HIGH WINGS CONSTRUCTION PVT. LTD.,GURGAON vs. ITO, WARD- 11(3), NEW DELHI

PER R.K. PANDA, AM,

This appeal filed by the assessee is directed against the

order dated 04.07.2018 of the learned CIT(A)-35, New Delhi,

relating to Assessment Year 2014-15.

2 ITA No.7175/Del/2018

company and filed its return of income on 31.03.2015 declaring

NIL income. The case was selected for scrutiny under CASS

and statutory notice u/s 143(2) of the Act was issued and sent

to the assessee. However, the said notice was returned by the

postal department with the comments ‘Left’. Accordingly, fresh

notice was issued by the AO and the same was served on the

assessee through its Director and also through e-mail. During

the course of assessment proceedings, notice u/s 142(1) of the

Act alongwith a questionnaire was also issued and served upon

the assessee. However, there was no compliance to the said

notice. Such non-compliance has been elaborated by the AO at

page 2 of the assessment order. In view of the persistent non-

compliance, the AO inferred that the assessee has nothing to

submit to the queries raised in the notice issued u/s 142(1) of

the Act. He, therefore, issued another show-cause notice u/s

144 of the Act giving final opportunity to the assessee to

furnish details which also remained non-complied with. Since,

the assessee did not appear before the AO nor the books of

accounts were produced, the AO proceeded to complete the

assessment u/s 144 of the Act.

3 ITA No.7175/Del/2018

assessee company, which was download from website of ROC

as well as that filed alongwith the return of income that the

assessee during the year under consideration has allotted

254166 shares of Rs.10/- each at a premium of Rs.110/- per

share. Since, the assessee did not respond to the query raised

by the AO on this issue i.e. allotment of shares at a premium of

1100% of the share value and to explain as to why share

premium so received may not be treated as its income as per

provisions of the Income Tax Act, 1961. The AO, referring to

the provisions of section 56(2)(viib) of the Act and Rule 11UA of

the Rules, proceeded to make the addition. He noted that in the

instant case, no report of merchant banker or accountant

exists. The director of the assessee company who appeared

before the AO has stated verbally that they are agriculturist by

profession and had wanted to purchase the agricultural land,

which is the only asset available with the company. It was

stated that only to bypass the Stamp Duty they fell in to the

trap of the seller and ended up in acquiring the company. It

was also intimated that the land under consideration is

forbidden for any other commercial activity by the competent

4 ITA No.7175/Del/2018

authority and only agricultural activity can be undertaken on

the same land. The above facts, though verbally submitted by

the Director get confirmed by the Assessing Officer from the

fact that the assessee company is not making any compliance

to the statutory provisions. Neither, it is furnishing return of

income, nor it is filing any document before ROC. The earlier

directors of the company, namely Shri Bijender Singh Lohia

and Ravinder Singh Lohia have resigned from the company and

in their place Gir Raj Bhati and Jitender Bhati have become

Directors. He further noted that besides the land at Sohna, the

assessee company is not having any asset or any other

apparatus which can justify the value paid for the shares.

According to the AO, even for discounted free cash flow method,

there has to be some income earning apparatus for future but

clearly the same is also missing in the present case. He noted

that the shareholders of the assessee company are

agriculturists who have sold other lands hold by them invested

the proceeds in the assessee company only for the sole motive

of acquisition of land. He noted that the land in question has

been purchased by the assessee company between Financial

year 2010-11 & 2011-12 and the same cannot be held to

5 ITA No.7175/Del/2018

having any premium during this short period of holding so as

to justify the premium at which the shares have been allotted.

