Section 68 addition cannot be made merely for meager income shown by Investor Companies

Mantram Commodities Pvt. Ltd. Vs ITO (ITAT Delhi)

So far as the addition under section 68 of the I.T. Act, 1961 is concerned, I find the assessee has filed the details such as P & L A/c, balance-sheet, bank statements, confirmation letters, PAN, copy of acknowledgment of return, Memorandum and Articles of Association of Companies etc. Further out of the 04 Investor Companies, it is seen that in case of Kuber Buildmart and Texcity Construction Pvt. Ltd., although the shares were issued during the impugned assessment year, however, the amounts were received in the preceding years which is verifiable from the bank statements filed by the assessee. In the case of Goodluck Industries Ltd., and Rishikesh Buildcon Pvt. Ltd., the assessee has filed the requisite details to substantiate the identity and creditworthiness of the share applicants and genuineness of the transaction. Nothing has been brought on record to negate the various evidences filed by the assessee. A perusal of the audited balance-sheet of these Investor Companies shows that these companies are having sufficient capital and reserves to make the investment in the assessee company and the entire transactions have been made through banking channel. Merely because the Investor Companies have shown meager income during the impugned assessment year, the same in my opinion, cannot be a ground to doubt the creditworthiness of the said company especially when the said company is having sufficient funds in its account in shape of share capital and free reserves.

Since the assessee in the instant case has proved the identity of the investors and filed sufficient details to substantiate the creditworthiness and genuineness of the transaction, therefore, respectfully following the decisions cited (supra), I hold that the Ld. CIT(A) was not justified in confirming the addition made by the A.O. under section 68 of the I.T. Act, 1961.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal filed by the assessee is directed against the order dated 17.03.2020 of the Ld. CIT(A), Faridabad, relating to A.Y. 2016-17.

2. There was a delay of 18 days in filing the appeal, for which, the assessee has filed condonation application along with affidavit explaining the reasons for the delay.

2.1. After considering the contents of the application and after hearing both the sides, the delay in filing of the appeal is condoned and the appeal is admitted for adjudication.

3. Facts of the case, in brief, are that the assessee is a company and filed its return of income on 28.08.2016 declaring income of Rs.1,46,020/-. The return was processed under section 143(1) of the I.T. Act, 1961. Subsequently, the case was selected for limited scrutiny under CASS to verify whether the funds received in the form of share premium are from disclosed sources and have been correctly offered for tax. Accordingly, notice under section 143(2) and 142(1) of the I.T. Act, 1961 were issued to the assessee calling for various details. In response to the same, the assessee filed the requisite details from time to time.

3.1. During the course of assessment proceedings, the A.O. noted that assessee company has received Rs.42 lakhs as share premium on 60000 shares which have been allotted to the following companies/persons.

3.2. In order to verify the identity and creditworthiness of the of the investors and genuineness of the transaction, the A.O. issued notice under section 133(6) of the I.T. Act, 1961. However, no response was received from these persons, for which, the A.O. asked the assessee to explain as to why the same should not be added to the total income of the assessee. Rejecting the various explanations given by the assessee, the A.O. made addition of Rs.48 lakhs to the total income of the assessee by invoking the provisions of Section 68 of the I.T. Act, 1961.

3.3. In appeal, the Ld. CIT(A) dismissed the appeal filed by the assessee by confirming the addition of Rs.48 lakhs made by the A.O. under section 68 read with proviso. The Ld. CIT(A) also rejected the valuation report justifying the premium charge in respect of such shares as furnished by the assessee and held that the share premium received by the assessee is in excess of face value as income of the assessee under section 56(a)(vii)(b) of the I.T. Act, 1961 on protective basis. Thus, the Ld. CIT(A) enhanced the income of the assessee by Rs.42 lakhs for the A.Y. 2016-17. The relevant observations of the Ld. CIT(A) are as under :

9. The facts of the case along with detailed submission of the appellant have been gone through. It is relevant to mention here in the beginning that the appellant has been granted numerous opportunities to explain the grounds of appeal during the appellate proceedings. Therefore, the grievance of the appellant that adequate opportunities have not been granted during the assessment proceedings has been resolved during the appellate proceedings. It is noted that the appellant has received share capital of Rs.6,00,000/-. and share premium of Rs.42,00,000/- from the following entities (face value of Rs.10/- with share premium of Rs.70/- each):-

10.1. The appellant has relied upon confirmed ledger account, copy of ITR, audit report, balance sheet and bank account in respect of share capital/ share premium received during the year. In order to verify the genuineness of transactions, the A.O. has issued notices u/s 133(6) of the Act in the cases of above share applicants calling for certain details in order to verify their identity, genuineness and creditworthiness. However, the share applicants have not made any compliance. in order to examine their genuineness and creditworthiness, the documents submitted by the appellants/ furnished by the by the appellant have been gone through by the undersigned. A brief description regarding financial and other relevant details regarding the share applicants and the appellant as noted from the perusal of these documents is under:

1) M/s Goodluck Industries Ltd., 13, 6^th Floor, Bonfield Lane, Kolkata.

