MANTRAM COMMODITIES PVT. LTD.,FARIDABAD vs. ITO WARD 1(5), FARIDABAD

Facts of the case, in brief, are that the assessee is a private limited company and has not conducted any business activity during the relevant assessment year. It filed its return of income on 10th September, 2015 declaring the total income at Rs.1,64,750/-. The AO, during the course of assessment proceedings, noted that

The AO obtained information u/s 133(6) from the above referred investors. From the perusal of the information, he observed that the covering letter of all the companies is of same font and none of the companies have any telephone number against them. The financial statement of these companies indicate that these are shell companies and have no real business. The assessee also did not file the bank account statement of the above companies. From the various details furnished by those companies, the AO noted that those details are of typical paper companies having no real business but only credit and equal amount of debit entries. He, therefore, was of the view that the credit worthiness and genuineness of the transaction remain highly suspicious. He, therefore, confronted the same to the assessee and asked it to substantiate the ingredients of section 68 of the IT Act. Rejecting the various explanations given by the assessee and following the decisions of the Hon’ble Supreme Court in the case of CIT vs. Durga Prasad More reported in 82 ITR 540, McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 and

In appeal, the ld.CIT(A) deleted the addition made u/s 68 of the Act on the ground that such share capital was not received by the assessee during the year, but, was received in F.Y. 2013-14 relevant to assessment year 2014-15 and the assessee has only allotted the shares during the year. He, however, confirmed the addition made by the AO u/s 56(2)(viib) of the Act by observing as under:- “12.10 However, it is noted from the perusal of bank statements and confirmed copies of account of M/s Ganga Shiv Contractors Pvt. Ltd. and Amar Shree Industries Pvt. Ltd., that amount in reference of Rs.48,00,000/- has been received by the appellant during F.Y. 2013-14 and shares have been allotted on the premium to the investors during the previous year under consideration. Thus from the facts, it has been found that no credits have been introduced in the books of account of the appellant during the year under consideration. In the circumstances, it is held that no addition u/s 68 can be made out of opening balances for Asstt. Year 2015-16. Under the facts, it is held that the AO was not justified in making addition of Rs.48,00,000/- u/s 68 of the Act. The same is hereby deleted. However, in view of discussion made as above, further addition made by the AO u/s 56(2)(viib) of the Act for Rs.42,00,000/- is confirmed. Ground No.3 and additional ground are Partly Allowed.”

Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds:-

He submitted that the assessee in the instant case has issued share capital @ 80 per share, i.e., face value of 10 + premium of 70 per share) as on 31.03.2015. He submitted that the value of each share was in accordance with Rule 11UA of the IT Rules and in support of value of each share the assessee had also furnished valuation certificate of a Chartered Accountant. The ld. Counsel drew the attention of the Bench to the following details/calculation:-

Referring to the above, he submitted that the aforesaid valuation was furnished before the AO to justify that the shares issued by the assessee was at fair market value which was computed in accordance with the Rule 11UA(2)(a) of the IT Rules, 1962. However, the AO arbitrarily rejected the valuation furnished by the assessee by holding that the assessee is not having any worth of receiving any share premium. He submitted that the AO has adopted the FMV of shares at Rs.10/- (at the face value) without appreciating the formula provided in Rule 11UA and has completely given a go by to the value of assets and liabilities shown in the balance sheet. He has not made any attempt to compute the value of shares of the assessee in accordance with Rule 11UA of IT Rules, 1962. He submitted that the adoption of the fair market value of shares @ Rs.10 per share as against Rs.82 per share as computed by the assessee without recourse to the formula as provided in Rule 11UA is unsustainable in law as for the purpose of section 56(2)(viib) of the Act, the fair market value of the shares has to be computed only in accordance with Rule 11UA. Further, the ld. CIT(A) without considering the statutory provision and without computing the fair market value of shares as per Rule 11UA, arbitrarily upheld the finding of the AO.

Referring to the order of the CIT(A) as well as the assessment order, the ld. Counsel submitted that none of the authorities below has found any fault in the computation of fair market value produced in the assessment proceedings. Both the lower authorities have summarily rejected the computation on assumption and presumption and without any basis. Referring to various decisions, the ld. Counsel submitted that the addition u/s 56(2)(viib) of the Act can be made only on the ground that consideration for issue of shares exceeds the fair market value of the shares. However, what will be the fair market value of the shares, the statute has provided a mechanism under Rule 11UA and fair market value has to be determined only on that basis and not on assumption and presumption. He submitted that when the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same.

