ACIT 5 (1), BHOPAL vs. M/S VINDHYA SOLVENT PVT. LTD., BHOPAL

PER Ms. MADHUMITA ROY - JM:

The instant appeal filed by the Revenue is directed against the order dated 15.02.2018 passed by the Commissioner of Income Tax (Appeals)-2, Bhopal (in short ‘CIT(A)’), arising out of the assessment order dated 28.12.2016 passed by the DCIT-5(1), Bhopal under Section 143(3)of the

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Income Tax Act, 1961 (hereinafter referred as to ‘the Act’) for Assessment Year 2014-15.

i. Large share premium received during the year. ii. Large amount of sundry creditors. iii. Low income in comparison to high loans/advances/investment in share.

Upon perusal of record, it appears that the assessee issued fresh 55,42,584 equity shares of face value of Rs.10/- each at Rs.216.50 per share to Chambal Trading Pvt. Ltd. and the share capital increased by Rs.5,54,25,840/- and had collected share premium of Rs.11,44,19,146/- thereon. In response to the explanation asked for the source and justification of such high premium, the assessee submitted that the purpose of issue of

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share and receipt of share premium was to invest the same into the business of the company. The Ld.AO did not agree with the valuation on the basis of which the shares were issued by the appellant. He was of the opinion that the appellant had not made any effort to achieve its main object nor undertaken business activity in F.Y. 2013-14 to F.Y. 2014-15. The collection of huge share premium by the appellant and invested in the shares of subsidiary company was not in accordance with the Memorandum of Association of the appellant company. As the subsidiary company was not yielding any profit to the assessee company, the same cannot be said to be business activity as the same is neither in consonance with the Memorandum of Association of the appellant company. The stand taken by the appellant that the company has sound financial position to issue shares at premium and the company did not have any sound liquidity position, due to paucity of fund to pay to its creditor is contrary to each other as of the opinion of the Ld. AO. Further that the appellant should have valued its own investment at net realizable value before arriving at the Fair Market Value of its own equity share. In that view of the matter, since, the share premium was the value of future relatable profit of the company, the valuation of shares at net asset value was found to be incorrect. The Ld.AO has referred the Explanation to Section 56(2)(viib) of the Act imposing prior condition of the satisfaction of the AO over the valuation. As the company was not earning profit and it had failed to bring to notice of its future plan or prospective revenue was planning to realize; the company has failed to discharge its onus to justify the valuation in accordance with any of the method prescribed under Rule 11UA and made valuation of the shares based upon audited balance sheet is not in accordance with law. He,

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therefore, added the share premium receipt by the Company during the previous year to the tune of Rs.1,41,41,91,146/- by invoking the provision of Section 56(2)(viib) of the Act.

“1. Ground No. 1 - The learned AO has erred in making addition of Rs. 114,41,91,146 on account of share premium received by the Appellant during the previous year 1.1. During FY 2013-14, the Appellant issued 55,42,584 equity shares of face value of Rs. 10 each at Rs. 216.50 per share to Chambal Tradings Put. Ltd. Copy of Balance Sheet of Chambal Tradings Private Limited has been submitted vide submission dated 15 December 2016. A copy of the submission is enclosed at Paper Book, Page No. 1 to 20. 1.2. The shares were issued by VSPL at the Fair Market Value (FMV) arrived at as per Rule 11UA of the Income-tax Rules, 1962 ('IT Rules') which has been prescribed under section 56(2)(viib) of the IT Act. The said valuation was submitted during the course of assessment proceedings vide submission dated 15 December 2016. A copy of the valuation is enclosed at Paper Book, Page No. 1 to 20 1.3 In the impugned assessment order passed, the learned AO disregarded the valuation on the basis of which shares were issued by the Appellant. The key observations of the learned AO are as under:

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VSPL has not made any efforts to achieve its main objects nor undertaken business activity in FY 2012-13 to FY 2014-15 (Page no. 8, Para No. 5 of the assessment order) VSPL's submission that the purpose of share issue was to invest the same in the business of the Company does not seem right as till 31 March 2015, no plant and machinery or land was bought by the Company (Page no. 8, Para No. 5 of the assessment order) VSPL has collected huge share premiums and invested in the shares of subsidiary companies which cannot be termed as an act in accordance with its Memorandum of Association (MoA) (Page no. 8, Para No. 5 of the assessment order) Company had made investment in its subsidiary companies which is not yielding any benefit to the Company and same cannot be said a business activity as the same is not in (accordance with the MoA of the Appellant (Page no. 1 7, Para No. 5 of the assessment order) On one hand the company is showing sound financial position to issue shares at a premium and on the other hand it has submitted that it does not have a sound liquidity position due to paucity of funds to pay its creditors (Page no. 8, Para No. 5 of the assessment order) Share premium is the value of future realizable profits of a Company and hence valuation of shares at Net Asset Value (NAV) is incorrect (Page no. 11, Para No. 5 of the assessment order) VSPL should have valued its non-current investments at net realizable value first, before arriving at the FMV of its own equity shares (page no. 8, Para No. 5 of the assessment order) The Explanation to section 56(2)(viib) imposes a prime condition of satisfaction of the AO over the method of valuation. In the present case, the Company is not earning profits and it had failed to bring to notice of its future plans or the prospective revenue which it is planning to realize (Page no. 11, Para No. 5 of the assessment order) The Company has failed to discharge its onus to justify the valuation in accordance with any of the method prescribed in Rule 11UA and made valuation of the Company based upon audited balance sheet (Page no. 17, Para No. 5 of the assessment order) 1.3. Consequently, the learned AO added back the share premium received by VSPL during the previous year by invoking the provisions of section 56(2)(viib) of the IT Act.

1.4. At the outset, it is submitted that the additions made by the learned AO are based on mere conjectures and surmises and merit to be quashed. The Appellant's submission on merits and rebuttals to the observations made by the learned AO are detailed below:

Appellant is a trading company and undertaken trading activities during FY 2012-13 to FY 2014-15. To carry out trading activities, there is no requirement to purchase land or plant and machinery, to achieve its objects

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1.5. The Appellant is engaged in the business of trading of Soya doc. Being a trading company, purchase of land or plant and machinery is not necessarily required to undertake trading activities, Your Honour will appreciate that expenditure on land / plant and machinery would usually be required in a manufacturing business. As regards the allegation of the learned AO that the Appellant has not undertaken any business activity, it is respectfully submitted that the same is factually incorrect. The Appellant has carried out its business activities of trading in soya doc since the past several years and continued the same business in FY 2012-13 to FY 2014-15. This is apparent from the face of the Profit and Loss Account (extracts of which are forming a part of the impugned assessment order).

Appellant has not invested the share capital raised in the shares of subsidiary companies 1.6. In this regard, it is submitted that the Appellant has not invested the proceeds of share issue in shares of its subsidiaries. The proceeds of shares have been utilized in giving advance for the purpose of business of the Appellant. This fact was also submitted during the course of assessment proceedings vide submission dated 19 December 2016. Copy of the submission is enclosed at Paper Book, Page No. 20 to 24. This is also apparent from the balance sheet of the Appellant wherein the advance made by the Company has been depicted under the head 'Long term loans and advances' and not under 'Non-Current Investments. Further, as also apparent from the schedule of 'Non-Current Investments' and 'Long term loans and advances', the Appellant has invested in shares of four companies namely, Decore Exoils Private Limited, Bhaskar Foods Private Limited, Sharda Solvent Limited and Divya Energy and Foods Private Limited, whereas the advance has been given to only one such company i.e. Bhaskar Foods Private Limited. Copy of the Balance Sheet of the Appellant was submitted vide submission dated 11 May 2016. Copy of the submission is enclosed at Paper Book, Page No. 25.

