MAAKHAN MILK PRODUCTS PVT. LTD.,HARYANA vs. ITO WARD 1(5), FARIDABAD

There is a delay of 49 days in filing the appeal by the assessee before us. The assessee has filed an affidavit from its Director explaining the reasons for the delay stating that the counsel handling the income-tax affairs of the assessee company had fallen sick which had attributed for the delay in filing the appeal. Considering the same, we are inclined to condone the delay and admit the appeal of the assessee for adjudication.

The ground Nos. 1 & 6 are general in nature and does not require any specific adjudication.

The ground No.2 raised by the assessee is challenging the addition made in the sum of Rs.30,00,000/- in respect of share capital and share premium received u/s 68 of the Act.

We have heard the rival submissions and perused the material available on record. At the outset, the ld. AO had noted in the first page of the assessment order that no business activity was carried out during the year. The ld. AO observed that the assessee company received share capital and share premium from the following persons:-

The assessee furnished the complete details of these share subscribers by furnishing the name, address, PAN, etc. Notice u/s 133(6) of the Act was sent by the ld. AO to the aforesaid investors. In response, the investors submitted the details called for by the ld. AO. This fact is also acknowledged by the ld. AO in page 2, para 2 of his order. However, the ld. AO suspected the details furnished by the investors on the ground that the covering letter of all the companies are in the same font and none of the companies have any telephone numbers mentioned against them. Further, the ld. AO observed that the financial statements of these companies indicate that these are shell companies and have no real business. Accordingly, the ld. AO observed that credit worthiness of investors and genuineness of transactions remained highly suspicious. The ld. AO also observed that the assessee company had not carried out any business activity during the year and, accordingly, was not worth enough to fetch share premium from the investors. The ld. AO also observed that the 3 share premium received by the assessee has been utilized for giving loans to others and were not indeed utilized for any proposed business activities of the assessee company. Accordingly, he concluded based on the profile of the investors as well as the assessee company, the whole transaction appear to be bogus. Accordingly, he proceeded to treat the receipt of the entire share capital and share premium of Rs.92,50,000/- received from the aforesaid seven parties as unexplained cash credit u/s 68 of the Act and completed the assessment.

Alternatively, the ld. AO also, on without prejudice basis, observed that since the assessee company is not worth of receiving any share premium, the calculation made by the assessee in terms of Rule 11UA of the Income Tax Rules by furnishing valuation report is rejected and, accordingly, whole of share premium of Rs.69,37,500/- was to be added u/s 56(2)(viib) of the Act. Further, the ld. AO noted that since the addition on account of share capital and share premium has already been made u/s 68 of the Act, no separate addition is made u/s 56(2)(viib) of the Act.

Before the ld.CIT(A), the assessee pleaded that the share capital/share premium received from the investors have been duly explained by furnishing various documents before the ld. AO such as confirmation from the share applicants, their ITR acknowledgements, copy of bank statements, copy of audited financial statements, share certificates for the shares allotted to the applicants and the evidence to prove that the transactions has been routed through regular banking channel apart from valuation report obtained in terms of Rule 11UA(2) of the Income-tax Rules. All the replies were, in fact, directly sent by the share applicants to the ld. AO in response to notice u/s 133(6) of the Act. Accordingly, the assessee had duly discharged its onus of proving the three 4 ingredients of section 68 of the Act. The assessee also submitted that out of the total receipt of Rs.92,50,000/-, a sum of Rs.56,50,000/- was received in Asst Year 2013-14 and a sum of Rs 6,00,000/- in Asst Year 2014-15 and, accordingly, these sums of Rs.62,50,000/-, in any case, cannot be the subject matter of addition u/s 68 of the Act. It was also pointed out that the assessee had obtained a valuation report from a valuer who had arrived at the fair market value of the share using Discounted Cash-flow Method (DCF Method) in terms of Rule 11UA of the Rules. Hence, the alternative addition proposed by the ld. AO u/s 56(2)(viib) of the Act for share premium is not sustainable in the eyes of law.

The ld.CIT(A) acknowledged the fact that bank statements of the investors are already on record. On perusal of the audited financial statements of the investors and their bank statements, the ld.CIT(A) concluded that throughout the year, the same pattern of flow of monies into the bank account of the investors and outflow of monies from the bank account of the investors were noticed and, accordingly, the ld.CIT(A) concurred with the findings of the ld. AO that these investor companies are mere paper/shell companies not having any worth. Similarly, the ld.CIT(A) observed that the assessee company’s bank statements also does not show any real business activity inasmuch as the funds received in the form of share capital and share premium had been utilized for advancing loans to outsiders and had accumulated profits of Rs.3,31,336/- only with earning per share at Rs. 0.48 per share. There were fixed assets of just Rs 1,45,083/- at its disposal. Accordingly, the ld.CIT(A) concurred that the findings of the ld. AO that the assessee company’s financial results do not support receipt of large premium of Rs.30/- on the face value of Rs.10 per share. The ld.CIT(A) granted relief in the sum of Rs.62,50,000/- in view of the fact that these sums were not received during the year. However, with regard to receipt of Rs.30,00,000/- from Metalcity Constructions Kovai Pvt Ltd, the ld.CIT(A) concluded that this company is mere paper company and the transaction carried out by it with the assessee company is not genuine and the credit worthiness of the party is also not proved in the instant case. Accordingly, the ld.CIT(A) sustained the addition made in the sum of Rs.30,00,000/- u/s 68 of the Act.

The ld.CIT(A) also observed that since the assessee company had not carried out any business activity during the year and also in prior years and especially in view of the fact that it had got meager fixed assets of Rs 1,45,083/- or had made any advance for purchase of fixed assets proving its intention to carry on any business in the near future, rejected the valuation report submitted by the assessee using DCF Method in terms of Rule 11UA of the Rules as suffering from defects. Accordingly, the ld.CIT(A) confirmed the addition made by the ld. AO u/s 56(2)(viib) for the share premium component in the sum of Rs.69,37,500/-.

