EAST DELHI LEASING P.LTD,NEW DELHI V. ITO, WARD-8(1), NEW DELHI

ITA 2678/DEL/2019

AI Insights

The case involves East Delhi Leasing P. Ltd., which appealed against the order of the Commissioner of Income-tax (Appeals)-34, New Delhi, confirming additions made by the Assessing Officer (AO) under Sections 56(2)(viib) and 68 of the Income Tax Act, 1961, related to share premium and share capital received, respectively. The AO had valued the shares issued at a premium and added the excess to the assessee's income, citing non-compliance with fair market value requirements. The Tribunal found that the valuation method used by the AO was incorrect and that the assessee had justified the share premium through a proper valuation report. Consequently, the Tribunal deleted the additions under Sections 56(2)(viib) and 68 but upheld the disallowance under Section 14A.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 34189 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Other Referred Cases: Sanraj Engineering Co. v. CIT, Ridhi Promoters P. Ltd. v. CIT-7, CIT vs. Nova Promoters & Fin lease (P) Ltd., Konark Structural Engineers Pvt. Ltd. vs. DCIT, Pavankumar M. Sanghvi vs. ITO, CIT vs. Durga Prasad More, CIT vs. Ultra Modern Exports (P) Ltd., Agro Portfolio (P) Ltd. vs. ITO
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DAYAINDER SINGH SIDHU
• Assessee Lawyers: K. SAMPATH; VARUN KOHLI
• Keywords: Depreciation; Fair market value; Valuation report; Source of fund; Rule 8D
• Section: 143(3); 250; 271(1)(c); 68; 14A