1.7. Further, the confirmation from Bhaskar Foods Private Limited was also submitted during the course of assessment vide submission dated 28 December 2016. Copy of the submission is enclosed at Paper Book, Page No. 26 to 27. In addition to the above, the following details pertaining to Bhaskar Foods Private Limited are also being submitted before your Honour at Paper Book. Page No. 28 to 55:

• Balance Sheet as on 31 March 2014 • Details of directors and shareholders Non-payment of creditors due to liquidity position not a ground for / disregarding issuance of shares at a premium 1.8. The Appellant submits that liquidity position and sound financial statement are two different concepts and a Company may have a sound financial position even though its liquidity position made not be good at a particular point of time. The financial position of a Company is a larger concept and is based on several factors,

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inter alia, including the assets of the Company, the investments of the Company, etc. The liquidity position on the other hand, is based on the availability of cash and cash equivalents at a particular point in time. 1.9. It is respectfully submitted that merely because, a Company has temporary shortage of funds to pay its debts in full, should not lead to the conclusion that the financial position of the Company is not good to warrant issuance of shares at a premium. The shares were issued a premium and the funds so raised were utilized for giving advance to Bhaskar Foods Private Limited as stated above. This decision was taken in the interests of the Appellant and for the purpose of advancing its business objects. Post this transaction, the Company did not have sufficient funds to pay off its creditors in full. 1.10. Your Honour's attention is also invited to the main object of the Appellant as per its MoA, which reads as under:

"To buy, sell, manufacture, produce, cultivate, extrude, refine, extracts, expel crush, press, process, manipulate, hydrogenate, import, export and deal in all kinds of oil seeds, oil cakes, deoiled cakes, oils, oil bearing substances, pulses, vanaspati ghee and other by product and also to invest in the Companies carrying out similar business. "(Emphasis Supplied)

1.11. From a perusal of the above, it is clear that investing in companies is also a part of the Appellant's main objects and as such the proceeds of the share issue have been utilized for the purpose of the business of the Appellant. Further, the Appellant's Articles of Association (AoA) also authorize the issue of shares at a premium. Copy of the assessment submission dated 5 October 2016 enclosing a copy of the AoA is enclosed at Paper Book, Page ,No, 56 to 58. Share premium is excess of issue price over nominal value and not realization of future profits 1.12. The learned AO has alleged that share premium is a consideration against realization of future profits and hence the valuation of shares at NAV is incorrect. At the outset it is submitted that these observations of the learned AO are incorrect.

1.13. The word 'share premium' is neither defined in the IT Act nor in the Companies Act, 2013. Therefore, in absence of a specific definition, a useful reference may be made to the dictionary meanings of share premium reproduced below:

(i) Black Law's Dictionary Ninth Edition, 2009 "Premium - 3. The amount by which a security's market value exceeds its face value" (ii) The law dictionary - Lexis Nexis, 2013 Edition "Share premium - the amount by which the issue price of a share exceeds the nominal value." (iii) Major Law Lexicon - Fourth Edition, 2010 - P Ramanatha Aiyar

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"Share premium - the amount by which the issue price of a share exceeds the nominal value. On issue of shares, a premium charged on the nominal value of shares if it seems that the real value is likely to be much higher (Investment; Banking; Insurance)"

1.14. Based on a perusal of the definitions given above, it is clear that share premium is simply the amount by which the issue price exceeds the nominal value. It is nowhere provided that share premium is the value of future realizable value profits, as stated by the learned AO in the impugned order. Even though, the prospects of future realizable profits may or may not play a role in determining the issue price and consequently the share premium, it cannot be construed that share premium solely depends on the future realizable value of profits. No requirement under section 56(2)(viib) of the IT Act to value investment in subsidiaries at net realizable value prior to valuing the shares of the Appellant Company

1.15. It is submitted that the learned AO has disregarded the valuation done by the Appellant for the issuance of the equity shares despite the same being mandated in accordance with section 56(2)(viib) of the IT Act read with Rule 111]A of the IT Rules.

1.16. Section 56(2)(viib) of the IT Act reads as under: "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— by a venture capital undertaking from a venture capital Company or a venture capital fund; or 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, licenses, franchises or any other business or commercial rights of similar nature, whichever is higher; (b) venture capital Company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a),

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clause (b) and clause (c) of [Explanation] to clause (23FB) of section 10; "(Emphasis Supplied) 1.17. Rule 11UA of the IT Rules, inter alia, prescribes the method of valuation of shares for the purpose of section 56(2)(viib) of the IT Act The relevant extract of Rule 11UA is reproduced below for ready reference:

"(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 Appellant, namely:— the fair market value of unquoted equity shares = (a) the fair market value of unquoted equity shares = (A-L)/(PE)*(PV) Where A = book value of the assets in the balance-sheet as reduced by any amount of tax paid asdeduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortized 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:— The paid-up capital in respect of equity shares; The amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the Company; Reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; 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; Any amount representing provisions made for meeting liabilities, other than ascertained liabilities; Any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance- sheet; PV = the paid up value of such equity shares;

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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" 1.18. Based on a perusal of the provisions of section 56(2)(viib) of the IT Act, it is amply clear that for the purposes of section 56(2)(viib), valuation of unquoted equity shares may be done either: > as per the provisions of Rule 11UA or > as 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, licenses, franchises or any other business or commercial rights of similar nature whichever is higher 1.19. Your Honour will appreciate that the requirement of substantiating the value to the satisfaction of the AO is only in a case where the value is not determined as per Rule 11 UA. As such, if the valuation is done in accordance with Rule IIUA then the question of substantiating the same to the satisfaction of the AO does not arise since it is squareln covered as prescribed under the IT Act. Further, the higher of the two valuations has to be taken for the purposes of section 56(2)(viib) of the IT Act

1.20. Based on a perusal of Rule 11UA, sub-rule 2, it is amply clear that the assessee has an option to value its equity shares either as per the NAV (as per the formula prescribed) or as per Discounted Cash Flow (DCF) method.

1.21. In the instant case, the Appellant has adopted the method as per sub-rule (a) of Rule 11UA i.e. NAV as per the latest audited balance sheet which is in accordance with Rule 11 UA and section 56(2)(viib) of the IT Act. 1.22. FMV of the Appellant's equity shares per Rule 11UA of the IT Rules is Rs. 216.50 per share. Since the learned AO has added back the entire share premium received by the Appellant’s., it can be inferred that as per the learned AO, the FMV of Appellant's equity shares is only the face value of the equity shares i.e. Rs. 10. 1.23. Even for the sake of argument, it is presumed (without admitting) that the FMV of the Appellant's equity shares is Rs. 10 and the same is acceptable to the learned AO to the satisfaction of the learned AO, the same is required to be compared with the valuation arrived at as per Rule 11UA and the higher of the two is to be considered as the FMV for the purpose of the said section. 1.24. Your Honour will appreciate that even in such a scenario, the value as per Rule 11UA (i.e. as adopted by the Appellant of Rs. 216.50 per share) would have to be considered as the FMV of Appellant's equity shares

