9911796707
TMI Blog2018 (10) TMI 1400X X X X Extracts X X X X X X X X Extracts X X X X ..... ective basis u/s 56(2)(viib) of the Act. 3. Before us, claim of the assessee is that the first addition of Rs. 20 crores cannot be made as complete information was and assessee has discharged its onus u/s 68 of the act. The ld AR took us through various evidences filed to show that the assessee has completely discharged its onus. He also referred to several judicial precedents to show that merely non-production of director of Investor Company cannot result in addition u/s 68 of the act. He also hastened to add that assessee at anytime ready to produce the directors of the investor company for verification of them by the ld AO on the documents submitted by the assessee. 4. With respect to taxability u/s 56(2)(viib) of the Act, he submitted that same is based on the valuation report of Chartered Accountant for share issue price in accordance with law. Such valuation also does not exceed the Fair market value of such shares; therefore, there is no incidence of taxation. He submitted that valuation report is submitted which is Discounted cash flow method , one of the acceptable method u/IT Rules 1962. In view of this, he submitted that on both the counts the amount of tax demand coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssues in the appeal. 8. Brief facts of the case shows that the assessee is a company who filed its return of income as stated above and the case of the assessee was selected for scrutiny for verification of large share premium received during the year and low income in pursuance to high loans and advances and investment in shares. 9. During the course of hearing the ld AO noted that the assessee has issued share capital of Rs. 20 crores in the name of 7 companies. Therefore, the assessee was asked to furnish certain details about the identity and creditworthiness of the shareholders and the genuineness of the transactions. The ld AO discussed the issue vide his order as under:- "The assesses filed its return digitally on 25.09.2014 declaring a loss off 3,53,777/-. The case was selected for scrutiny for the verification of large share capital/premium raised by the assessee during the year, which is reproduced as under:- Large share premium received during the year. Low income in comparison to high loans/advances/investment in shares. 2. Accordingly notice u/s 143(2) dated 28.08.2015 was issued and served upon the assessee company selecting the case of scrutiny. Thereaft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounts statements were examined thoroughly and noticed that either exact or approximate amount is being deposited on same day of remittance in assessee's account or one day before the remittance and the similar practices has been adopted in all seven bank accounts. In addition to the measure and negligible income of the assessee, the claimed net worth of these share subscribers companies was verified / reconciled with the nature of current and non-current assets/investment shown in relevant schedule of the financial statement/balance sheet of these companies and found that the net worth with evidence. Because whatever asset/investment reflected in the balance sheet of these share subscriber companies were investment in unlisted shares at huge premium in released/ group companies which are expediting the accommodation entry affairs as happened in the assessee's case. These share subscriber companies are doing no business but to making investment & doing so-calledshare trading business with private limited related companies. As such, net worth shown to the AR was found fictitious and meant for reporting purpose only. Relevant transaction/entries in the accounts of some shareholde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t SD 11193972009 DR 51 5017602 24.03.2014 S71088863 RTGS SD1119398027 STR YTON EXIM INDIA PVT LTD DR 5000000 17602 24.03.2014 S71088863 Charges for RTGS Customers Payment SD 1119398027 DR 51 17541 31.03.2014 Ml 68550 KAMSON 150300 CR 500000 517541 It is pertinent to mention here that a single page of bank account statement has been given by the assessee as well as by the shareholder companies. However, scrutiny of entries established the paucity of funds in these share subscriber companies as detailed in instances above. Besides, the above all seven-share holder companies are maintaining accounts with the same bank i.e. Punjab National Bank and the very same branch also. The purpose of maintenance of account all the shareholders in the same bank/branch have found to be established after perusal of transaction's date. The established fact is that all the accounts are maintained in the same bank/branch in order to expedite the affairs of siphoning the assessee money through banking channels in the name of socalled shareholders by single person or group of persons providing color of transactions of being Vide notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Officer of the assessee company. In view of this, the AR vide note sheet dated 07.11.2016-. 