GOPESH FABRICS PVT. LTD.,BALLABHGARH vs. ITO WARD-1(3) , FARIDABAD
Facts
The assessees' returns were selected for 'limited scrutiny' to verify the source of share premium received. The Assessing Officer (AO) made additions under Section 68 of the Income Tax Act on account of share capital and share premium, doubting the identity, creditworthiness, and genuineness of the investors. The Ld. CIT(A) upheld these additions and further enhanced the income under Section 251(1) read with Section 56(2)(viib) by rejecting the valuation reports furnished by the assessees.
Held
The Tribunal found that the assessees had provided sufficient documentary evidence to establish the identity, creditworthiness, and genuineness of the share transactions. It held that the AO and CIT(A) erred in rejecting the valuation reports (prepared using the Discounted Cash Flow method as per Rule 11UA(2)) without providing any contrary material or having the legal authority to substitute their own valuation. The Tribunal concluded that the additions under Section 68 and enhancements under Section 56(2)(viib) were based on conjectures and were bad in law, thus liable to be deleted.
Key Issues
(i) Whether CIT (A) was correct in confirming the addition made u/s 68 of the Income Tax Act on account of share capital and share premium received by the assessee Company? (ii) Whether CIT(A) was correct in enhancing the income of the assessee u/s 251(1) read with Section 52(2) (viib) of the Act on protective basis ignoring the valuation report furnished as per Rule 11UA(2) of the IT Rules, 1962?
Sections Cited
Section 68 of the Income Tax Act, Section 251(1) of the Income Tax Act, Section 56(2)(viib) of the Income Tax Act, Section 133(6) of the Income Tax Act, Section 143(1) of the Income Tax Act, Section 142(1) of the Income Tax Act, Section 271(1)(c) of the Income Tax Act, Rule 11UA of the Income Tax Rules, 1962, Rule 11UA(2) of the Income Tax Rules, 1962, Rule 11U of the Income Tax Rules
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘H’: NEW DELHI
Before: DR. B.R.R. KUMAR & SHRI YOGESH KUMAR U.S.
PER YOGESH KUMAR U.S., JM:
The above captioned appeals are filed by the different
Assessees against the orders passed by the Learned Commissioner
of Income Tax (Appeals), Faridabad [“Ld. CIT(A)”, for short],dated
19/03/2020, 23/03/2020, 13/03/2020, 17/03/2020 and
23/03/2020 respectively pertaining to Assessment Year 2016-17.
The common grounds of Appeal taken by the Assessees in all
the captioned appeals except variance of figures are as under:-
Page 2 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
CONCISE GROUNDS OF APPEAL
“1. That the Ld. CIT (A) has erred in law as well as on facts in confirming addition of Rs. 67,20,000/- u/s 68 of the Act and enhancing the income by Rs. 28,80,000/- u/s 251(1) of the Acton account of alleged unexplained share premium and share capital despite furnishing all the documentary evidence for establishing identity, creditworthiness of the investors and the genuineness of the transaction.
That the Ld. CIT (A) has erred in law as well as on facts in enhancing the income of appellant u/s 251(1) by a sum of Rs. 60,54,400/-under the head income from other sources by applying section 56(2)(viib) of the Acton protective basis and rejecting the valuation report furnished under Rule 11UA(2)(b) of Income Tax Rules, 1962 i.e., Discounted Cash Flow Method.
That the Ld. CIT(A) has grossly erred in law as well as on facts in sustaining addition u/s 68 of the Act and enhancing the income of appellant on protective basis u/s 56(2)(viib) r.w.r 11UA of IT rules without appreciating the fact that the case was selected for limited scrutiny for the reason that "Large share premium received during the year (verify applicability of sec 56(2)(viib)" which restrict the scope of assessing authorities to scrutinize the limited aspect.
Page 3 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
That the Ld. CIT(A) has erred in law as well as on facts in initiating the penalty proceedings u/s 271(1)(c) of the Act. The above grounds of appeals are independent of and without prejudice to each other.
That the appellant craves leave to add, alter, amend or withdraw all or any grounds herein or add any further grounds as may be considered necessary either before or during the hearing of these grounds.”
The issues involved in the above appeals are identical; 3.
therefore all the appeals are heard together. The common issues to
be decided in the above Appeals are as under:-
(i) Whether CIT (A) was correct in confirming the addition made u/s
68 of the Income Tax Act (‘Act’ for short) on account of share capital
and share premium received by the assessee Company?
(ii) Whether CIT(A) was correct in enhancing the income of the
assessee u/s 251(1) read with Section 52(2) (viib) of the Act on
protective basis ignoring the valuation report furnished as per Rule
11UA(2) of the IT Rules, 1962?
Page 4 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
The facts in brief are that, the return filed by the Assessees
were processed u/s 143(1) of the Act and the case of the Assessees
were selected for ‘limited scrutiny’ under CASS to verify whether the
funds received in the form of share premium are from the disclosed
sources or not. During the course of assessment proceedings,
statutory notices were issued for which assessee furnished the
information from time to time. The A.O. issued notice u/s 133(6) of
the Act to the Investor Companies requiring them to furnish
relevant information and confirming the investment made in the
subscription of the shares in the Assessees Company. In response,
most of the investor Companies have confirmed the investment
made in the Assessees Company. The A.O. made the addition of the
entire share application received, to the income of the assessees by
doubting the credibility and identity of the investors and
genuineness of the transaction. Aggrieved by the assessment
orders made against the assessee herein, assessees have preferred
Appeals before the CIT(A). The Ld. CIT(A) upheld the additions made
by the A.O. and also enhanced income of the assessees u/s 251(1)
Page 5 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
read with Section 56(2) (viib) of the Act on protective basis by
rejecting the valuation report furnished by the assessee under Rule
11UA(2) of the Income Tax Rules (‘Rules’ for shrot). Aggrieved by
the impugned orders of the Ld. CIT(A), the Assessees have preferred
the above captioned appeals on the common grounds mentioned
above.