This entity has made payment of Rs.5 Lacs in the F.Y. 2015-16 to the appellant during the previous year relevant to the assessment year under consideration. From the copy of confirmation furnished, it is found that it has been signed by some Sh. Rishi but his actual identity and relationship with Goodluck has not been furnished. Therefore, genuineness of such confirmation is not established.

From its Balance sheet as on 31.03.2016, it is noted that it has shown paid up capital Rs.37.03 Lacs (Rs.37.03 Lacs as on 31.03.2015) with share premium of Rs.6.33 Crore (Rs.6.33 Crore as on 31.03.2015). It has shown accumulated loss for Rs.(-)13,54,397/- as on 31.03.2016 (Rs.(-)14,66,829/- as on 31.03.2015) in the reserve and surplus account. It has made investment of its fund mainly in shares of private limited companies and loans and advances to others. It has NIL fixed assets in its balance sheet. It has shown profit of Rs.1,62,708/- as on 31.03.2016 (Rs.2,69,674/- as on 31.03.2015). The only source of income is from interest and has not carried out any tangible business activities. Copy of bank statement has not been made available. therefore, source of investment made could not be verified. The return of income has been furnished reflecting petty income of Rs. 1,62,709/- income for A.Y. 2016-17. On the basis of these facts it can be safely inferred that the above share applicant is paper company, created just on papers having no worth.

2)  M/s Kuber Buildmart, 11-69, Ground Floor, DDA Flats, Phase-I, Ashok Vihar, Delhi:

This entity has made payment of Rs.8 Lacs in the F.Y. 2015-16 to the appellant during the previous year relevant to the assessment year under consideration. From the copy of confirmation furnished, it is found that it has been signed by some Sh. Ranjit but his actual identity and relationship with M/s Kuber has not been furnished. Therefore, genuineness of such confirmation is not established.

From its Balance sheet as on 31.03.2016, it is noted that it has shown paid up capital Rs.6.10 Lacs (Rs.5.11 Lacs as on 31.03.2015) with share premium of Rs.3.80 Crore (Rs.3.41 Crore as on 31.03.2015). It has shown accumulated loss for Rs. (-)16,13,792/- as on 31.03.2016 (Rs.(-)17,43,761/- as on 31.03.2015) in the reserve and surplus account. It has made investment of its fund mainly in shares of private limited companies and loans and advances to others. It has NIL fixed assets in its balance sheet. It has shown profit of Rs.1,88,089/- as on 31.03.2016 (Rs.1,56,958/- as on 31.03.2015). The only source of income is from interest and has not carried out any tangible business activities. Copy of bank statement has not been made available. Therefore, source of investment made could not be verified. The return of income has been furnished reflecting petty income of Rs. 1,88,089/- income for A.Y. 2016-17. On the basis of these facts it can be safely inferred that the above share applicant is paper company, created just on papers having no worth.

3) M/s Rishikesh Buildcon Pvt. Ltd., H-69, Ground Floor, DDA Flats, Phasetl, Ashok Vihar, Delhi :

This entity has made payment of Rs.25 Lacs in the F.Y. 2015-16 to the appellant during the previous year relevant to the assessment year under consideration. From the copy of confirmation furnished, it is found that it has been signed by some Sh. Ranjit but his actual identity and relationship with M/s Rishikesh has not been furnished. Therefore, genuineness of such confirmation is not established.

From its Balance sheet as on 31.03.2016, it is noted that it has shown paid up capital Rs.6.59 Lacs (Rs.5.69 Lacs as on 31.03.2015) with share premium of Rs.4.77 Crore (Rs.4.33 Crore as on 31.03.2015). It has shown accumulated loss for Rs. (-)28,09,646/- as on 31.03.2016 (Rs.(-)28,68,764/- as on 31.03.2015) in the reserve and surplus account. It has made investment of its fund mainly in shares of private limited companies and loans and advances to others. It has NIL fixed assets in its balance sheet. It has shown profit of Rs.85,554/- as on 31.03.2016 (Rs.1,47,875/- as on 31.03.2015). The only source of income is from interest and has not carried out any tangible business activities. From its bank account it is noted that the equivalent amounts have been received before transferring the cheques in favour of the appellant leaving very petty balance. This pattern is prevalent throughout the year in the bank account. The return of income has been furnished reflecting petty income of Rs. 85,554/- income for A.Y. 2016-17. On the basis of these facts it can be safely inferred that the above share applicant is paper company, created just on papers having no worth.