21.111.2016 (order sheet) & 02.12.2016 was requested; a) to provide the details of source of money received in investing entities alongwith documentary evidence b) to produce the directors of the entities from whom it had received Snap; Application Money, along with their details as asked vide notice u/s 133(6) of the act. 5. Instead of producing such persons and the directors of assessee company- the assessee has tried to discharge its onus u/s 68 of the Act by submitting the acknowledgement of ITR, Balance Sheet & part bank statements of such persons. However, the replies received from them raised more questions than answers on account of the following: * a) The Balance Sheets were incomplete in that no schedules were found attached which showed the details of the non-current investments, which is mandatory as per ICAI guidelines. b) There are no significant transactions/revenue from business operations in the P/L accounts of such applicants. c) Their ITR show negligible income from their own operations. d) As described earlier, all of the deposits by cheques/transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Final Show Cause notice date! 02. 12.2016: Please refer to show cause notice dated 07,11.2016, vide which you are requested as follows: "In reply to notices issued u/s 133(6), all the seven share holder companies has filed their replies along with copy of ITR but could not filed the copy of bonk account statement to reevaluate the bank statement furnished by you earlier and as such the creditworthiness of all share holder companies remained unexplained as yet. Therefore, you are requested to expenditure the personal deposition of the directors of the aforesaid 1 companies along with details requisitioned by the notice u/s 133(6) issued from this office earlier. The all 7 Directors may be produced on 22.11.2016 or on the date convenient for your as well as Directors which prior intimation undersigned". On 22.11.2016, your AR appeared but failed to furnish any details/explanation as well as failed to produce all 7 Directors, as required by the above show cause. However, in the interest of natural justice, you are afforded another opportunity to furnish the above requisite details by 07.12.2016, failing which it shall be presumed that you have nothing to submit in the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Also furnish notes on business wisdom of the Director to invest such a huge amount in premium out of such a meager income/ asset of share subscriber company. 9. Copy of share purchase register along with valuation report of these shares as on date. 10. Produce books of account and other relevant details to justify tire valuation of share of your company at such a huge premium earning share on the date of valuation. Please note that in case of failure to produce the Directors of share subscriber companies and furnish requisite details/evidence to justify such a huge valuation of shares @ 2000 of premium shall made u/s 56(2)(viib) of h; Act and order shall be passed accordingly. Case adjourned to 26.12.2016 for this purpose. The AR of the assessee appeared on 26.12.2016 but he neither produced even a single Director of share subscriber company as requisitioned vide notice dated 10 12.2016 nor filed any substantial evidence to discharge the onus on the company to prove id entry, creditworthiness and genuineness of transaction in respect of credit in its books of accounts. 9. It has been judicially established that the primary onus is on the assessee to prove the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investor" came to know of the requirements of funds by the assessee-company in the absence of a public issue or any advertisement by the assessee-company. For accepting the identity and the availability of funds in its hands of the entity in its own capacity, it is necessary to have at least some idea, if not complete details, of the actual business in which it is it is said to be engaged. 11. The assessee had been accorded enough opportunity to lead by positive evidence to prove the creditworthiness & genuineness of the transactions it is evident from the above; discussion that the assessee could not rebut the above discussed evidence & neither could it produce the principal officers of any of the entities, with the books of account, so that they could be examined for the genuineness & creditworthiness of the transaction. This is despite the fact that these persons are still alleged share holders of the assessee company. 12. Recently Hon'ble Delhi High Court in case of Sanraj Engineering P Ltd ITA 79/2016 has observed that onus of assessee u/s 68 is not discharged merely by submitting ITR, Balance Sheet & Bank Statements especially when the bank statements from which monies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application Money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless- (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.] The crux of amendment is that the closely held company receiving share application money/share capital/share premium/any such amount has to prove the source of funds in the hands of shareholder/person giving the share application money/share capital/share premium/any such amount. The Finance Act, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound; hence the addition as such may be deleted. 