DREAMZ MYNEWCAR INDIA PRIVATE LIMITED,BANGALORE vs. DCIT 1(3)(1), MUMBAI

The brief facts of the case are that the assessee filed its return of income declaring a total loss of Rs.1,18,58,181/-. The case of the assessee was selected for scrutiny under CASS. During the relevant assessment year, the assessee had allotted shares at a premium and received an aggregate amount of Rs.1,24,43,765/- from non-resident investors and Rs.13,85,621/- from resident investors. During the course of assessment proceedings, the Ld. AO observed that, in respect of the share capital/share premium received from the non- resident investors, the assessee had failed to establish the identity and creditworthiness of the investors and the genuineness of the transactions. Consequently, the amount of Rs.1,24,43,765/- received from the non-resident investors was added to the total income of the assessee under section 68 of the Act. In respect of the shares allotted to the resident investors, the assessee furnished a valuation report determining the value of the shares by adopting the Discounted Cash Flow (“DCF”) method. However, the Ld. AO rejected the valuation adopted by the assessee and determined the value of each share at Rs.1/-, thereby treating the shares as overvalued. Accordingly, the share premium amounting to Rs.13,85,621/- received from the resident investors was brought to tax under section 56(2)(viib) of the Act. Thus, the Ld. AO made additions of Rs.1,38,39,386/- in respect of the aforesaid transactions. Though the aggregate value of the both the additions come to Rs. 1,38,29,386/-. Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A) and furnished additional evidence, including documents relating to the share subscribers and a detailed valuation of the shares under Rule 11UA of the Income-tax Rules, 1962 (“the Rules”). The assessee also contended in the Ground No-6 that the Ld. CIT(A) has erred to in ignoring the submission of the assessee that quantum addition made amount to Rs. 1,38,39,386/- was erroneous when the total share capital raised by the assessee during alleged year amount to Rs. 1,26,47,895/-. The Ld. CIT(A), however, did not grant the relief sought by the assessee and declined the assessee’s request for restoration of the matter to the Ld. AO, inter alia, on the ground that the assessment had not been framed ex parte under section 144 of the Act. Consequently, the additions made by the Ld. AO were upheld. Being aggrieved by the impugned appellate order, the assessee is in appeal before us.

The Ld. AR argued and filed a paper book comprising pages 1 to 236 which has been placed on record. The Ld. AR contended that related to the addition of share capital received from the non-resident subscriber, the assessee was not able to file the details of bank statements before the Ld. CIT(A). During the appeal before the ITAT, the assessee submitted the additional evidence for furnishing the bank statements and e-KYC of the non- resident subscribers. The Ld. AR further contended that the assessee had submitted all these additional evidence related to the non-resident shareholders before the Appellate Authority but the Ld. CIT(A) had duly rejected the assessee’s plea and without obtaining the remand report u/s. 46A of the Rule. The Ld. AR invited our attention in impugned appellate order in page 7 to 8. The relevant observation of the Ld. CIT(A) is duly reproduced as below:

The Ld. AR further contended that during the assessment proceedings, the assessee submitted the valuation report related to the allotment of share to the resident individual. So, the rejection of the valuation report is unjustified. The Ld. AR argued that before passing out the assessment order the assessee-company had requested a personal hearing in order to explain its case better. It is important to note that as per Instruction No. 8/2017 of CBDT dated 29/09/2017, where show-cause notice contemplating any adverse view is issued by the Ld. AO and the assessee requests for personal hearing to explain the matter, a particular hearing may take place manually. Therefore, it is incumbent upon the Ld. AO to grant a personal hearing if a request for the same has been made by the assessee. However, in the present case despite the request being made by the assessee for personal hearing the same was denied and the order was passed without such hearing. The additions were made by the officer on the following grounds:

The Ld. DR relied upon the orders of the revenue authorities and contended that the assessee had failed to establish the identity and creditworthiness of the share subscribers and the genuineness of the transactions by furnishing the requisite supporting evidence. The Ld. DR further supported the rejection of the valuation adopted by the assessee for the shares issued to the resident subscribers and submitted that the additions made under sections 68 and 56(2)(viib) of the Act were justified. Accordingly, the Ld. DR prayed for upholding the impugned order of the Ld. CIT(A).

