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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: SHRI T.R. SENTHIL KUMAR & SHRI MAKARAND V. MAHADEOKAR
Year : 2013-14 Nepra environmental- The Income Tax Officer बनाम/ Solutions Private Limited Ward-3(1)(1) v/s. 705, Sharan Circle Hub Ahmedabad Nr. Sharan Homes, Zundal Gandhinagar 382 421 (Gujarat) �थायी लेखा सं./PAN: AACCP 0273 F (अपीलाथ�/ Appellant) (�� यथ�/ Respondent) Assessee by : Shri Divyakant Parikh, AR Revenue by : Shri Santosh Kumar, Sr.DR सुनवाई की तारीख/Date of Hearing : 20 /02/2025 घोषणा की तारीख /Date of Pronouncement: 25/02/2025 आदेश/O R D E R
PER MAKARAND V. MAHADEOKAR, AM:
This appeal has been preferred by the assessee against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [NFAC], Delhi [hereinafter referred to as “CIT(A)”], dated 07-08-2024, for the Assessment Year (AY) 2013-14. The assessment was completed under section 143(3) r.w.s. 144 of the Income Tax Act, 1961, [hereinafter referred to as “the Act”] vide order dated 18-07-2024, wherein the Assessing Officer [hereinafter
2 referred to as “AO”] made additions and disallowances, which were later confirmed by the CIT(A).
The key issues for adjudication in the present appeal are: (i) Disallowance of expenses amounting to Rs.1,97,068/- claimed by the assessee.
(ii) Addition of Rs.95,00,000/- under section 68 of the Act in respect of share application money received.
(iii) Alternative addition of Rs.70,99,350/- under section 56(2)(viib) of the Act on account of excessive share premium.
Facts of the Case:
The assessee-company was incorporated for providing website designing and software development services. However, as noted by the AO, no business activities were carried out during the relevant assessment year. The revenue sources disclosed were only interest income and miscellaneous receipts. The AO observed that the assessee had received Rs.95,00,000/- as share application money from five subscribers, namely: Smt. Kokilaben Navnitlal Patel - Rs. 20,00,000/- Smt. Sheetal Thadani alias Sheetal Brijesh Patel - Rs. 20,00,000/- Smt. Vaishali Dhaval Patel - Rs. 20,00,000/- Shri Brijesh Navnitlal Patel - Rs. 15,00,000/- Shri Dhaval Navnitlal Patel - Rs. 20,00,000/- 4. The AO noted that these individuals had taken loans from M/s. Aerolam Insulations Pvt. Ltd., a company with substantial losses in the year under consideration. Further, the creditworthiness of these shareholders was not found satisfactory as they had meagre incomes in their Income Tax
3 Returns. The AO issued summons under section 131 of the Act to the shareholders but found that their explanations regarding the source of investment were unsatisfactory. Consequently, the AO invoked section 68 of the Act, treating the share application money as unexplained cash credit and added Rs.95,00,000/- to the assessee’s income. Additionally, the AO rejected the DCF method of share valuation adopted by the assessee and applied the NAV method, leading to an alternative addition of Rs.70,99,350/- under section 56(2)(viib) of the Act. The AO also disallowed Rs.1,97,068/- claimed as expenses, stating that since no business operations were carried out, the expenses could not be allowed as business expenditure.
5. The assessee preferred an appeal before the CIT(A) who confirmed the order of the AO, holding that the assessee had not satisfactorily explained the source of share application money, as the investors were financially weak, and their source of income was questionable. The CIT(A) also held that the AO was justified in rejecting the DCF valuation method and substituting it with NAV. Since no business activity was carried out, the expenses of Rs.1,97,068/- were rightly disallowed.
Aggrieved by the order of the CIT(A) the assessee is in appeal before us with following grounds of appeal:
1. The Ld. National faceless Appeal Centre [ NFAC]/ CIT (APPEALS) has grievously erred both in law and on facts in confirming the order of Id.A.O. making addition / disallowance of deduction of expenses of Rs.1,97,068/- correctly claimed by the appellant as per law. The disallowance made and confirmed by Id CIT(Appeals) is against the facts and provisions of law. It be so held now.
2. The Ld. National Faceless Appeal centre [NFAC] / CIT (APPEALS) further grievously erred both in la wand on facts in confirming the addition of Rs.95,00,000/- made by Id AO u/s 68 of the IT Act in respect of share application 4 money and premium ignoring the fact that even sources of sources of credits of the creditors were established by documentary evidences. It be so held now and addition be deleted.
3. The Ld. National Faceless Appeal centre [NFAC] / CIT (APPEALS) miserably failed to appreciate that all the amounts of share application money were received through proper banking chanel and necessary documentary evidences including IT returns and bank statements of the creditors/ share applicants were furnished and thus primary onus under section 68 read with proviso was fully discharged by establishing sources of sources of even source. It be so held now and addition of Rs.95,00,000/- be deleted now.
