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Facts
The Assessing Officer (AO) made additions for differences in sundry creditor balances with M/s. Bajrang Steel Trading Company and M/s. Saket Enterprises, and a disallowance under Section 56(2)(viib) regarding share valuation during a proprietorship takeover. The CIT(A) provided partial relief by allowing the addition related to M/s. Saket Enterprises but confirmed the additions concerning M/s. Bajrang Steel and Section 56(2)(viib). The assessee subsequently appealed these two confirmed additions to the ITAT.
Held
The ITAT remanded the sundry creditor mismatch issue concerning M/s. Bajrang Steel Trading Company back to the Assessing Officer for verification, instructing the assessee to provide relevant documents. Regarding the disallowance under Section 56(2)(viib) amounting to Rs.1,06,86,000/-, the Tribunal deleted the addition, finding that the AO erred in mechanically valuing shares without considering the market value of assets acquired and that there was no real gain for the assessee.
Key Issues
1. Mismatch in sundry creditor balances between the assessee's books and those of M/s. Bajrang Steel Trading Company. 2. Correct application and valuation under Section 56(2)(viib) concerning share premium during the takeover of a proprietorship firm.
Sections Cited
250, 143, 56(2)(viib)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C” BENCH KOLKATA
Before: SHRI PRADIP KUMAR CHOUBEY & SHRI SANJAY AWASTHI
Present for: Appellant by : Shri Miraj D. Shah, AR Respondent by : Shri Amuldeep Kaur, Addl. CIT, Sr. DR Date of Hearing : 01.05.2025 Date of Pronouncement : 13.05.2025 O R D E R
Per Sanjay Awasthi, Accountant Member :
The present appeal emanates from order passed u/s. 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) on 28.08.2024 by Ld. CIT(A), NFAC, Delhi.
1.1. In this case, the Ld. Assessing Officer made three additions as under: (i) Rs.15,00,339/- on account of a difference in the value of creditor pertaining to one M/s. Bajrang Steel Trading Company Pvt. Ltd. between the books of assessee and those of the said creditor. (ii) Rs.2,20600/- on account of difference in values between assessee’s books and the books of creditor M/s. Saket Enterprises.
Ramkrishna Engineering Pvt. Ltd., AY: 2015-16 (iii) Disallowance u/s. 56(2)(viib) of the Act amounting to Rs.1,06,86,000/- on account of alleged transfer of shares at a higher value than the alleged book value of the same. 1.2. Aggrieved with this action, the assessee approached the Ld. CIT(A), where he could succeed with respect to the amount of alleged sundry creditor discrepancy with respect to M/s. Saket (Rs.2,20,600/-). The remaining two additions were confirmed.
Further aggrieved with this action of Ld. CIT(A), the assessee has approached the ITAT with the following grounds: “
1. That the order passed u/s. 143 is bad in law as well as on facts of the case.
2. For that Ld. Assessing Officer erred in assessing Sundry Creditors. The ld. Assessing Officer made the addition only for the reason that there is a difference of amount in the books of two companies.
3. For that the Ld. Assessing Officer erred to apply u/s. 56(2)(vii)(b).
4. That the appellant craves to leave, add, amend or adduce any of the grounds of appeal during the course of appellate proceedings.”
2.1. Before us, the ld. AR argued, with the help of written submissions and a paper book that the alleged difference between the books of assessee and M/s. Bajrang Steel was actually readily explainable. The Ld. AR explained that even though Rs.15,00,339/- was payable by the assessee to M/s. Bajrang Steel, but was actually settled by another party (M/s. D. K. Enterprises). All these three entities had interconnected transactions. However, the assessee could not give effect to this fact in his books. It was requested to remand this issue to the Ld. Assessing Officer for verification. 2.2. Regarding the addition made u/s. 56(2)(viib) of the Act, it has been stated that the assessee company was formed with the object of taking over the proprietorship business of M/s. Ramkrishna Enterprises. The proprietor of this firm and the promoter of the assessee company are same persons. It was argued that the proprietorship concern had assets of book value of Rs.2.19 Crores (immovable property) which was actually valued in the market at Rs.6.64 Crores. The ld. AR pointed out that this fact has Ramkrishna Engineering Pvt. Ltd., AY: 2015-16 been duly recorded by the Ld. Assessing Officer on page 5 of his order. Thus, the assessee company was actually taking over property which was book valued at Rs.2.19 Crores and market valued at Rs.6.64 Crores in lieu of 2,60,000 equity shares of face value of Rs.10/- and premium of Rs.40/- amounting to Rs.1.30 Crores. Thus, the proprietor of erstwhile M/s. Rama Krishna Enterprises was effectively parting with assets with Rs.6.64 Crores (book value of Rs.2.19 Crores) in lieu of shares worth only Rs.1.30 Crores. Thus, the assessee company paid for the said immovable assets at much less than their real value. It was further added that the said assets would vest in the company with the allotment of shares to the erstwhile proprietor of M/s. Ram Krishna Enterprises and it did not matter significantly about the valuation because the promoter of the assessee (along with his wife) is the same person as the proprietor of M/s. Rama Krishna Enterprises. Thereafter, the ld. AR relied on the case of FIS Payment Solutions & Services India (P) Ltd. reported in 166 taxmann.com 354 (Del.) to canvass the point that the deeming fiction used in 56(2)(viib) of the Act could not be stretched to absurd lengths where there is no real gain as to the assessee has been alleged by the ld. Assessing Officer. 2.3. The Ld. DR relied on the orders of the authorities below and pointed out that the book value calculated by the ld. Assessing Officer was correct. He also pointed out that there was a mismatch between the sundry creditors shown by the assessee and that of M/s. Bajrang Steel Trading Company.
We have heard the rival submissions and also gone through the records and documents before us. Regarding the issue of mismatch between the sundry creditor figure in the books of assessee and those of M/s. Bajrang Steel, we deem it fit to remand the matter back to the file of the Ld. Assessing Officer for verifying whether another entity was involved in settling the liability. For this, the assessee would produce the relevant documents for verification.
Ramkrishna Engineering Pvt. Ltd., AY: 2015-16 3.1. Regarding the issue of addition u/s. 56(2)(viib) of the Act, it is observed that the assessee has charged a far less premium for the shares issued to acquire the said proprietorship firm than whatever would be due if the market value of the asset was to be considered. This finding is in line with the finding in the case of FIS Payment Solutions & Services India Pvt. Ltd. (supra), in which there was a transaction between a holding company and its subsidiary company. In light of this finding it is held that the Ld. Assessing Officer has fallen in error in valuing the shares (book value) mechanically, without considering the actual value of assets being brought into the company as a result of the impugned transaction. The addition of Rs.1,06,86,000/- is hereby deleted.
In the result, this appeal of the assessee is partly allowed.
Order pronounced on 13th May, 2025.