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

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.

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 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.

ITA No.6181/Del/2019 9

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.

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

ITA No.6181/Del/2019 10

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.

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:-

“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 report for the premium charged of Rs.70/- on each share under Rule 11UA does not carry any force.”

the addition made u/s 56(2)(viib) has given justifiable reasons and, therefore, the

same should be upheld.

14.1. So far as the addition u/s 68 of the Act submitted by the learned CIT(A) is

concerned, he relied on the order of the learned CIT(A)

ITA No.6181/Del/2019 11

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,

ITA No.6181/Del/2019 12

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.

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.

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

ITA No.6181/Del/2019 13

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

17.1 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 unquoted equity × (PV), shares = (PE) where, A = book value of the assets in the balance-sheet as reduced by any 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 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; L = book value of liabilities shown in the balance-sheet, 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

ITA No.6181/Del/2019 14

negative, other than those set apart 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 capital as shown in the balance-sheet; PV = the paid up value of such equity shares; or (b) the fair market value of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash Flow method.”

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

ITA No.6181/Del/2019 15

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.

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

ITA No.6181/Del/2019 16

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.

addition of Rs.22,90,000/- sustained by the learned CIT(A) u/s 68 of the Act.

After hearing both sides, I find the assessee during the year has received share

capital and share premium of Rs.45,80,000/- from various parties, the details of

which are given by the learned CIT(A) at page 34 of his order which is as

under:-

Name of allottees Date Net Amount Net Amount Page No. received during received in the year earlier years Best Buildmart Pvt. 16/01/2015 10,00,000 Ltd. Palani Builders Pvt. 17/11/2014 6,00,000 Ltd. Taxcity 10/05/2013 20,00,000 Constructions (Kovai) Pvt. Ltd. Lekh Nath Pandey 16/01/2015 6,90,000 Rishi Credit & Industries Pvt. Ltd. Total 22,90,000

Rs.22,90,000/- received by the assessee in the preceding year but sustained the

ITA No.6181/Del/2019 17

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/-).

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.

ITA No.6181/Del/2019 18

I therefore direct the Assessing Officer to delete the addition of Rs.6,00,000/- in

respect of M/s Palani Builders Pvt. Ltd.

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.

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.

Considering the totality of the facts of the case and in the interest of justice, I

deem it proper to restore the issue relating to the share applicants in respect of

M/s Best Buildmart Pvt. Ltd. and Shri Lekh Nath Pandey to the file of the

Assessing Officer with a direction to give one more opportunity to the assessee

ITA No.6181/Del/2019 19

to substantiate with evidence to his satisfaction regarding the identity and

creditworthiness of the above two share applicants and genuineness of the

transaction. The Assessing Officer shall decide the issue as per fact and law after

giving due opportunity of being heard to the assessee. I hold and direct

accordingly. Ground no.2 filed by the assessee is accordingly partly allowed for

statistical purpose.

statistical purpose.

Order pronounced in the open court on 17/08/2021

Sd/- Sd/- (SUCHITRA KAMBLE) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER Delhi/Dated-17.08.2021 f{x~{tÜ f{x~{tÜ? fÜA cAfA f{x~{tÜ f{x~{tÜ fÜA cAfA fÜA cAfA fÜA cAfA Copy forwarded to: - 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT By Order Assistant Registrar, ITAT, Delhi