2021 (9) TMI 1091 - AT - Income Tax

Addition u/s. 56(2)(viib) in respect of share premium - value the shares on the basis of intrinsic value per share or by adopting Discounted Cash Flow Method (DCF) - AO expressed dissatisfaction over the valuation on the plea that the assessee was having negative reserves surplus - The actual financial results of financial years 2014-15 2015-16 were not in accordance with the projections made by the assessee - discounting factor of 15.16% was very high - HELD THAT - The valuation made by the assessee has been arrived at on the basis of DCF method of valuation and therefore, disturbing the same, without any cogent reasons, could not be held to be justified. The prime object of insertion of Sec. 56(2)(viib) was to tax excessive share premium received unjustifiably by private companies on issue of shares without carrying underlying value. The intent of the provision was to deter the generation and use of unaccounted money. However, there are no such allegations against the assessee since the assessee has demonstrated the fulfilment of primary ingredients of Section 68. Our aforesaid findings are duly supported by the binding judicial pronouncement of Hon ble Bombay High Court in the case of Vodafone M-Pesa Ltd. V/s PCIT 2018 (3) TMI 530 - BOMBAY HIGH COURT wherein it was held that there was no immunity from scrutiny of the valuation report and AO was entitled to scrutinise the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF Method and it is not open to him to change the method of valuation which has been opted for by the Assessee. Here is a case where the shares had been subscribed by unrelated independent parties, who were one of the leading industrialists and businessman of the country, and after considering the valuation report and future prospect of the company, had chosen to make investment as an equity partners in a 'start-up company' like assessee, then it cannot said that there is any kind of tax abuse tactics or laundering of any unaccounted money. It cannot be the unaccounted or black money of investors as it is their tax paid money invested, duly disclosed and confirmed by them; and nothing has been brought on record that it is unaccounted money of assessee company routed through circuitous channel or any other dubious manner through these accredited investors. As the facts and circumstances of the case do not convince us to confirm the impugned additions made u/s 56(2)(viib). By deleting the same, we allow the ground no.1

Summary

Issues Involved:
1. Confirmation of addition under Section 56(2)(viib) of the Income Tax Act.
2. Validity of the appellate and assessment orders.
3. Alternative addition under Section 68 of the Income Tax Act (for AY 2015-16).

Detailed Analysis:

Issue 1: Confirmation of Addition under Section 56(2)(viib)
The primary issue in both assessment years (AY 2013-14 and AY 2015-16) revolves around the addition made under Section 56(2)(viib) concerning the share premium received by the assessee. The assessee issued shares at a premium, supported by a valuation report using the Discounted Cash Flow (DCF) method, which is one of the prescribed methods under Rule 11UA. The Assessing Officer (AO) rejected this valuation, arguing that the actual financial results did not align with the projections and that the discounting factor used was too high. The AO instead used an alternative formula to determine the Fair Market Value (FMV), resulting in a substantial addition to the income of the assessee.

The appellate authority (CIT(A)) upheld the AO's decision, stating that the valuation report was based on self-serving documents without independent analysis and that the actual figures did not support the projections. However, upon further appeal, it was found that the DCF method, being a prescribed method, should not be rejected merely because the actual results differed from projections. The Tribunal cited judicial precedents supporting the use of the DCF method and emphasized that the intent of Section 56(2)(viib) was to tax unjustified share premiums, not to penalize genuine business transactions. Consequently, the Tribunal deleted the additions made under Section 56(2)(viib).

Issue 2: Validity of the Appellate and Assessment Orders
The assessee also contested the validity of the appellate and assessment orders, claiming they were invalid and bad in law. However, this ground became infructuous as the primary issue regarding the addition under Section 56(2)(viib) was resolved in favor of the assessee. Therefore, this issue did not require further adjudication.

Issue 3: Alternative Addition under Section 68 (for AY 2015-16)
For AY 2015-16, the AO alternatively proposed an addition under Section 68, questioning the creditworthiness of the investors and the genuineness of the transactions. The assessee had provided copies of Income Tax Returns (ITR), confirmations, and bank statements but did not submit balance sheets and profit & loss accounts. The AO noted that the major investor was incurring losses and funded the investment through another group entity.

Upon review, the Tribunal found that the assessee had sufficiently proved the identity, creditworthiness, and genuineness of the transactions. The AO's allegations lacked concrete material evidence, and no further investigations were shown to disprove the assessee's documentary evidence. The Tribunal emphasized that additions under Section 68 could not be made based on presumptions or conjectures and noted the absence of any finding that the assessee's unaccounted money was being laundered. Therefore, the alternative addition under Section 68 was deemed unsustainable.

Conclusion:
The Tribunal, after thorough consideration, deleted the impugned additions made under Section 56(2)(viib) for both assessment years and dismissed the alternative addition under Section 68 for AY 2015-16. Consequently, both appeals were partly allowed.