities.

4. Without prejudice to the above grounds, on the facts and in the circumstances of the case as well as in law the learned Commissioner of Income Tax (Appeals) grossly

25

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. erred in confirming the addition under section 68 of the act in respect of share capital without appreciating the

fact that the case was selected for limited scrutiny to

investigate "whether the funds received in the form of

share premium are from disclosed source" which restrict

the scope of assessing authorities to scrutinize only the

source of share premium. Hence, investigating the other

facts under limited scrutiny is overreaching the

jurisdiction assume under the Provision of act/ rules/

instruction issued by the Board which is not permissible

either to LD Assessing officer or LD CIT (A). Accordingly,

addition on account of share capital as confirmed by LD

CIT(A) is wrong and bad in law, liable to deleted as

such.

Grounds with regard to enhancement of income on

protective basis:

5. On the facts in the circumstances of the case as well as

in law the learned Commissioner of Income Tax (Appeals) grossly erred in enhancing the addition, on protective basis, of Rs.40,25,000/- under section 56 (2)

26

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. (viib) of the act r.w.r. 11UA of the IT rules based on account of excessive valuation (securities premium)

which is wrong and bad in law.

6. On the facts and in the circumstances of the case as

well as in law the learned Commissioner of Income Tax (Appeals) grossly erred in enhancing the addition, on protective basis, under section 56 (2) (viib) of the act r.w.r. 11UA of the IT rules based on account of excessive valuation (securities premium) without appreciating the fact that the case was selected for limited scrutiny to investigate "whether the funds received in the form of share premium are from disclosed source" which restrict the scope of assessing authorities to scrutinize only the source of share premium. Hence, investigating the other facts under limited scrutiny is overreaching the jurisdiction assume under the Provision of act/ rules/ instruction issued by the Board which is not permissible either to LD Assessing officer or LD CIT (A). Hence, addition on

27

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. account of protective basis by LD CIT(A) is wrong and bad in law, liable to deleted as such.

7. On the fact and circumstances of the case as well as in

law the learned Commissioner of Income Tax (Appeals) grossly erred in returning the contrary finding against the material on record that appellant has not submitted the valuation report which is wrong, based on whims or surmises and even contrary to the assessment order passed u/s 143(3) of the act by the LD AO. Therefore, enhancing the addition on adducing a wrong presumption is wrong and bad in law.

8. Without prejudice to the Ground no 6 and 7, on the fact and circumstances of the case as well as in law the learned Commissioner of Income Tax (Appeals) grossly erred in enhancing the assessment without appreciating the fact that there is enough material placed on record which is not only accepted by the LD AO but also not required by him to make the addition under section 56(2)(viib) of the act. Hence, enhancing the assessment

28

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. order on protective basis is based on surmises, whims and conjectures." 4. Learned Counsel for the Assessee strongly

challenged the order of the Ld. CIT(A) in upholding the

addition made by the A.O. under section 68 of the I.T. Act,

1961. He submitted that assessee during the course of

assessment proceedings have filed voluminous details to

prove, identity, creditworthiness and genuineness of the

share applicants and genuineness of the transaction.

Relying on various decisions filed in the paper book and

case law compilation, he submitted that since the assessee

has discharged the onus cast on it by providing the identity,

creditworthiness and genuineness of the share applicants

and genuineness of the transaction, the addition made by

the A.O. and sustained by the Ld. CIT(A) is not justified. So

far as the order of the Ld. CIT(A) in invoking the provisions

of Section 56(2)(viib) of the I.T. Act, 1961 for making the

addition of share premium on protective basis is concerned,

he submitted that as per the said provision which was

inserted by the Finance Act, 2012 and as existed during the

29

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. relevant assessment year, the ld. Counsel submitted that as per the said provision where a company receives any