4) M/s Texcity Construction Pvt. Ltd., 222, 1st Floor, New Scheme Road, Pnpalam, Coimbatore, Tamilnadu:

This entity has made payment of Rs.10Lacs in the F.Y. 2015-16 to the appellant during the previous year relevant to the assessment year under consideration. From the copy of confirmation furnished, it is found that it has been signed by some Sh. Rishi but his actual identity and relationship with M/s Texcity has not been furnished. Therefore, genuineness of such confirmation is not established.

From its Balance sheet as on 31.03.2016, it is noted that it has shown paid up capital Rs.2.79 Lacs (Rs.2.79 Lacs as on 31.03.2015) with share premium of Rs.8.97 Crore (Rs.9.97 Crore as on 31.03.2015). It has shown accumulated loss for Rs. (-)34,61,633/- as on 31.03.2016 (Rs.(-)39,23,487/- as on 31.03.2015) in the reserve and surplus account. It has made investment of its fund mainly in shares of private limited companies and loans and advances to others. It has NIL fixed assets in its balance sheet. It has shown profit of Rs.2,34,231/- as on 31.03.2016 (Rs.1,36690/- as on 31.03.2015). The only source of income is from interest and has not carried out any tangible business activities. From its bank account noted that the equivalent amounts have been received before transferring the cheques in favour of the appellant leaving very petty balance. This pattern is prevalent throughout the year in the bank account. The return of income has been furnished reflecting petty income of Rs. 2,34,231/- income for A.Y. 2016-17. On the basis of these facts it can be safely inferred that the above share applicant is paper company, created just on papers having no worth.

5)  M/s Mantram Commodities Pvt. Ltd. (The appellant)

Further it is noted from the particulars of the appellant that it has shown Rs.NIL revenue receipts as on 31.03.2015 and 31.03.2016 in its profit and loss account. It has shown other income in the form of interest of Rs.17.43 Lacs (Rs.17.37 Lacs as on 31.03.2015). Net profit of Rs.1,46,018/- (Rs.1,64,745/- as on 31.03.2015) has been reflected in the profit and loss account. In its balance sheet as on 31.03.2016 it has been shown share capital of Rs.29.80 Lacs as on 31.03.2016 (Rs.23.80 Lac as on 31.03.2015) with share premium of Rs.2.11 Crore as on 31.03.2016 (Rs.1.69 as on 31.03.2015). It has shown accumulated profits of Rs.3,23,662/- as on 31.03.2016 (Rs.2,22,763/- as on 31.03.2015).The earning per share have shown at Rs.0.34 per share. The funds at its disposal have been invested in the shape of loan/ advances to various other entities. The’re are no fixed assets. It has furnished its return of income for Rs.1,46,018/- for A.Y. 2016­17. These financial results do not support the receipt of such large premium of Rs.70/- on the face value of Rs.10/- on each share as the appellant does not have any business worth to justify receipt of share premium (seven times in the face value of the shares). On going through the past financial results of the appellant it is noted that there are no business activities carried out in the prior years also. In the absence of fixed assets of any type, it is difficult to presume the genuineness of any business existence of the appellant. The submission of the Ld. AR that the appellant was negotiating with other companies to start business activities has remained unsubstantiated as no corroborating details have been furnished. During the appellate proceedings it has been gathered that till date no business activities have been commenced.

From the above facts it can be safely concluded that though these are companies registered with ROC, having PAN, having bank accounts, filing their Income, Tax Returns etc. but in fact these are just existing of papers. All the share applicants have been found audited by the common auditors. In fact transactions have been routed through banking channels to hide the real transactions. Therefore, the claim of the appellant that it has proved the identity, creditworthiness and genuineness of transaction in respect of credits by furnishing copy of ITR, bank account, balance sheet, confirmations is not proved. Mere filing of ITR, PAN and transaction through banking channel is not enough to prove identity, genuineness and creditworthiness of the cash credits. It is also important to note that these alleged share applicants are corporate entities set up for earning of profits, however it has been gathered that these have not received any income from these transactions with the appellant in last so many years. This fact along with other surrounding facts also strengthens and corroborates the lack of genuineness in their existence. There is no satisfactory explanation on record on what basis the investors have applied for allotment of shares at such high premium of Rs.70/- each against face value of Rs.10/- each share. It is, beyond human probability that anyone will invest and pay such high premium without having any net worth of the investee company or having any future prospects of earning by the investee company. In case of private placement of shares, a higher onus is required to be established on the assessee since the information is within his personal knowledge. Mere filing of names, addresses, copies of ITRs, balance sheets, ROC record is not enough to establish the identity and creditworthiness and genuineness in respect of share applicants. These are paper documents which are prepared in each and every case of the corporate entity (real or paper entity) but are not adequate enough to show their actual identity, creditworthiness and genuineness particularly in view of the above facts.

10.2 The AO has confronted the appellant about lack of identity, creditworthiness of the share applicants, lack of genuineness of transactions and lack of business worth of the appellant to receive such large share premium vide show cause notice dated 24.12.2018 u/s 142(1) of the Act. No explanation has been furnished. In the circumstances it is noted that the initial burden which was upon the appellant, has not been discharged as the explanation furnished by the appellant regarding the identity, creditworthiness of the share applicants and genuineness of the transactions has not been found as satisfactory.,

10.3 At this stage it is relevant to make reference to the provisions of section 68 of the Act read with the first proviso. The onus was on the appellant to offer a satisfactory explanation about the source and nature of the sum found credited in its books of accounts maintained for the previous year under consideration. Further as per the proviso to section 68 of the Act, the onus was on the appellant to furnish the satisfactory explanation regarding the source and nature of such sum in the hands of the such share applicants. From the above analysis in respect of the share applicants and the appellant, it is noted that the above share applicants’ entities are not doing any tangible business activities to support the availability such large funds at their disposal to make such investment with the appellant. In the view of the above facts, it is noted that real identity, creditworthiness of the share applicants and genuineness of the above transactions has not been established from the above documents. The above entities have been found to have been existing only on papers without having any real or physical worth to support the alleged investments made with the appellant and are in the nature of shell companies.

10.4 In view of the above detailed facts, the reliance of the Ld. AR on the case laws referred above does not help its case as facts of this case are entirely different from the referred cases. It is relevant to mention here that many of the decisions as relied by the appellant relate to the period prior to insertion of proviso to section 68 of the Act i.e. prior to 01.04.2013 and therefore, are not applicable to the facts of the present case.

10.5 It has been held by Hon’ble Delhi High Court in the case of Navodaya Castle Pvt. Ltd. in ITA No.320/2012 that certificate of incorporation, PAN etc. are relevant for the purpose of identification but have their limitation when there is evidence and material to show that the subscriber was a paper company and not a genuine investor. The SLP against the ruling of the Hon’ble High Court has been dismissed by the Hon’ble Supreme Court (2015) 230 Taxman 268. Further, it has been held by Hon’ble Delhi High Court in the case of Youth Construction Pvt. Ltd. 357 ITR 197 (Delhi) that mere proof of identity without genuineness and creditworthiness is not enough for share application. Further, it has been held by the Hon’ble Delhi High Court in the case of N.R. Portfolio Pvt. Ltd. 87 DTR 0162 (Del) that the onus to prove the three factum is on the assessee as the facts are within his knowledge. Mere furnishing names address and PAN particulars or relying on entries in the ROC website is not enough. If upon verification or during the proceedings, the AO cannot contact the share applicant or information becomes unverifiable or there are further doubts in pursuit of such details, onus shifts back to the assessee to explain the same. Further reliance is put on the decisions of the Hon’ble Supreme Court in the case of POT vs. NRA Iron & Steel Pvt. Ltd., 2019, 103 Taxmann.com 48 (SC), the Hon’ble Delhi High Court in the case of PCIT vs. NDR Promoters Pvt. Ltd. in ITA No. 49/2018 dated 17.01.2019, and the Hon’ble ITAT Delhi ‘G’ Bench in the case of ITO (Exemption) vs. M/s Synergy Finlease Pvt. Ltd., in ITA No. 4778/Del/2013 dated 08.03.2019. The case laws relied by the appellant are not found applicable to the facts of the present case.

10.6 After going through the ratio of decisions as referred above, it is noted that the facts of the present case are similar to the facts of the above cases. The appellant has failed to prove identity, creditworthiness and genuineness of transaction in respect of credits of Rs.48,00,000/-. Nothing has been brought on record to justify the rate of premium charged @ Rs.70/- against face value of Rs.10/-. Once it is proved that credits have not been explained then, there is no duty upon the AO to point out the source from which the money was received by the assessee. Reliance is put on the decision of the Hon’ble Apex Court in the case of A. Govindarajulju Mudaliaar v. CIT (1958) 34 ITR 807, Commissioner of Income-tax vs Independent Media (P.) Ltd.210 TAXMANN 14(Delhi)(2012).

10.7 The AO has confronted the appellant through a detailed show cause on 24.12.2018 before making the addition. Various adverse findings have been confronted to the appellant during the assessment proceedings. Adequate opportunities of being heard have been provided during in the appellate proceedings. Therefore, there is no merit in such ground of appeal taken by the appellant. Further reliance is placed upon the decision of Hon’ble Supreme Court in the case of CIT vs Durga Parsad More 82 ITR 540 where it has been held, hat the apparent must be considered as real until it is shown that there are reasons to believe that apparent is not real. In this case enough material has been brought on record to show that the apparent is not real. Further reliance is placed upon the decision Hon’ble Supreme Court in the case of Sumati Dayal vs. CIT (1995) 214 ITR 802 (SC). After going through the ratio of decisions as referred above, facts of the case, element of human probability and surrounding circumstances, it is noted that the appellant has failed to prove identity, creditworthiness and genuineness of transaction in respect of share capital and share premium of Rs.48,00,000/-.