4. The Ld. AO has erred in law and on facts in assessing the case as a completed scrutiny as against limited scrutiny prescribed, hence the whole assessment as such is bad and may be quashed. 5. The appellant craves leave to add, substitute or modify any grounds of appeal on or before date of hearing." 5. The First Ground taken by appellant pertains to the addition of Rs. 20,00,00,000/- u/s 68 of IT Act on account of share application/premium money received by assessee during the year. 5.1 In support of aforesaid ground, appellant has submitted as under:- "Appellant Contention The appellant submits as follows: 1. The company was incorporated as on 19.03.2004. The return was filed on 25.09.2014 declaring an income of Rs.nil. 2 During the year under consideration, there was investment by certain companies in the appellant whose name is give above, in whose respect; further detail is given as below. Further, the following evidences in support of investment in the company were filed by the appellant:- * Copy Of board resolution of investor company * Copy Of ITR with complete audited finance statement for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y business decision of the investor company that whether he wants to invest at premiums or not in the appellant company. All 7 share, holder company are having account in the same bank with same branch only if all the shareholders coincidently have accounts in the same bank then it does not prove that this could not lead to any inference otherwise. In fact, similar kind of objection in the case of Winstral Petrochemicals (P.) Ltd. [2011] 330 ITR 603 / 10 taxmann.com 137 (Delhi) that all ihe shareholders are having the same address. In that case, honorable DHC has held that the common address of shareholders was not a valid basis to disregard the claim of the assessee. ITR and profit and loss account do not reflect their creditworthiness or No significant revenue from business operation or ITR shows negligible income ITR and Balance Sheet reflect the status of a year whether there is a profit or loss in that year and how much it is. It does not reflect the creditworthiness of the company. This is balance sheet of the company which reflects the creditworthiness of the company.. In the case under consideration, your honor will appreciate that the creditworthiness 0f the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... criber of the capital in investor company were filed, before the LD AO. which is confirmed by the LD AO in the assessment order:(Emphasis Supplied) Hence, this point is not relevant. Details of non current investment are not attached as mandatory as per ICAI Guidelines After the companies Act, 2013, the balance sheets are prepared as per the company Act, and hence it is prepared accordingly. The investment has been done as per the AS-13. Investment in USA company can be done directly and not required to be made through assessee there are various person who invest in mutual fund and Mutual fund entity in turn investment in shares. Now the question is why they do not invest in shares directly; why they shares their profit with mutual fund. The subject matter of business conducting in USA or investment in USA, both business scenario could not be taken at par. This is submitted that every person cannot open company in USA and enter into agreement over there for investment in coal mines. This is some people who conceive such idea and implement them,. This issue is at all not relevant. Share holders were not produced In this regard, it is submitted that all the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct Delhi High Court in the case of Five Vision Promoters Pvt Ltd analyzed this and held that Before proceeding to discuss the above submissions, a brief recapitulation of the legal position as regards Section 68 of the Act is necessary. Under Section 68 of the Act, the AO has jurisdiction to undertake enquiries with regard to the amount credited in the books of the accounts of an Assessee. This could be any sum whether in the form of sale proceeds or receipt of share capital money. First, the AO is to enquire whether the alleged shareholders in fact exist or not. The truthfulness of the assertion by the Assessee regarding the nature and the source of the credit in its books of accounts can be examined by the AO. Where the identity of the shareholders stands established and it is shown that they had in fact invested money in the purchase of the Assessee's shares, then - the amount received would be regarded as capital. Where the Assessee offers no explanation at all or the explanation offered is unsatisfactory, the provision of Section 68 may be invoked. That the assessee under consideration by producing lots of evidence as stated above has proved the identity, creditworth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s whose names are given to the Assessing Officer, then the Department is free to proceed