However, the assessee company is not doing any business and

incurring only statutory expenses. It has shown losses in all

the years for which the returns have been filed. He noted that

the book value of liabilities in the present case is more than the

book value of asset therefore, the fair market value of shares

was below par. Therefore, he was of the opinion that the

shares under the facts and circumstances shares should have

been allotted at par. Since, there was no other details available

before him, therefore, applying the provisions of section

56(2)(viib) of the Act, the AO held that the assessee company

has received excess sum of Rs.110 per share on 254166/-

shares issued during the year. Therefore, he made addition of

Rs.2,79,58,260/- to the total income of the assessee.

submission alongwith certain additional evidences. The

learned CIT(A) called for a remand report from the AO. After

considering the remand report of the AO and rejoinder filed by

the assessee on such remand report, he upheld the action of

the AO by observing as under:-

6 ITA No.7175/Del/2018

“4.23.2, The appellant has stated that the procedural matters which was considered by the AO in his remand report dated 01/02/2018 for discarding the share valuation certificate like Income Tax Return for subsequent years was not filed, Financials was not Audited and the company has argued that all procedural matters are duly complied and necessary documentary evidences was submitted during appellate proceedings. The appellant company submitted that for the purpose of determination of Fair Market Value of unquoted share provisions of section 56(2)(viib) read with rule 11UA(2) aliows the appellant to choose any of the method of valuation given in clause (a) or in clause (b) and accordingly in the present case, the appellant choose method prescribed in Rule 11UA (2) (b) and the Fair Market Value of the equity share having face value of RslO/- each was. determined at Rs121/- by the Chartered Accountant M/s P.K. Lakhani & Co, Chartered Accountants vide their share valuation report dated 11th February , 2014. The appellant has stated that a deeming provision or a legal fiction, as it is commonly called, is one whose mandate does not exist but for such provision. The appellant has further submitted that in the case of closely holding company for computing the fair market value of unquoted equity shares under section 56(2)(vlib) methods are prescribed under Rule 11UA(2) clause (a) and (b), out of which appellant may choose at his choice any of the method for finding Fair Market Value of Unquoted Equity Shares . Clause (b) of Rule 11UA(2) specified Fair Market Values of unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method. The appellant has submitted that procedural defects like filling of Income of Returns, Audited Financials etc. for subsequent years pointed out by AO and considering those defects AO rejected the Share Valuation Report. 4.2.3.3. The facts of the case have been considered and the additional evidence has been perused. I agree with the view taken by the AO in the remand report and it is held that the valuation report has been prepared on the basis of Projected Financials of the appellant company for the next five financials years ended March, 2018 i.e. from F.Y. 2013- 14 to 2017-18 as per the Discounted Free Cash Flow Methodology ("DFCF")- On perusal of ITR filed for A.Y. 2014- 15, it is seen that the appellant company is not doing any business, and was incurring statutory expenses, it has shown loss. Therefore, it is held that the valuation report is actually an afterthought by the appellant company. 4.2.3.4. It is seen that during the year under consideration the appellant company has allotted shares

7 ITA No.7175/Del/2018

254166 shares of Rs.10/- each, at a premium of Rs.110/- per share and the allotment of shares at a premium of 1100% of the share value was done by the appellant company. The appellant company has submitted that during assessment proceedings, the AO issued notices under section 133(6) to each share holders and information under section 133(6) from share holders acknowledged on 29/09/2016 and the AO was Satisfied with the information collected under section 133(6) towards Identity, Genuineness and Creditworthiness of the share holders, hence no addition was made under section 68 by the AO. This argument of the appellant is rejected and reliance is placed on the following decision of the Hon'ble Kerela High Court, v/herein, it has been held that 'Excess share premium rightly taxed by AO even if genuineness of transaction was proved'. The facts of the case are given below: a) Assessee, a private limited Company, issued shares at a premium above the face value. It did not offer any amount so received as income for the purpose of taxation under the Income-tax Act. A notice under Section 143(2) was issued and assessee was have disclosed the genuineness of the persons, who purchased the said shares on a premium . b) Assessing Officer (AO) then attempted to tax the amounts so received under Section 56(2)(viib). Assessee contended the notice issued was only with respect to the source from which the funds were received and the same had been disclosed and there was no scope for a further proceeding, especially under Section 56(2)(viib). The High Court held in favour of revenue as under: 1) Clause (viib) of section 56(2) is triggered at stage of computation of income itself when share application money received, from a resident, by a Company, in which public are not substantially interested is above face value. 2) Thus, aggregate consideration received for shares as exceeds fair market value will be included as income from other sources. However, as per section 68, as substituted with provisos, when resident investor is not able to explain nature and source for credit seen in books of account of Company or explanation offered is not satisfactory then entire credit would be charged to income-tax for that previous year.