The Ld. Counsel for the assessees summarizing the issues
involved in the above five appeals, filed a chart showing common
issues involved in the captioned Appeals which reproduced as
under:-
S. particulars ITA No. ITA No. ITA No. ITA No. ITA No. 84/Del/2021 87/Del/202 88/Del/20 98/Del/2021 No.99/Del/2021 M/s Shanta 1 21 Blankets (P) Ltd. M/s Zhilmil M/s Vidhi M/s Gopesh M/s Pingash Electronic cinemas (P) Fabrics (P) Ltd. Marketing (P) Ltd. (P) Ltd. Ltd. 1 Addition made Rs. Rs. Rs. Rs. Rs. by the Ld.AO 67,20,000/- 70,00,000 51,00,000 93,00,000/- 96,00,000/- u/s /- /- 68 of the Act. 2 CIT(A) u/s 68 of AO) + Rs. IT Act on 28,80,000/- account of share (enhanced by capital invested CIT(A) Total Rs. by investor 96,00,000/- companies. 3 Enhancement of Rs. Rs. Rs. Rs. Rs. income u/s 60,54,400/- 52,50,000 34,00,000 62,00,000/- 64,00,000/- 251(1) r.w.s /- /- 56(2)(viib) - income by CIT(A) on protective basis. 4 Investment made Rs. N/A N/A Rs. Rs. by the investor 45,00,000/- 45,00,000/- 24,00,000/- companies in preceding years. Page 6 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
Details of M/s Alpha N/A N/A M/s investors who Developers (?) Gangashiv M/s Best made investment Ltd. Contractors (P) Infracon (P) Ltd. during the (Rs. Ltd. Rs. 4,50,000/- on preceding years 6,00,000/-) (Rs. 30.7.2014. for which on 18,00,0000/-) on M/s Om addition is 18.2.2015 8.8.2014 Shivam made. M/s M/s RSM Contractors Herculese Constructions (P) Rs. 6,00,000/- on Builder (P) Ltd. Ltd. 5.8.2014. (Rs. (Rs. 21,00,000 on M/s Rishi 3.0. 000/-) 23. 12.2014, Credit and on 18.12.2014, Industries Pvt 21.8.2014 22.07.2014) Ltd. M/s Texcity M/s Best Infracon Rs. 9,00,000/- on Construction ns (P) Ltd. Rs. 5.08.2014. (P) Ltd. 3,00,000/-) on M/s Teccity (Rs. 22.7.2014 Constructions 36.0. 000/-) M/s Pearl Home Kovail (P) Ltd. Rs. build (P) Ltd. (Rs. 4,50,000/- on on 16.09. 2014 3,00,000/-) on 30/07/2014. and 123.12.2014 17.09.2014. 6 Investment made Rs. Rs. Rs. Rs. Rs. by the investor 51,00,000/- 70,00,000/ 51,00,000/ 48,00,000/- 72,00,000/- companies during - - the year in concern. 7 Details of the M/s Mega Sonic M/s Pearl M/s Beta M/s Herculese investors who pro Service (P) Durobuild Nirman (P) Builders made the Ltd. (P) Ltd. Ltd. (Coimbatore)( P) investment (Rs. (Rs. (Rs. Ltd. Rs. during the year 21,00,000/- 20,00,000/ 6,00,000/- 21,00000/- M/s Cee Aar on -) ). on9.10.20 Decors (P) Ltd. 16.3.2016) 15) (Rs. 24,00,000/- M/s Nu Ruchi M/s M/s Nu M/s Triketa on Barter (P) Ltd. Radha Ruchi Multitrade (P) Ltd. 13.10.2015) (Rs. Ballabh Barter (P) Rs. 27,00,000/- 30,00,000/- Builders Ltd. on M/s Sigma Tech on (P) Ltd. (Rs. 15.3.2016 Services (P) Ltd. 10.3.2016) (Rs. 24,00,000/ . (Rs. 36,00,000/- 5,00,000/- - )• on ) 05.03.2016) M/s Good M/s Rivet Luck Health 05.03.2017) Industries Club (P) M/s Ltd.(Rs. Ltd. Viratsons 25,00,000/ (Rs. Multitrade (P) -) 21,00,000/ Ltd. - )• (Rs. 12,00,000/- M/s Rishi On 18.03.2016 Credit & Industries (P) Ltd. (Rs. 20,00,000/ -) 8. Evidences M/s Alpha he /s M/s Pearl M/s Beta M/s Gangashiv M/ M/sBest furnished in Developers Durobuild Nirman (P) Contractors (P) Infracon (P) Ltd. the PB (P) Ltd. (PB (P) Ltd. Ltd. (PB Ltd. (PB 111-138) (PB 200- 224) 67-91) PB 95-119) 64-88) M/ M/s Radha M/s RSM M/s Om M/ M/s Herculese Ballabh M/s Nu Constructions (P) Shivam Builder (P) Ltd. Builders (P) Ruchi Ltd. (PB 165-189) Contractors (PB (PB 92- 116) Ltd. (PB Barter (P) 160-185)
Page 7 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
120-143) Ltd. (PB M/s Best M/ M/s Mega 89-121) Infracon (P) Ltd. Sonicpro M/ M/s Luck (PB 200- 224) M/ M/s Rishi Service (P) Ltd. Good Rivet Credit and (PB 117-147) Industries Health M/s Pearl Industries Pvt. Ltd. (PB Club (P) Homebuild (P) Ltd. (PB 186- M/ M/s Ruchi Nu 144-168) Ltd. (PB Ltd. (PB 225- 211) Barter (P) Ltd. 122-148). 250) Rishi M/ M/s Texcity (P 147A-181) Credit & M/s Herculese Construction s Industries Builders Kovai (P) Ltd. M/s Texcity (P) Ltd. (PB (Coimbatore)( P) (PB 225-248) Constructions 169- 193). Ltd. (PB 139-164) M/s Cee Aar (P) Ltd. (PB 182- Decors (P) Ltd. 208). M/s Triketa (PB 134-1959) Multitrade (P) M/ M/s Sigma Tech Ltd. (PBN 190- services (P) Ltd 199) (PB 212-224) M M/s Viratsons Multitrade (P) Ltd. (PB 249- 279) 9 Information Yes- 133(6) - Yes- 133(6) Yes- 133(6) Yes- 133(6) Yes- 131 sought by the Ld. Could not be Partly Complied complied by all summon replied AO u/s 133(6) or complied complied- by one investors except vide online reply summon issued Pg 3 of AO investor one - Pg 3 of AO dated u/s 131 of the company- 22.12.2018- Pg3 Act. Pg 3 of AO of AO f 10 Value of shares as Rs. 30/- (PB 51- Rs. 40 (PB Rs. 30 (PB Rs. 30/- PB 64- 66) per Discounted 53) 87- 89). 23- 25). Cash Flow Method (DCF) under Rule Rs. 30/- PB 55- 1lUA(2)(b) IT 57) Rules, 1962.
