ACIT Vs Drishti Soft Solutions Pvt. Ltd (ITAT Delhi)
The ITAT, Delhi, in ACIT v. Drishti Soft Solutions Pvt. Ltd. [ITA No. 8523/Del/2019 dated February 10, 2023] upheld the order passed by the Commissioner of Income Tax (Appeals) (“CIT(A)”) and dismissed the appeal filed by the Revenue Department and held that no tax would be levied on the issue of shares to venture capital fund and further upheld the observation of CIT(A) that, payment for valuation certification and retainership fees to a CA firm is a revenue expenditure.
Facts:
Drishti Soft Solutions Pvt. Ltd. (“the Respondent”) is a company engaged in the business of software development and had electronically filed its return of income for the Assessment Year (“A.Y.”) 2016-17 on October 17, 2016, declaring total income at INR 1,69,85,280/-, which was selected for scrutiny and thereafter, assessment was framed under Section 143(3) of the Income Tax Act, 1961 (“the IT Act”). On December 20, 2018, Order-in-Original (“the OIO”) was passed by the Revenue Department (“the Appellant”), wherein the total income was determined at INR 24,26,59,340/-. The addition was made on the following grounds a) premium on the issue of shares shall be taxable and b) expense incurred on valuation certification is a capital expenditure.
With respect to the first ground, the Appellant, during the investigation, found out that the Respondent had raised INR 24,99,98,288/- by issuing 2,01,402 shares to M/s. Forum Synergies India Trust (“FSIT”) is a venture capital fund. Thereafter, the Respondent was asked to furnish the justification of funds received in the form of share premium, for which the Respondent submitted the valuation report, which was not found acceptable to the Appellant as it was noted that the Respondent’s CA had used Discounted Cash Flow Method for valuing shares which was not realistic and did not match with the actual financial condition of the Respondent. The Appellant post calculating the valuation of shares as per Rule 11UA of the Income Tax Rules, 1962 (“the IT Rules”) added INR 21,57,85,188/- to the income of the Respondent under the head of income from other sources.
In respect to the second ground, it was found during the investigation proceedings that the Respondent has paid INR 1,36,000/- to a CA firm on account of Professional fee for share valuation certificate. The Respondent submitted that the amount was towards monthly retainership fees and professional fees for the PE Fund’s valuation. Thus, they are fully allowable under Section 37 of the IT Act. The Appellant held that the expense was not in the nature of routine business expenses but in the nature of capital expenses and therefore, the addition of INR 1,36,000/- was made to the income.
Being aggrieved by the OIO, an appeal was filed by the Respondent before the CIT(A), who vide Order-in-Appeal dated September 19, 2019 (“the OIA”) granted substantial relief to the Respondent.
Hence, this appeal has been filed by the Appellant.
Issues:
1. Whether the CIT(A) has erred in deleting the addition of INR 21,57,85,188/- on account of share premium valuation?
2. Whether the CIT(A) has erred in deleting the addition of INR 1,36,000/- being expense for valuation certification under Section 37(1) of the IT Act?
Held:
The ITAT, Delhi in ITA No. 8523/Del/2019 held as under:
