BRASH STEELS PVT LTD,FARIDABAD vs. ITO WARD - 1(2), FARIDABAD

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.

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 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 Mantaram Commodities (P) Ltd. vs ITO vide ITA No.6170/Del/2019, order dated 12.02.201, he submitted that under identical circumstances, the addition sustained u/s 56(2)(viib) has been deleted.

So far as the addition of Rs.22,90,000/- sustained by the learned CIT(A) u/s 68 of the Act is concerned, he submitted that the assessee has discharged the onus cast on it by proving the three ingredients of section 68 i.e. the identity and creditworthiness of the share applicants & genuineness of the transaction. The share applicants have directly responded to the Assessing Officer in their response to notice u/s 133(6) of the Act. The addition was made basically on presumption & surmises and therefore, the same is liable to be deleted.

The ld. DR, on the other hand, heavily relied on the order of the CIT(A).

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.

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. 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 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 to the extent of Rs.22,90,000/- and sustained the balance amount of Rs.22,90,000/-, the reasons of which already reproduced in the preceding paragraph. 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.

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.

I find merit in the above argument of the ld. Counsel. The provisions of section 56(2)(viib) of the Act reads as under:-

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. I find, in the instant case the assessee has valued its shares at Rs.81.57 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 issued by the assessee was at fair market value and 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.3,62,445/- and short-term loans and advances of Rs.1,85,20,998/-. 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 at all. Other methods or mode of performance are impliedly and necessarily forbidden.

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 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 on this issue as per grounds of appeal no. 3 to 5 are accordingly allowed.

So far as ground of appeal no.2 is concerned, the same relates to the addition of Rs.22,90,000/- sustained by the learned CIT(A) u/s 68 of the Act.

A perusal of the above shows that he has deleted the addition of Rs.22,90,000/- received by the assessee in the preceding year but sustained the amount of Rs.22,90,000/- received by the assessee during the year. Thus, the amount sustained by the learned CIT(A) of Rs.22,90,000/- relates to three parties namely Best Buildmart Pvt. Ltd. of Rs.10,00,000/-, Palani Builders Pvt. Ltd. Rs.6,00,000/- and Shri Lekh Nath Pandey Rs.6,90,000/-. A perusal of the assessment order shows that there was no response to notice issued u/s 133(6) of the Act to Sh. Lekha Nath Pandey (Rs.6,90,000/-) and Best Buildmart Pvt. Ltd. (Rs.10,00,000/-).

So far as the Palani Builders Pvt. Ltd. is concerned, it is noted that the said company had responded to the notice u/s 133(6) of the Act. The company has paid up capital of Rs.6.56 lakhs with share premium of Rs.1.28 Crores as on 31.03.2015. The assessee has filed all the requisite details to prove the identity and creditworthiness of the share applicants and genuineness of the transactions. Merely because the equivalent amount have been received before transferring the cheques in favour of the assessee leaving very petty balance in my opinion cannot be a reason for addition u/s 68 of the Act especially when the assessee has filed requisite details to prove the identity and creditworthiness of the said party and genuineness of the transaction and the said party had directly responded to notice issued u/s 133(6) of the Act by the Assessing Officer. Entire addition made by the Assessing Officer and sustained by the learned CIT(A) in this case is merely based on presumption and surmises. The various details furnished before the Assessing Officer were neither proved to be false or untrue.

So far as the share capital and share premium from Mr. Lekh Nath Pandey (Rs.6,90,000/-) is concerned, neither the said party responded to the notice u/s 133(6) of the Act nor the assessee filed any supportive documents and failed to explain to the satisfaction of the lower authorities. Similarly, in the case of M/s Best Buildmart Pvt. Ltd., the said party also did not respond to the notice u/s 133(6) of the Act issued by the Assessing Officer. Although the assessee had filed certain details/documents to substantiate the identity and creditworthiness of the above two parties and genuineness of the transaction, however, the fact remains that both the parties did not respond to the notice u/s 133(6) of the Act.

For explaining any cash credit as genuine, the onus is always on the assessee to substantiate with evidence to the satisfaction of the Assessing Officer regarding the identity and creditworthiness of the creditors/share applicants and the genuineness of the transactions. In the instant case, the assessee has failed to discharge the same in respect of the above two parties. Although some details were furnished before the Assessing Officer, they did not respond to the notice issued u/s 133(6) nor the assessee produced them before the Assessing Officer.

Ground no. 1 and 6 being general in nature are dismissed.

In the result, the appeal filed by the assessee is partly allowed for statistical purpose.