consideration for issue of shares that exceeds the face value

of such shares, the aggregate consideration received for

such shares as exceeds the fair market value of the shares

shall be taxable as income from other sources. Further,

clause (a)(i) of Explanation provides that fair market value of

the shares shall be the value as may be determined in

accordance with such method as may be prescribed. He

submitted that for the purpose of section 56(2)(viib) of the

Act, the valuation of the shares has to be done in

accordance with Rule 11UA of the Income Tax Rules. The

ld. Counsel also referred to the provisions of Rule 11UA and

submitted that as per the aforesaid Rules, the fair market

value of unquoted equity shares for the purpose of sub-

clause (i) of clause (a) of Explanation to clause (viib) of sub-

section (2) of section 56 shall be determined under clause

(a) or clause (b) at the option of the assessee. He submitted

that as per clause (b) value has to be determined by the merchant banker as per Discounted Free Cash Flow

30

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. method, whereas as per clause (a) the fair market value of unquoted equity shares shall be equal to:

Book value of Assets - Book Value of Liability x Total amount of paid up Paid up value of such shares equity share capital 4.1. He submitted that the assessee in the instant case has issued share capital @ 80 per share, i.e., face value

of 10 + premium of 70 per share) as on 31.03.2016. He

submitted that the value of each share was in accordance

with Rule 11UA of the IT Rules and in support of value of

each share the assessee had also furnished valuation

certificate of a Chartered Accountant. The Learned Counsel

for the Assessee drew the attention of the Bench to the

following details/calculation:-

"Book value of Assets - Book value of liability x Total amount of paid up Paid up value of such shares equity share capital i.e., 2,33,83,034.23(-) 38,22,653)/23,81,250 x 10

=82.028

31

Pvt. Ltd., Sector 20-B, Faridabad, Haryana.

4.2. Referring to the above, he submitted that the

aforesaid valuation was furnished before the AO to justify that the shares issued by the assessee was at fair market value which was computed in accordance with the Rule 11UA(2)(a) of the IT Rules, 1962. However, the AO arbitrarily rejected the valuation furnished by the assessee by holding that the assessee is not having any worth of receiving any share premium. He submitted that the AO has adopted the FMV of shares at Rs.10/- (at the face value) without appreciating the formula provided in Rule 11UA and has completely given a go by to the value of assets and liabilities shown in the balance sheet. He has not made any

32

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. attempt to compute the value of shares of the assessee in accordance with Rule 11UA of IT Rules, 1962. He

submitted that the adoption of the fair market value of

shares @ Rs.10 per share as against Rs.82 per share as

computed by the assessee without recourse to the formula

as provided in Rule 11UA is unsustainable in law as for the

purpose of section 56(2)(viib) of the Act, the fair market

value of the shares has to be computed only in accordance

with Rule 11UA. Further, the ld. CIT(A) without considering

the statutory provision and without computing the fair

market value of shares as per Rule 11UA, arbitrarily upheld

the finding of the AO.

4.3. Referring to the order of the CIT(A) as well as the

assessment order, the ld. Counsel submitted that none of the authorities below has found any fault in the computation of fair market value produced in the assessment proceedings. Both the lower authorities have summarily rejected the computation on assumption and presumption and without any basis. Referring to various decisions, the ld. Counsel submitted that the addition u/s

33

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. 56(2)(viib) of the Act can be made only on the ground that consideration for issue of shares exceeds the fair market

value of the shares. However, what will be the fair market

value of the shares, the statute has provided a mechanism

under Rule 11UA and fair market value has to be

determined only on that basis and not on assumption and

presumption. He submitted that 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.

4.4. So far as the decision relied on by the CIT(A) in

the case of Agro Portfolio Pvt. Ltd. vs. ITO vide ITA No.2189/Del/2018, order dated 16^th May, 2018 is concerned, he submitted that the facts of that case is clearly distinguishable as, in that case, the shares were valued on the basis of discounted cash flow method and the Tribunal noted that the assessee did not produce any evidence to substantiate the basis of projections of cash flow but relied on the valuer's report vehemently contending that such a report cannot be disturbed by the ld. AO and at no point of