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1.25. The Appellant submits that where the IT Act provides for a particular method to be followed, the same has to be followed. Reliance in this regard, is placed on the decision of the Hon'ble Hyderabad Tribunal in the case of Medplus Health Services (P.) Ltd v. ITO ([2016] 68 taxmann.com 29), wherein it has been held that AO has to compute the FMV in accordance with the prescribed method. The Hon'ble Tribunal observed that the legislature in its wisdom has also given a formula for computation of the FMV which cannot be ignored by the, authorities below. Copy of the judgment is enclosed at Paper Book, Page No. 59 to 70. The relevant part of the judgment is reproduced below for your ready reference: "On a careful reading of the judgments discussed above, it is seen that the Courts have held that where a method has been prescribed by the legislature, that method, alone shall be followed for computation of the fair market value. The A.O. and the Id. CIT(A) have not followed the relevant provisions for adopting or computing the fair market value of the shares, but have adopted the market value at which some of the shares have been purchased by the Appellant as FMV. This, in our opinion, is not correct. As held by the Courts in the above judgments, the A.O. has to compute the fair market value in accordance with the prescribed method but cannot adopt the market value as fair market value under section 56(2)(viia) of the[Act. The legislature in its wisdom has also given a formulae for computation of the fair market value which cannot be ignored by the authorities below" (Emphasis Supplied) 1.26. Further, reliance is also placed on the following decisions wherein it has been held that where the taxing statute prescribes a rule, it has to be strictly and mandatorily followed:

• Bharat Hari Singhania v. CWT ([1994] 207 ITR 1 (SC)) • Mrs. Prem Shamsher Singh v. CWT ([1994] 210 ITR 233 (Del HC))

1.27. In the instant case, the learned AO has proceeded beyond the mandate of Rule 11 UA of the IT Rules and alleged that the Appellant should have valued its current investment first before proceeding to value its equity shares as per the provisions of the said rule. In doing so, the AO has gone beyond the express provision of Rule 11 UA.

1.28. From a plain reading of Rule 11UA, it is amply clear that for the purpose of arriving at the FMV of unquoted equity shares (as in the case of Appellant), the book value of the assets has to be considered as the starting point for the basis of arriving at the said value. The contention of the learned AO that non-current investments need to be valued first is beyond the provisions of the Rule.

1.29. It is submitted that the if the contention of the learned AO of adopting the net realizable value of assets / investments is to be accepted then, then such valuation would not be based on book value of assets and the entire purpose of incorporating the words, "book value of the assets" in Rule 11UA would get defeated,

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1.30. Further, it is a well settled principle in law that in the absence of ambiguity in the words, a taxing statute should be strictly construed. Attention in this regard is invited to the following decisions of the Hon'ble Supreme Court:

* Orissa State Warehousing Corp. V.CIT (fl 999] 23 7ITR 589) " In fine thus, a fiscal statute shall have to be interpreted on the basis of the language used therein and not de hors the same. No words ought to be added and only the language used ought to be considered so as to ascertain the proper meaning and intent of the legislation. The Court is to ascribe natural and ordinary meaning to the words used by the Legislature and the Court ought not, under any circumstances, to substitute its own impression and ideas in place of the legislative intent as is available from a plain reading of the statutory provisions. "(Emphasis Supplied) • HH Lakshrrd Bai v. Commissioner of Wealth-tax ([1994] 206 ITR 688)

"It is settled law that taxation statute in particular has to be strictly construed and that there is no equity in a taxing provision. It is because of this that the submission of Ms. Ramachandran that strict interpretation of the proviso would cause hardship to small depositors as against the richer ones, even if true, has no relevance. "(Emphasis Supplied)

1.31. In the instant case, the words used in the section 56(2)(viib) and the Rule 11UA are clear and unambiguous and therefore, they ought to be given their strict meaning as per the rule of strict interpretation of upheld in the above decisions.

Recent Notification issued for amendment in Rule 11UA for the purpose of section 56(2)(x) of the IT Act

1.32. Attention is also invited to the recent amendment made in Rule 11UA (Income- tax (Twentieth Amendment) Rules, 2017 -Notification No. 61/2017) dated 12 July 2017. Copy of the notification is enclosed at Paper Book, Page No. 71 to 72. As per the said notification, method prescribed for section 56(2)(viia) and section 56(2)(x) of the IT Act has been substituted for a different method. The said amendment is prospective in nature and is applicable for AY 2018-19 onwards. As per the new method now provided, the FMV (as per Rule 11UA) of equity shares' (i.e. investment) held by the Company,, forming a part of the Company's assets in the balance sheet has to be taken, inter alia, for the computation of FMV of the Company's unquoted equity shares as per Rule 11UA.

1.33. It is pertinent to note that, the new method is only applicable for valuation of shares done under section 56(2)(viia) and 56(2)(x) of the IT Act. The method of valuation for the purposes of section 56(2)(viib) of the IT Act has been kept unaltered.

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1.34. Your Honour will appreciate that if the intention of the legislature was to consider the FMV of investments for the purposes of section 56(2)(viib) also, the same could have been expressly clarified by way of an amendment in the rules ( as done in the case of method of valuation for the purpose of section 56(2)(viia) and section 56(2)(x) of the IT Act). Since, the rule prescribed for section 56(2)(viib) has been kept unaltered, it can be said that the sub-rule for section 56(2)(viib) does not require computing the FMV of the investments first and then compute the FMV of equity shares of the Company. Impact on shareholder (i.e. Chambal Trading Pvt. Ltd) if shares were issued at a lesser price (then the NAV as per Rule 11UA)

1.35. Here, your Honour's attention is invited to the provisions of section 56(2)(viia) of the IT Act as per which, if any firm or a company receives any property being shares of a company, for a consideration which is less than the aggregate of FMV of the property bu an amount exceeding Rs. 50,000, the aggregate FMV of such property as exceeds such consideration shall be chargeable to income-tax under the head, "Income from other sources". Further, the NAV method as per Rule 11UA has been prescribed as the method for computing FMV of the shares for the purposes of section 56(2)(viib) of the IT Act.

1.36. Accordingly, if for the sake of argument, shares were issued by the Appellant at a price lower than the FMV as per Rule 11UA, then the difference between the FMV and the issue price would have become taxable in the hands of the Appellant's shareholder i,e. Chambal Trading Put. Ltd.

Conclusion 1.37. In view of the factual and legal position discussed above, it is submitted that the addition of Rs. 114,41,91,146 made under section 56(2)(viib) of the IT Act, is bad in law and merits to be quashed for the following reasons:

• The Appellant has not invested the proceeds of the share issue in the shares of another Company • The Appellant is entitled to issue shares at a premium even though its liquidity position at the time of issuance of shares was not good • The learned AO's contention that the FMV of Appellant's investments is required to be made before computing the FMV of its own equity shares is beyond the method prescribed under the IT Rules • The Appellant has valued its shares as per Rule 11UA of the IT Rules and such value which has been calculated as per Rule 11UA is not required to be substantiated to the satisfaction of theAO • Under Rule 11 UA, the Appellant has an option to value shares basis the NAV (as per prescribed formula) or DCF method. The Appellant has opted for NAV. 1.38. The Appellant prays for due relief.

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8.3 Rule 11UA of the Income Tax Rules, prescribes the method of valuation of shares for the purpose of section 56(2)(viib) of the IT Act. The relevant part of Rule 11UA is reproduced below: "(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 (viibj 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:— the fair market value of unquoted equity shares = (b) the fair market value of unquoted equity shares = (A- L)/(PE)*(PV) Where A = book value of the assets in the balance-sheet as reduced by any 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 and any amount shown in the balance-sheet as asset including the unamortized 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:— The paid-up capital in respect of equity shares; The amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the Company; Reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; 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; Any amount representing provisions made for meeting liabilities, other than ascertained liabilities; Any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance- sheet; PV = the paid up value of such equity shares; 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"

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8.4 Accordingly, section 56(2) (viib) of the Act read with Rule 11UA makes it clear that for the purposes of section 56(2)(viib), valuation of unquoted equity shares may be done either: > as per the provisions of Rule 1 1UA or > as 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, licenses, franchises or any other business or commercial rights of similar nature, whichever is higher.