Aggrieved, the assessee is in appeal before us against the aforesaid action of the ld.CIT(A).

At the outset, it is not in dispute that the assessee, in respect of all the parties, the assessee had furnished the following documents before the lower authorities:- a) Copy of certificate of incorporation along with Memorandum of Association and Articles of Association;

Though a sum of Rs.92,50,000/- has been received by the assessee towards share capital/share premium from seven investors, it is not in dispute that a sum of Rs.62,50,000/- was received prior to 01.04.2014 and, hence, the same would be obviously outside the purview of addition u/s 68 of the Act. The ld. CIT(A) had rightly granted relief in this regard u/s 68 of the Act. The remaining sum of Rs 30,00,000/- is received from Metalcity Construction Kovai Pvt Ltd during the year under consideration at a premium of Rs 30 per share which is the subject matter of dispute before us.

It is not in dispute that the assessee had furnished the preliminary documents pertaining to this investor before the ld. AO. The ld. AO had sought to examine the veracity of the documents furnished by the assessee by issuing notice u/s 133(6) of the Act to the investor. All the details called for by the ld. AO had been duly furnished by the investor directly to the ld. AO in response to notice u/s 133(6) of the Act. The bank statement of the investor was also furnished before the ld. AO. That alone had enabled both the ld. AO as well as the ld.CIT(A) to examine the various credits and debits appearing in the bank statement of the investor to come to the conclusion that there were same pattern of transactions in the bank account of the investor which had raised suspicion in the minds of the lower authorities. These facts go to prove that the assessee had duly discharged its onus to prove the three ingredients of section 68 of the Act, namely, the identity of the investor, credit worthiness of the investor and the genuineness of the transaction. Merely because in the bank statement of the investor, there were certain credits and the monies had been immediately given to so many parties including the assessee, it cannot be directly concluded that those transactions in the books of investor company is bogus. As far as the assessee is concerned, it is duty-bound to prove the nature and source of credit within the meaning of section 68 of the Act. The credit is in the form of share capital and share premium from the investor which fact is established beyond doubt. The nature of receipt as share capital is also established from the fact that the investor company had duly reflected the fact of making investments in the assessee company in its balance sheet and had also given a separate confirmation to this effect before the lower authorities directly in response to the notice u/s 133(6) of the Act. One of the main source of raising funds for a limited company including the assessee company would be receipt of share capital either from the promoters/relatives/friends or from the entities known to them. From the audited financial statements of this investor company, we find that it is having sufficient net worth of Rs 9,60,05,826/- in its kitty which proves the credit worthiness for making investment in the assessee company.

The transaction is routed through regular banking channels and the fact of the investor making investment in assessee company is reflected in its balance sheet and also confirmed by it separately directly before the ld. AO. Hence, the genuineness of the transaction cannot be doubted in the instant case. The notice u/s 133(6) of the Act had been served on this investor and the investor had also responded directly before the ld. AO. Apart from this, the investor is regularly assessed to income-tax. Hence, the identity of the investor cannot be doubted. Hence, the assessee in the instant case has proved all the three ingredients of section 68 of the Act.

Source of Source is proved by the balance available in the bank account of the investor. Hence assessee had duly discharged its onus from all fronts in the instant case to get out of the rigours of section 68 of the Act. Accordingly, we direct the ld. AO to delete the addition made u/s 68 of the Act in the sum of Rs 30,00,000/-. The Ground No. 2 raised by the assessee is hereby allowed.

With regard to addition made u/s 56(2)(viib) of the Act , it is true that the assessee company had not commenced its business at all during the year under consideration. It is true that assessee had invested in the fixed assets for meager amount of Rs 1,45,083/- and had not given any advance for purchase of fixed assets or purchase of goods showing its intent to start the business in the near future. Hence the business projections carried out by the valuer in the DCF method would rightly suffer from infirmities. However, it cannot be brushed aside that DCF method and NAV method are two recognised methods under Rule 9 11UA of the Income Tax Rules. The ld. AO and the ld. CIT (A) in the instant case had rejected the DCF method adopted by the assessee for determination of fair market value of shares. Having done so, the lower authorities ought to have reworked the fair market value on their own using DCF method itself by keeping the business projections as Zero and ultimately arrived at the fair market value per share at Zero. This was admittedly not done by the lower authorities. When a particular method adopted by the assessee for determination of fair market value per share is rejected by the lower authorities, then it is bounden duty on their part to either rework the fair market value based on their conclusions or adopt the other method available which is NAV. The ld. AR also rightly drew our attention to the valuation of share as per NAV method which worked out to Rs 1054 per share as on 31.03.2014. This NAV when compared to the issue price of the assessee at Rs 40 per share, duly justifies the share premium of Rs 30 per share. Hence no addition could be legally made in the instant case u/s 56(2)(viib) of the Act as the share premium charged by the assessee cannot be construed as excessive.. We find that the ld. AR had distinguished the case law relied upon by the lower authorities of Delhi Tribunal in the case of Agro Portfolio P Ltd reported in 94 taxmann.com 112 as under:-

In view of the aforesaid observations, we have no hesitation to hold that the addition u/s 56(2)(viib) of the Act is not justified in the facts and circumstances of the instant case. Accordingly, the Ground No. 3 is hereby allowed.

The Ground Nos. 4 & 5 raised by the assessee are only supportive of Ground Nos. 2 & 3 raised and adjudicated hereinabove and hence the same does not require any specific adjudication. 20. In the result, the appeal of the assessee is allowed.