Both the lower authorities have completely misdirected them for making and sustaining addition u/s 68 of the Act r.w.s 115BBE on irrelevant and untenable ground regarding volume of income of the creditors ignoring their genuine sources of funds for making investment in the shares of appellant. It be so held now and addition be deleted.
The addition u/s 68 made half heatedly by Id AO on suspicion without proper inquiry on the documentary evidences furnished is against the sanction of law. The same ought to be deleted in toto by Id NFAC/ CIT(Appeals) in view of the settled legal position. The same be deleted now.
6. The Ld. National Faceless Appeal centre [NFAC] / CIT (APPEALS) further grievously erred both in law and on facts in confirming action of Id AO for making / proposing alterative addition of Rs.70,99,350/- in respect of share premium u/s 56(2)(viib) ignoring the very purpose of said provisions and since the addition u/s 68 is wrongly made which ought to be deleted, section 56(2)(viib) ought not to be invoked. It be so held now and alternative addition proposed by ld AO be held to be untenable.
7. Without prejudice to the above, both the lower authorities erred in law and on facts in not appreciating that the valuation of shares made as per prescribed method under rule 11UA on the basis of DCF method could not be altered as done by ld AO and hence the valuation made by ld AO and resultant addition proposed u/s 56(2)(viib) ought not to be upheld. It be so held now.
8. The Ld. National Faceless Appeal centre [NFAC] / CIT (APPEALS) ought to have accepted appellants ground No: 4 before him against proposed addition u/s 56(2)(viib) of the Act and ought not to have passed a cryptic order on the said ground. It be so held now.
5 9. The Ld. National Faceless Appeal centre [NFAC] / CIT (APPEALS) ought to have allowed the appeal in toto. 10. The appellant craves leave to add, alter, modify or delete any of the grounds at the time of hearing.
During the course of hearing before us, the Authorized Representative (AR) of the assessee contended that the assessee had discharged its primary onus under section 68 of the Act by submitting confirmations, bank statements, and ITRs of the investors. The AR argued that the assessee has explained the source of the source of the share capital introduced and therefore the burden is shifted to AO to prove that the creditworthiness or genuineness is lacking. The AR further argued that the AO failed to conduct any further inquiry beyond rejecting the documents on suspicion. The AR stated that the AO rejected the creditworthiness of the share applicants only on the ground of their low income, which is legally untenable. The AR further stated that the assessee did not carry out any business activities during the relevant year being the first year of operations and therefore there is no question of any unaccounted income in the hands of the assessee. Regarding the valuation of shares, the AR stated that the assessee followed Rule 11UA(2) and used the DCF method, which is a prescribed valuation method and the AO has a choice of selecting the method under Rule 11UA. The AR also argued that the AO cannot replace the method of valuation arbitrarily.
7.1. The AR placed reliance on the following judicial precedents: - Mitesh Rolling Mills P. Ltd. vs. CIT [2002] 258 ITR 278 (Guj.). - CIT vs. Bharat Engineering & Construction Co. [1972] 83 ITR 187 (SC). - CIT vs. Vrindavan Farms (P) Ltd. (Delhi HC) [ITA No: 71/2015, 72/2015 & 84/2015].
6 - Arjun Trading Co. Pvt. Ltd. vs. ITO [ITA No. 290/Agra/2016]. - DCIT vs. JWL Cold Store Pvt. Ltd. (Mumbai ITAT) ITA No: 3098/MUM/2023. - ITO vs. Surana Metcast (India) Pvt. Ltd. (Ahmedabad ITAT) ITA No: 2339/AHD/2018. - PCIT vs. I A Hydro Energy (P) Ltd. ( HC of Himachal Pradesh) of 2024.
The Departmental Representative (DR), on the other hand, relied on the order of CIT(A) and stated that the assessee failed in proving creditworthiness of the Shareholders.
We have carefully considered the rival submissions, perused the material available on record as well as the judicial precedents relied upon by the assessee and we find that the assessee submitted confirmations, bank statements, and ITRs of all share applicants, thereby discharging its initial burden of proof. As held by Hon’ble High Court of Delhi in the case of CIT vs. Vrindavan Farms (P) Ltd. (supra), once the assessee submits basic documentary evidence, the onus shifts to the AO to make further inquiries and bring contrary material on record. In the present case, the AO merely rejected the documents without conducting further verification, which is contrary to this principle.
9.1. From the financial statements of the company, it is observed that the company has not yet commenced its operations whereas it has earned other income of Rs.2,60,308/- during the Financial Year (FY) 2012-13 which mainly include interest income of Rs.2,12,309/- As decided by the Agra Bench of the 7 tribunal in case of Arjun Trading Co. Pvt. Ltd., where a company is newly incorporated and has not commenced business, cash credits cannot be treated as unaccounted income. Similar issue was confirmed by the Apex court in the case of CIT Vs. Bharat Engineering and Construction Co. [1972] 83 ITR 187 (SC).