8.5 Thus as per section 56(2)(viib) read with Rule 11UA, the requirement of substantiating the value to the satisfaction of the AO will trigger only in a case where the value is not determined as per Rule 11UA. If the valuation is done in accordance with Rule 11UA, then the question of substantiating the same to the satisfaction of the AO would not arise at all as the same is prescribed under the IT Act. It is further important to note that the higher of the two valuation has to be taken for the purposes of section 56(2) (viib) of the IT Act. 8.6 The sub-rule 2 of Rule 11UA unambiguously provides that the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of subsection (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. Thus, the law is absolutely clear that the assessee has an option to value its equity shares either as per the NAV (as per the formula prescribed) or as per Discounted Cash Flow (DCF) method.

8.7 In this case, the appellant has adopted the method as per sub-rule (a) of Rule 11UA i.e. NAV as per the latest audited balance sheet which is clearly in accordance with Rule 11UA and section 56(2) (viib) of the IT Act.

8.8 The FMV of the appellant's equity shares per Rule 11UA of the IT Rules is Rs. 216.50 per share. As the AO has added the entire share premium received, it is observed that the FMV of such shares as per the AO is only the face value of the equity shares i.e. Rs. 10 each. Even if this value determined by the AO is to be accepted as the FMV, the same was required to be compared with the valuation arrived at as per Rule 11UA and the higher of the two was to be considered as the FMV for the purpose of the section56(2)(viib). Therefore, even in such a situation, the value as per Rule 11UA (i.e. Rs. 216.50 per share) should have been taken by the AO as the FMV of Appellant's equity shares.

8.9 Thus, a plain reading of section 56(2)(viib) read with Rule 11UA clearly shows that the AO has completely disregarded unambiguous provisions of law and failed in applying the mandatory requirement of law.

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8.10 It is trite law that where the IT Act provides for a particular method to be followed, the same has to be followed strictly. 8.11 The principle of law is well-settled that when the language of a statute is clear and unambiguous, the courts are to interpret the same in its literal sense and not to give a meaning which would cause violence to the provisions of the statute, as held in Bntania Industries Ltd. vs. C.I.T. (2005) 278-ITR-546 at 547 (SC). 8.12 It is a well settled principle of law that the court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous. A statute is an edict of the Legislature. The language employed in a statute is the determinative factor of legislative intention. While interpreting a provision the court only interprets the law and cannot legislate it. If a provision of law is misused and subjected to the abuse of process of law, it is for the Legislature to amend, modify or repeal it, if deemed necessary. Legislative casus omissus cannot be supplied by judicial interpretative process. A casus omissus ought not to be created by interpretation, save in some case of "strong necessity" as held in Union of India vs. Dharmendra Textiles Processors and Others (2008) 306-ITR-277 at page 278 (SC). 8.13 It has been held in C.I.T. vs. Rajasthan Financial Corporation (2007) 295-ITR- 195 (Raj F.B.) that if the construction of a statutory provision on its plain reading leads to a clear meaning, such a construction has to be adopted without any external aid. 8.14 It is a settled principle of rule of interpretation that the Court cannot read any words which are not mentioned in the section nor can substitute any words in place of those mentioned in the section and at the same time cannot ignore the words mentioned in the section. Equally well settled rule of interpretation is that if the language of statute is plain, simple, clear and unambiguous then the words of statute have to be interpreted by giving them their natural meaning as observed in Smita Subhash Sawant vs. Jagdeshwari Jagdish Amin AIR 2016 S.C, 1409 at 1416. Further, it is a well settled principle in law that in the absence of ambiguity in the words, a taxing statute should be strictly construed. 8.15 It is settled law that a taxing statute is to be construed strictly. In a taxing statute one has to look merely at what is said in the relevant provision. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. There is no room for any intendment. There is no equity about a tax. In interpreting a taxing statute the court must look squarely at the words of the statute and interpret them as held in Ajmera Housing Corporation and Another vs. C.I.T. (2010) 326-ITR-642 (SC).

8.16 Similar view has been expressed by the Apex Court in HH LakshmiBai v. Commissioner of Wealth-tax ([1994] 206 ITR 688): "It is settled law that taxation statute in particular has to be strictly construed and that there is no equity in a taxing provision. It is because of this that the

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submission of Ms. Ramachandran that strict interpretation of the proviso would cause hardship to small depositors as against the richer ones, even if true, has no relevance." (emphasis supplied) 8.17 On this issue, the Hon'ble Supreme Court has reiterated in Qrissa State Warehousing Corp. V.CIT ([1999] 237 ITR 589) as follows:

"A fiscal statute shall have to be interpreted on the basis of the language used therein and not de hors the same. No words ought to be added and only the language used ought to be considered so as to ascertain the proper meaning and intent of the legislation. The Court is to ascribe natural and ordinary meaning to the words used by the Legislature and the Court ought not, under any circumstances, to substitute its own impression and ideas in place of the legislative intent as is available from a plain reading of the statutory provisions, "(emphasis supplied)

8.18 The appellant has correctly placed reliance on the decision of the ITAT Hyderabad in the case of Medplus Health Services (P.) Ltd v. ITO ([2016] 68 taxmann.com 29), wherein it has been held that AO has to compute the FMV in accordance with the prescribed method. The Tribunal observed that the legislature in its wisdom has also given a formula for computation of the FMV which cannot be ignored by the authorities below. The relevant part of the judgment is reproduced below: "On a careful reading of the judgments discussed above, it is seen that the Courts have held that where a method has been prescribed by the legislature, that method alone shall be followed for computation of the fair market value. The A.O. and the Ld. CIT(A) have not followed the relevant provisions for adopting or computing the fair market value of the shares, but have adopted the market value at which some of the shares have been purchased by the Appellant as FMV. This, in our opinion, is not correct As held by the Courts in the above judgments, the A.O. has to compute the fair market value in accordance with the prescribed method but cannot adopt the market value as fair market value under section 56(2)(viia) of the Act. The legislature in its wisdom has also given a formulae for computation of the fair market value which cannot be ignored by the authorities below" (Emphasis Supplied)

8.19 The legal position that where the taxing statute prescribes a rule, it has to be strictly and mandatorily followed has been reiterated in the following decisions: • Bharat Had Singhania v. CWT([1994] 207 ITR 1 (SC)) • Mrs. Prem Shamsher Singh v. CWT ([1994] 210 ITR 233 (Del HC)) 8.20 It is observed that in this case, the AO has proceeded beyond the mandate of Rule 11 UA of the IT Rules in taking the view that the appellant should have valued its current investment first before proceeding to value its equity shares as per the

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provisions of the said rule. This is nowhere prescribed in law. From a plain reading of Rule 11 UA, it is clear that for the purpose of arriving at the FMV of unquoted equity shares (as in this case), the book value of the assets has to be considered as the starting point for the basis of arriving at the said value. The view of the AO that non- current investments need to be valued first is beyond the provisions of the Rule. Thus in doing so, the AO has transgressed the express provision of Rule 11 UA.

8.20 There is force in the argument that if the contention of the AO of adopting the net realizable value of assets/ investments is to be accepted then such valuation would not be based on book value of assets and the entire purpose of incorporating the words, "book value of the assets" in Rule 11UA would get defeated.

8.21 Therefore, the law i.e. section 56(2)(viib) and Rule 11UA are very clear and unambiguous that in this case the FMV was to be computed in a particular manner as prescribed in the Rule. The law ought to have been strictly applied. It was not open to the AO to replace the value, contrary to law, by his own value without any legal basis and solely on the basis of his own surmises and conjectures. Further, the AO again failed in correctly applying even the plain and simple words of law that higher of the two values was to be considered as the FMV for the purpose of the section 56(2)(viib) r.w. Rule 11UA.

8.22 It is pertinent to refer to recent amendment made in Rule 11UA for the purpose of section 56(2)(x) of the IT Act (Income-tax (Twentieth Amendment) Rules, 2017 - Notification No. 61/2017 dated 12 July 2017). By the said amendment, method prescribed for section 56(2)(viia) and section 56(2)(x) of the IT Act has been substituted for a different method. The rule applies to the transactions on or after 01 April, 2017. Therefore, the said amendment is expressly prospective in nature and is applicable for AY 2018-19 onwards./As per the new method now provided, the FMV (as per Rule 111JA) of equity shares (i.e. investment) held by the Company, forming a part of the Company's assets in the balance sheet has to be taken, inter alia, for the computation of FMV of the Company's unquoted equity shares as per Rule 11UA.

8.23 It is important to note that, the new method is only applicable for valuation of shares done under section 56(2)(viia) and 56(2)(x) of the IT Act. The method of valuation for the purposes of section 56(2)(viib) of the IT Act has been kept unaltered.

8.24 As the valuation method u/s 56(2)(viib) remains same, if the / intention of the legislature was to consider the FMV of investments for the purposes of section 56(2)(viib) also, the same would have been expressly clarified by way of an amendment in the rules (as done in the case of method of valuation for the purpose of section 56(2)(viia) and section 56(2)(x) of the IT Act). Since, the rule prescribed for section 56(2)(viib) has been kept unchanged, it can be said that the sub-rule for section 56(2)(viib) does not require computing the FMV of the investments first and then compute the FMV of equity shares of the Company.

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8.25 The appellant in his arguments has invited attention to the provisions of section 56(2) (viia) of the IT Act as per which, if any firm or a company receives any property being shares of a company, for a consideration which is less than the aggregate of FMV of the property by an amount exceeding Rs. 50,000, the aggregate FMV of such property as exceeds such consideration shall be chargeable to income-tax under the head, "Income from other sources". Further, the NAV method as per Rule 11UA has been prescribed as the method for computing FMV of the shares for the purposes of section 56(2)(viib) of the IT Act. Thus, even if for the sake of argument, shares were issued by the appellant at a price lower than the FMV as per Rule 11UA, .then the difference between the FMV and the issue price would have become taxable in the hands of the appellant's shareholder i.e. Chambal Trading Pvt. Ltd. This clearly shows that the approach of the AO has been illogical. 8.26 Instead of following plain and simple provisions of section 56(2)(viib) and Rule 11UA, the AO applied his own reasoning without any legal basis. Though, in view of above discussion, it is not relevant to go into those reasons, however, as an abundant caution reasons of AO are also examined. 8.27 The AO has pointed out that VSPL has not made any efforts to achieve its main objects nor undertaken business activity in FY 2012-13 to FY 2014-15. There is force in the argument of appellant that that expenditure on land / plant and machinery would usually be required in a manufacturing business whereas being a trading company, purchase of land or plant and machinery was not necessarily requirement for the VSPL to undertake trading activities. In any case, this ground is legally not relevant. 8.28 The AO has also noted that the appellant has not undertaken any business activity. The same is found to be factually incorrect. As is noted from a perusal of the Profit and Loss Account (extracts of which are forming a part of the assessment order) that the appellant has carried out its business activities of trading in soya doc since the past several years and continued the same business in FY 2012-13 to FY 2014-15. It is a acceptable fact that the level of economic activity in a business cannot be the same in each year and there can be instances, where the economic activity is low due to various factors. Merely because, the level of economic activity is low cannot lead to the conclusion that business is not carried out by the appellant. 8.29 The AO has observed that the appellant has not invested the share capital raised in the shares of subsidiary companies. In this regard, the appellant has explained that it has not invested the proceeds of share issue in shares of its subsidiaries. The proceeds of shares have been utilized in giving advance for the purpose of business of the appellant. This fact was also submitted during the course of assessment proceedings. This is also apparent from the balance sheet of the appellant wherein the advance made by the Company has been shown under the head 'Long term loans and advances' and not under 'Non-Current Investments. Further, as is also clear from the schedule of 'Non-Current Investments' and 'Long term loans and advances', the appellant has invested in shares of four companies namely, Decore Exoils Private Limited, Bhaskar Foods Private Limited, Sharda Solvent Limited and Divya Energy and Foods Private Limited, whereas the advance has been given to only one

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such company i.e. Bhaskar Foods Private Limited. The AO's reasoning is vague and factually not correct. 8.30 The AO also observed that on one hand the company was showing sound financial position to issue shares at a premium and on the other hand it had submitted that did not have a sound liquidity position due to paucity of funds to pay to its creditors. The appellant argued that liquidity position and sound financial statement are two different concepts and a company may have a sound financial position even though its liquidity position made not be good at a particular point of time. The financial position of a Company is a larger concept and is based on several factors, inter alia, including the assets of the Company, the investments of the company, etc. The liquidity position on the other hand, is based on the availability of cash and cash equivalents at a particular point in time. There is force in the argument. Merely because, a company does not have good liquidity at a certain point of time, it cannot be said that the financial position of the company is not good to warrant issuance of shares at a premium. This ground is also irrelevant.

8.31 The AO has also noted that VSPL has collected huge share premium and invested in the shares of subsidiary companies which cannot be termed as an act in accordance with its Memorandum of Association (MoA). In this regard, it is observed that the "main object” of the appellant as per its MoA is as follows:

"To buy, sell, manufacture, produce, cultivate, extrude, refine, extracts, expel crush, press, process, manipulate, hydrogenate, import, export and deal in all kinds of oil seeds, oil cakes, deoiled cakes, oils, oil bearing substances, pulses, vanaspati ghee and other by product and also to invest in the Companies carrying out similar busmess."(Emphasis Supplied) 8.31.1 A perusal of MoA clearly shows that investing in companies is also a part of the appellant's main objects and as such the proceeds of the share issue have been utilized for the purpose of the business of the appellant. Further, the Articles of Association (AoA) of the assessee company also authorize the issue of shares at a premium. 8.32 The AO has also taken a view that share premium is the value of future realizable profits of a Company and hence valuation of shares at Net Asset Value (NAV) is incorrect. It is important to note that this is only a general statement and in view of section 56(2)(viib) and Rule 11UA, this consideration is not relevant. Further, the observations are incorrect also. 8.33.1 The word 'share premium' is neither defined in the IT Act nor in the Companies Act, 2013. Therefore, in absence of a specific definition, a useful reference may be made to the dictionary meanings of share premium reproduced below: • Black Law's Dictionary Ninth Edition, 2009 "Premium - 3. The amount by which a security's market

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value exceeds its face value" • The law dictionary - Lexis Nexis, 2013 Edition "Share premium - the amount by which the issue price of a share exceeds the nominal value." • Major Law Lexicon - Fourth Edition, 2010 - P Ramanatha Aiyar "Share premium - the amount by which the issue price of la share exceeds the nominal value. On issue of shares, a premium charged on the nominal value of shares if it seems that the real value is likely to be much higher (Investment; Banking; Insurance)" 8.32.2 Based on the definitions given above, it is clear that share premium is simply the amount by which the issue price exceeds the nominal value. It is nowhere provided that share premium is the value of future realizable value profits, as noted by the AO in the assessment order. The prospects of future realizable profits may play a role in determining the issue price and consequently the share premium, it cannot be said that share premium solely, depends on the future realizable value of profits. In any case, this observation is legally not relevant in view of express provision of law. 8.33 In view of the totality of facts and legal position, as the law i.e. section 56(2)(viib) and Rule 11UA are very clear and unambiguous, it is concluded that in this case the FMV was correctly computed by appellant as per the method prescribed in the Rule. It was not open to the AO to replace the value, contrary to law, by his own value without any legal basis and solely on the basis of his subjective reasoning and surmises and conjectures. The addition of Rs. 114,41,91,146/- made under section 56(2)(viib) of the Act is found to be unjustified and bad in law. The same is therefore, deleted. 8.34 This ground of appeal is allowed.”