Judgement Text

"ITA No.2678/Del/2019 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “B” NEW DELHI BEFORE SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER AND SHRI NAVEEN CHANDRA, ACCOUNTANT MEMBER आ.अ.सं/.I.T.A No.2678/Del/2019 िनधा\tरणवष\t/Assessment Year:2013-14 East Delhi Leasing P. Ltd., J17, Ramesh Nagar, Sanatan Dharam Mandir Lane, New Delhi. PAN No.AAACE0240R बनाम Vs. ITO, Ward 8(1), New Delhi. अपीलाथ\u0014 Appellant \u0016\u0017यथ\u0014/Respondent Assessee by Shri K. Sampath, Shri Varun Kohli and Shri V. Rajakumar, Adv. Revenue by Shri Dayainder Singh Sidhu, CIT DR सुनवाईक\bतारीख/ Date of hearing: 03.01.2025 उ\u000eोषणाक\bतारीख/Pronouncement on 19.03.2025 आदेश /O R D E R PER C.N. PRASAD, J.M. This appeal is filed by the Assessee against the order dated 25.02.2019 passed u/s. 250 of the Income Tax Act, 1961 (the Act hereafter) by the Ld. Commissioner of Income-tax (Appeals)-34, New Delhi confirming the addition made in the assessment order dated 29.03.2016 passed u/s. 143(3) of the Act by the AO. ITA No.2678/Del/2019 2 2. The Assessee has raised the following Grounds:- “That on the facts and in the circumstances of the case and in law the Ld. CIT (Appeals) erred in confirming the following actions of the Assessing Officer in:- i. invoking provisions of section 56(2)(viib) read with section 2(24)(xvi) of the Income Tax Act, 1961 (‘the Act’) holding that the share premium received by the assessee is in excess of fair market value of the shares and in thereby sustaining an addition of Rs. 12,08,73,280/-; ii. invoking the provisions of section 68 of the Act on account of share application / premium received treating the same as undisclosed and in sustaining an addition of Rs. 14,93,00,000/-; and iii. making an addition of Rs. 37,064/- under section 14A read with Rule 8D of the Income Tax Rules, 1962. All the actions being erroneous, unlawful and untenable it is prayed that the same must be quashed with directions for appropriate relief.” 3. Brief facts are that the Assessee Company, which is engaged in the business of trading in shares, filed its return of income on 30.09.2013 declaring a total income of Rs.3,89,400/-. The assessment was completed on 29.03.2016 by the AO u/s. 143(3) of the Act determining the income at Rs.14,97,26,462/-. The AO ITA No.2678/Del/2019 3 during the course of the assessment proceedings for the year under appeal found that the Assessee had received share capital with premium amounting to Rs. 14.93 crores from two entities viz. M/s King Merchandise (P) Ltd. and M/s BGS Credit (P) Ltd.(Subscribing Companies hereafter). Form No. 2 filed with ROC in this connection revealed that 11,85,000 shares were issued on 31.07.2012 to M/s King Merchandise (P) Ltd. and 3,08,000 shares on 10.10.2012 to M/s BGS Credit (P) Ltd. These shares had a face value of Rs. 10/- each which had been issued with a share premium of Rs.90/- at Rs.100 per share. The AO required the Assessee to file justification for charging the share premium at Rs.90/- per share in the light of the provisions of Sec.56(2)(viib) of the Act. The Assessee was also asked to explain how the fair market value of the shares had been determined. In reply the Assessee submitted that the subscribing Companies viz. M/s King Merchandise (P) Ltd. and M/s BGS Credit (P) Ltd. were group Companies with income-tax PAN numbers and that the capital infusion exercise was done to restructure the shareholding pattern within the group Companies in the wake of the new Companies Act, 2013 coming into force. The Assessee cited Rule 11UA providing for determination of the market value of shares as per DCF method which it substantiated by a valuer’s report by a ITA No.2678/Del/2019 4 Chartered Accountant as prescribed in Rule. Additionally, the Assessee also contended that the provisions of Sec.56(2)(viib) of the Act were not attracted to the Assessee. The AO, however, rejected these arguments of the Assessee and also the calculations leading to the determination of the fair market value of shares, as well as the evidence filed by the Assessee. The AO made an addition of Rs.12,08,73,280/-with the following observations:- “The submission of the assessee and the certificate of the Chartered Accountant dated: 23.02.2016 has been given due consideration but not found acceptable due to following reasons: 1. Valuation of the shares is to be made as per the provisions of Rule 11UA(1) and not as per provisions of Rule 11UA(2)(b) as the shares were issued by the assessee company prior to 29.11.2012, when Rule 11UA was amended by CBDT Notification No. 52/2012 w.e.f. 29.11.2012. 