So far as the decision relied on by the CIT(A) in the case of Agro Portfolio Pvt. Ltd. vs. ITO vide ITA No.2189/Del/2018, order dated 16th May, 2018 is concerned, he submitted that the facts of that case is clearly distinguishable as, in that case, the shares were valued on the basis of discounted cash flow method and the Tribunal noted that the assessee did not produce any evidence to substantiate the basis of projections of cash flow but relied on the valuer’s report vehemently contending that such a report cannot be disturbed by the ld. AO and at no point of time the assessee tried to explain where did the ld. AO went wrong in his comments on the figures reflected in the above valuation report of the expert. The

The ld. DR, on the other hand, heavily relied on the order of the CIT(A). Referring to para 12.2 of the order of the CIT(A), the ld. DR drew the attention to the same which reads as under:- “12.2 The valuation report for the shares as furnished by the appellant under Rule 11UA(2) has been perused. It is noted that the appellant in the said report has considered share premium of Rs.1,28,28,924/- as on 31.03.2014. From the above facts it has been noted that the appellant has no business worth. There is no tangible business activity being carried out by the appellant since incorporation. There are no fixed assets or any other intangible assets in possession of the appellant to justify such kind of cash flow in the prior years. In the absence of any business worth of the appellant, the reliance of the appellant on the valuation report for the premium charged of Rs.70/- on each share under Rule 11UA does not carry any force. Such valuation report has been found without any basis and thus, is rejected. Reliance is hereby placed upon the decision of Hon'ble ITAT Delhi in the case of Agro Portfolio Pvt. Ltd, vs. ITO 2018, 171/ITD/74 (Del). Therefore, in the absence of business worth of the appellant the reliance of the appellant on the valuation report for the premium charged of Rs.70/- on each share under Rule 11UA does not carry any force.”

Referring to the above, he submitted that the ld.CIT(A) while sustaining the addition made u/s 56(2)(viib) has given justifiable reasons and, therefore, the same should be upheld.

I have considered the rival arguments made by both the sides and perused the orders of the Assessing Officer and CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find, the AO, in the instant case, made addition of Rs.48 lakhs u/s 68 of the IT Act on the ground that the assessee could not substantiate with evidence to his satisfaction regarding the credit worthiness of the share applicants and the genuineness of the transaction is doubtful. The AO, further held that the assessee is not having any worth of receiving of share premium and the calculation made by the assessee in terms of Rule 11UA for calculating the share premium is to be rejected. Since the AO had made addition u/s 68 of the Act, he did not make any separate addition u/s 56(2)(viib) of the IT Act. I find the ld.CIT(A) deleted the addition made by the AO u/s 68 of the IT Act on the ground that no credits have been introduced in the books of account of the assessee during the year under consideration and, therefore, no addition u/s 68 can be made out of opening balances for A.Y. 2015-16. The Revenue is not in appeal against the above finding of the CIT(A), therefore, I am not concerned about the same. However, the ld.CIT(A) held that the assessee has no business worth and there is no tangible business activity being carried out by the assessee since incorporation. There are no fixed assets or any other intangible assets in possession of the assessee to justify the premium charged by the assessee on issue of shares. He, therefore, held that the reliance of the assessee on the valuation report for the premium charged at Rs.70/- on each share under Rule 11UA does not carry any force. Relying on the 9

It is the submission of the ld. Counsel for the assessee that for the purpose of section 56(2)(viib) of the Act the valuation of the shares has to be done in accordance with the Rule 11UA of IT Rules, 1962. As per the said Rule, the fair market value of unquoted equity shares for the purpose of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be determined under clause (a) or clause (b), at the option of the assessee. It is his submission that the assessee in the instant case has issued the share capital @ Rs.80 per share (face value of Rs.10 per share + premium at Rs.70 per share) as on 31.03.2015 and the valuation of each share was in accordance with Rule 11UA of the Act. It is also his submission that when the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same.

I find merit in the above argument of the ld. Counsel. The provisions of section 56(2)(viib) of the Act reads as under:- “(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received—

A combined reading of section 56(2)(viib) read with Rule 11UA states that for the purpose of section 56(2)(viib) of the Act the valuation of the shares has to be done in accordance with Rule 11UA and the fair market value of unquoted equity shares for the purpose of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be determined under clause (a) or clause (b), at the option of the assessee. We find, in the instant case the assessee has valued its shares at Rs.82.07 as per the valuation certificate issued by the chartered accountant. Although the said valuation report was submitted before the AO to justify that the shares issued by the assessee was at fair market value, it was computed in accordance with Rule 11UA(a) of IT Rules, 1962, however, I find, the AO rejected the same holding that the assessee is not having any worth of receiving any share premium. He has ignored the various assets shown by the assessee in the balance sheet such as cash and cash equivalent of Rs.6,18,035/-, - short-term loans and advances of Rs.2,38,07,381/- and other current assets of 12

So far as the decision of the Tribunal in the case of Agro Portfolio Private Ltd. (supra) relied on by the Ld. CIT(A) is concerned, the same in my opinion is not applicable to the facts of the present case. In that case, the shares were valued on the basis of discounted cash flow method and it was found by the Tribunal that the assessee did not produce any evidence to substantiate the basis of projections in cash flow but relied on the valuer’s report contending that such a report cannot be disturbed by the AO and at no point of time the assessee tried to explain where did the AO went wrong in his comments in the figures reflected in the valuation report. However, in the instant case, the assessee has issued the shares at fair market value computed in accordance with Rule 11UA(a) of the IT Rules 1962 and no fault has been found in the method applied by the assessee and the lower authorities have made the addition u/s 56(2)(viib) purely on presumptions and surmises. Therefore,

In the result, the appeal filed by the assessees is allowed. The decision was pronounced in the open court on 12.02.2021. Sd/- (R.K. PANDA) ACCOUNTANT MEMBER Dated: 12th February, 2021. dk Copy forwarded to 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi