I. Addition on Share Premium Deleted as Assessee Provided Necessary Documents.
Issue:
Whether an addition under Section 68 on account of share premium is justified when the assessee has furnished all relevant documents, including a valuation certificate as per Rule 11UA(2)(b), to prove the identity and creditworthiness of investors and the genuineness of the transaction, and the Assessing Officer provides only a bald rebuttal without contrary evidence.
Facts:
- The assessee-company allotted equity shares at a premium to six entities and received share application money.
- The Assessing Officer made an addition under Section 68 on account of the share premium received.
- The assessee furnished all relevant documents and a valuation certificate as per Rule 11UA(2)(b) to prove the identity and creditworthiness of the investors and the genuineness of the transaction.
- The tax authorities did not bring any contrary material on record, offering only a bald rebuttal.
Decision:
The court held that the additions made under Section 68 were to be deleted. The assessee had discharged its burden by providing the necessary documents. A bald rebuttal without any material evidence or circumstances to the contrary was insufficient to justify the addition.
Key Takeaways:
- When an assessee provides documents to establish the identity, creditworthiness of investors, and genuineness of share premium transactions, the burden shifts to the tax authorities to bring contrary evidence on record.
- A mere bald rebuttal without any supporting material is not sufficient to make additions under Section 68.
- Valuation certificates as per Rule 11UA(2)(b) are significant evidence in such cases.
II. Addition under Section 56(2)(viib) Deleted as Valuation Report as per Rule 11UA(2)(b) Was Valid.
Issue:
Whether an addition under Section 56(2)(viib) is justified when the assessee has furnished a valuation report as per Rule 11UA(2)(b) (Discounted Cash Flow method), and the Assessing Officer or Commissioner (Appeals) rejects it without providing valid reasons or contrary material.
Facts:
- The assessee issued shares at a premium and furnished a valuation report based on the Discounted Cash Flow (DCF) method as per Rule 11UA(2)(b), certified by a Chartered Accountant.
- The Assessing Officer made an addition under Section 68 on account of the share premium.
- The Commissioner (Appeals) sustained the addition to a certain extent and rejected the valuation report, stating it lacked basis, and enhanced the income under Section 56(2)(viib).
- Rule 11UA(2)(b) provides the assessee with a choice of valuation methods, and the assessee opted for the DCF method.
- Neither the Assessing Officer nor the Commissioner (Appeals) provided any reasoning for rejecting the valuation report or furnished any contrary material.
Decision:
The court held that the impugned valuation of shares as per Rule 11UA(2)(b) using the DCF method was valid, and the addition made under Section 56(2)(viib) was to be deleted. The tax authorities did not provide any valid reasons or contrary material to justify the rejection of the valuation report submitted by the assessee.
Key Takeaways:
- Rule 11UA(2)(b) gives the assessee a choice of methods for valuing unquoted equity shares.
- If the assessee opts for a method prescribed under Rule 11UA(2)(b) and provides a valuation report accordingly, the tax authorities must provide valid reasons and contrary material if they intend to reject it.
- Rejecting a valuation report without proper reasoning or evidence is not permissible.
- Valuation done as per the prescribed rules should generally be accepted unless there are strong reasons and evidence to the contrary.
IN THE ITAT DELHI BENCH ‘F’
People Care Hospitals (P.) Ltd.
v.
ITO
ANUBHAV SHARMA, Judicial member
and S. Rifaur Rahman, Accountant member
and S. Rifaur Rahman, Accountant member
IT Appeal Nos.6178 and 6179 (Del) of 2019
[Assessment Year 2015-16]
[Assessment Year 2015-16]
DECEMBER 27, 2024
Rajeev Saxena, Dishant Sethi and Ms. Sumangla Saxena, Advs. for the Appellant. Ms. Harpreet Kaur Hansra, Sr. DR for the Respondent.
ORDER
Anubhav Sharma, Judicial Member.- Heard and perused the records. The two appeals have common investors whose investments have been doubted by the ld, Tax authorities below. The ld. representatives of both the sides have argued citing facts of ITA No.6178/Del/2019 which also covered the other ITA No.6179/Del/2019. Thus, for convenience, the two appeals of different assessee are being disposed of ny this common order.
2. The appellant no 1, ITA No.6178/Del/2019, is a company carrying on the business to acquire, establish and maintain one or more hospital, treatment of persons suffering from illness or mental defect or of persons requiring medical attention or rehabilitation and to provide medical relief to the public in all branches of medical sciences by all available means.