The Ld. Counsel for the assessee submitted that the CIT(A)
has committed error by sustaining the addition made u/s 68 of the
Act, though the assessee has proved the ingredients of Section 68 of
the Act i.e. identity of investors and creditworthiness of the
investors and genuineness of the transaction. The assessees have
produced names, addresses and PAN particulars of each of the
investors and also entries in ROC Website. The assessees have also Page 8 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
produced documents to prove identity, creditworthiness and
genuineness of the transaction, but the Lower Authorities have
erroneously ignored the same. The Ld. Counsel taken us through
the documents produced in the paper book and submitted that
apart from furnishing all the documents before the Lower
Authorities, also produced valuation certificate as per Rule 11UA(2)
of the Rules. Thus, submitted that the assessees have proved the
ingredients as required u/s 68 of the Act i.e. identity,
creditworthiness and genuineness of the transaction, therefore
sought for deletion of the additions. The Ld. Counsel has also relied
on following decisions:-
• Order of Tribunal in the matter of Mantram Commodities pvt. Ltd. Vs. ITO in ITA No. 6170/Del/2019 for Assessment Year 2015-16. • Order of Tribunal in the matter of Mantram Commodities pvt. Ltd. Vs. ITO in ITA No. 105/Del/2021 for Assessment Year 2016-17. • Order of Tribunal in the matter of Dayalu Iron & Steel Pvt. Ltd. Vs. ITO in ITA No. 6173/Del/2019, Dayalu Fashion Pvt. Ltd. Vs. ITO in IETA o. 6174/Del/2019 and Devesh Cinemas Pvt. Ltd. Vs. ITO in ITA No. 6184/Del/2019 for Assessment Year 2015-16 • Order of Tribunal in the matter of Sparsh Beauty Care Pvt. Ltd. Vs. ITO in ITA No. 170 and 246/Del/2022 for Assessment Year 2015-16. Page 9 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
• Judgment of Hon'ble High Court of Delhi in the matter of Pr. Commissioner of Income Tax-2 Vs. M/s Cinestan Entertainment Pvt. Ltd. in ITA No. 1007/Del/2019. • Judgment of Hon'ble High Court of Delhi in the matter of Pr. Commissioner of Income Tax-2 Vs. Enrich Agro Food Products Pvt. Ltd. in reported [2023] 148 taxmann.com 26. • Order of Tribunal in the matter of Abhirvey Projects Pvt. Ltd. Vs. ACIT in ITA No. 9400/Del/2019 for Assessment Year 2015-16. • Copy of Judgment of Hon'ble Apex Court in the matter of Pr. Commissioner of Income Tax- Vs. Rohtak Chain Co. Pvt. Ltd. in reported [2019] 110 taxmann.com 59. • Copy of Judgment of Hon'ble Apex Court in the matter of Pr. Commissioner of Income Tax- Vs. BharatSecurities . Pvt. Ltd. in reported [2020] 113 taxmann.com 32. • Copy of Judgment of Hon'ble High Court of Madhya Pradesh in the matter of Pr. Commissioner of Income Tax- Vs.Chain House International Pvt. Ltd. In reported [2018] 98 taxmann.com 47.” 7. Per contra, the Ld. Departmental Representative submitted that the assessees have not produced the original confirmation, confirmations have not been produced in some of the cases and in some of the cases there is no documentary evidence such as confirmation, ITR, Balance sheet, Bank Account etc. The assessees have not provided requisite documents to satisfy the ingredients of Section 68 of the Act, thus, the assessees have not discharged the burden to prove the identity, creditworthiness of the share
Page 10 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
applicant and the genuineness of the transaction. Thus submitted
that, the orders of the ld. CIT(A) requires no interference at the
hands of the Tribunal.
We have heard both the parties and perused the material
available on record. In the case of the assessees the return of
income was processed u/s 143(1) of the Act and the cases were
selected for limited scrutiny under CASS to verify ‘whether the
funds received in the form of share premium are from the disclosed
sources’. During the course of the assessment proceedings, the
A.O. issued statutory notices to the assessees. In response to the
notices issued u/s 142(1) of the Act, the assessees have filed
certain documents such as certificate of incorporation, MOA/AOA,
auditor’s report along with balance sheet and profit and loss
account for the relevant Financial Year 2015-16, valuation report of
shares, bank statement, bank ledger account. The assessees have
also furnished the documents with respect to investor companies
such as confirmation of accounts share application form, certificate
of incorporation, MOA/AOA, auditor’s report along with balance
Page 11 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
sheet and profit and loss account for the relevant Financial Year
2015-16. The assessees have reproduced the above documents
along with the paper books before us and also provided the details
of all the investor companies and the amount of share capital and
share premium invested for which addition was made. The
particular of the above details Assessees have mentioned as under:-
(1) M/s Shanta Blankets (P) Ltd. ITA No. 84/Del/2021 A.Y 2016-17
Particulars M/s Shanta Blankets (P) Ltd. 1 Name of the investor 1. M/s Alpha Developers (P) Ltd. company and amount (Rs. 6,00,000/-) on 18.02.2015 of share capital and 2. M/s Herculese Builder (P) Ltd. share premium (Rs. 3,00,000/-on 21.08.2014.) invested for which the 3. M/s Mega Sonic pro Service (P) addition was made. Ltd. (Rs. 21,00,000/-) 4. M/s Nu Ruchi Barter (P) Ltd. (Rs. 30,00,000/-) 5. M/s Texcity Constructions (P) Ltd. (Rs. 36,00,000/-) on 16.09.2014 and 17.09.2014). 2 Evidences furnished in M/s Alpha Developers (P) Ltd. (PB the PB 67-91) M/s Herculese Builder (P) Ltd. (PB 92-116) M/s Mega Sonicpro Service (P) Ltd. (PB 117-147) M/s Nu Ruchi Barter (P) Ltd. (PB 147A-181) M/s Texcity Constructions (P) Ltd. (PB 182-208).