Under the facts it is held that the AO was justified in making addition of Rs.48,00,000/- u/s 68 of the Act. The same is hereby confirmed u/s 68 of the Act read with proviso. Ground No. 3,4,5 and 6 of the appellant are dismissed.

10.8 It is further noted that the appellant has failed to bring on record any evidence to justify the basis of share premium charged in excess of its face value inspite of being given opportunity on this account on 09.01.2020 during the appellate proceedings. No valuation report justifying the premium charged in respect of such shares was furnished by the appellant. In the circumstances, the share premium received in excess of the face value is also held as income of the appellant u/s 56(2)(viib) of the Act on protective basis. Accordingly income of the appellant is enhanced by Rs.42,00,000/- for the A.Y. 2016-17 u/s 251(1) of the Act. It is found that the appellant has furnished inaccurate particulars of its income in respect of the amount of Rs.42,00,000/- in terms of section 271(1)(c) of the Act, therefore, penalty proceedings u/s 271(1)(c) are being initiated for furnishing inaccurate particulars of the income on the above account. Accordingly, notice u/s 274 read with section 271(1)(c) of the Act, is being issued separately to the appellant. The AO is directed to give appeal effect on this account and issue demand notice u/s 156 of the Act after computing tax and interest payable under relevant provisions of the Act.

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

1. On the facts and in the circumstances of the case as well as in law the learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs.48,00,000/-,received by the appellant on account of share capital and securities premium thereon, made by Ld Assessing officer under section 68 of the act which is bad in law and liable to be set aside.

2. On the facts and in the circumstances of the case as well as in law the learned Commissioner of Income Tax (Appeals) grossly erred in upholding the action of learned Assessing Officer of treating Rs.48,00,000/- as unexplained cash credit under section 68 of the Act without appreciating the fact that appellant had furnished the enough material to prove the identity, veracity and genuineness of the transaction at the Assessment proceedings or Learned Commissioner of Income Tax (Appeal).

3. On the facts and in the circumstances of the case as well as in law the learned Commissioner of Income Tax (Appeals) grossly erred in upholding the exteriors consideration of the LD AO and not considered the evidences which was filed before the assessing authorities.

4. Without prejudice to the above grounds, On the facts and in the circumstances of the case as well as in law the learned Commissioner of Income Tax (Appeals) grossly erred in confirming the addition under section 68 of the act in respect of share capital without appreciating the fact that the case was selected for limited scrutiny to investigate “whether the funds received in the form of share premium are from disclosed source” which restrict the scope of assessing authorities to scrutinize only the source of share premium. Hence, investigating the other facts under limited scrutiny is overreaching the jurisdiction assume under the Provision of act/ rules/ instruction issued by the Board which is not permissible either to LD Assessing officer or LD CIT (A). Hence, addition on account of share capital as confirmed by LD CIT(A) is wrong and bad in law, liable to deleted as such.

Grounds with regard to enhancement of income on protective basis:

5. On the facts in the circumstances of the case as well as in law the learned Commissioner of Income Tax (Appeals) grossly erred in enhancing the addition, on protective basis, of Rs.42,00,000/- under section 56(2)(viib) of the act r. w.r. 11UA of the IT rules based on account of excessive valuation (securities premium) which is wrong and bad in law.

6. On the facts and in the circumstances of the case as well as in law the learned Commissioner of Income Tax (Appeals) grossly erred in enhancing the addition, on protective basis, under section 56(2)(viib) of the act r. w.r. 11UA of the IT rules based on account of excessive valuation (securities premium) without appreciating the fact that the case was selected for limited scrutiny to investigate “whether the funds received in the form of share premium are from disclosed source” which restrict the scope of assessing authorities to scrutinize only the source of share premium. Hence, investigating the other facts under limited scrutiny is overreaching the jurisdiction assume under the Provision of act/ rules/ instruction issued by the Board which is not permissible either to LD Assessing officer or LD CIT (A). Hence, addition on account of protective basis by LD CIT(A) is wrong and bad in law, liable to deleted as such.

7. On the fact and circumstances of the case as well as in law the learned Commissioner of Income Tax (Appeals) grossly erred in returning the contrary finding against the material on record that appellant has not submitted the valuation report which is wrong, based on whims or surmises and even contrary to the assessment order passed u/s 143(3) of the act by the LD AO. Therefore, enhancing the addition on adducing a wrong presumption is wrong and bad in law.