to assess them individually in accordance with law. The Supreme Court did not find any infirmity with the impugned judgment of the High Court which was a common order along with the decision in CIT v, Divine Leasing & Finance Ltd. [2008) 299 ITR 268 (Delhi). Since the Commissioner of Income-tax (A) has not only found that the identity of each of the shareholders .stood established, but has also examined the fact that each of them' were income-lax assessees and had disclosed the shape application money in their accounts which were duly reflected in their Income-tax return as well as in their balance sheets. In these circumstances we see merit in what the learned counsel for the appellant has submitted and we feel that the Tribunal was unjustified incoming to the conclusion that the CIT(A) had not considered the matter in the right perspective. Consequently, we decide the question in favor of the assessee and set aside the order passed by the Tribunal." PCIT vs LAXMAN INDUSTRIAL RESOURCES LTD, ITA 169/2017, C.M. APPL. 7385/2017, DHC This Court notices that the assessee had provided several ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the "undisclosed income" of the assessee. The initial burden is on the assessee to explain the "nature and source" of the credit and to do so, the assessee is. required to prove (a) Identity of the shareholder; (b) Genuineness of transaction; and (c) credit worthiness of shareholders; (a) The identity of the shareholder can be proved by before the AO or by way of documents, registered address, PAN etc; (b) The genuineness of the transaction can be shown from the fact that the money has: been received from the shareholder. If the money is received by cheque and is transmitted through banking or other indisputable channels, the genuineness of transaction would be proved. Other documents showing the genuineness of transaction could be the espies of the shareholders register, share application forms, share transfer register, etc. (c) The creditworthiness or financial strength of the creditor/ subscriber can be proved by producing the bank statement of the creditors/subscribers showing that it had sufficient balance in its accounts to enable/ it to subscribe to the share capital. Once these documents are produced, the assessee would have satisfactorily discharge the onus cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 21st January 2008 of the Supreme Court in Special Leave to Appeal (Civil) (CC) 375 of 2008) 3 decisions dated 17th September 2012 of the Supreme Court m CIT v. Kamuhenu Steel & Alloys Ltd. [SLP (Civil) CC 15640 of 2012)]. In all the above -three decisions the Supreme Court had affirmed the corresponding decisions of this Court including 4 CIT v. Divine Leasing & Finance Ltd. [2008] 299 ITR 268/[2007] 158 Taxman 440. 5 CIT v. Sophia Finance Ltd. [1994] 205 ITR .98/[1993] 70 Taxman 69 (FB). Prayer In view of the above facts, law and legal precedents, it is prayed to delete the addition under section 68 of the Income Tax Act, 1961." 5.2 I have considered the facts of the case, basis of addition made by AO and submissions of the Appellant. As it is clear from the assessment order that assessment proceedings were undertaken by AO on the ground or selecting the case for scrutiny for verification of large share capital or premium received during the year and in comparison to that, low/nominal income disclosed in the return. It was also clear from the state of affairs of appellant that disproportionately high premium i.e. Rs. 19,90,00,00,000/- against the face value of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, appellant has been able to satisfy all three conditions, i.e., identity of creditor, creditworthiness and genuineness of transactions in its case. So far as the word 'identity' is concerned, Hon'ble jurisdictional High Court in the case N.R. Portfolio Pvt. Ltd., [2014] 2 ITR-OL 68, has defined that 'the identification of the person would include the place of work, the staff, the fact that it was actually carrying on business and recognition of the said company in the eyes of public. Merely producing PAN or assessment particulars did not establish the identity of the person. The actual and the true identity or the person a company was the business undertaken by them.' In the case of appellant, appellant has failed to establish the identity of share applicant companies as despite of several opportunities given by AO, the appellant could not file any such evidence in respect of share applicant companies that they actually exist. The AO had specifically asked the appellant on 07.11.2016, 22.11.2016, & 02.12.2016 to produce the doctors of the aforesaid companies to examine their identity, creditworthiness and genuineness of transactions but every time, appellant fail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when surrounding and attending facts predicate a cover up. These facts indicate and reflect proper paper work or documentation but genuineness, creditworthiness, are deeper and obtrusive. Companies no doubt are artificial or juristic person but they are soulless and are dependent