8 ITA No.7175/Del/2018

3) Thus, ITAT was right in concluding that order passed by Assessing Officer treating share premium received by assessee on issue of shares was to be assessed as ‘income from other sources’ under section 56(2)(viib) even though assessee had disclosed genuineness of persons who purchased shares on a premium. In view of the provisions of section 56(2)(viib) of the Act, the appellant company has received excess sum of Rs.110 per share on 254,166 shares issued during the year. Hence, the sum of Rs.27958260/-(254166 x 110) is chargeable to income tax under the head ‘Income from other sources’ and the Assessing Officer’s order on this issue is upheld. Appeal on ground nos. 1 to 6 are dismissed.” 5. Aggrieved with such order of the learned CIT(A), the

assessee is in appeal before this Tribunal by raising following

grounds:-

9 ITA No.7175/Del/2018

Appellant was discarded by AO in the remand report due to defect in procedural matters where as such defect in procedural matters were subsequently removed and documentary evidences were duly placed before Ld. CIT(A). 4. That without prejudice to the contention raised in Ground No.3 above, the Ld. CIT(A) was wrong in confirming the order of AO on the basis of remand report of AO where in in the remand report AO arbitrarily discarded the share valuation method followed by the Appellant without having sufficient material against the value arrived by following Discounted Cash Flow Method (DCF). 5. That on the facts, and in the circumstances of the case and in law, Ld.CIT (A) grossly erred in rejecting the share valuation certificate submitted by the Appellant under Discounted Cash Flow Method (DCF) without appreciating the fact that section 56(2)(viib) read with rule 11UA gives option to the assessee to adopt any of the methods for computation of Fair Market Value of Unquoted Shares and AO is duty bound to consider the higher of two values. 6. That on the facts , and in the circumstances of the case and in law, that provisions of section 56(2)(viib) can not be invoked in the case of appellant company because by virtue of cash being brought in to assessee-company by ' Share Holders' for allotment of shares with high premium, benefit had only passed on to 'relatives' as there is no scope in the Act to tax when cash is transferred to by a 'relative' to another 'relative' as defined in Explanation ('e) of section 56(2)(vii). 7. That the Ld. CIT(A) has grossly erred in relying on the judgment of Hon'ble Kerala High Court in the case of Sunrise Academy of Medical Specialities (India) Pvt Ltd Vs. ITO (2018) 94 taxmann.com 181 (Kerala HC) totally inapplicable to the facts of the case of the appellant and has further grossly erred in not considering the ratio of the Judicial Precedents pronounced by Courts similar to the facts of the appellant's case which was drawn to the attention of the Ld.CIT(A) during appellate proceedings.” 6. The learned counsel for the assessee strongly

challenged the order of the learned CIT(A) in confirming the

addition made by the AO. He submitted that land is not

depreciable assets and for computing the price of the shares

10 ITA No.7175/Del/2018

market value has to be considered. The learned counsel for the

assessee filed the following chart and submitted that the net

asset value/ market value per shares comes to Rs.137 whereas,

the assessee issued shares at a premium of Rs.110/-:-

Particulars Historical Cost Mkt. Value Method (Rs.) Method (Rs.) Inventories (Land) 26,168,750/- 3,20,00,000/- Cash & Cash Equivalents 1,38,196/- 1,38,196/- Short Term Loans and 60,00,000/- 60,00,000/- Advances Total Assets (A) 32,306,946/- 38,138,196/- Other Current Liabilities 18,61,822/- 18,61,822/- Net Assets (A-B)=(c) 30,445,124/- 36,276,374/- Nos. Of Equity Shares=(D) 2,64,166 Nos 2,64,166 Nos Net Asset Value/Market 115/- 137/- Value Per Share=(C/D)=(E)”

that the assessee has filed a valuation report from M/s M.