Page 12 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
2.M/s Zhilmil Electronics (P) Ltd. ITA No. 87/Del/2021 A.Y 2016-17
Sr. No. Particulars M/s Zhilmil Electronics (P) Ltd. 1 Name of the investor 1. M/s Pearl Durobuild (P) Ltd. (Rs. company and amount 20,00,000/-) of share capital and 2. M/s Radha Ballabh Builders (P) share premium Ltd. (Rs. 5,00,000/-) invested for which the 3. M/s Good Luck Industries Ltd. addition was made. (Rs. 25,00,000/-) 4. Rishi Credit & Industries (P) Ltd. (Rs. 20,00,000/-)
Rs. 70,00,000/- 2 Evidences furnished in M/s Pearl Durobuild (P) Ltd. (PB 95- the PB 119) M/s Radha Ballabh Builders (P) Ltd. (PB 120-143) M/s Good Luck Industries Ltd. (PB 144-168) Rishi Credit & Industries (P) Ltd. (PB 169-193)
M/s Vidhi Cinemas (P) Ltd. ITA No. 88/Del/2021 A.Y 2016-17
S. No. Particulars M/s Vidhi Cinemas (P) Ltd 1 Name of the investor company and 1. M/s Beta Nirman (P) amount of share capital and share Ltd. (Rs. 6,00,000/-). premium invested for which the addition 2. M/s Nu Ruchi Barter was made. (P) Ltd. (Rs. 24,00,000/-). 3. M/s Rivet Health Club (P) Ltd. (Rs. 21,00,000/-) 2 Evidences furnished in the PB 1. M/s Beta Nirman (P) Ltd. (PB. 64-88) M/s Nu Ruchi barter (P) Ltd.. (PB 89-121)
Page 13 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
4.M/s Gopesh Fabrics (P) Ltd. ITA No. 98/Del/2021 A.Y 2016-17
Sr. No. Particulars M/s Gopesh Fabrics (P) Ltd. 1 Name of the investor 1. M/s Gangashiv Contractors (P) Ltd. company and amount of (Rs. 18,00,0000/- on 8.8.2014) share capital and share 2. M/s Herculese Builders (Coimbatore) premium invested for (P) Ltd. (Rs. 21,00,000/-) which the addition was 3. M/s RSM Constructions (P) Ltd. made (Rs. 21,00,000 on 23. 12.2014, 18.12.2014, 22.07.2014) 4. M/s Triketa Multitrade (P) Ltd. (Rs. 27,00,000/-) 5. M/s Best Infracon (P) Ltd. (Rs. 3,00,000/- on 22.7.2014) 6. M/s Pearl Homebuild (P) Ltd. (Rs. 3,00,000/- on 13.12.2014 2 Evidences furnished in M/s Gangashiv Contractors (P) Ltd. (PB the PB 111-138) M/s RSM Constructions (P) Ltd. (PB 165- 189) M/s Best Infracon (P) Ltd. (PB 200-224) M/s Pearl Homebuild (P) Ltd. (PB 225- 250) M/s Herculese Builders (Coimbatore) (P) Ltd. (PB 139- 164) M/s Triketa Multitrade (P) Ltd. (PB 190- 199)
M/s Pingash Marketing(P) Ltd. ITA No. 99/Del/2021 A.Y 2016-17
S. No. Particulars M/s Pingash Marketing(P) Ltd. 1 Name of the investor 1. M/s Best Infracon (P) Ltd. (Rs. company and amount of 4,50,000/- on 30.7.2014 share capital and share 2. M/s Cee Aar Decors (P) Ltd. (Rs. premium invested for which 24,00,000/-) the addition was made. 3. M/s Om Shivam Contractors (Rs. 6,00,000/- on 5.8.2014) 4. M/s Rishi Credit and Industries Pvt Ltd. (Rs. 9,00,000/- on 5.8.2014) 5. M/s Sigma Tech Services (P) Ltd. (Rs. 36,00,000/-) Page 14 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
M/s Texcity Constructions Kovai (P) Ltd. (Rs. 4,50,000/- on 30.7.2014) 7. M/s Viratsons Multitrade (P) Ltd. (Rs. 12,00,000/-) 2 Evidences furnished in the M/s Best Infracon (P) Ltd. (PB 108- PB 133) M/s Om Shivam Contractors (PB 160- 185) M/s Rishi Credit and Industries Pvt. Ltd. (РВ 186-211) M/s Texcity Constructions Kovai (P) Ltd. (PB 225-248) M/s Cee Aar Decors (P) Ltd. (PB 134- 159) M/s Sigma Tech Services (P) Ltd. (PB 212-224
On perusal of the documents produced by the assessee, it is
found that the assessee in order to prove the genuineness, of the
transaction, identity and creditworthiness of the investors,
produced the copy of the certificate of incorporation along with MOA
and AOA, copy of auditor’s report, balance sheet, trading and profit
and loss account as on 31/03/2016 along with notes of financial
statement, copy of acknowledgement of return of income for
Assessment Year 2016-17 along with computation of income tax,
copy of share application form, copy of confirmation of account,
copy of bank account statement and copy of valuation report as per
Rule 11UA(2) of the Rules. Page 15 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
In respect of source of credit, in order to prove the three
necessary ingredients ie identity of share applicants, genuineness of
transactions and creditworthiness of share applicants the Assessee
furnished the copies of balance sheets and income tax returns etc.
which are reproduced in the Paper Book. Apart from same, those
companies are active in the MCA website and credentials could be
very well be verified by the Department. It is the case of the
Assessees regarding the creditworthiness of the shares applicants,
those companies are having sufficient capital and reserves to make
the investment in the assessee company, which can be corroborated
from the audited financial statements, the monies have been
directly paid to the assessee company by account payee checks out
of the bank balances available in their respective bank accounts,
thus genuineness of the transactions cannot be doubted.
It is the case of the Department that some of the documents
were not filed by the assessee in relation to aforesaid investors
however, Ld. CIT(A) appreciated the documents, but did not agree
with the Assessee despite there was nothing brought on record
Page 16 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
contrary to the documents brought to the record by the Assessee.
The Assessees Representative contended that AY 2016-17 was the
first year of assessment under faceless scheme and due to technical
glitches sometimes despite uploading the documents it could not
reach. The IT department also found faults and so upgraded their
website later. The assessee can only submit the documents and it is
the duty of the Ld. AO to make necessary efforts and enquiry if
required, but cannot sit idle by not accepting the documents
submitted by the assessee and infer against the Assessee without
any contrary documents on record. The Ld. CIT(A) merely on
doubts ignored the documents, but could not bring any material
contrary during the appellate proceedings.