upon the individuals behind them to run them and manage them. It is the persons behind the company who take the decision, control and manage them.' In the case of appellant company also, though the soulless juristic entity is existent on paper but the individuals, running and managing, them are found non-existing as the appellant company could not give a single detail about the existence or location of the share applicant companies. Since the creditors are non-existing, their creditworthiness is also not established. During the assessment proceedings also, appellant could not prove with the documentary evidence that the creditor companies are having sufficient balance for investing in share application of the appellant company. Thus, the creditworthiness of the aforesaid share applicant companies has not been proved herein in the case of the appellant. Similarly, the genuineness of transactions in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment proceedings. Onus, was on the said creditor companies to explain the nature and source of their funds by representing themselves before the AO with the supporting documentary evidence to prove their identity and creditworthiness and also the genuineness of transactions. But the same has not been done either by appellant or the said creditor companies. During the appellate proceedings, some details related to these share applicant companies have been filed to establish their genuineness but that is by the appellant, not by the creditor companies whereas the proviso clearly mandates that the explanation or details or evidence has to be offered by such creditor company. Thus neither during assessment proceedings nor appellate proceedings, these share applicant companies could satisfy the conditions as per proviso to section 68 of IT Act. 5.7 In such situation, the appellant has failed to discharge the onus cast upon it by the substantive provisions of section 68 of the Act or its proviso. Thus the appellant has failed on both the counts. In view of this, I hold that the AO was justified in treating the aforesaid sum of Rs. 20,00,00,000/- as unexplained cash credits u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g companies before the ld AO for his examination. He submitted that before the ld AO assessee has failed for the reason that assessee was under the belief that when the adequate documents are produced the ld Ao will accept them. The final notices issued by the ld AO was very late and therefore there was no occasion to produce them. 13. The ld DR vehemently supported the orders of the ld AO and the ld CIT(A) has stated that the assessee has failed to discharge initial onus cast upon it and therefore, the addition has rightly been made. He further submitted that as assessee has merely produced the documents but not the investors' directors, therefore not all these papers had any credential. He submitted that company's only act through the directors, unless they are examined with respect to those papers and explain sources of their funds invested in Assessee Company, the addition has been made correctly. 14. The ld AR vehemently submitted that though it is not necessary to produce the directors of the assessee company and ld AO could have issued summons to them when the complete details are furnished, but in any case assessee is ready to produce the directors of the investors compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t even the identity, creditworthiness and genuineness of the transaction is not proved. Therefore, assessee is in appeal before us. On careful analysis of the orders of the lower authorities, it is apparent that assessee has submitted relevant documents before the ld AO but grievance of the ld AO and the ld CIT (A) is that assessee has failed to produce the directors of the investor companies. It is also facts that when the share capital is issued by the assessee company to the other companies at a premium, to verify the creditworthiness and genuineness of the transaction, if the directors are produced who can be examined on the documents submitted by the assessee, it will test whether the assessee has discharged its initial onus or not. Further, as assessee is a private limited company, it is proper for ld AO to presume that assessee has the close nexus with the shareholders, therefore they can be produced before the ld AO. So far as the issue of the opportunity to the assessee is concerned the ld AO issued show cause notice on 20/12/2016 asking assessee to produce the directors on 26/12/2016 and passed the assessment order on 30/12/2016. Therefore it is also apparent that assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siphone its own money through banks accounts of seven so-called share subscribers at 199 time above face value of its share and the assessee company is a private limited where public are not substantially interested receives in any previous year from any person being a resident, any consideration for issue of shares. In such a case if the consideration received for issue of share as exceeds the fair market value of share shall be chargeable to income