34

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. time the assessee tried to explain where did the ld. AO went wrong in his comments on the figures reflected in the above

valuation report of the expert. The ld. Counsel submitted

that since the assessee had issued shares at fair market

value computed in accordance with Rule 11UA of the Rules,

no fault has been found in the method applied by the

assessee and the addition u/s 56(2)(viib) was made merely

on assumptions and presumptions, therefore, the addition

made by the AO and sustained by the CIT(A) being not in

accordance with the law should be deleted. Referring to the

decision of the Co-ordinate Bench of the Tribunal in the

case of Mantram Commodities (P). Ltd. vs ITO vide ITA

No.6170/Del/2019, order dated 12.02.2021 for A.Y. 2015-

16, he submitted that identical issue has been decided by

the Tribunal and appeal filed by the assessee has been

allowed.

5. The ld. DR, on the other hand, heavily relied on

the order of the CIT(A). Referring to para 12.2 of the order of the CIT(A), the ld. DR drew the attention to the same which reads as under:-

35

Pvt. Ltd., Sector 20-B, Faridabad, Haryana.

"12.2. The valuation report for the shares as furnished by the appellant under Rule 11UA(2) has been perused. It is noted that the appellant in the said report has considered share premium of Rs.1,28,28,924/- as on 31.03.2014. From the above facts it has been noted that the appellant has no business worth. There is no tangible business activity being carried out by the appellant since incorporation. There are no fixed assets or any other intangible assets in possession of the appellant to justify such kind of cash flow in the prior years. In the absence of any business worth of the appellant, the reliance of the appellant on the valuation report for the premium charged of Rs.70/- on each share under Rule 11UA does not carry any force. Such valuation report has been found without any basis and thus, is rejected. Reliance is hereby placed upon the decision of Hon'ble ITAT Delhi in the case of Agro Portfolio Pvt. Ltd, vs. ITO 2018, 171/ITD/74 (Del). Therefore, in the absence of business worth of the appellant the reliance of the appellant on the valuation

36

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. report for the premium charged of Rs.70/- on each share under Rule 11UA does not carry any force." 5.1. Referring to the above, he submitted that the ld.CIT(A) while sustaining the addition made u/s 56(2)(viib)

has given justifiable reasons and, therefore, the same

should be upheld.

6. I have considered the rival arguments made by

both the sides, perused the orders of the A.O. and the Ld. CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find the A.O. in the instant case made addition of Rs.46 lakhs under section 68 of the I.T. Act, 1961 on the ground that assessee could not substantiate with evidence to his satisfaction regarding creditworthiness of the 04 share applicants and genuineness of the transaction is doubtful. I find the Ld. CIT(A) upheld the action of the A.O, the reasons of which have already been reproduced in the preceding paragraph. While doing so, he held that the share premium received by the assessee in excess of the face value is liable to be held as income of the assessee under section 56(2)(vii)(b) of

37

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. the I.T. Act, 1961 on protective basis. It is the submission of the Learned Counsel for the Assessee that for the purpose of

section 56(2)(viib) of the Act the valuation of the shares has

to be done in accordance with the Rule 11UA of IT Rules,

1962. As per the said Rule, the fair market value of

unquoted equity shares for the purpose of sub-clause (i) of

clause (a) of Explanation to clause (viib) of sub-section (2) of

section 56 shall be determined under clause (a) or clause (b),

at the option of the assessee. It is his submission that the

assessee in the instant case has issued the share capital @

Rs.80 per share (face value of Rs.10 per share + premium at

Rs.70 per share) as on 31.03.2015 and the valuation of each

share was in accordance with Rule 11UA of the Act. It is

also his submission that 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.