Further, on a reading of Section 56(2)(viib) of the Act, it
becomes clear that fair market value of share as on date of sale has
to be determined by applying the methodology provided under Rule
11UA of the Rules. A reading of Rule 11UA(2)(b) of the Rules would
make it clear that the fair market value of equity shares has to be
determined by applying the methodology as provided under clause
Page 17 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
(a) or clause (b), at the option of the assessee. Rule 11UA (2)(b) of
the Rules applicable to the relevant assessment year provided an
option to the assessee to get fair market value of the shares
determined by a merchant bank or an accountant. In the fact of the
present case, admittedly, the assessee has got the fair market value
of the shares determined through an accountant. Thus, the
assessee has acted as per the mandate of section 56(2)(viib) read
with Rule 11UA. Whereas, the Assessing Officer has substituted fair
market value determined by the assessee through his own
valuation.
While dealing with an identical issue, the Coordinate Bench in
case of M/s. Dayalu Iron & Steel Pvt. Ltd. (supra) has held as
under:
"12. The Ld. A.O while making an addition u/s 68 of the Act raised question over the ne of the transaction source of funds invested. Further held that, the investor companies do not have produced creditworthiness to fund the assessee company which has been confirmed by the CIT(A) and the CIT(A) has also rejected the valuation report. The assessee in response to notice u/s 142 has produced following documents which have been also in the paper book before us:-
Page 18 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
Particulars Page no of paper book Certificate of Incorporation and MOA 1-34 & AOA Independent Auditors Report, Balance 35-47 Sheet as at 31.03.2015, Profit and Loss Account for the year ended March 31, 2015 along with notes to financial statement for the year ended March 31, 2015 Copy of acknowledgement of Income 48-82 Tax Return along with ITR 6 and Computation of Income Bank book and Bank statement for 83-84 the period from 1.4.2014 to 31.3.2015 Ledger account of the bank book in 85 the books of the appellant company Valuation Reprot under Rule 86-89 11UA92)(b) of the Income Tax Rules, 1962 from the Chartered Accountant as per Discounted Cash Flow Method.
On going through the order of A.O and Ld.CIT(A) it is found that the authorities have just brush aside the documents produced by the assessee and without making any enquiry about authenticity of the documents furnished and without bringing any material or making enquiry came to conclusion that the assessee company is not worth enough to fetch the share premium of Rs. 76,00,000/-. The authorities below without verifying the veracity of the documents from the publically available data on the web site of MCA IT Department. Once the assessee provided the names, addresses and Pan, particulars and ROC details of the investors. The Ld. A.O ought to have made further enquiry. Once the assessee furnishes the documents to prove the identity, creditworthiness and genuineness of the transaction. The same cannot be denied in the absence of material contrary brought by the Assessing Officer.
Page 19 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
The Hon'ble Supreme Court in the case of CIT Vs. Lovely Export Pvt. Ltd. reported in 319 ITR 5 (ST) observed that even if the share capital money is received by the assessee from alleged bogus share holders, whose names are given to the A.O. The Department is free to proceed to reopen their individual assessment in accordance with law. But cannot regarded undisclosed income of the assessee Company. The present case, the assessee has substantially provided materials to prove the genuineness of the share holders apart from giving the Pan Card, name and ROC details. In our considered opinion, the Ld.CIT(A) has erred in confirming the addition of Rs. 12,00,000/- u/s 68 of the Act on account of unexplained share premium and share capital. 15. Further, the Ld. CIT (A) has rejected the valuation report of the assessee, wherein premium charge of Rs. 40 on each share under Rule 11UA has been found to be without basis and while doing so the CIT(A) has relied on decision of the Coordinate Bench of this Tribunal in the case of Agro Portfolio Pvt. Ltd. vs. ITO 2018, 171/ITD/74 DEL. The decision made in Agro Portfolio Pvt. Ltd. (supra) has been considered by the Coordinate bench of this Tribunal in the case of Cinestan Entertainment (P). Ltd. Vs. ITO for AY 2015-16 dated 27/05/2019, wherein it is held that the Assessing Officer cannot examined or substituted its own value in place of valuation arrived by the assessee either DCF Method or NAV Method, the commercial expediency has to be seen from the point view of businessman. Further held that if law provides the assessee to get the valuation done from a prescribed expert as per the prescribed method, then the same cannot be rejected because neither the Assessing Officer nor the assessee have been recognized as expert under the law. The relevant portion are hereunder:- "28. Now what we are required to examine whether under these facts and circumstances Assessing Officer after invoking the deeming provision of Section 56(2)(vii) could have determined the fair market value of the premium on shares issued at Nil after rejecting the valuation report given by the Chartered Accountant on one of the Page 20 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
prescribed methods under the rules adopted by the Valuer. Before us, learned counsel, Mr. Dinodia, first of all had harped upon the spirit and intention of the Legislature in introducing such a deeming provision and submitted that such a provision cannot be invoked on a normal business transaction of issuance of shares unless it has been demonstrated by the Revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the ld. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in which such deeming provisions are triggered. It is a trite law well settled by the Constitutional Bench of Supreme Court, in the case of Dilip Kumar & Sons (supra) that in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory, and if there are two views possible in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares have been subscribed by unrelated independent parties, who are one of the leading industrialists and businessman of the country, after considering the valuation report and future prospect of the company, have chosen to make investment as an equity partners in a 'start-up company' like assessee, then can it be said that there is any kind of tax abuse tactics or laundering of any unaccounted money. It cannot be the unaccounted or black money of investors as it is their tax paid money invested, duly disclosed and confirmed by them; and nothing has been brought on record that it is unaccounted money of assessee company routed through circuitous channel or any other dubious manner through these accredited investors. If such a strict view is adopted on such investment as have been done by
Page 21 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
the Assessing Officer and by ld. CIT(A), then no investor in the country will invest in a 'start-up company', because investment can only be lured with the future prospects and projection of these companies. 29. Now, whether under the deeming provision such an investment received by the assessee company be brought to tax. The relevant provision of Section 56 for the sake of ready reference is reproduced hereunder: 2018 "Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :-- (i)....... (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 (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 prescribed: 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;" Further, as per clause (i) of the Explanation as reproduced above, the FMV is to be Page 22 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
determined in accordance with such method as may be prescribed. Clause (ii) admittedly is not applicable on the facts of the assessee's case. The method to determine the FMV is further provided in Rule 11UA(2). The relevant extract of the applicable rules is reproduced below: "11UA. [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,-- (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:-- (b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method." 30. Ergo, the assessee has an option to do the valuation and determine the fair market value either on DCF Method or NAV Method. The assessee being a 'start-up company' having lot of projects in hand had adopted DCF method to value its shares. Under the DCF Method, the fair market value of the share is required to be determined either by the Merchant Banker or by the Chartered Accountant. The valuation of shares based on DCF is basically to see the future year's revenue and profits projected and then discount the same to arrive at the present value of the business....................................................................... ................................................................................... 31. .......................................................................... 32. What is seen here is that, both the authorities have questioned the assessee's commercial wisdom for making the investment of funds raised in 0% compulsorily convertible debentures of group companies. They are Page 23 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