2.1 The captioned appeal ITA No.6178/Del/2019, filed by appellant no. 1, is against the order of CIT(A) u/s 250(6) of IT Act, 1961 dated 29.03.2019. The appeal is directed against the order involving the issues relating to:
| A. | Whether the Ld.CIT(A) was correct in confirming the addition of Rs. 48,00,000/- confirmed u/s 68 of the Act on account of share capital? |
| B. | Whether the Ld.CIT(A) was correct in enhancing of income by Rs.70,87,500/-u/s 56(2)(viib) of the Act on protective basis for share premium charged by rejecting the valuation report furnished under Rule 11UA(2)(b) i.e. Discounted Cash Flow Method? |
3. The appellant no 2, ITA No.6179/Del/2019, is a company is carrying on the business to process, produce, mix, pack, preserve, freeze, extract, refine, manufacture, import, export, buy, sell, trade and deal in processed foods, health foods, protein foods, food products, agro foods, fast foods, packed foods, poultry products, sea foods, milk foods, bakery products and confectionery items etc. and the assessee filed the Income Tax Return for the AY 2015-16 declaring the total income of Rs. 2,70,220/- on 13.09.2015.
3.1 The captioned appeal ITA 6179/Del/2019 is filed by appellant no. 2, against the order of CIT(A) u/s 250(6) of IT Act, 1961 dated 30.03.2019. The appeal is directed against the order involving the issues relating to:
| A. | Whether the Ld.CIT(A) was correct in confirming the addition of Rs. 35,00,000/- confirmed u/s 68 of the Act on account of share capital? |
| B. | Whether the Ld.CIT(A) was correct in enhancing of income by Rs.42,43,750/-u/s 56(2)(viib) of the Act on protective basis for share premium charged by rejecting the valuation report furnished under Rule 11UA(2)(b) i.e. Discounted Cash Flow Method? |
4. The case of appellants is that after the formation of the company, the assessee desirous of reviving the business activities, arranged funds/capital to be invested in the business.
5. In this regard, appellant no. 1, during the FY 2012-13, the appellant company invited others for making investment and after receiving the share application money shares were allotted to them during the year. In this concern, the company has allotted 2,36,250 equity shares of Rs. 10/- per share at a premium of Rs. 30/- per share to six entities. The detail of number of shares allotted along with the allottee companies/persons has been provided as under:
| Name of the Person | No. of shares | Nomin al Value per share (in Rs) | Premium per share (in Rs.) | Share Capital (In Rs) | Share Premium (in Rs) | Total amount paid including premium (in Rs) |
| M/s Cee Aar Decors Pvt. Ltd. | 20,000 | 10/- | 30/- | 2,00,000/- | 6,00,000/- | 8,00,000/-on 18.07.2014 |
| M/s Texcity constructions (Kovai) Pvt. Ltd. | 37,500 | 10/- | 30/- | 3,75,000/- | 11,25,000/- | 15,00,000/-on 01.10.2013 |
| M/s Metalcity Construction Kovai Pvt. Ltd. | 50,000 | 10/- | 30/- | 5,00,000/- | 15,00,000/- | 10,00,000/-on 28.03.2013 and 10,00,000/-on 16.11.2013 |
| M/s PP Buildmart Pvt. Ltd. | 28,750 | 10/- | 30/- | 2,87,500/- | 8,62,500/- | 11,50,000/-on 17.01.2013 |
| M/s Amarshree Industries Pvt. Ltd. | 62,500 | 10/- | 30/- | 6,25,000/- | 18,75,000/- | 25,00,000/-on 14.01.2015 |
| M/s Goodluck Industries Ltd. | 37,500 | 10/- | 30/- | 3,75,000/- | 11,25,000/- | 15,00,000/-on 08.01.2015 |
| Total | 2,36,250 | – | – | 23,62,500/- | 70,87,500/- | 94,50,000/- |
6. During the course of the assessment, the return of income was taken up for scrutiny and the Ld.AO assessed the income of the appellant at Rs. 96,69,430/- as against the returned income of Rs. 2,19,430/-. While computing the aforesaid income, Ld.AO framed the assessment order u/s 143(3) while making an addition of Rs. 94,50,000/- u/s 68 of the Act for shares allotted to shareholders on premium during the year. The Ld.AO in the assessment order raised the question of identification of the shareholders, creditworthiness and genuineness of the transaction. That mere production of audit report, balance sheet, payment through bank is not sufficient in order to satisfy the test of genuine transaction.