tax under the head income from other sources. Accordingly, the genuineness of transaction of Rs. 19,90,00,000/- needs to be examined on the parameters of new amendment to section 56(2) i.e. 56(2)(viib) applicable from the A.Y. 2014-15. As per audited balance sheet these share were issued to following share holders with details mentioned against their name. S. No. Name No. of Share s Face value of Amount of premium per share Total an of premium received Face Value 01. M/s. Apire Sales Pvt. 12500 10 1990 2500000 125000 02. M/s. Ankita Enterprises 32000 10 1990 64000000 320000 03. M/s. Wens Industries 1800 0 10 1990 36001000 180000 04. M/s. Airson Mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Shares and justification for the quantum of premium and valuation report of the share price ". Vide reply dated 26.12.2016 the assessee filed nothing material in support of valuation report. Annexure and exhibit were part of the report but not submitted by the assessee. Section 56(2)(viib) which is applicable from this year had specified that the valuation of the unaccounted shares has to be done as per 11 U/11UA of income tax rules notified where in share price method has been given. The assessee failed to establish the how such requirement of the section and rules were satisfied. The assessee has reported loss of Rs. 3,53,377/- during the year. Discounted cash flow is always depended on current cash flow w of revenue which is Loss as per P&L account. In this connection the assessee is required to show cause as to why share premium of Rs. 19,90,00,000/- shout a not he added back to the income of the assessee u/s 56(2) (viib) of the act read with rule 11UA (2)(b) of the income tax rules:- Vide reply dated 07.12.2016 the assessee has submitted that share premium was received by the assessee based on the cash flow done by the assessee. The report front' C.A. was tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment 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 prescribed; or (ii) as may be substantiated by the company In 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, licenses, 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 1 to clause (23FB) of section 10; Vide Notification No. 52/2012 [F.N X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee for next two year it was noted that the assessee don't have any actual cash flow against projected one. The assessee has not given complete report as per 11UA of the Income tax rules. By nature, the valuation needs to be as of the date of receipt of gift or as of the date of receipt of consideration for issuance of shares for premium taxation. The assessee has issued shares on various dates. Since the assessee has issued shares on premium in such case as per provision of the section 56(2)(viib) read with rule 1IUA the assessee should have provided valuation report at various dates from any accountant as per section 285 of the Act or from any merchant banker as per definition given in Security Exchange Board of India . As per 11UA the valuation should have been done on valuation date. The valuation date should have be considered on date of issuance of shares i.e. date of allotment. For the purpose of section 56 (2)(viib), shares will need to be valued on the date of issue of shares. Unlike section 56(2)(viia), there is no specific reference to the date of valuation which occurs in section 56(2)(viib). However, Explanation (aXii) makes it clear valuation needs to be done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 19,90,00,000/- are directly hit by section 56(2) (viib) of the I.T. Act. The onus is on the assessee to prove the value of the share. The assessee has failed to discharge its onus on genuineness of transactions. It is important to note that valuation should be based on facts - an expert opinion without data in support of the same is required to be ignored, since his opinion is valued not so much because of his experience and qualification, but because of its justification on facts, which he is able to prove for his opinion. Value of expert evidence, it was held, is directly proportionate to the accuracy of the facts and the cogency of reasons capable of objective verification. It is important to note that valuation should be based on facts - an expert opinion without data in support of the same is required to be ignored, since his opinion is valued not so much because of his experience and qualification, but because of its justification on facts, which he is able to prove for his opinion. Value of expert evidence, it was held, is directly proportionate to the accuracy of the facts and the cogency of reasons capable of objective verification. Merely filing some papers in suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Company raised Rs. 20,00,00,000.00 by issuing equity through private negotiation and on the strength of coal mine opportunities in US from the following investors. a. Aspire Sale's Private Limited 2.50 Crores b. Akita enterprises Private Limited 6.40 Crores c. Wens Industries Private Limited 3.60 Crores d. Airson Mercantile Private Limited 2.25 Crores e. Mahamashi Enterprises Private Limited 2.25 Crores f. Moral Sales Private Limited 2.00 Crores g. Dashing Industries Private Limited 1.00 Crores TOTAL 20.00 Crores 4. The company t thereafter entered into an agreement/MOU with the promoters of coal mine project in US to subscribe the 60% equity ($.20 Units) for value of USD 30,50,000.00 in SPV company to be incorporated in US to undertake coal mining, [copy of MOU/agreement is enclosed in annexure]. 