8. Without prejudice to the Ground no 6 and 7, On the fact and circumstances of the case as well as in law the learned Commissioner of Income Tax (Appeals) grossly erred in enhancing the assessment without appreciating the fact that there is enough material placed on record which is not only accepted by the LD AO but also not required by him to make the addition under section 56(2)(viib) of the act. Hence, enhancing the assessment order on protective basis is based on surmises, whims and conjectures.”

5. Learned Counsel for the Assessee strongly challenged the order of the Ld. CIT(A) in sustaining the addition made by the A.O. He submitted that the amount of share capital and share premium received from Kuber Buildmart was received on 16.07.2012 which pertains to A.Y. 2013-14. The shares were only allotted during the year to the extent of Rs.8 lakhs. Therefore, addition of Rs.8 lakhs on account of share capital and share premium received from Kuber Buildmart was not justified.

5.1. So far as Texcity Construction Pvt. Ltd., is concerned, the Learned Counsel for the Assessee submitted that the money was received from Texcity Construction Pvt. Ltd., was on 30.12.2013 which pertains to A.Y. 2014-15. Only the shares were allotted during this year, therefore, the addition of Rs.9,95,950/- in the case of Texcity Construction Pvt. Ltd., is also not justified.

5.2. He submitted that the assessee during the course of assessment proceedings has filed the copy of income tax return along with computation of income, P & L A/c, Auditor’s Report, Balance Sheet with Audited Financial Statements, Memorandum of Association and Articles of Association and Certificate of Incorporation of the Investor Companies. The assessee has also filed the bank statement, details of share premium receipt along with name, PAN, address etc., and valuation report under Rule 11UA(2)(a) of the I.T. Act, 1961. The assessee company had filed the relevant documents from the parties of allottee of shares during the year. Despite all these details filed by the assessee, the lower authorities have brushed aside all these things and the A.O. made the addition which has been sustained by the Ld. CIT(A). Learned Counsel for the Assessee drew the attention of the Bench to the valuation report placed at Page No.80 of the PB according to which the book value of the share by the Auditors comes to Rs.80/-. Referring to the decision of the Tribunal in assessee’s own case for the immediately preceding assessment year, he submitted that under identical circumstances, the Tribunal has deleted the addition made by the A.O. and upheld by the Ld. CIT(A).

5.3. He submitted that although the valuation report was furnished before the lower authorities to justify that shares issued by the assessee were on fair market value which was computed in accordance with Rule 11UA(2)(a) of the I.T. Rules, 1962, however, the lower authorities have rejected such valuation furnished by the assessee by holding that the assessee is not having any worth of receiving any share premium. He submitted that the issue has already been decided in favour of the assessee by the Tribunal in assessee’s own case. Therefore, the order of the Ld. CIT(A) be set aside and the grounds raised by the assessee should be allowed.

6. The Ld. D.R. on the other hand, heavily relied on the order of the A.O. and the Ld. CIT(A).

7. I have considered the rival arguments made by both the sides, perused the orders of the A.O. and the Ld. CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find the A.O. in the instant case made addition of Rs.48 lakhs under section 68 of the I.T. Act, 1961 on the ground that assessee could not substantiate with evidence to his satisfaction regarding creditworthiness of the 04 share applicants and genuineness of the transaction is doubtful. I find the Ld. CIT(A) upheld the action of the A.O, the reasons of which have already been reproduced in the preceding paragraph. While doing so, he held that the share premium received by the assessee in excess of the face value is liable to be held as income of the assessee under section 56(2)(vii)(b) of the I.T. Act, 1961 on protective basis. It is the submission of the Learned Counsel for the Assessee that for the purpose of section 56(2)(viib) of the Act the valuation of the shares has to be done in accordance with the Rule 11UA of IT Rules, 1962. As per the said Rule, the fair market value of unquoted equity shares for the purpose of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be determined under clause (a) or clause (b), at the option of the assessee. It is his submission that the assessee in the instant case has issued the share capital @ Rs.80 per share (face value of Rs.10 per share + premium at Rs.70 per share) as on 31.03.2015 and the valuation of each share was in accordance with Rule 11UA of the Act. It is also his submission that when the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same.