7. In this connection, the Ld.AO issued notices u/s 133(6) of the Act to the investor companies for providing requisite details. In response to which investor companies submitted various documents including ITR, Computation of Income, Audit report, and Share Certificates etc. Further, the Ld.AO issued a detailed show cause notice (SCN) on 18.12.2017 stating that on perusal of information and documents it has been found that these are shell companies and have no real business. The case of assessee is that it furnished the copy of ITR, Audit report including Balance Sheet, Profit and Loss account, Bank statement for M/s Cee Aar Decor Pvt. Ltd., M/s Amarshree Industries Ltd, M/s Goodluck Industries Ltd. along with the written reply which was filed physically. The said documents have also been filed in this appeal before us.
8. The case of assessee appellant no. 1, is that the assessee further furnished the valuation report as per Rule 11UA(2)(b) i.e DCF method certified by the Chartered Accountant as also mentioned in reply dated 29.12.2017. Thus, it is submitted that the assessee as well as investor companies has furnished all the relevant documents in order to prove identity, creditworthiness and genuineness of the transaction i.e., the ingredients of section 68 of the Act. Ld. AR has submitted now before us that the assessee discharged its onus cast upon it under the Act by establishing the identity, creditworthiness and genuineness of the transaction and the onus shifted to the department.
9. Aggrieved by the order of Ld.AO, the assessee filed an appeal before Ld.CIT(A). The Ld.CIT(A) partly allowed the appeal of assessee and sustained the addition of Rs. 48,00,000/- u/s 68 of the Act for the share premium received by the assessee company from the investors M/s Cee Aar Decor Pvt. Ltd., M/s Amar Shree Pvt. Ltd. and M/s Goodluck Industries Ltd. during the relevant assessment year. Further the total addition to the tune of Rs. 46,50,000/- was deleted by the Ld. CIT(A) as amount paid by the shareholders namely M/s Texcity Constructions Kovai Pvt. Ltd., Metalcity Constructions Kovai Pvt. Ltd. and P.P Buildmart Pvt. Ltd. of Rs. 15,00,000/- and 20,00,000/- and 11,50,000/-respectively pertains to earlier years and the same was corroborated by the Bank Statements of the respective investor companies.
10. Further, The Ld. CIT(A) rejected the valuation report justifying the premium charged in respect of such shares as furnished by the appellant as per Rule 11UA(2)(b) i.e., Discounted Cash Flow Method. (PB 70-72). With regard to the valuation report which was filed as per the Rule 11UA(2)(b) i.e., Discounted Cash Flow Method the Ld. CIT(A) stated that said valuation report does not carry any force and has been found without any basis. Thus, on this ground CIT(A) enhanced the income of the appellant by Rs. 70,87,500/- u/s 251(1) of the Act by invoking provisions of section 56(2) (viib) of the Act.
11. Hence, the assessee is in appeal before this Tribunal raising following grounds:
“1. The Ld. CIT(A) has erred in law as well as on facts in confirming the assessment framed by Ld. AO u/s 143(3) of the Income Tax Act’ 1961.
2. The Ld. CIT(A) has erred in law as well as on facts in confirming the addition of Rs. 48,00,000/- u/s 68 of the Act on account of alleged unexplained share premium and share capital.
3. The Ld. CIT(A) has erred in law as well as on facts in enhancing the income of appellant assessee by sum of Rs. 70,87,500/- u/s 251(1) of the Act by invoking section 56(2)(viib) of the Act wherein rejecting the valuation method taken by appellant assessee.
4. The Ld. CIT(A) has erred in law as well as on facts in enhancing the income of appellant assessee by not issuing valid show cause notice as mandated.
5. The Ld. CIT(A) has erred in law as well as on facts in confirming and enhancing the addition without giving cogent reasons and by recording incorrect facts and by disregarding all the documentary evidences furnished by assesssee.
6. That, the appellant craves leave to add, alter, amend or withdraw all or any ground either before or during the hearing of these grounds.
It is prayed that it be held that additions/disallowance are not in accordance with law and therefore, the addition so made may kindly be deleted and appeal of the appellant may kindly be allowed.”
12. At outset we find that as before the ld. Tax authorities below, the assessee has also placed before us following relevant evidences of the investor companies.