Choudhary & Associates and the AO has not found any defect

in the valuation report. Further, no other evidence is available

with the AO to show that the fair market value of the land is

incorrect. He submitted that the audited financials at 31st

March 2014 was available on records, the learned CIT(A) has

again failed to give the credit to the extent of the valuation of

Rs.115/- per equity shares based on net asset value method.

The above facts clearly show that the learned CIT(A) is acting

11 ITA No.7175/Del/2018

for the benefit of the Revenue. He submitted that since as per

valuation certificate of land, market value per equity share of

Rs.137 being higher than the issue price per equity share of

Rs.120/-, therefore, the addition of Rs.2,79,58,260/- made

u/s5 6(2)(viib) by the AO deserves to be deleted in full having

regard to the provisions of section 56(2)(viib) read with

Explanation (a)(ii). The learned counsel for the assessee relied

upon the following decisions:-

the company is the owner of the land admeasuring 2.56 acres

located at Village Bandhwari, Dist. Gurgaon, Haryana, at the

time of issue of equity shares carrying book value of

Rs.26,168,750/- as per the audited financials for the financial

year ended on 31st March 2014. Referring to page 71 of the

paper book, the learned counsel for the assessee submitted

that the circle rate of the land as per the land revenue records

for the Financial Year 2013-14 was Rs.1,12,00,000/- per acre.

12 ITA No.7175/Del/2018

He submitted that if the circle rate of the land is considered

then fair market value per equity share comes to Rs.124.94

whereas the assessee has issued the shares at Rs.120/-,

therefore, no addition is called for u/s 56(2)(viib) of the Act.

for the assessee drew the attention of the Bench to the

following table and submitted that equity shares of Rs.10/-

each were allotted at a premium of Rs.110/- per share to the

family members and others who are relatives of the Directors.

Sl. Name of No. Of Share Share Relationship No. Share Equity Capital Premium with the Holder Shares Amt.(Rs.) Amt (Rs.) Directors Allotted 1 Amit 41,666 Nos 4,16,660/- 45,83,260/- Real Kumar Brother of the Director Jitender Bhati 2 Manju 75,000 Nos. 7,50,000/- 82,50,000/- Wife of the Devi Director Gir Raj Bhati 3 Sansar 1,37,500 13,75,000/- 1,51,25,000 Mother of Devi Nos. the Director Jitender Bhati Total 2,54,166 25,41,660/- 2,79,58,260 Nos

genuineness of the transaction was satisfied before the AO for

which he has not made addition u/s 68 of the Act but he has

13 ITA No.7175/Del/2018

proceeded to make addition u/s 56(2)(viib) of the Act and Rule

11UA(2) of the Rules. The learned counsel for the assessee

submitted that the share valuation report under discounted

cash flow method was rejected by the CIT(A) and the AO

without finding any serious defect. He submitted that since, the

assessee has got the valuation done from a prescribed expert as

per the prescribed method, therefore, in absence of any

contrary material, the lower authorities could not have rejected

such certificate. Relying on various decisions, the learned

counsel for the assessee, submitted that the order of the

learned CIT(A) be set-aside and the ground raised by the

assessee be allowed.

the order of the AO and the learned CIT(A). He submitted that

the assessee did not appear before the AO and did not file the

requisite details for which the AO was constrained to pass the

order u/s 144 of the Act. He submitted that before the learned

CIT(A) also, the assessee could not substantiate with

documentary evidence regarding issue of shares at high

premium of Rs.110 per share of Rs.10/- especially when it has

not shown any business and was only incurring statutory

14 ITA No.7175/Del/2018

expenses and filing loss return. He submitted that the learned

CIT(A) has given valid reasons for which the same does not call

for any interference. He accordingly submitted that the

grounds raised by the assessee should be dismissed.