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not found to be acceptable to the Ld.AO. Further that the investment made by the assessee company is in the shares of its subsidiary companies and therefore valuation of shares of subsidiaries companies be determined and thereafter valuation of companies asset can be determined as of the opinion of the Ld.AO. Apart from that, the trade payable shown in the balance sheet of the appellant company is not beyond doubt. The assessee, therefore, failed to justify the explanation how the share premium of Rs.1,41,41,91,146/- was collected which is not in consonance with the provisions of Section 56(2)(viib) of the Act and its explanation read with Rule 11UA. On the contrary, the assessee’s case is this that the method prescribed under Rule 11UA(2) r.w. 11U gives an option to the assessee to determine the fair market value of unquoted shares as per the method prescribed therein which has been duly complied with by the assessee and therefore the valuation is not required to be substantiated by the company to the satisfaction of the Ld. AO and in that view of the matter, the addition made in the instant appeal by the Ld.AO was rightly held to be not sustainable in the eye of law by the Ld. CIT(A).

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aforesaid provision of law, the question of requirement of substantiating the value to the satisfaction of the Ld.AO would only arise in the event the valuation is not determined in terms of Rule 11UA. Relevant to mention that the higher of the two valuations to be taken for the purposes of Section 56(2)(viib) of the Act.

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passed by the Hon’ble Apex Court in the case of Ajmera Housing Corporation & Anr. Vs. CIT, reported in (2013) 326 ITR 642 which is found to be in favour of the assessee. The assessee further relied upon the judgment passed by the Hon’ble ITAT Ahmedabad Bench in the case of Medplus Health Services Pvt. Ltd. Vs. ITO, reported in (2016) 68 taxmann.com 29 wherein it has been held that the Ld AO has to compute the fair market value in accordance with the prescribed method; the formulae for computation of FMV has been provided by the legislature in its wisdom, the same cannot be ignored by the authorities below. Thus, it appears that the case of the assessee as has been made out in the matter before us is sufficiently guarded by the ratio laid down in different judgments pronounced by different judicial forums. So far as the other issues raised by the Ld.AO is concerned as already discussed at the first paragraph of this noting, the Ld.CIT(A) rebutted the same in the following manner:

“8.27 The AO has pointed out that VSPL has not made any efforts to achieve its main objects nor undertaken business activity in FY 2012-13 to FY 2014-15. There is force in the argument of appellant that that expenditure on land / plant and machinery would usually be required in a manufacturing business whereas being a trading company, purchase of land or plant and machinery was not necessarily requirement for the VSPL to undertake trading activities. In any case, this ground is legally not relevant. 8.28 The AO has also noted that the appellant has not undertaken any business activity. The same is found to be factually incorrect. As is noted from a perusal of the Profit and Loss Account (extracts of which are forming a part of the assessment order) that the appellant has carried out its business activities of trading in soya doc since the past several years and continued the same business in FY 2012-13 to FY 2014-15. It is a acceptable fact that the level of economic activity in a business cannot be the same in each year and there can be instances, where the economic activity is low due to various factors. Merely because, the level of economic activity is low cannot lead to the conclusion that business is not carried out by the appellant. 8.29 The AO has observed that the appellant has not invested the share capital raised in the shares of subsidiary companies. In this regard, the appellant has explained that it has not invested the proceeds of share issue in shares of its subsidiaries. The

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proceeds of shares have been utilized in giving advance for the purpose of business of the appellant. This fact was also submitted during the course of assessment proceedings. This is also apparent from the balance sheet of the appellant wherein the advance made by the Company has been shown under the head 'Long term loans and advances' and not under 'Non-Current Investments. Further, as is also clear from the schedule of 'Non-Current Investments' and 'Long term loans and advances', the appellant has invested in shares of four companies namely, Decore Exoils Private Limited, Bhaskar Foods Private Limited, Sharda Solvent Limited and Divya Energy and Foods Private Limited, whereas the advance has been given to only one such company i.e. Bhaskar Foods Private Limited. The AO's reasoning is vague and factually not correct.

8.30 The AO also observed that on one hand the company was showing sound financial position to issue shares at a premium and on the other hand it had submitted that did not have a sound liquidity position due to paucity of funds to pay to its creditors. The appellant argued that liquidity position and sound financial statement are two different concepts and a company may have a sound financial position even though its liquidity position made not be good at a particular point of time. The financial position of a Company is a larger concept and is based on several factors, inter alia, including the assets of the Company, the investments of the company, etc. The liquidity position on the other hand, is based on the availability of cash and cash equivalents at a particular point in time. There is force in the argument. Merely because, a company does not have good liquidity at a certain point of time, it cannot be said that the financial position of the company is not good to warrant issuance of shares at a premium. This ground is also irrelevant.

8.31 The AO has also noted that VSPL has collected huge share premium and invested in the shares of subsidiary companies which cannot be termed as an act in accordance with its Memorandum of Association (MoA). In this regard, it is observed that the "main object” of the appellant as per its MoA is as follows:

"To buy, sell, manufacture, produce, cultivate, extrude, refine, extracts, expel crush, press, process, manipulate, hydrogenate, import, export and deal in all kinds of oil seeds, oil cakes, deoiled cakes, oils, oil bearing substances, pulses, vanaspati ghee and other by product and also to invest in the Companies carrying out similar busmess."(Emphasis Supplied)

8.31.1 A perusal of MoA clearly shows that investing in companies is also a part of the appellant's main objects and as such the proceeds of the share issue have been utilized for the purpose of the business of the appellant. Further, the Articles of Association (AoA) of the assessee company also authorize the issue of shares at a premium. 8.32 The AO has also taken a view that share premium is the value of future realizable profits of a Company and hence valuation of shares at Net Asset Value (NAV) is incorrect. It is important to note that this is only a general statement and in

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view of section 56(2)(viib) and Rule 11UA, this consideration is not relevant. Further, the observations are incorrect also.”

The observation made by the Ld.CIT(A) is found to be justified in view of the reasons assigned therein.

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addition thereon. Thus, in our considered opinion, the order passed by the Ld.CIT(A) in deleting the addition made by the Ld. AO is just and proper so as to warrant interference. The same, is, thus, upheld. The ground of appeal preferred by the Revenue is found to be devoid of merit and, thus, dismissed.

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explained the impugned addition under Section 68 of the Act was done as (treating the opening balance as peak credit basis), which was, in turn, deleted by the Ld.CIT(A). Hence, the instant appeal before us.

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creditor was duly paid and the closing balance, therefore, as on 31st March, 2014 remained only Rs.1,08,78,25,900/- which was also disregarded by the Ld.AO. Thus, the addition made by the Ld.AO is not found to be justifiable. Apart from that the manner of utilization of its fund is the prerogative of the businessman and the appellant herein had decided to utilize the share proceeds for advancement of other business objects of the company instead of repaying its creditors. Mainly because the creditors were not re-paid, it cannot be a ground to invoke the provision of Section 68 of the Act.