1. M/s Cee Aar Decors Pvt. Ltd.
Company is a corporate entity, incorporated on 10.07.1996 with an objective of carrying on the business to undertake jobs of interior/exterior decorators, furnishers, cleaners, repairs and render services in all other ancillary fields etc. This company has invested Rs. 20,000. Subsequently, the assessee company has allotted 20,000 shares @ Rs. 40/- during the year in concern. A list of documents have been annexed to the Paper Book in order to prove the identity & creditworthiness of the investors and the genuineness of the transaction.
| S.No | Particulars | Page no. of the Paper Book |
| 1. | Copy of Certificate of Incorporation, along with MOA & AOA | Attached with this synopsis. |
| 2. | Copy Auditor’s report, Balance Sheet and trading and profit & loss account as on 31.3.2015 along with notes to financial statement. | 87-97 |
| 3. | Copy of acknowledgement of return of income for AY 201516 along with computation of income tax. | 98-99 |
| 5. | Copy of share application form. | 100 |
| 6. | Copy of Share Certificate of Investor Company issued by the Assessee Company | 101 |
| 7. | Copy of confirmation of accounts dated 01.04.2015 from the period of 01.04.2014-31.3.2015 from the assessee company showing the net amount of Rs. 8,00,000/- received from the investor company by the assessee company. | 102 |
| 8. | Copy of investor company’s bank account statement showing the debit entry of Rs. 08,00,000/- on 18.07.2014 | 103-104 |
2. M/s Amar Shree Industries Pvt. Ltd.
Company is a corporate entity, incorporated on 18.03.1992 with an objective of carrying on the business to manufacture, trade, Buy, sell, import, export and deal in organic and inorganic chemicals, chemical compounds, chemical product, acids, alkalis petro- chemicals, petrolbased products, polymers and its products, tanning chemicals and solvents of all type intermediates etc. This company has invested Rs. 25,00,000/-. Subsequently, the assessee company has allotted 62,500 shares @ Rs. 40/- during the year in concern. A list of documents have been annexed to the Paper Book in order to prove the identity & creditworthiness of the investors and the genuineness of the transaction.
| S.No | Particulars | Page no. of the Paper Book |
| 1. | Copy of Certificate of Incorporation, along with MOA & AOA | Attached with this synopsis. |
| 2. | Copy Auditor’s report, Balance Sheet and trading and profit & loss account as on 31.3.2015 along with notes to financial statement. | 159-169 |
| 3. | Copy of acknowledgement of return of income for AY 201516 along with computation of income tax. | 170-171 |
| 5. | Copy of share application form. | 172 |
| 6. | Copy of Share Certificate of Investor Company issued by the Assessee Company | 173 |
| 7. | Copy of confirmation of accounts dated 01.04.2015 from the period of 01.04.2014-31.3.2015 from the assessee company showing the net amount of Rs. 25,00,000/- received from the investor company by the assessee company. | 174 |
| 8. | Copy of investor company’s bank account statement showing the debit entry of Rs. 25,00,000/- on 14.01.2015. | 175-176 |
3. M/s Goodluck Industries Ltd.
Company is a corporate entity, incorporated on 13.04.1993 with an objective of carrying on the business of weaving, spinning, manufacturing or dealing in cotton or other fibrous substances and the preparation, dyeing or colouring of any of the said substances and the sale of cloth or other manufactured fibrous products etc. This company has invested Rs. 15,00,000. Subsequently, the assessee company has allotted 37,500 shares @ Rs. 40/- during the year in concern. A list of documents have been annexed to the Paper Book in order to prove the identity & creditworthiness of the investors and the genuineness of the transaction.