6.1. I find an identical issue had come-up before the

Tribunal in the case of Mantram Commodities (P.) Ltd. (supra), wherein, the Tribunal has allowed the appeal filed

38

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. by the assessee and set aside the order of the Ld. CIT(A) by observing as under :

"13. I have considered the rival arguments made

by both the sides and perused the orders of the Assessing Officer and CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find, the AO, in the instant case, made addition of Rs.48 lakhs u/s 68 of the IT Act on the ground that the assessee could not substantiate with evidence to his satisfaction regarding the credit worthiness of the share applicants and the genuineness of the transaction is doubtful. The AO, further held that the assessee is not having any worth of receiving of share premium and the calculation made by the assessee in terms of Rule 11UA for calculating the share premium is to be rejected. Since the AO had made addition u/s 68 of the Act, he did not make any separate addition u/s 56(2)(viib) of the IT Act. I find the ld.CIT(A) deleted the addition made by the AO u/s 68 of the IT Act on the ground that no credits have been

39

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. introduced in the books of account of the assessee during the year under consideration and, therefore, no

addition u/s 68 can be made out of opening balances

for A.Y. 2015-16. The Revenue is not in appeal against

the above finding of the CIT(A), therefore, I am not

concerned about the same. However, the ld.CIT(A) held

that the assessee has no business worth and there is

no tangible business activity being carried out by the

assessee since incorporation. There are no fixed assets

or any other intangible assets in possession of the

assessee to justify the premium charged by the

assessee on issue of shares. He, therefore, held that

the reliance of the assessee on the valuation report for

the premium charged at Rs.70/- on each share under

Rule 11UA does not carry any force. Relying on the

decision of the Hon'ble Delhi High Court in the case of

Agro Portfolio Pvt. Ltd. vs. ITO, 171 ITD 74, the ld.CIT(A)

held that the valuation report for the premium charged

of Rs.70/- on each share under Rule 11UA does not

carry any force.

40

Pvt. Ltd., Sector 20-B, Faridabad, Haryana.

14. It is the submission of the ld. Counsel for the assessee that for the purpose of section 56(2)(viib) of the Act the valuation of the shares has to be done in accordance with the Rule 11UA of IT Rules, 1962. As per the said Rule, the fair market value of unquoted equity shares for the purpose of sub-clause (i) of clause

(a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be determined under clause (a) or clause (b), at the option of the assessee. It is his submission that the assessee in the instant case has issued the share capital @ Rs.80 per share (face value of Rs.10 per share + premium at Rs.70 per share) as on 31.03.2015 and the valuation of each share was in accordance with Rule 11UA of the Act. It is also his submission that 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.

41

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. 15. I find merit in the above argument of the ld. Counsel. The provisions of section 56(2)(viib) of the Act

reads as under:-

"(viib) where a company, not being a company in

which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:

Provided that this clause shall not apply where the consideration for issue of shares is received—

(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or

(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

42

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. 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 prescribed⁹; 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, licences, 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 Explanation to clause (23FB) of section 10;"

43

Pvt. Ltd., Sector 20-B, Faridabad, Haryana.

15.1 Similarly, the provisions of Rule 11UA of the ITAT Rules, 1962 read as under:-

"(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 (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause

(a) or clause (b), at the option of the assessee, namely:-

(A-L)

(a the fair market value of

× (PV),

) unquoted equity shares =

(PE)

wher e,

book value of the assets in the balance-sheet as A = reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as

44

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in

the balance-sheet as asset including the

unamortised amount of deferred expenditure which

does not represent the value of any asset;

book value of liabilities shown in the balance-sheet,

L = but not including the following amounts, namely:—

(i) the paid-up capital in respect of

equity shares;

(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;

(iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart

45

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. towards depreciation;

(iv) any amount representing

provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as

reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;

(v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;

(vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;

PE = total amount of paid up equity share

46

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. capital as shown in the balance-sheet; PV = the paid up value of such equity shares;

or

the fair market value of the unquoted equity shares

(b) determined by a merchant banker as per the

Discounted Free Cash Flow method."