both the sides, perused the orders of the Assessing Officer and

the learned CIT(A) and the paper book filed on behalf of the

assessee. We have also considered the various decisions cited

before us. We find the assessee in the instant case has issued

254166 shares of Rs.10 each at a premium of Rs.110 per share

during the year. Since, the allotment of share was at a

premium of 1100% of the share value, the AO asked the

assessee to substantiate the issue of such shares at higher

premium. Since, there was no compliance to the statutory

notice issued by the AO, he had no other option but to

complete the assessment u/s 144 of the Act, wherein, he made

addition of Rs.2,79,58,260/- by invoking provisions of section

56(2)(viib) of the Act r.w.r. 11UA of the Rules. While doing so,

he also noted the verbal statement of the Director that they are

agriculturist by profession and had wanted to purchase the

agricultural land, which is the only asset available in the

15 ITA No.7175/Del/2018

company. It was further stated that only to bypass the Stamp

Duty they fell in to the trap of the seller and ended up in

acquiring the company. We find the learned CIT(A) after

considering the remand report of the AO and the submission of

the assessee to such remand report sustained the addition

made by the AO, the reasons of which have already been

reproduced in the preceding paragraphs. It is the submission

of the learned Counsel for the assessee that the learned CIT(A)

without any valid reason and without finding any defect in the

fair market valuation certificate of the land done by M/s M.

Choudhary & Associates upheld the action of the AO. It is also

his submission that the learned CIT(A) has not found any

defect in the valuation report so filed before him. It is also his

submission that the fair market value of the equity shares at

the time of issue of share was based on the market value of the

land as determined by the registered valuer comes to Rs.137/-,

whereas the assessee has issued the shares of Rs.10/- each at

a premium of Rs.110/- only which is much less than the

market value of the shares. It is also the submission of the

learned counsel for the assessee that the equity shares so

issued at a premium were subscribed by the family members of

16 ITA No.7175/Del/2018

the director and therefore no addition u/s 56(2)(viib) of the Act

is called for.

completed u/s 144 of the Act due to persistent non-compliance

of the assessee to the statutory notices issued by the AO.

Although, the assessee has filed certain documents in shape of

additional evidences before the learned CIT(A), however, the

arguments made before the Tribunal were not made before the

learned CIT(A). The argument of the assessee that the shares

were subscribed by the family members of the Directors and

their relatives was never argued before the learned CIT(A).

Since, the full details were not filed before the AO and the

powers of the AO during the remand proceedings are limited

and the various arguments and case law decisions cited before

us were not cited before the lower authorities, therefore,

considering the totality of the facts of the case and in the

interest of justice, we deem it proper to restore this issue to the

file of the AO with a direction to grant one more opportunity to

the assessee to substantiate its case. The assessee is also

hereby directed to appear before the AO and produce all the

relevant details justifying the issue of shares of face value of

17 ITA No.7175/Del/2018

Rs.10/- at a premium of Rs.110/-. The AO shall decide the

issue as per fact and law after giving due opportunity of being

heard to the assessee. We hold and direct accordingly. The

grounds raised by the assessee are accordingly allowed for

statistical purpose.

allowed for statistical purpose.

Order was pronounced in the open court on 19/07/2021.

Sd/- Sd/- [SUDHANSHU SRIVASTAVA] [R.K.PANDA] JUDICIAL MEMBER ACCOUNTANT MEMBER Delhi; Dated: 19/07/2021. P.S f{x~{tÜ? f{x~{tÜ? fÜA f{x~{tÜ? f{x~{tÜ? fÜA fÜA P.S fÜA P.S P.S Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR

Asst. Registrar, ITAT, New Delhi