| S.No | Particulars | Page no. of the Paper Book |
| 1. | Copy of Certificate of Incorporation, along with MOA & AOA | Attached with this synopsis. |
| 2. | Copy Auditor’s report, Balance Sheet and trading and profit & loss account as on 31.3.2015 along with notes to financial statement. | 177-186 |
| 3. | Copy of acknowledgement of return of income for AY 201516 along with computation of income tax. | 187-188 |
| 5. | Copy of share application form. | 189 |
| 6. | Copy of Share Certificate of Investor Company issued by the Assessee Company | 190 |
| 7. | Copy of confirmation of accounts dated 01.04.2015 from the period of 01.04.2014-31.3.2015 from the assessee company showing the net amount of Rs. 15,00,000/- received from the investor company by the assessee company. | 191 |
| 8. | Copy of investor company’s bank account statement showing the debit entry of Rs. 15,00,000on 08.01.2015. | 192-193 |
13. Giving thoughtful consideration to the matter before us and the submissions, we find that the Ld. CIT(A) stated mere furnishing names, address and PAN particulars or relying on entries in the ROC website is not enough. We are of considered view that when the burden on assessee is to establish identity, creditworthiness and genuineness of the transaction these documents are of vital significance and the ld tax authorities should bring on record some material to the contrary. A bald rebuttal without any material evidence or circumstances is not sufficient. The assessee company has furnished all the relevant documents before the lower authorities along with the valuation certificate as per the Rule 11UA(2)(b) of the Income Tax Rules, 1962.
14. The Ld. AR has placed reliance on catena of judgments including the judgment of the Hon’ble Jurisdictional High Court in the case of CIT v. M/s Kamdhenu Steel and Alloys Ltd. reported in [2012] 19 taxmann.com 26/206 Taxman 254/[2014] 361 ITR 220 (Delhi) wherein it has held that, no addition can be made in respect of share capital received from shareholders, whose necessary evidence has been placed on record and, the Ld. AO has not led any material to the contrary. It was held therein as under:
14 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 monev. According to the assessee, he had given the required information to explain the source and was not obligated to prove the 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 suspicions to a logical conclusion by further investigation. After the registered letters sent to the investing company had been received back undelivered, the AO presumed that these companies did not exist at the given address. No doubt, if the companies are not existing, i.e., they have only paper existence, one can draw the conclusion that the assessee had not been able to disclose the source of amount received and presumption under s. 68 of the Act for the purpose of addition of amount at the hands of the assessee. But, it has to be conclusively established that the company is non-existence.
15. Now coming to the question of enhancement made by the CIT(A) to the tune of Rs. 70,87,500/- u/s 56(2)(viib) of the Act. We are of the considered view that Ld.CIT(A) has erred in not accepting the valuation report by a Chartered Accountant who valued shares as per clause (b) of Rule 11UA(2) of IT Rules, 1962, when the legislature provided the option to be exercised by the assessee/appellant to reach the value of each share and the same has been provided by the assessee calculating as per clause (b), through Discounted Cash Flow Method (DCF). It is no more res integra that the Rule 11UA(2)(b), gives assessee company a choice to opt for one of the methods enumerated in the above provision and the appellant has chosen to opt for clause (b) i.e Discounted Cash Flow Method for valuation of unquoted equity shares based and following the same, the value per share had been computed at Rs. 40/- per share i.e premium of Rs. 30/- per share for a share of Rs. 10/-. The ld AO or CIT(A), has not given any reasoning for rejecting the valuation report nor they have furnished any material to the contrary which justified the rejection of the valuation report.
16. It is submitted with respect that in the appellate proceedings, Ld. CIT(A) without appreciating the statutory provision, and without computing the Fair Market Value of shares as per Rule 11UA, arbitrarily upheld the finding of the Ld.AO merely on the ground that such valuation is without any basis and thereby rejected the valuation report and further stated that the said valuation report is suffering from the tangible defects. A mere allegation that corroborating details have not been furnished to substantiate the cash flow from the equity for Rs. 20.97 lacs and 22.13 lacsfor FY 2015-16 and 2016-17 relevant to assessment year 2016-17 and 2017-18, is not sufficient unless assessee is show caused for explaining it. The Ld.CIT(A) has concluded on the that appellant has no business worth or tangible/intangible assets to justify such kind of cash flow. Ld. AR has pointed that despite having huge funds, only Rs. 10.52 lacs and 11.26 lacs was stated to be spent on the operating cost for year ending 31.03.2016 and 31.03.2017 respectively, on which profit was earned of Rs. 3.51 lacs and 3.75 lacs which is quite normal in the business. The assessee has calculated and estimated the projected figures at the lowest and even then, the value arrived at Rs. 20.97 lacs and 22.13 lacs for year ending 31.03.2016 and 31.03.2017 respectively. After reducing from the present value factor at the rate of 14% year wise because of diminishing value of the money, the value of the enterprise value arrived at Rs. 20.97 lacs and 22.13 lacs and value per share arrived at Rs. 40 per share. This clearly justified the value of premium received