7.1. I find an identical issue had come-up before the Tribunal in assessee’s own case for the immediately preceding assessment year. I find the Tribunal in ITA.No.6170/Del./2019 order dated 12.02.2021 has allowed the appeal filed by the assessee and set aside the order of the Ld. CIT(A) by observing as under :

“13. I have considered the rival arguments made by both the sides and perused the orders of the Assessing Officer and CIT(A) and the paper book filed on behalf of the assessee. I have also considered the various decisions cited before me. I find, the AO, in the instant case, made addition of Rs.48 lakhs u/s 68 of the IT Act on the ground that the assessee could not substantiate with evidence to his satisfaction regarding the credit worthiness of the share applicants and the genuineness of the transaction is doubtful. The AO, further held that the assessee is not having any worth of receiving of share premium and the calculation made by the assessee in terms of Rule 11UA for calculating the share premium is to be rejected. Since the AO had made addition u/s 68 of the Act, he did not make any separate addition u/s 56(2)(viib) of the IT Act. I find the ld.CIT(A) deleted the addition made by the AO u/s 68 of the IT Act on the ground that no credits have been introduced in the books of account of the assessee during the year under consideration and, therefore, no addition u/s 68 can be made out of opening balances for A.Y. 2015-16. The Revenue is not in appeal against the above finding of the CIT(A), therefore, I am not concerned about the same. However, the ld.CIT(A) held that the assessee has no business worth and there is no tangible business activity being carried out by the assessee since incorporation. There are no fixed assets or any other intangible assets in possession of the assessee to justify the premium charged by the assessee on issue of shares. He, therefore, held that the reliance of the assessee on the valuation report for the premium charged at Rs.70/- on each share under Rule 11UA does not carry any force. Relying on the decision of the Hon’ble Delhi High Court in the case of Agro Portfolio Pvt. Ltd. vs. ITO, 171 ITD 74, the ld.CIT(A) held that the valuation report for the premium charged of Rs.70/- on each share under Rule 11UA does not carry any force.

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

15. I find merit in the above argument of the ld. Counsel. The provisions of section 56(2)(viib) of the Act reads as under:-

“(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:

Provided that this clause shall not apply where the consideration for issue of shares is received—

(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or

(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

Explanation.—For the purposes of this clause,—

(a) the fair market value of the shares shall be the value—

(i) as may be determined in accordance with such method as may be prescribed⁹; or

(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;

(b) “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of  section 10;”

15.1 Similarly, the provisions of Rule 11UA of the ITAT Rules, 1962 read as under:-

“(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:—

(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 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 unamortised amount of deferred expenditure which does not represent the value of any asset;

L ]= book value of liabilities shown in the balance- sheet, but not including the following amounts, namely:—

(i) the paid-up capital in respect of equity shares;

(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;

(iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;

(iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;

(v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;

(vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;

PE = total amount of paid up equity share capital as shown in the balance-sheet;

PV = the paid up value of such equity shares; or

(b) the fair market value of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash Flow method.”

16. A combined reading of section 56(2)(viib) read with Rule 11UA states that for the purpose of section 56(2)(viib) of the Act the valuation of the shares has to be done in accordance with Rule 11UA and the fair market value of unquoted equity shares for the purpose of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be determined under clause (a) or clause (b), at the option of the assessee. We find, in the instant case the assessee has valued its shares at Rs.82.07 as per the valuation certificate issued by the chartered accountant. Although the said valuation report was submitted before the AO to justify that the shares issued by the assessee was at fair market value, it was computed in accordance with Rule 11UA(a) of IT Rules, 1962, however, I find, the AO rejected the same holding that the assessee is not having any worth of receiving any share premium. He has ignored the various assets shown by the assessee in the balance sheet such as cash and cash equivalent of Rs.6,18,035/-, – short-term loans and advances of Rs.2,38,07,381/- and other current assets of Rs.1,16,534/-. The AO did not apply the formula provided in Rule 11UA and did not make any attempt to compute the value of shares of the assessee in accordance with Rule 11UA of IT Rules, 1962 which has been upheld by the ld.CIT(A). In my opinion, when the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same. It has been held by Hon’ble Supreme Court in the case of A.K. Roy vs. State of Punjab AIR 1986 2160 that where a statute requires to do a certain thing in a certain way, the thing must be done in that way or not at all. Other methods or mode of performance are impliedly and necessarily forbidden.

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

18. In the result, the appeal filed by the assessees is allowed.”

7.2. I find the assessee has filed certificate of Auditor valuing the book value of the shares at Rs.80/- the details of which are as under :

7.3. Respectfully following the order of the Tribunal in assessee’s own case for the immediately preceding assessment year (supra), I hold that the Ld. CIT(A) was not justified in making the addition of Rs.42 lakhs on protective basis by invoking the provisions of Section 56(2)(vii)(b) of the I.T. Act, 1961.

7.4. So far as the addition under section 68 of the I.T. Act, 1961 is concerned, I find the assessee has filed the details such as P & L A/c, balance-sheet, bank statements, confirmation letters, PAN, copy of acknowledgment of return, Memorandum and Articles of Association of Companies etc. Further out of the 04 Investor Companies, it is seen that in case of Kuber Buildmart and Texcity Construction Pvt. Ltd., although the shares were issued during the impugned assessment year, however, the amounts were received in the preceding years which is verifiable from the bank statements filed by the assessee. In the case of Goodluck Industries Ltd., and Rishikesh Buildcon Pvt. Ltd., the assessee has filed the requisite details to substantiate the identity and creditworthiness of the share applicants and genuineness of the transaction. Nothing has been brought on record to negate the various evidences filed by the assessee. A perusal of the audited balance-sheet of these Investor Companies shows that these companies are having sufficient capital and reserves to make the investment in the assessee company and the entire transactions have been made through banking channel. Merely because the Investor Companies have shown meager income during the impugned assessment year, the same in my opinion, cannot be a ground to doubt the creditworthiness of the said company especially when the said company is having sufficient funds in its account in shape of share capital and free reserves.