5. Company thereafter applied for permission from RBI through HDFC for making overseas direct investment (ODI) (Copy of ODI approved attached. 6. RBI permission for USD 30,50,000.00 was received and UIN NDJAZ20140175 was allotted. 7. SPV in the name of M/s Stryton Minerals & Resources, LLC was incorporate in US (Copy of certi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Rules 1962, contains the prescribed method which is being produced as follows: Determination of fair market value. 11UA. 7-[l)] ***** 11 UA(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: e. * * * * * b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method.] Rule 11UA(2), of Income Tax Rules 1962, contains the prescribed method and permits the assessee to opt for either a) Book value method subject to the prescribed adjustments or b) Fair value determined by a Chartered Accountant or a Merchant Banker using discounted free cash flow method. It is pertinent to note that method pertaining to discounted free cash flow method was brought into rule w.e.f 29.11.2012. Therefore fair m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by assessee in USA Company was much less and there was a need to invest more over there; hence the project is delayed. Furthermore, it is not necessary that whatever is planned is actually materialized. As far as basis of DCF method is concerned; and, such high future cash flow is concerned; it is submitted that there was a very sound basis of such high cash flow; first it was an investment in USA and second irf coal mines; these two words are sufficient to attract high premium in the company. In facts, what sells in the market is idea and If idea is correct arc seems viable one can obtain a high degree of premium on that. (Emphasis,- Supplied) The appellant, in support of his projection; places the following documents before your honor:- - Proposal to invest in coal mines in USA as received - Due diligence report of the proposal with annexure I to XVII - Formation of company as Strytone Minerals and Resources LLC - Share Certificate in Strytone Minerals and Resources LLC -Coal Lease Agreement dated 21.01.2014 - Definite coal Lease Agreement dated 21.01.2014 - Agreement for transfer of lease rights dated 21.01.2014 - Engineering service agreement 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is as much bound by rules of valuation made under the Act as anybody else is. Since Rule ID uses the word 'shall', it prima facie indicates its mandatory character. 2. Mrs. Prem Shamsher Singh 210 ITR 233: In this case, the Hon'ble Delhi High court followed the judgment of the Hon'ble Supreme Court in the above cited case of Bharat Hari Singhania and others. 3. Chandra Kishore Jha 8SCC 266 : In this case, the Hon'ble Supreme Court was dealing with an election petition filed after the prescribed period of 45 days' from the election and while examining the rules made for the said purpose and the appellants' compliance thereto, it was held that 'it is a settled salutary principle that if a stature provides-for a thing to be done in a particular manner, then it has to be done in that manner and in no other manner.' 4. Singhara Singh AIR 1963 358 (SC): In this case the Hon'ble Supreme Court was dealing with the validity of a confession not recorded Jn accordance with the procedure prescribed u/sl64 of the Criminal Procedure Code land held that 'if a statute has conferred a power to do an act and had laid down the method in which tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L MINE and: for this purpose, a new company in the name of M/s. Stryton Minerals and Resources, LLC was incorporated in USA as SPV company, and since the mining of coal in USA is a high profitable business activity and huge profit was expected to be received by M/s. Stryton Mineral & Resources, LLC, incorporated by appellant company, the shares were valued -at such high rate that it fetched the premium of such high amounts. In view of this background, appellant opted to determine the fair market value of shares as per Rule 11UA on the basis of Discounted Free Cash Flow method as prescribed under Rule11 lUA(2)(b) of IT Rules. For this purpose, appellant got the valuation of the shares done by Chartered Accountant, who vide his report dated 31.01.2014, valued per share at Rs. 2035.53 as on 15.l.2014. the copy of valuation report is submitted during the appellate proceedings. However, while making valuation of the shares, the Valuer, vide para 2.2, has mentioned that his opinion about the value of shares is based solely on the information provided by the management of company and it has been informed by the management that the only source of income is investment in subsidiary company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other sources. The report is strictly confidential in nature which is not to be used by any other person or entity except by Stryton Exim India Pvt. Ltd. The photocopies of the documents provided by the company are believed to be true copy of the original documents. Our report should not be used, reproduced or circulated to any other person or for any purpose other than as mentioned in this report, in whole or in part, without our prior written consent." 