POTENT FOODS PRIVATE LIMTED,FARIDABAD vs. ITO WARD-2(1), FARIDABAD

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES “SMC” : DELHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA.No.104/Del./2021 Assessment Year 2016-2017 M/s. Potent Foods Pvt. The Income Tax Officer, Ltd., FF-9, Vishnu Ward – 2 (1), FBD Place, Near Neelam vs. C.R. Building, Flyover, Sector 20-B, Faridabad. Faridabad. Haryana. PIN – 121 001 Haryana – 122 001. PAN AAGCP6222N (Appellant) (Respondent) Shri Rajiv Saxena, Shri Sumangla Saxena & For Assessee : Shri Shyam Sunder Advocates For Revenue : Shri Om Prakash, Sr. DR Date of Hearing : 30.03.2022 Date of Pronouncement : 05.05.2022 ORDER This appeal filed by the assessee is directed against the order dated 23.03.2020 of the Ld. CIT(A), Faridabad, relating to A.Y. 2016-17.

2 ITA.No.104/Del./2021 M/s. Potent Foods Pvt. Ltd., Sector 20-B, Faridabad, Haryana.

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 ITA.No.104/Del./2021 M/s. Potent Foods Pvt. Ltd., Sector 20-B, Faridabad, Haryana. Name of Person No. of Premium Share Capital Amount of Total amt. Shares per share Premium paid Nominal value per (Rs.) (Rs.) including share premium (Rs.) (Rs.) 9,375 10 70 93,750/- 6,56,250/- 7,50,000 M/s Pearl Multicon Pvt. Ltd.

16,875 70 1,68,750/- 11,81,250/- 13,50,000/- M/s Pearl Nestbuild Pvt. 10 Ltd. 18,750 10 70 1,87,500/- 13,12,500/- 15,00,000/- M/s Rishi Credit and Industries Pvt. Ltd. 12,500 10 70 1,25,000/- 8,75,000/- 10,00,000/- M/s Zeya Developers Pvt. Ltd. Total 57,500 5,75,000/- 40,25,000/- 46,00,000/- 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods Pvt. Ltd., Sector 20-B, Faridabad, Haryana.

S.No Name of company(M/s) Amount of share application money . & premium (in Rs.) 1. Pearl Multicon Pvt. Ltd. 7,50,000/- 2. Pearl Nestbuild Pvt. Ltd. 13,50,000/- 3. Rishi Credit & Industries Ltd. 15,00,000/- 4. Zeya Developers Pvt. Ltd. 10,00,000/- Total 46,00,000/- 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, 2nd Floor, Mangal Sain Building, Bagh Kare Khan, Kishan Ganj, Delhi.

7 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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, 6th 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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. ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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.

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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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.

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 ITA.No.104/Del./2021 M/s. Potent Foods Pvt. Ltd., Sector 20-B, Faridabad, Haryana.

Book Value of Assets as on 31.03.2015 (Amount in Rs.) Cash and cash equivalent- 32,312.23 Short term loans and advances- 2,29,93,818.00 Other current assets- 3,56,904.00 Total 2,33,83,034.23 Book Value of Liability as on 31.03.2015 (Amount in Rs.) Trade Payables 37,37,500.00 Other Current Liabilities 1,655.00 Short term Provisions. 83,498.00 Total 38,22,653.00 Paid-up Value of Shares 23,81,250,00/- Face Value of Shares 10.00 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 order dated 16th 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 ITA.No.104/Del./2021 M/s. Potent Foods 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.

35 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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.

6.1. 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods Pvt. Ltd., Sector 20-B, Faridabad, Haryana.

41 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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 determined by a merchant banker as per the (b) Discounted Free Cash Flow method.”

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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods Pvt. Ltd., Sector 20-B, Faridabad, Haryana.

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 ITA.No.104/Del./2021 M/s. Potent Foods 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.

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 ITA.No.104/Del./2021 M/s. Potent Foods 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 ITA.No.104/Del./2021 M/s. Potent Foods 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.

Order pronounced in the open Court 05.05.2022.