16. A combined reading of section 56(2)(viib) read with Rule 11UA states that for the purpose of section 56(2)(viib) of the Act the valuation of the shares has to be done in accordance with Rule 11UA and the fair market value of unquoted equity shares for the purpose of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be determined under clause (a) or clause (b), at the option of the assessee. We find, in the instant case the assessee has valued its shares at Rs.82.07 as per the valuation certificate issued by the chartered accountant. Although the said valuation report was submitted before the AO to justify that the shares

47

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. issued by the assessee was at fair market value, it was computed in accordance with Rule 11UA(a) of IT Rules,

1962, however, I find, the AO rejected the same holding

that the assessee is not having any worth of receiving

any share premium. He has ignored the various assets

shown by the assessee in the balance sheet such as

cash and cash equivalent of Rs.6,18,035/-, - short-term

loans and advances of Rs.2,38,07,381/- and other

current assets of Rs.1,16,534/-. The AO did not apply

the formula provided in Rule 11UA and did not make

any attempt to compute the value of shares of the

assessee in accordance with Rule 11UA of IT Rules,

1962 which has been upheld by the ld.CIT(A). In my

opinion, 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 held by Hon'ble Supreme Court in the case

of A.K. Roy vs. State of Punjab AIR 1986 2160 that

where a statute requires to do a certain thing in a

certain way, the thing must be done in that way or not

48

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. at all. Other methods or mode of performance are impliedly and necessarily forbidden.

17. So far as the decision of the Tribunal in the

case of Agro Portfolio Private Ltd. (supra) relied on by the Ld. CIT(A) is concerned, the same in my opinion is not applicable to the facts of the present case. In that case, the shares were valued on the basis of discounted cash flow method and it was found by the Tribunal that the assessee did not produce any evidence to substantiate the basis of projections in cash flow but relied on the valuer's report contending that such a report cannot be disturbed by the AO and at no point of time the assessee tried to explain where did the AO went wrong in his comments in the figures reflected in the valuation report. However, in the instant case, the assessee has issued the shares at fair market value computed in accordance with Rule 11UA(a) of the IT Rules 1962 and no fault has been found in the method applied by the assessee and the lower authorities have made the addition u/s 56(2)(viib) purely on

49

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. presumptions and surmises. Therefore, in my considered opinion, such action of the lower authorities

being not in accordance with law is unsustainable. I,

therefore, set aside the order of the CIT(A) and direct the

AO to delete the addition. The grounds raised by the

assessee are accordingly allowed.

18. In the result, the appeal filed by the assessees

is allowed." 6.2. Since, the facts of the instant case are identical to the facts of the case decided by the Tribunal, therefore, respectfully following the order of the Tribunal in the case, cited (supra) I hold that the Ld. CIT(A) was not justified in making the addition of Rs.40,25,000/- lakhs on protective basis by invoking the provisions of Section 56(2)(vii)(b) of the I.T. Act, 1961.

6.3. So far as the addition under section 68 of the I.T. Act, 1961 is concerned, I find the assessee has filed the details such as P & L A/c, balance-sheet, bank statements, confirmation letters, PAN, copy of acknowledgment of

50

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. return, Memorandum and Articles of Association of Companies etc.to substantiate the identity and

creditworthiness of the share applicants and genuineness of

the transaction. Nothing has been brought on record to

negate the various evidences filed by the assessee. A perusal

of the audited balance-sheet of these Investor Companies

shows that these companies are having sufficient capital

and reserves to make the investment in the assessee

company and the entire transactions have been made

through banking channel. Merely because the Investor

Companies have shown meager income during the

impugned assessment year, the same in my opinion, cannot

be a ground to doubt the creditworthiness of the said

company especially when the said company is having

sufficient funds in its account in shape of share capital and

free reserves.

6.5. I find the Hon'ble Delhi High Court in the case of

CIT vs., M/s. Kamdhenu Steel and Alloys Ltd., 361 ITR 220 (Del.) has observed as under :

51

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. 35. The important question which arises at this stage is as to whether on the basis of these facts, could

it be said that it is the assessee which has not been

able to explain the source and receipt of money.