9.2. The AO rejected creditworthiness solely on the ground of low-income levels of investors, which is legally untenable, as held by the Co-ordinate Bench in the case of EAM Fruits LLP vs. ITO. In this case, the Co-ordinate Bench ruled that creditworthiness should be evaluated based on the financial transactions of the investor such as loans, gifts or any other source of income rather than just income levels. The present case follows a similar pattern, where the AO ignored the sources of funds of the shareholders. The AO failed to conduct any further inquiry or cross-examine the investors, despite having their details. This is contrary to the principle laid down by the Co-ordinate Bench in the case of Clavecon India P. Ltd. vs. DCIT (ITAT Delhi), where it was held that if the AO doubts the creditworthiness, he must conduct independent inquiries before making an adverse inference.
9.3. In light of the above judicial precedents and considering the factual matrix of the case, it is evident that the assessee has fully discharged its burden under Section 68 by providing all relevant documentary evidence. The AO, on the other hand, failed to conduct any meaningful inquiry or bring on record any material evidence to contradict the submissions of the assessee. The rejection of share applicants' creditworthiness solely on the basis of their low-income levels is not legally sustainable. Since no business activity had commenced during the relevant year, the application of Section 68 in this case
8 is wholly unwarranted. Accordingly, the addition under Section 68 deserves to be deleted in its entirety.
9.4. The alternative addition of Rs.70,99,350/- under Section 56(2)(viib) of the Act is based on the Assessing Officer’s (AO) rejection of the Discounted Cash Flow (DCF) method, which was adopted by the assessee as per Rule 11UA(2) of the Income Tax Rules, 1962. The AO replaced it with the Net Asset Value (NAV) method without providing a valid reason. This action is contrary to the legal principle that the choice of valuation method under Rule 11UA(2) lies with the assessee,. We have noted the judicial precedents relied on by the assessee which collectively held that the AO does not have the discretion to substitute the DCF method with the NAV method unless there is an apparent defect or non-compliance in the application of the chosen method and the AO had no jurisdiction to substitute the NAV method of assessing the valuation of shares, once the assessee had exercised option of a DCF method as per Rule 11UA(2) of the Rules. In the present case, the AO’s action of ignoring the DCF method without any proper basis and replacing it with the NAV method is arbitrary, contrary to legal precedents, and unsustainable in law. Accordingly, the alternative addition under Section 56(2)(viib) of the Act is unjustified and deserves to be deleted.
9.5. Before we conclude we deal with the ground relating to the disallowance of Rs.1,97,068/- The assessee claimed expenses amounting to Rs.1,97,068/- against its income, which primarily consisted of interest income of Rs.2,12,309/- and other miscellaneous income of Rs.2,999/-. The AO disallowed these expenses on the ground that since the assessee did not carry out any business activity during the relevant assessment year, the expenses
9 claimed did not have a nexus with the earning of income. The AO noted that the financial cost of Rs.1,73,285/- was related to borrowings used for investment in the share capital of an associate company, which is not allowable under section 57(iii) of the Act. Similarly, ROC expenses of Rs.30,654/- were held to be capital in nature. Other expenses such as traveling, legal, and professional fees were also disallowed due to lack of any direct connection with the interest income. The CIT(A) upheld the disallowance, concurring with the AO’s finding that the expenditure was not incurred for the purpose of earning interest income and thus could not be allowed under section 57(iii) of the Act. The only expenses allowed were statutory audit fees, postal expenses, and telephone charges, totalling to Rs.18,240/-, which were deducted from the income.
9.6. Considering the facts on record, we find no reason to interfere with the decision of the lower authorities. The assessee did not demonstrate any direct nexus between the claimed expenditure and the income earned, which is a necessary condition under section 57(iii) of the Act. The AO and CIT(A) have correctly applied the provisions of law, and accordingly, the disallowance of Rs.1,97,068/- is justified.
9.7. In light of the submissions made by both parties, the material placed on record, and the discussion of the judicial precedents relied upon, we conclude that the assessee has successfully demonstrated the genuineness of the share application money received by providing relevant documentary evidence, and thus, the addition under Section 68 is deleted. Similarly, the alternative addition under Section 56(2)(viib) of the Act is unsustainable as the assessee has correctly followed the DCF method for valuation, and the 10 AO was not justified in substituting it arbitrarily. However, with respect to the disallowance of expenses amounting to Rs.1,97,068/-, the assessee has failed to establish a direct nexus between the expenditure and the income earned, and therefore, the disallowance is confirmed.
In the result, the appeal of the assessee is partly allowed. pronounced in the Open Court on 25th February, 2025 at Ahmedabad.