trying to suggest that assessee should have made investment in some instrument which could have yielded return/ profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply dividend and interest. Any businessman or entrepreneur, visualise the business based on certain future projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the income tax department or revenue official cannot guide a businessman in which manner risk has to be undertaken. Such an approach of the revenue has been judicially frowned by the Hon'ble Apex Court on several occasions, for instance in the case of SA Builders, 288 ITR 1 (SC) and CIT vs. Panipat Woollen and General Mills Company Ltd., 103 ITR 66 (SC). The Courts have held that Income Tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee's own business objective of projection of films and media entertainment, then such commercial wisdom cannot be questioned. Even the prescribed Rule 11UA (2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the Assessing Officer to tinker with such valuation. Here, in this case, Assessing Officer has not substituted any of his own method or valuation albeit has simply rejected the valuation of the assessee. 33. Section 56(2) (viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting such deeming provision. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Assessing Officer has to accept the same and in case he is not satisfied, then we
Page 24 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
do not we find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Assessing Officer has been given a power to tinker with the valuation report obtained by an independent valuer as per the qualification given in the Rule 11U. Here, in this case, Assessing Officer has tinkered with DCF methodology and rejected by comparing the projections with actual figures. The Rules provide for two valuation methodologies, one is assets based NAV method which is based on actual numbers as per latest audited financials of the assessee company. Whereas in a DCF method, the value is based on estimated future projection. These projections are based on various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the ld. Counsel, for instance: - i) Securities & Exchange Board of India &Ors [2015 ABR 291 - (Bombay HC)] "48.6 Thirdly, it is a well settled position of law with regard to the valuation. that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is but its very nature based on projections by applying what is essentially a hindsight view that the performance did not
Page 25 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
match the projection is unknown to the law on valuations. Valuation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information is available on the date of the valuation and a projection of future revenue that valuer may fairly make on the basis of such information." ii) Rameshwaram Strong Glass Pvt. Ltd. v. ITO [2018- TIOL1358-ITAT- Jaipur] "4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assessee we have to bear in mind the DCF Method and is essentially based on the projections (estimates) only and hence these projections cannot be compared with the actual to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figure is beyond its control. At the time of making a valuation for the purpose of determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where there is no commencement of production or of the business, does not mean that its share cannot command any premium. For such cases, the concept of start-up is a good example and as submitted the income-tax Act also recognized and encouraging the start-ups." iii) DQ (International) Ltd. vs. ACIT (ITA 151/Hyd/2015) "10...... In our considered view, for valuation of an intangible asset, only the future projections along can be adopted and such valuation cannot be reviewed with actual after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed". The aforesaid ratios clearly endorsed our view as above. 34. In any case, if law provides the assessee to get the valuation done from a prescribed expert as per the prescribed method, then the same cannot be rejected
Page 26 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
because neither the Assessing Officer nor the assessee have been recognized as expert under the law. 16. The Coordinate Bench of the Tribunal while lying down the above ratio has also considered the decision of the Coordinate bench in Agro Portfolio Pvt. Ltd. Vs. ITO which has been relied by the CIT(A). Therefore, we are inclined to follow the ratio laid down in the case of Cinestan Entertainment P. Ltd. Supra and hold that the Ld. A.O and CIT(A) have committed an error in rejected the valuation done by the assessee from prescribed expert as per the prescribed method. 17. Further, the Ld.CIT(A) while enhancing the income of the assessee u/s 56 (2)(viib) had observed that, such share premium received by the appellant for Rs. 76,00,000/- during the Financial Year 2014-15 relevant to Assessment Year 2015- 16 is considered income of the appellant. The Ld. CIT(A) has not provided mandatory opportunity of hearing to the assessee u/s 251 (1) of the Act which ultimately resulted in enhancement of assessed income. The assessee has produced the valuation report before the CIT (A) but the same has not been considered by the CIT(A). The assessee has prepared valuation of the shares in accordance with Rule 11US of the Act for the purpose of Section 56(2) (viib) of the Act, adopting discounted cash flow method. The Ld. CIT(A) failed to understand the valuation of the shares made as per DCF Method and not considered the valuation provided by the assessee. In our opinion, the CIT(A) has committed an error on this count. Further, similar issue has been considered by the Mumbai Bench in the case of Vodafone M Star Ltd. Vs. DCIT (2020) 114 Taxman.com 323 (Mumbai Trib.) wherein it is held as under:- 19. "Since Ld. CIT(A) has already addressed the issue of method of valuation which has to be adopted therefore we do not intend to go into which method has to be adopted and accordingly, we notice that the department is in appeal against Ld. CIT(A) and in our considered view, Ld. CIT(A) has properly rejectee the method adopted by the AO and proceeded to accept the DCF method adopted by the Page 27 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
assessee Therefore, we are inclined to dismiss the ground raised by the department. 20. Coming to the findings of Ld. CIT(A), we notice that Ld. CIT(A) has accepted the DCF methoc adopted by the assessee and he analyzed the factual performance of the assessee subsequent to issue o: shares. The valuation of shares are for that matter any valuation is itself is a projection of future events oi activities and no doubt it has to be done with some accuracy, however no person in the world at the time o: projecting events or result to project with 100% of accuracy and actual events are highly volatile ant highly dependent on so many factors. Assessee has projected based on the fact that software of wallet and association of ICICI bank will increase the market share and accordingly, they have projected the figure; and further the valuer has adopted the projection figures provided by the assessee and it is left to the wisdom of valuer to accept or reject or to carry out independent investigation raised with the valuer am legislature in more than one place depends on the skills of the professionals like merchant banker only value the valuation of shares or other volatile securities. Since, Ld. CIT(A) has compared the factual witl projections and assessee has achieved 40% of the actual results is too harsh to the assessee and this valuation is done in order to carry out certain activities by the management. In this case, the valuation ws used to issue of rights shares. The AO or Ld. CIT(A) is trying to evaluate the accuracy of the valuation a the time of assessment, this is not proper and also the factuals are based on so many factors subsequent t< adoption of projection and valuation. Accordingly, we are not in a position to accept the method adoptei by Ld. CIT(A). In the similar facts, the Coordinate Bench of ITAT has held as under: "25. We have heard the rival contentions, perused the relevant findings given in the impugned order as well as material referred to before us at the time of hearing. In various grounds of appeal, the sol issue raised by the appellant assessee Page 28 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
relates to the addition of Rs.90,95,46,200/- made by the AO, b; invoking the deeming provisions of sections 6 (2)(viib) by adopting fair market value of the shar premium received by the Assessee Company from the investors at NIL What has been sought to b taxed is mainly the share premium issued on equity shares which according to the AO far exceede the FMV of the shares. Though facts have been discussed in detail in the foregoing paragraphs however in the succinct manner, the relevant facts and background are reiterated in order to appreciat the controversy and the issue for adjudication. The assessee company was incorporated on 19t September, 2013, I.e., in the Assessment Year 2014-15, with the objective of carrying of business production and distribution of feature film, tele films, video films, documentary films etc. During th year under consideration assessee company was in the initial phase of the setting up of the business therefore, there was no business of film production as such. The assessee company to start its ventur of its film production approached accredited ace investors of India to join in as equity partner; namely, Shri Rakesh Jhunjhunwala, Shri Anand Gopal Mahindra & Shri Radhakishan Damani. Th funds were raised by way of issue of equity shares to the aforesaid equity partners and by raisin premium on such shares over and above the face value of Rs.l0/-per share. The details and quantum of premium received from each of the equity partners are as under:
S Name of Date of Name Premium Amount l equity issue of (Rs.) Per of partner shares shear premium N (Rs.) o . 1 Sh. 06.01.20 4,15,3 1949 80,95,8 Anand 15 85 5,365 Mahindr a 23.02.20 15 2 Sh. 19,027 2602 4,99,80, Rakesh 793 Jhunjhu nwala 3 Sh. 19,027 2602 90,95,4 Radhaki 6,200/- shan Damini total 4,53,7 99
Page 29 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
The assessee before issuing the shares had got the share valued by Chartered Accountant, i.e., 'Accountant' as provided under Rule 11UA(2) by using the 'DCF Method' which is one of the prescribed method in Rule HUA(2)(b) r.w.s. 56(2)(viib). Based on the said valuation report dated 15.12.2014, the assessee company had issued the shares to the aforesaid equity partners on premium. The Ld. Assessing Officer has discarded the valuation report of the CA mainly on the ground that valuation of the equity shares carried out by the assessee was based on projection of revenue which did not match with the actual revenues of the subsequent years. He further held that no efforts have been made by the assessee to substantiate the figures of projected revenue in the valuation report and has also failed to submit any basis for projection. Instead, AO held that assessee should have invested the share premium amount to earn some income, whereas assessee has made investment in debentures of its associate company and hence the basic substance of receiving the high premium was not justified. After invoking the provision of section 56(2)(viib), AO took fair market value of premium at Nil and face value of Rs. 10/- per share. 27. From the perusal of the records and the impugned orders, it transpires that Assessing Officer had also issued notices u/s. 133(6) to all the 3 investors to seek confirmation, information and documents pertaining to transaction of issuance of shares. In response to the said notices, Assessing Officer has received all the details and replies directly from these investors confirming the transaction. The venture agreement between the assessee and the investors were also filed before the Assessing Officer and in this regard, our attention was also drawn by the Id. counsel that the investment was to be made by these investors in various phases and transactions and it was only after they have gone by the projection and satisfied with the potentials and credentials of future growth, they were willing to make such huge investment in the 'start-up company' like assessee. Thus, neither the identity nor the creditworthiness of the investors nor the genuineness of the
Page 30 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
transaction can be doubted and in fact the same stands fully established to which Assessing Officer has also not raised any doubt or disputed this fact. Thus, under the deeming provisions of section 68, the test of proving the nature and source of the credit received stood accepted. 28. Now what we are required to examine whether under these facts and circumstances Assessing Officer after invoking the deeming provision of section 56(2)(vii) could have determined the fair market value of the premium on shares issued at Nil after rejecting the valuation report given by the Chartered Accountant on one of the prescribed methods under the rules adopted by the Valuer. Before us, learned counsel, Mr. Dinodia, first of all had harped upon the spirit and intention of the Legislature in introducing such a deeming provision and submitted that such a provision cannot be invoked on a normal business transaction of issuance of shares unless it has been demonstrated by the Revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the Id. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in which such deeming provisions are triggered. It is a trite law well settled by the Constitutional Bench of Supreme Court, in the case of Dilip Kumar & Sons {supra) that in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory, and if there are two views possible in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares have been subscribed by unrelated independent parties, who are one of the leading industrialists and businessman of the country, after considering the
Page 31 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
valuation report and future prospect of the company, have chosen to make investment as an equity partners in a 'start-up company' like assessee, then can it be said that there is any kind of tax abuse tactics or laundering of any unaccounted money. It cannot be the unaccounted or black money of investors as it is their tax paid money invested, duly disclosed and confirmed by them; and nothing has been brought on record that it is unaccounted money of assessee company routed through circuitous channel or any other dubious manner through these accredited investors. If such a strict view is adopted on such investment as have been done by the Assessing Officer and by Id. CIT(A), then no investor in the country will invest in a 'start-up company', because investment can only be lured with the future prospects and projection of these companies. 33. Section 56(2)(viib) is a deeming provision and one cannot "expand the meaning of scope of any word while interpreting such deeming provision. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Assessing Officer has to accept the same and in case he is not satisfied, then we do not find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Assessing Officer has been given a power to tinker with the valuation report obtained by an independent valuer as per the qualification given in the Rule 11U. Here, in this case, Assessing Officer has tinkered with DCF methodology and rejected by comparing the projections with actual figures. The Rules provide for two valuation methodologies, one is assets based NAV method which is based on actual numbers as per latest audited financials of the assessee company. Whereas in a DCF method, the value is based on estimated future projection. These projections are based on various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected
Page 32 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the Ld. Counsel, for instance: - (I) Securities & Exchange Board of India &Ors [2015 ABR 291 - (Bombay HC)] 48.6 Thirdly, it is a well settled position of law with regard to the valuation, that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is but its very nature based on projections by applying what is essentially a hindsight view that the performance did not match the projection is unknown to the law on valuations. Valuation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information Is available on the date of the valuation and a projection of future revenue that valuer may fairly make on the basis of such information." (ii) Rameshwaram Strong Glass (P.) Ltd. v. ITO [2018-TI0L- 1358-ITAT- Jaipur] "4.5.2 Before examining the fairness or reasonableness of valuation report submitted by the assessee we have to bear in mind the DCF Method and is essentially based on the projections (estimates) only and hence these projections cannot be compared with the actuals to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figure is beyond its control. At the time of making a valuation for the purpose of determination of the fair market value, the past history may or may not be available in a given case and Page 33 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where there is no commencement of production or of the business, does not mean that its share cannot command any premium. For such cases, the concept of start-up is a good example and as submitted the income-tax Act also recognized and encouraging the start-ups." (iii) DQ (International) Ltd. v. ACIT (ITA 15 l/Hyd/2015) "10... In our considered view, for valuation of an intangible asset, only the future projections along can be adopted and such valuation cannot be reviewed with actual after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed". The aforesaid ratios clearly endorsed our view as above." Therefore, respectfully following the decision of Coordinate Bench of ITAT, we allow the grounds raised by the assessee; 21. In the net result, the appeal filed by the assessee is allowed and appeal filed by the revenue stands dismissed." 18. In view of the above judicial pronouncements and for the reasons discussed above we are inclined to delete the addition made u/s 68 of the Act and also set aside the order of the CIT(A) in enhancing the income of the appellant u/s 251(1) of the Act by invoking Section 56(2) (viib) of the Act. Accordingly, we allow the Assessee's Grounds of Appeal No. 2 to 5. 19. In the result, I.T.A. No. 6173/DEL/2019 is allowed."