17. The case of appellant no. 2 is similar to that of aforesaid appellant no. 1 and after the formation of the company, the assessee desirous of reviving the business activities, arranged funds/capital to be invested in the business. In this concern, the appellant no. 2, company has allotted 60,625 equity shares of Rs.10/- per share at a premium of Rs. 70/- per share to three entities. The detailof number of shares allotted along with the allottee companies/persons has been provided as under:
| Name of the Person | No. of shares | Nomin al Value per share (in Rs) | Premium per share (in Rs.) | Share Capital (In Rs) | Share Premium (in Rs) | Total amount paid including premium (in Rs) |
| Zeya Developers Pvt. Ltd. | 12,500 | 10/- | 70/- | 1,25,000/- | 8,75,000/- | 10,00,000/-on 03.03.2014 |
| Gharonda NirmanPvt. Ltd. | 4,375 | 10/- | 70/- | 43,750/- | 3,06,250/- | 3,50,000/-on 16.05.2013 |
| Goodluck Industries Ltd. | 43,750 | 10/- | 70/- | 4,37,500/- | 30,62,500/- | 5,00,000/-on 13.12.2014, 20,00,000/-on 04.02.2015 and 10,00,000/-on 05.03.2015 |
| Total | 60,625 | – | – | 6,06,250/- | 42,43,750/- | 48,50,000/- |
18. During the course of the assessment, the return of income was taken up for scrutiny and the Ld.AO assessed the income of the appellant at Rs. 51,20,220/- as against the returned income of Rs. 2,70,220/-. While computing the aforesaid income, Ld.AO framed the assessment order u/s 143(3) while making an addition of Rs. 48,50,000/- u/s 68 of the Act for shares allotted to shareholders on premium during the year. The Ld.AO in the assessment order raised the question of identification of the shareholders, creditworthiness and genuineness of the transaction.
19. In this connection, the Ld.AO issued notices u/s 133(6) of the Act to the investor companies for providing requisite details. In response to which investor companies submitted various documents including ITR, Computation of Income, Audit report, Balance Sheet and P/L, and Share Certificates etc. Further, the Ld.AO issued a detailed show cause notice (SCN) on 18.12.2017 stating that on perusal of information and documents it has been found that these are shell companies and have no real business.
20. The case of assessee is that it furnished the copy of ITR, Audit report including Balance Sheet, Profit and Loss account and notes to accounts, memorandum of association, Form PAS-3 and copy of share certificates along with the written reply which was filed physically. Further the said documents have been annexed again in the paper book before us.
21. Aggrieved by the order of Ld.AO, the assessee filed an appeal before Ld.CIT(A). The Ld.CIT(A) partly allowed the appeal of assessee and sustained the addition of Rs. 35,00,000/- u/s 68 of the Act for the share premium received by the assessee company from the investor M/s Goodluck Industries Pvt Ltd. during the relevant assessment year. Further the total addition to the tune of Rs.13,50,000/- was deleted by the Ld. CIT(A) as amount paid by the shareholders namely M/s Zeya Developers Pvt. Ltd. and M/s GharondaNirman Pvt. Ltd. of Rs. 10,00,000/- and 3,50,000/- respectively pertains to earlier years and the same was corroborated by the Bank Statements of the respective investor companies.
22. Further, the Ld. CIT(A) rejected the valuation report justifying the premium charged in respect of such shares as furnished by the appellant as per Rule 11UA(2)(b) i.e., Discounted Cash Flow Method. (PB 70-72). With regard to the valuation report which was filed as per the Rule 11UA(2)(b) i.e., Discounted Cash Flow Method the Ld. CIT(A) stated that said valuation report does not carry any force and has been found without any basis. Thus, on this ground CIT(A) enhanced the income of the appellant by Rs. 42,43,750/- u/s 251(1) of the Act by invoking provisions of section 56(2) (viib) of the Act.
23. Hence, the assessee is in appeal raising following grounds:
“1. The Ld. CIT(A) has erred in law as well as on facts in confirming the assessment framed by Ld. AO u/s 143(3) of the Income Tax Act’ 1961.
2. The Ld. CIT(A) has erred in law as well as on facts in confirming the addition of Rs. 35,00,000/- u/s 68 of the Act on account of alleged unexplained share premium and share capital.
3. The Ld. CIT(A) has erred in law as well as on facts in enhancing the income of appellant assessee by sum of Rs. 42,43,750/- u/s 251(1) of the Act by invoking section 56(2)(viib) of the Act wherein rejecting the valuation method taken by appellant assessee.