“9.5 The addition has been made under section 68 of the Act which reads as under: 68. Where any sum is found credited in the books of an Appellant maintained for any previous year, and the Appellant offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the Appellant of that previous year: Provided that where the Appellant is a Company (not being a Company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount

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by whatever name called, any explanation offered by such Appellant-Company shall be deemed to be not satisfactory, unless— c) the person, being a resident in whose name such credit is recorded in the books of such Company also offers an explanation about the nature and source of such sum so credited; and

d) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum \referred to therein is recorded, is a venture capital fund or a venture capital Company as referred to in clause (23FB) of section 10 9.6 From a bare reading of section 68, it is clear that the said section applies to cash credits for which assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory. Thus clearly, the section 68 applies to instances of "unexplained" credits and not "unpaid" credits. In the present case adequate evidences were available with the AO which explained the identity of creditor, nature of credit, etc. Consequently, prima facie the action of the AO of invoking the provisions of section 68 merely because the creditors have not been paid in full is legally unjustified.

9.7 Hon'ble Calcutta High Court in the case of CIT v. S.C. Ghosal ([1977] 106 ITR 980), based on evidences such as existence of creditors, assessment file number of creditors and the confirmation received from the creditor, upheld the order of the Tribunal. The relevant portion of the judgment is reproduced below:

"On a careful consideration of the facts and circumstances we are unable to accept his contentions. It does not appear to us that the Tribunal has decided the matter only on the basis of onus. Positive evidence had been adduced by the Appellant which was accepted by the Tribunal To reiterate,, such positive evidence is (a) the existence of the creditors, (b) the assessment file numbers of the creditors, (c) the confirmation letters of the creditors in support of the Appellant's claim, and (d) books of account at least in the case of one creditor, i.e. Bhaqwandas Purushottamdas of Bangalore, and (e) the discharged hundis. The Tribunal has duly taken note of such positive evidence and the fact that there was no contrary evidence forthcoming from the revenue. The revenue only relied on the prevalent practice of utilising fictitious hundis through bogus persons. It appears to us that the Tribunal accepted the evidence of the Appellant as sufficient to discharge their preliminary onus and in that process further noted that there was no further evidence to the contrary. In the absence of any such evidence the contentions of the Appellant stood proved.”(Emphasis Supplied) 9.8 The appellant has also placed reliance on the decision of the Hon'ble Gauhati High Court in the case of Jalan Timbers v. CIT ([1997] 90 Taxman 298) wherein

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based on evidences such as returns of the creditors and acceptance of such returns during the course of assessment, creditors have been held to be genuine. The relevant extract of the judgment is reproduced below: "In the instant case, the amounts were shown in the income-tax return of the Appellant. Besides, the creditors had also shown in the returns about giving of the loan to the Appellant. Strangely, the ITO while making the assessment in respect of the three creditors above named accepted the returns. This itself will go to show that the amount received by the Appellant was at least prima facie genuine. As the ITO had accepted the returns of the three creditors it should go to mean that the amounts given by those creditors were also genuine."

9.9 It has been observed that in this case, similar evidences as discussed in the case of S.C. Ghosal (supra) and Jalan Timbers (supra), such as returns of the creditor, balance sheet of the creditor, balance confirmation statement were available with the AO. Despite the same, the AO made the addition on arbitrary grounds, without providing any cogent reasons for refuting the evidence available on record.

9.10 The AO has invoked the provisions of section 68 to add the/ outstanding balance of creditor (Ojas), on the ground that the appellant had not^paid it out of the funds available from the issue of shares. It is observed that the manner of utilization of its funds is the prerogative of a businessman and the appellant in this case, had decided to utilize the share issue proceeds for advancement of other business objects of the company instead of repaying its creditors. Merely because the creditors were not repaid, it cannot be a ground to invoke the provisions of section 68 of the IT Act.

9.11 In taking a view that the appellant should have paid the sundry creditors out ofjthe proceeds of^share issue, the AO has sought to put himself in the armchair of a businessman. In this regard, it is pertinent to refer to the decision of the Hon'ble Supreme Court in the case of SA Builders Ltd v. CIT ([2007] 288 ITR 1). The relevant extract of the judgment is reproduced below: "We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377] that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the Appellant itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the Appellant and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman"(Emphasis Supplied)

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9.12 Further, the Hon'ble Delhi High Court in the case of CIT v. Dalmia Cement (Bharat) Ltd ([2002] 252 ITR 377), has held as below: "Once it is established that there was a nexus between the expenditure and the purpose of business, the revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. We need not go into any hypothetical issue in this case in view of the accepted position that the factum of services rendered by CDL has not been refuted by the revenue. It needs no reiteration that the settled position in law is that no businessman can be compelled to maximise his profits. The obvious answer to the first question is in the affirmative, in favour of the Appellant and against the revenue."(Emphasis Supplied) 9.13 Though not expressly mentioned in the order, it appears that by adding the amount of credit balance on account of nonpayment, the AO also had in mind the provisions of section 41(1) of the IT Act. Applicability of this provision is also examined. 9.14 It is observed that in this case, there has been no remission or cessation of trading liability as envisaged by section 41(1) of the IT Act. It appears that the AO has inferred the remission / cessation merely because the creditor has been unpaid. 9.15 The Supreme Court in Chief Commissioner of Income Tax V. , Kesaria Tea Co. Limited' - 2002 -TMI - 6065 - held that the resort to Section 41(1) could arise only when the liability of the assessee can be said to have ceased finally without the possibility of reviving it. It was held that even an unilateral action on the part of the assessee by way of writing off the liability in its accounts does not necessarily mean that the liability ceased in the eye of law.

9.16 The Supreme Court in 'Commissioner of Income Tax V. Sugauli Sugar Works P Limited' - 1999 – TMI – 5715 had the occasion to consider the applicability of Section 4 1 of the Act. It was held that the mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the department to say that Section 4 1 would apply and the amount should be included in the total income of the assessee. It could not be said that the liability had come to an end as period of more than 20 years has elapsed and the creditor had not taken any steps to recover the amount. The expiry of the limitation did not extinguish the debit but only prevented the creditor from enforcing the debt.

9.17 In this regard, it is relevant to refer to the decision of the ITAT Mumbai in the case of Madan Mohla v. ITO ([2016] 50 ITR(T) 204) wherein it has been held that as long as the liabilities are acknowledged in the books of accounts, no presumption should be drawn that the liability ceased to exist that too merely on the basis of their age. The relevant extract of the judgment is reproduced below:

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"It means that assessee continue to acknowledge these liabilities in its books of account. Under these circumstances, even if more than 3 years have passed, then at the best these liabilities may be termed as not enforceable in the court of law, but that alone would not finally exonerate the assessee from these liabilities. The assessee is carrying in the business and for its respectful and peaceful existence in the business as well as in the society; he man prefer to pay off all the liabilities from social moral, commercial or many other angles. The decision to pan or not to pay a liability can be taken by the businessman alone. So long as, the liabilities are acknowledged in the books of account, no presumption should be drawn that the liability ceased to exist that too merely on the basis of their age. Further, there is nothing to show that the creditors had discharged the assessee from payments of these liabilities and that too in the near under consideration. It is further noted by us that for the application of provisions of section 41(1), an assessee must get some benefit in real terms by way of remission or cessation of the liabilities."(Emphasis Supplied)

9.18 Further, it is a trite law that no addition can be made under section 41(1) of the IT Act, without proving that liability ceased to exist and that too in the year under consideration.