14 The ratio laid down in the aforesaid decision of the Tribunal
squarely applies to the facts of the present captioned appeals.
Page 34 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
In so far as enhancement made by the Ld. CIT(A) u/s 251(1)
r.w.s. 56(2) (viib) of the Act, the Ld. CIT(A) has not accepted the
Valuation Report submitted by the Assessee as per Rule 11UA of
the Rules. During the assessment proceedings the Assessees have
submitted the Valuation Report duly signed by the auditor by
following NAV/DCF Method as required under Rule 11UA(2) of the
Rules. The Valuation Reports are produced before us along with
the paper book. Both the lower authorities have failed to follow the
Rule 11UA of IT Rules, 1962 as per which the option to choose the
valuation of the shares lies with the assessee and the same is
binding on the Income Tax Authorities. For the sake of convenience,
relevant provisions of Rule 11UA of the Rules are extracted
hereunder:
‘(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:-
Page 35 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
(a) The fair market value of unquoted equity shares (A- L(PV) (PE) A book value of the assets in the balance-sheet as reduced by any am of paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the become-tax Act and 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 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 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.
Page 36 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
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 or an accountant formatted by the IT (sixth amendment) Rules, 2018 w.e .24.3.2018) as per Discounted Free Cash Flow Method’.
As per the aforesaid Rule, 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 determined under clause (a) or clause (b),
at the option of the assessee. The Assessees having the choice
to opt for one of the methods enumerated in the above
provision and the appellant has chosen to opt for clause (b) in
most of the abovementioned cases for valuation of unquoted
equity shares and based on the same, the value of the share
had been computed. Accordingly, the new shares were issued
and allotted to the investors during the captioned assessment
year. During the assessment proceedings, computation of Fair
Page 37 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
Market Value of shares as per Rule 11UA(2) was submitted
before the Ld.AO to justify that the shares issued by the
appellants were at Fair Market Value (FMV) which was
computed in accordance with Rule 11UA(2) of the Income Tax
Rules, 1962. But the AO has not given any reasoning for
rejecting the valuation of shares nor have they furnished any
material to the contrary which justified the rejection of the
valuation of shares.
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 hitherto an
uncontroverted legal position that where a statute requires to
do a certain thing in a certain way, the thing must be done in
that way only. Other methods or modes of performance are
impliedly and necessarily forbidden. The aforesaid settled legal
proposition is based on legal maxim "Expressio unis est
exclusio alterius", meaning thereby that if a statute provides
for a thing to be done in particular manner, then it has to be Page 38 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
done in that manner and in no other and following other
course is not permissible. For the said proposition reliance is
placed in the case of IMC Limited and Ors. vs. Union of India
and Ors. (10.05.2019 - GUJHC): MANU/GJ/0860/2019.
The Hon’ble Jurisdictional High Court in the case of PCIT Vs Cinestaan Entertainment Pvt Ltd (2021) 433 ITR 82 (Delhi) held that No addition can be made for share issued at Premium based on prescribed methodology in following manners:- "13. From the aforesaid extract of the impugned order, it becomes clear that the learned ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of fair market values as per prescribed methodology. The Appellant-Revenue had the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method. The Respondent-Assessee being a start-up company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent- Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or
Page 39 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent-Axesser is not correct. The AO has simply rejected the valuation of the Respondent- Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then Appellant-Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the Respondent-Assessee, accepted by the learned ITAT, is a conclusion of fact dronen on the basis of material and facts available. The test laid down by the Courts for interfering with the findings of a valuer is not satisfied in the present case, as the Respondent-Assessee adopted a recognized method of valuation and Appellant-Reveme is unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process."
Page 40 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
Considering the fact that the Assessees have issued the
shares at fair market value computed in accordance with Rule
11UA of the Rules and no fault has been found in the method
applied by the assessees and thus the enhancement of the
income by Ld.CIT(A) u/s 56(2)(viib) of the Act on protective
basis is purely based on conjectures which has no basis in law
and is liable to be deleted. Further, as the assessee has
provided document to prove the identity, creditworthiness and
the genuineness of the transaction of each shareholder, which
has not been controverted by the Department and in the
absence of any contrary material on record to disprove the
same in our considered opinion, the addition of income made
under section 68 of the Act as well as the enhancement of
income u/s 56(2)(viib) of the Act is bad in law accordingly, the
additions/enhancement made by the A.O/CIT(A) are hereby
deleted.
Page 41 of 42
ITA No.84, 87, 88, 89 & 99Del/2021 M/s Shanta Blankets and Ors.
In the result, Appeals in ITA No. 84/Del/2021,
87/Del/2021, 88/Del/2021, 89/Del/2021 and 99/Del/2021,
filed by the Assessee are allowed.
Order pronounced in open Court on 18th April, 2024.
Sd/- Sd/- (DR. B.R.R.KUMAR) (YOGESH KUMAR U.S.) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 18 /04/2024 R.N, Sr. PS Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT
ASSISTANT REGISTRAR ITAT, NEW DELHI
Page 42 of 42