4. The Ld. CIT(A) has erred in law as well as on facts in enhancing the income of appellant assessee by not issuing valid show cause notice as mandated.
5. The Ld. CIT(A) has erred in law as well as on facts in confirming and enhancing the addition without giving cogent reasons and by recording incorrect facts and by disregarding all the documentary evidences furnished by assesssee.
6. That, the appellant craves leave to add, alter, amend or withdraw all or any ground either before or during the hearing of these grounds.
It is prayed that it be held that additions/disallowance are not in accordance with law and therefore, the addition so made may kindly be deleted and appeal of the appellant may kindly be allowed.”
24. Giving thoughtful consideration to the matter before us we find that as before the ld. Tax authorities below, the assessee has also placed before us following relevant evidences of the investor companies.
1. M/s Goodluck Industries Ltd.
This company has invested Rs. 35,00,000. Subsequently, the assessee company has allotted 43,750 shares @ Rs. 80/- during the year in concern. A list of documents have been annexed to the Paper Book in order to prove the identity & creditworthiness of the investors and the genuineness of the transaction.
| S.No | Particulars | Page no. of the Paper Book |
| 1. | Copy of Certificate of Incorporation, along with MOA & AOA | Attached with this synopsis. |
| 2. | Copy Auditor’s report, Balance Sheet and trading and profit & loss account as on 31.3.2015 along with notes to financial statement. | 108-118 |
| 3. | Copy of acknowledgement of return of income for AY 201516 along with computation of income tax. | 119-120 |
| 5. | Copy of share application form. | 121 |
| 6. | Copy of confirmation of accounts dated 01.04.2015 from the period of 01.04.2014-31.3.2015 from the assessee company showing the net amount of Rs. 35,00,000/- received from the investor company by the assessee company. | 122 |
| 7. | Copy of Share Certificate of Investor Company issued by the Assessee Company | 123 |
| 8. | Copy of investor company’s bank account statement showing the debit entry of Rs. 10,00,000/-, 20,00,000/- and Rs. 5,00,000/- on 05.03.2015, 04.02.2015 and 13.12.2014 respectively | 124-127 |
25. The case of appellant no. 2 here is squarely covered by our discussion with regard to genuineness of the investor M/s Goodluck Industries Ltd., as discussed in the case of appellant no. 1 above.
26. As with regard to the valuation of the shares. It is submitted that in the appellate proceedings, Ld. CIT(A) has noticed the discrepancies in his mind on the valuation report but without providing any opportunity or seeking any clarification from the appellant concluded that corroborating details have not been furnished to substantiate the cash flow from the equity for Rs. 7,25,000/-and 8,00,000/- for FY 2015-16 and 2016-17 relevant to assessment year 2016-17 and 2017-18.
27. As discussed by us in case of appellant no. 1, similarly in this case too, the ld.CIT(A) did not appreciate despite having huge funds, only Rs. 20.25 lacs was stated to be spent on the operating cost, on which profit was earned of Rs. 3.57 lacs which is quite normal in the business of trading. The assessee has calculated and estimated the projected figures at the lowest and even then, the value arrived at Rs. 7.25 lacs. After reducing from the present value factor at the rate of 14% year wise because of diminishing value of the money, the value of the enterprise value arrived at Rs. 7.25 lacs and value per share arrived at Rs. 80 per share. This clearly justified the value of premium received by the assessee from the investors of Rs. 70 per share. The ld. Tax authorities have discredited the valuation report without any independent exercise of their own. We are of considered view that in case of fresh issue of shares made by unquoted company, the AO is not authorized to pick and choose method of valuation of shares since that option is given to the Assessee. Where the Assessee exercises its option to value its shares as per DCF method, the AO cannot completely disregard such method and replace it his method even if specific discrepancies are found by the AO in Appellant’s working of DCF based FMV. Reliance for this proposition can be placed on the decision of Hon’ble Delhi High Court in case of Pr. CIT v. Cinestaan Entertainment (P) Ltd. v. ITO 433 ITR 82, wherein it was held as under:
“The methodology adopted was a recognized method of valuation and the Department was unable to show that the assessee adopted a demonstrably wrong approach or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which went to the root of the valuation process. The deletion of addition was justified”.
28. Consequently we are inclined to sustain the grounds raised in both the appeals and allow the appeals of respective appellants.