According to the assessee, he had given the required

information to explain the source and was not obligated

to prove source of the money. It is the submission of the

assessee that even in case there is some doubt about

the source of money in giving into coffers of the share

applicants which they invested with the assessee, it

would not automatically follow that the said money

belongs to the assessee and becomes unaccounted

money. According to us, the assessee appears to be

correct on this aspect. We feel that something more

which was necessary and required to be done by the

AO was not done. The AO failed to carry his suspicious

to logical conclusion by further investigation. 6.6. I find the Hon'ble Delhi High Court in the case of CIT vs., Real Time Marketing (P) Ltd., 306 ITR 55 (Del.) has

observed as under :

52

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. "8. There is a finding of fact given by the two authorities namely CIT(A) and the Tribunal to the effect

that :-

The confirmation of M/s. ACL has been filed by the

Assessee. The said company was assessed to tax.

The source of ACL had been explained as out of

transfer of funds from the accounts of M/s. BTL.

Thus, the Assessee discharged its burden of

proving identity, capacity and genuineness of the

transaction. The Assessing Officer has not brought

any material to show that the funds to ACL were

provided by the Assessee. Under the

circumstances, it cannot be said that the cash

credit in question has remained unexplained.

There is absolutely no material to link the

Assessee with the sum of Rs.22,97,000/-

deposited in cash in the bank account of M/s.

FBSL.

9. In view of the concurrent findings of the fact given by the two authorities that there is no material to

53

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. link the Assessee with a sum of Rs.22,97,000/- deposited in cash in the bank account of M/s. FBSL, as

such, no case is made out for making addition under

Section 68 of the Act, since there was no material with

the Assessing Officer to come to the conclusion

regarding any genuineness or fictitious identity of the

entries or non-capacity of the lender.

10. Under these circumstances, we do not find any

infirmity or perversity in the order passed by the Tribunal and in our opinion no substantial question of law arises in this case. With the result, the present appeal is not maintainable and the same is hereby dismissed." [Emphasis Supplied] 6.7. I find the Coordinate Bench of the Tribunal in the case of M/s. Priyatam Plaschem Pvt. Ltd., vs., ITO vide

ITA.No.2534/Del./2018 order dated 10.08.2018 has

observed as under :

"10. Considering the facts of the case, in the light

of material on record and the above decisions, it is clear that assessee produced sufficient documentary

54

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. evidence before A.O. at the assessment as well as appellate stage to prove ingredients of Section 68 of the

I.T. Act. The A.O. however, did not make any further

enquiry on the documents filed by the assessee. Thus,

the A.O. failed to conduct scrutiny of the documents at

assessment stage and merely suspected the

transactions in question on the irrelevant reasons. The

A.O. did not make any enquiry from the Banker of the

Investor and Income Tax record of the Investor

Company. The valuation report filed by the assessee

supports the explanation of assessee that shares were

issued at premium which were below the fair market

value per share of Rs. 1221/-.

The assessee, thus, proved the identity of the Investor,

its creditworthiness and genuineness of the transaction

in the matter. No material has been produced before us

to rebut the explanation of assessee. We, therefore, did

not find any justification to sustain the addition. We,

accordingly, set aside the orders of the authorities

below and delete the addition of Rs.6 crores. There is no

material available on record to justify if assessee paid

any amount of Rs. 12 lakhs as alleged commission to

obtain any accommodation entry. Orders of the

authorities below were not justified in making addition

of Rs. 12 lakhs. We, accordingly, set aside the orders of

55

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. the authorities below and delete the addition of Rs.12 lakhs." 6.8. Since the assessee in the instant case has proved

the identity of the investors and filed sufficient details to

substantiate the creditworthiness and genuineness of the

transaction, therefore, respectfully following the decisions

cited (supra), I hold that the Ld. CIT(A) was not justified in

confirming the addition made by the A.O. under section 68

of the I.T. Act, 1961. I, therefore, set aside the Order of the

Ld. CIT(A) and delete the addition. Grounds raised by the

assessee are allowed.

7. In the result, appeal of the Assessee is allowed.

Order pronounced in the open Court 05.05.2022. Sd/-

(R.K. PANDA)

56

Pvt. Ltd., Sector 20-B, Faridabad, Haryana. Copy to

// By Order //

Assistant Registrar : ITAT Delhi Benches :

Delhi.