7.5. I find the Hon’ble Delhi High Court in the case of CIT vs., M/s. Kamdhenu Steel and Alloys Ltd., 361 ITR 220 (Del.) has observed as under :

35. The important question which arises at this stage is as to whether on the basis of these facts, could it be said that it is the assessee which has not been able to explain the source and receipt of money. According to the assessee, he had given the required information to explain the source and was not obligated to prove source of the money. It is the submission of the assessee that even in case there is some doubt about the source of money in giving into coffers of the share applicants which they invested with the assessee, it would not automatically follow that the said money belongs to the assessee and becomes unaccounted money. According to us, the assessee appears to be correct on this aspect. We feel that something more which was necessary and required to be done by the AO was not done. The AO failed to carry his suspicious to logical conclusion by further investigation.

7.6. I find the Hon’ble Delhi High Court in the case of CIT vs., Real Time Marketing (P) Ltd., 306 ITR 55 (Del.) has observed as under :

“8. There is a finding of fact given by the two authorities namely CIT(A) and the Tribunal to the effect that :-

The confirmation of M/s. ACL has been filed by the Assessee. The said company was assessed to tax. The source of ACL had been explained as out of transfer of funds from the accounts of M/s. BTL. Thus, the Assessee discharged its burden of proving identity, capacity and genuineness of the transaction. The Assessing Officer has not brought any material to show that the funds to ACL were provided by the Assessee. Under the circumstances, it cannot be said that the cash credit in question has remained unexplained. There is absolutely no material to link the Assessee with the sum of Rs.22,97,000/-deposited in cash in the bank account of M/s. FBSL.

9. In view of the concurrent findings of the fact given by the two authorities that there is no material to link the Assessee with a sum of Rs.22,97,000/- deposited in cash in the bank account of M/s. FBSL, as such, no case is made out for making addition under Section 68 of the Act, since there was no material with the Assessing Officer to come to the conclusion regarding any genuineness or fictitious identity of the entries or non-capacity of the lender.

10. Under these circumstances, we do not find any infirmity or perversity in the order passed by the Tribunal and in our opinion no substantial question of law arises in this case. With the result, the present appeal is not maintainable and the same is hereby dismissed.” [Emphasis Supplied]

7.7. I find the Coordinate Bench of the Tribunal in the case of M/s. Priyatam Plaschem Pvt. Ltd., vs., ITO vide ITA.No.2534/Del./2018 order dated 10.08.2018 has observed as under :

“10. Considering the facts of the case, in the light of material on record and the above decisions, it is clear that assessee produced sufficient documentary evidence before A.O. at the assessment as well as appellate stage to prove ingredients of Section 68 of the I.T. Act. The A.O. however, did not make any further enquiry on the documents filed by the assessee. Thus, the A.O. failed to conduct scrutiny of the documents at assessment stage and merely suspected the transactions in question on the irrelevant reasons. The A.O. did not make any enquiry from the Banker of the Investor and Income Tax record of the Investor Company. The valuation report filed by the assessee supports the explanation of assessee that shares were issued at premium which were below the fair market value per share of Rs. 1221/-. The assessee, thus, proved the identity of the Investor, its creditworthiness and genuineness of the transaction in the matter. No material has been produced before us to rebut the explanation of assessee. We, therefore, did not find any justification to sustain the addition. We, accordingly, set aside the orders of the authorities below and delete the addition of Rs.6 crores. There is no material available on record to justify if assessee paid any amount of Rs. 12 lakhs as alleged commission to obtain any accommodation entry. Orders of the authorities below were not justified in making addition of Rs. 12 lakhs. We, accordingly, set aside the orders of the authorities below and delete the addition of Rs.12 lakhs.”

7.8. Since the assessee in the instant case has proved the identity of the investors and filed sufficient details to substantiate the creditworthiness and genuineness of the transaction, therefore, respectfully following the decisions cited (supra), I hold that the Ld. CIT(A) was not justified in confirming the addition made by the A.O. under section 68 of the I.T. Act, 1961. I, therefore, set aside the Order of the Ld. CIT(A) and delete the addition. Grounds raised by the assessee are allowed.

8. In the result, appeal of the Assessee is allowed. Order pronounced in the open Court 25.04.2022.