6.2 From the above it can be seen that method of valuation of shares of appellant company to fetch such a high premium, is full of defects and based on the data of self-serving documents. The Valuer clearly mentioned in his report that he has not made any independent analysis for the valuation of shares, rather, it is based on the reports and documents provided by appellant only. However, for valuation of shares, the projection of income by appellant for subsequent three years is made at Rs. 1,05,00,000/-, Rs. 4,20,0,000/- and Rs. 4,20,00,000/- for A.Ys. 2015-16, 2016-17 and 2017- 18 and against it, the expenses of Rs. 80,43,000/-, Rs. 3,21,72,000/- and Rs. 3,03,72,000/- respectively. The basis of these projections has been cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this, the alternate addition of Rs. 19,90,00,000/- made by AO, is also confirmed and ground taken by appellant is dismissed." 18. The ld AR submitted that the addition has been made by the ld AO on protective basis as the substantive addition has been made u/s 68 of the Act. He further stated that the assessee has supported the valuation of the shares based on the discounted cash flow (DCF) method as provided under rule 11UA of the IT Rules 1962. He submitted that assessee has a proposal to investors in coal mines in USA and therefore, due diligence report was obtained and the company was confirmed therein. He further referred to the coal lease agreement dated 21.01.2014 and various contracts to show that based on this the valuation of the profit shown by the assessee for the purpose of the valuation for few years is justified. He therefore, stated when the assessee has determined the premium which is accepted by the Reserve Bank of India in the ODI forms there is no reason that the ld AO rejects the same. He further submitted that disclaimer shown in the valuation report is the regular disclosure and therefore, merely based on the same it cannot be excluded. He further stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the rival contention and the orders of the lower authorities. The assessee has issued shares of Rs. 20 crores having face value of Rs. 10 lakhs and share premium of Rs. 19.90 crores. Though learned assessing officer has made the addition of the about some under section 68 of the income tax at holding that appellant company has failed to prove the identity, creditworthiness of the companies and genuineness of the transaction. Therefore the substantive addition is made under section 68 of the income tax Act. However out of abundant caution the learned AO further invoked the provisions of section 56(2)(viib) of the act which applies to a company in which public are not substantially interested, when it receives share premium which exceeds the fair market value as determined in accordance with the prescribed rules is an income of the recipient company. Therefore apparently assessee is a private limited company hence it is hit by the provisions of section 56 (2)(viib) of the act. Therefore appellant is required to justify its what is the fair market value of the share premium received by it of Rs. 19.90 crores. Assessee company submitted a valuation report according to which the valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hown by the assessee at the time of the valuation did not materialize in subsequent year due to different business reasons such as delay in the project. The assessee has shown that there is a delay in the project and subsequently the LLC company has started earning the sum. If that be the case that if there is a variation in the discounted cash flow shown by the assessee with actual result in subsequent years, then the basic fallacy will arise that discounted future cash flow should be equal to the actual cash flow of the assessee. According to us it will result in absurdity. However it can also not be subscribed to the view that if there are wide variations in subsequent years with actual results compared with the projected cash flow submitted by the assessee, then in such situation if the projected cash floor is accepted then provisions of section 56(2)(viib) will become redundant. Therefore an objective evaluation of the valuation report submitted by the assessee deserves to be carried out. Further, the valuation report is prepared by the professionals such as chartered accountant, or merchant bankers for which their respective professional bodies have laid down specific disclos ..... X X X X Extracts X X X X X X X X Extracts X X X X
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