TMI Blog2023 (10) TMI 544X X X X Extracts X X X X X X X X Extracts X X X X ..... rthiness of the parties to invest in the share capital of the Assessee Companies stood discharged. Once the Assessee established the identity of the parties, the genuineness of the transactions and the creditworthiness of the parties to invest in the share capital of or advance loans to the Assessee Companies, the burden shifted to the Revenue to prove the contrary. A.O has failed to discharge the secondary onus of demolishing/disproving the genuineness of the documentary evidences filed by the Assessee. Thus before fastening any liability upon the Assessee, A.O is required to show by bringing on record tangible material that the amounts received as share capital/loans from the investors/lenders actually emanated from the coffers of the Assessee or represented the undisclosed income of the Assessee - Decided in favour of assessee. Enhancement of income u/s 251(1) - Addition under the head from other sources by applying Section 56(2)(viib) on protective basis by rejecting the valuation report furnished u/R 11UA (2) (b) i.e. Discounted Cash Flow Method (DCF Method) - HELD THAT:- For the purpose of section 56(2)(viib) of the Act, the valuation of shares has to be done in ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital despite furnishing all the documentary evidence for establishing identity, creditworthiness of the investors and the genuineness of the transaction. 2. That the Ld. CIT(A) has erred in law as well as on facts in enhancing the income of appellant as 251(1) of the Act by Rs. 70,83,500/- under the head income from other sources by applying section 56(2)(viib) of the Act on protective basis and rejecting the valuation report furnished under Rule 11UA(2)(b) of Income Tax Rules, 1962 i.e., Discounted Cash Flow Method. 3. That the Ld. CIT(A) has erred in law as well as on facts in enhancing the income of appellant by not issuing valid show cause notice as mandated u/s 250(2) of the Act. 4. That the Ld. CIT(A) has grossly erred in enhancing the income of appellant on protective basis u/s 56(2)(viib) r.w.r 11UA of IT rules without appreciating the fact that the case was selected for limited scrutiny to verify whether the funds received in the form of share premium are from disclosed sources and have been correctly offered to tax which restrict the scope of assessing authorities to scrutinize only the source of share premium. 5. That the Ld. CIT(A) has erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant beyond doubt. The investors have furnished the bank statements through which money towards subscription of the share capital in the Assessee Company and Ld. AO is wrong to hold that these are not having any creditworthiness. All the companies are registered companies filing their ITR regularly, with running income and business activities, thus the order of the CIT(A) is erroneous. 5. Per contra, the Ld. Departmental Representative argued that the assessee had failed established identity, creditworthiness of the investors and also failed to prove the genuineness of the transaction, further by relying on the orders of the Lower Authorities prayed for dismissal of the Ground No. 1 of the assessee. 6. We have heard the parties and perused the material available on record. It is also found from the record that during the assessment proceedings, it is found from the record that after filing the return, the case was selected for scrutiny to verify whether the funds received in the form of share premium are from more disclosed sources and have been correctly offered for tax, accordingly notice has been issued to the assessee. On the basis of details filed by the assessee, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stors as well as the genuineness of the transactions. As brought out above, in the absence of the relevant bank account statements, neither the creditworthiness factor is established nor the genuineness of transaction been fully proved. Also, the fourth limb [over and above the identity, creditworthiness and genuineness factors] of reasonableness/business prudence in such transactions is glaringly conspicuous by its absence, on the face of the surrounding attendant facts of the case. 9. Considering the above facts that the assessee had provided all the details to discharge the onus to prove the identity, creditworthiness and genuineness of the investors, the onus will shift to Income Tax Authorities to disprove the documents furnished by the assessee. It is found from the record that the Ld. A.O. or the CIT(A) has not made any further investigation on the claim made by the assessee or the document produced by the assessee. Thus, the addition cannot be sustained merely based on the inferences without gathering tangible evidence. It is well settled law that once the assessee discharges its onus to prove the creditworthiness of the investor companies and the genuineness of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its finding. The aforesaid finding of fact recorded by the ITAT are based on the material available on record which is a finding based on appreciation of evidence on record. 52. Issuing the share at a premium was a commercial decision. It is the prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of shareholder whether they want to subscribe the shares at such a premium or not. This was a mutual decision between both the companies. In day to day market, unless and until, the rates is fixed by any Govt. Authority or unless there is any restriction on the amount of share premium under any law, the price of the shares is decided on the mutual understanding of the parties concerned. 53. Once the genuineness, creditworthiness and identity are established, the revenue should not justifiably claim to put itself in the armchair of a businessman or in the position of the Board of Directors and assume the role of ascertaining how much is a reasonable premium having regard to the circumstances of the case. 12. Further, in the case of CIT Vs. Kamdhenu Steel and Alloys Ltd. reported in 361 ITR 220 the Jurisdictional High Court h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above judicial principles to the cases at hand, since the Assessee herein filed detailed documentary evidences in the form of duly signed confirmation of investors/lenders (parties), details of PAN, copies of ITR, duly establishing the identity of the parties and genuineness of the transactions and the bank statements of the parties duly establishing the creditworthiness of the parties to invest in the share capital of or advance loans to the Assessee Companies. Thus, the Assessee effectively discharged the burden cast upon them u/s 68 of proving identity of the investors, the genuineness of the transactions and the creditworthiness of the parties with respect to the transactions that took place between the Assessee and the investors. Since the Assessees filed the bank statements of the parties conclusively proving that the impugned sums were received through normal banking channels from the bank accounts of the parties, the burden of proving the genuineness of the transactions between the Assessee and the parties and the creditworthiness of the parties to invest in the share capital of the Assessee Companies stood discharged. Once the Assessee established the identity of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e IT Rules and arrived the value of each share calculating the same as per Discount Cash Flow Method. As per the valuation report the value per share had been computed at Rs. 60/- per share i.e. premium of Rs. 50/- per share for a share of Rs. 10/-. Accordingly, new shares were issued and allotted to the investors during the year under consideration. 17. The Section 56(2)(viib) of the Act provides that where a company receives 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 shall be taxable as income from the sources. Further, clause (a)(i) of Explanation provides that fair market value of the shares shall be the value as may be determined in accordance with such method as may be prescribed. For the purpose of section 56(2)(viib) of the Act, the valuation of shares has to be done in accordance with the Rule 11UA of the Income Tax Rules. For the sake of convenience, relevant provisions of Rule 11UA are extracted hereunder: (2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (I), the fair market value of unquoted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that assessee should have made investment in some instrument which could have yielded return/ profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply dividend and interest. Any businessman or entrepreneur, visualise the business based on certain future projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the income tax department or revenue official cannot guide a businessman in which manner risk has to be undertaken. Such an approach of the revenue has been judicially frowned by the Hon'ble Apex Court on several occasions, for instance in the case of SA Builders, 288 ITR 1 (SC) and CIT vs. Panipat Woollen and General Mills Company Ltd., 103 ITR 66 (SC). The Courts have held that Income Tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee s own bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and thus, the value which is relevant today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the ld. Counsel, for instance: - i) Securities Exchange Board of India Ors [2015 ABR 291 - (Bombay HC)] 48.6 Thirdly, it is a well settled position of law with regard to the valuation. that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is by its very nature based on projections by applying what is essentially a hindsight view that the performance did not match the projection is unknown to the law on valuations. Valuation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information is available on the date of the valuation and a projection of future revenue that valuer may fairly make on the basis of such information. ii) Rameshwaram Strong Glass Pvt. Ltd. v. ITO [2018-TIOL1358- ITAT- Jaipur] 4.5.2. Before examining the fairness or reasonableness of valuation rep ..... X X X X Extracts X X X X X X X X Extracts X X X X
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