Reliance is placed on the following judgments that support the above proposition: • CIT v, Sugauli Sugar Works (P.) Ltd., [1999] 236 ITR 518 (SC)) • CIT v. SI Group India Ltd. ([2015] 379 ITR 326) • Chief CIT v. Kesaria Tea Co. Ltd. ([2002] 254 ITR 434 (SC)) • CIT v. Jain Exports (P.) Ltd. ([2013] 35 taxmann.com 540 (Delhi • PCIT v. Matruprasad C. Pandey ([2015] 377 ITR 363(Guj HC)) • ITO v. Bhavesh Prints (P.) Ltd. ([2011] 46 SOT 268 (Ahd. ITAT) • Nitin S. Garg v. Asstt. CIT([2010] 40 SOT 253 (Ahd. ITAT))

9.19 The Delhi High Court in ITA NO. 1073/2011 in the case of CIT v. Hotline Electronics Ltd has held that unpaid liabilities cannot be added as the assessee's income under section 41(1) merely because they remained unpaid for a sufficiently long time and that it is required of the revenue authorities to show that the liability to pay the creditors has ceased or has been remitted by the creditors.

9.20 It has been held in ITO Vs. Thadaram Khaldas Tolani by ITAT Mumbai in ITA No. 3149/Mum/2016 that a plain reading of section 41(1) makes it clear that before coming to the conclusion that a liability has ceased to exist or there is remission/cessation of a particular liability, it must be proved that such benefit by way of remission/cessation has accrued to the assessee in the relevant financial year. If there is nothing on rec9rd to show that either the creditors have written-off the liabilities in their books of account or the assessee has refused to pay the amount to them. Therefore, it cannot be said that any benefit on account of the liability has accrued to the assessee. A reading of the provisions contained under section 41(1) of

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the Act would also make it clear that the burden is on the assessing officer to prove that conditions of section 41(1).of the Act have been fulfilled to treat a liability as an income on account of remission or cessation of liability in a particular assessment year. 9.20.1 In the facts of the present case, it is evident, from the balance sheet itself and undisputed that payments have been made to the concerned creditors during the relevant financial year. Therefore, the AO cannot presume cessation of liability in this case. 9.21 The appellant has also argued that the genuineness of the transaction entered into by the appellant were not doubted in past. It is observed that the case was subjected to scrutiny assessment under section 143(3) of the Act for AY 2010-11 and AY 2012-13. The purchase transaction undertaken with Ojas in AY 2010-11 was duly allowed as expenditure. Even in the last scrutiny assessment for AY 2012-13, the genuineness of the said transaction with the creditor (i.e. Ojas) was not doubted. Therefore, by adding the amount due to Ojas, the AO cannot take a different stand and contradict his own stand adopted in earlier assessment years without any discovery of new facts or change in legal position. 9.22 Further, there is force in the argument that the AO has not doubted the genuineness of Ojas while ascertaining the FMV of equity shares of the appellant in accordance with Rule 11UA. Therefore, here also the AO is found to be contradicting his own stand. 9.23 It is also observed that since the outstanding amount which has been added to the appellant's total income pertains to FY 2009-10, no addition can be made for the same during the course of assessment AY 2014-15 u/s 68 of the Act as has been done by the AO. 9.24 It is pertinent to refer to the decision of the Hon'ble Delhi High Court in the case of Usha Stud Agricultural Farms Ltd v. CIT ([2008] 183 Taxman 227), wherein the High Court has held that since the credit balance appearing in the accounts of the Appellant did not pertain to the year under consideration, the same could not be added back to the Appellant for the year under consideration. The relevant part of the judgment is reproduced below:

Since it is a finding of fact recorded by the CIT(A) that this credit balance appearing in the accounts of the Appellant, does not pertain to the year under consideration, under these circumstances the Assessing Officer was not justified in making the impugned addition under section 68 of the Act and as such no fault can be found with the order of the Tribunal which has endorsed the decision of the CIT(A). (Emphasis Supplied)

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9.25 The Hon'ble Delhi High Court in CIT v. Sri Vardhaman Overseas Ltd., 343 ITR 408 (Del), on identical facts, held that neither section 68 nor section 41(1) of the Act would be attracted. 9.26 It is trite law that Section 68 is not applicable to liabilities representing old opening balances. In a recent judgment, ITAT Chennai in ITA No. 305/Mds./2016 in M/s. Sooraj Leathers vs. ITO has held that If the liabilities are old, no credit has been made in so far those credits in the books of accounts in the assessment year under consideration, Sec.68 cannot be applied. The ITAT said that this view is supported by the judgement of Delhi High Court in the case of Usha Stud Agricultural Farms Ltd., wherein held that credit balance in the account of the assessee did not pertain to the year under consideration, the AO was not justified in making the addition u/s.68 of the Act. 9.27 On identical facts, similar view has been taken by the Delhi ITAT in the case of Eastern Medkit Ltd. v. DCIT ([2012] 19 taxmann.com 286) that section 68 and section 41(1) are not applicable. The relevant extract of the judgment is reproduced below : "We have considered the facts of the case and submissions made before us. The facts submitted by the Id. counsel regarding the credits being old and their not being written off in the books of account stand undisputed. As the liabilities are old no credit has been made in the books in so far as these liabilities are concerned. Therefore, the provision u/s 68 is not applicable as rightly contended by the ld. counsel. The liabilities have not been written off, thus, the liabilities have not ceased to exist etc. Therefore, the provision contained in section 41(1) is also not applicable. Thus, we do not find any error in the order of the ld. CIT(A) (Appeals) on the basis of the plain reading of the provisions under sections 68 and 41(1). Therefore, this ground is dismissed. (Emphasis Supplied) 9.28 On similar facts, the ITAT Banglore in ITA No.l078/Bang/2014 in the case of Glen Williams Vs. ACIT has held as follows: On the applicability of section 68, we are of the view that those provisions will not apply as the balances shown in the creditors account do not arise out of any transaction during the previous year relevant to AY 2009-10. The provisions of sec. 68 are clear inasmuch as they refer to "sum found credited in the books of account of an assessee maintained for any previous year". Since the credit entries in question do not relate to previous year relevant to AY 2009-10, the same cannot be brought to tax u/s. 68 of the Act.

9.29 In view of the totality of facts and legal position, the addition made by the AO u/s 68 is found to be unjustified and unsustainable in law as the appellant had satisfactorily explained its sundry creditors and AO had also obtained confirmation from the said creditor; merely because the creditors were not repaid would not attract the provisions of section 68 of the IT Act; and most importantly the credit which has

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been added u/s 68 does not pertain to the AY 2014-15 but to earlier years and therefore, the same cannot be added to the total income for AY 2014-15.”

Order pronounced on 18 /10/2022 by placing the result on the Notice Board as per Rule 34(4) of the Income Tax (Appellate Tribunal) Rule, 1963.

Sd/- Sd/- (BHAGIRATH MAL BIYANI) (MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER Indore; Dated 18/10/2022 TRUE COPY S. K. Sinha, Sr. PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)- 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Indore 6. गाड�फाईल / Guard file. आदेशानुसार/ BY ORDER,

(Dy./Asstt.Registrar) ITAT, Indore

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1.Date of dictation on 11.10.2022 2.Date on which the typed draft is placed before the Dictating Member 12.10.2022 3.Date on which the approved draft comes to the Sr.P.S./P.S. 4.Date on which the fair order is placed before the Dictating Member for pronouncement 5.Date on which the fair order comes back to the Sr.P.S./P.S 6.Date on which the file goes to the Bench Clerk 7.Date on which the file goes to the Head Clerk…………. 8.The date on which the file goes to the Asstt. Registrar for signature on the order…………………… 9.Date of Despatch of the Order………Date on which the typed draft is placed before the Dictating Member 19.12.2019Other Member………………Date on which the approved draft comes to