We have heard the rival submissions and perused the material available on record. The principal grievance of the assessee relates to the additions made in respect of share capital/share premium received from non-resident as well as resident shareholders. The addition in respect of the non-resident shareholders was made under section 68 of the Act on the ground that the assessee had failed to establish the identity and creditworthiness of the investors and the genuineness of the transactions. In respect of the resident shareholders, the addition was made under section 56(2)(viib) of the Act after rejecting the valuation arrived at by the assessee under the DCF method. We find that during the appellate proceedings before the Ld. CIT(A), the assessee furnished additional evidence and sought its consideration in support of the share subscription transactions. The Ld. CIT(A), in paragraph 8(i) of the impugned order, has himself recorded that the documents furnished by the assessee were capable, at least, of establishing the identity of the investors and further observed that the creditworthiness was required to be examined with reference to the bank statements and other financial particulars of the investors. The Ld. CIT(A) also acknowledged the practical difficulty pleaded by the assessee in obtaining certain documents from the overseas investors. We further observe that the Ld. CIT(A), in paragraph 8(iii), recorded that the additional evidence furnished by the assessee had been admitted and evaluated; however, the prayer for restoration of the matter to the Ld. AO was declined on the ground that the assessment had not been framed under section 144 of the Act. The assessee also contended in the Ground No-6 that the Ld. CIT(A) has erred to in ignoring the submission of the assessee that quantum addition made amount to Rs. 1,38,39,386/- was erroneous when the total share capital raised by the assessee during alleged year amount to Rs. 1,26,47,895/-. In our considered view, once additional evidence having a material bearing on the controversy was admitted at the appellate stage, the same was required to be examined in accordance with the procedure prescribed under Rule 46A of the Rule, including by affording the Ld. AO an appropriate opportunity to examine the evidence and furnish his comments thereon. The fact that the assessment was not framed under section 144, by itself, does not dispense with the procedural requirement governing consideration of additional evidence.

We also find that the assessee has now placed before us further documents, including the bank statements and e-KYC particulars of the non- resident shareholders, which, according to the assessee, have a direct bearing upon the identity and creditworthiness of the subscribers and the genuineness of the transactions. These documents require factual verification by the appropriate authority and their evidentiary value cannot appropriately be determined for the first time without such verification.

As regards the addition under section 56(2)(viib) of the Act, the assessee contends that a valuation report adopting the DCF method in accordance with Rule 11UA was furnished before the authorities below. The Ld. AO rejected the valuation principally with reference to the projections vis-à-vis the actual financial performance. Since the valuation report and the underlying assumptions, projections and supporting material involve factual examination, this issue also requires consideration on the basis of the complete material after granting adequate opportunity to the assessee.

Considering the totality of the facts and circumstances, and without expressing any view on the merits of either addition, we deem it appropriate to set aside the impugned appellate order and restore the issues to the file of the Ld. CIT(A) for fresh adjudication in accordance with law. The Ld. CIT(A) shall consider the additional evidence furnished by the assessee and it is directed to obtain a remand report from the Ld. AO and afford the assessee an effective opportunity to respond thereto. The assessee shall also be afforded reasonable opportunity of being heard and shall furnish all documents and explanations necessary for adjudication of the issues.

We make it clear that all the contentions of both sides, including those relating to section 68 of the Act, the applicability of section 56(2)(viib), and the valuation of shares under Rule 11UA, are kept open for consideration by the Ld. CIT(A) in accordance with law. We have expressed no opinion on the merits of these issues.

In the result, the appeal of the assessee bearing ITA No.2367/Mum/2026 is allowed for statistical purpose.