2. Certificate of the Chartered Accountant was obtained on 23.02.2016 whereas the shares were issued prior to 29.11.2012. This makes it clear that the fair market value of the shares was not determined at the time of issuing the equity shares. Certificate of the CA is an afterthought of the assessee to manipulate the FMV of shares on the basis of unsupported data. 3. Without prejudice to the fact that FMV in assessee’s case is to be determined as per NAV method and not under DCF method. It is further held that filing of the above valuation report is an afterthought to somehow claim that FMV of its share comes to more than Rs. 100/- at which it has issued shares. In this regard, filing of this manipulative valuation report is being ITA No.2678/Del/2019 5 highlighted. EBITDA (Earnings Before Interest, Tax & Depreciation) has been assumed at fantastic and unreasonable figures as on 23.02.2016, whereas by that time actual of EBITDA were available. While making valuation under DCF method, first preference is given to historical data for being used as a launching pad But it has not been done in assessee’s case. However, for the sake of record and comparison actual of EBITDA for the above period are given as under on the basis of ITRs of the assessee available with the undersigned: EBITDA (Total Income shown in ITR+Dep.Intt. 2010-11(AY 2011-12) 2011-12 (AY 2012-13) 2012-13 (AY 2013- 14) 2013-14 (AY 2014-15) 2014-15 (AY 2015- 16) 1206136 (Loss of Rs. 4,36,154 and Speculative Income of Rs. 3,78,981) 7,08,000 2,93,343 6,22,716 Therefore, having made fantastic assumptions in the said valuation report the assessee has made a crude manipulative attempt to justify FMV of its shares in the face of the above actuals. In this regard, a comparison is also being drawn in respect of other valuations of shares filed by the assessee earlier in respect of other Group companies and the one filed as above by assessee in support of FMV of its own shares. In case of other Group companies, Beta of 1.5 has been shown as against 0.5 shown in assessee’s case. Beta of any company is indicator of degree of risk in investing in a particular company and it is applied to Return on Equity or Expected Market Rate of Return on Equity in order to work out Cost of Capital. Generally, the Beta should be 1 in respect of a safe company. Therefore, Beta of 0.5 in assessee’s case is unrealistically low to be true and acceptable. In respect of other companies, the Expected Market Rate of Return has been shown as 15%, which is quite acceptable, whereas in assessee’s case the same has been shown as 12%, much below the generally acceptable figure of 15-16%. Therefore, while in other cases Cost of Equity has been worked at 18.46%, in assessee’s own case it has been worked out at a meagre 10%. It has to be kept in ITA No.2678/Del/2019 6 view, that the higher the Cost of Capital would be, the Present Value of DCF (Discounted Cash Flow) would be lower. Therefore, the assessee has manipulated lower Cost of Capital in order to have higher Present Value of its DCF. The Terminal Value is generally 10-15 times of the DCF of the Terminal Year, so as to find out the value of the business till perpetuity. In assessee’s case the Terminal Value has been shown at Rs. 89,45,21,005/- which is 26.49 times of the DCF of Rs. 3,37,55,510/- in Terminal Year (2019-20). It is also pertinent to mention that EBITDA has been assumed at very high unrealistic figure as against actual income. Therefore, the valuation report is a blatant crude attempt to somehow justify, FMV of Rs. 100/-. Therefore, without prejudice to the value of Rs. 19.04 as determined under NAV method in assessee’s case, otherwise also the DCF valuation report filed by assessee is rejected being unreaslistic and afterthought to manipulate the FMV for the purpose of section 56(2)(viib) r/w Rule 11UA. Although, it is a matter of academic interest, but without drawing a proper table for DCF on the basis of actual and also by applying correct Beta and Return on Equity. It can be safely said that FMV of assessee’s shares as per DCF method would be a negative figure i.e. zero. 2.7 In view of the above discussion the FMV of the equity share of the assessee company as on 31.03.2012 comes to Rs. 19.04 as per the provisions of Rule 11UA of the I.T.Rules. The assessee has received Rs. 100/- per equity share as against Rs. 19.04. Thus an amount of Rs. 80.96 per share has been received in excess of FMV by the assessee during the financial year 2012-13. During the year the assessee has issued 1493000 equity shares. Thus an amount of Rs.12,08,73,280/- (1493000x80.96) has been received by the assessee as share premium in excess of FMV of the shares. Considering the above facts, an amount of Rs.12,08,73,280/- is added to the total income of the assessee under the provisions of section 56(2)(viib) r/w section 2(24)(xvi) of the I.T.Act, 1961 and read with Rule 11UA of the I.T. Rules,1962. As the assessee has concealed/furnished inaccurate particulars of its income, provisions of penalty u/s 271(1)(c) of the I.T. Act,1961 are attracted in its case. [Addition : Rs.12,08,73,280/-]” ITA No.2678/Del/2019 7 3.1 Additionally, the AO examined the accounts of the two subscribing companies M/s King Merchandise (P) Ltd. and M/s BGS Credit (P) Ltd. and finding that they had availed funds in the preceding years from five Calcutta based companies opined that it was done to inflate their respective Reserves. After examining the fund flow pattern of the two companies, and following the ratios of the decisions in Sanraj Engineering Co. v. CIT in ITA No. 79/2016 [2016-TIOL-316-HC-DEL-IT], Ridhi Promoters P. Ltd. v. CIT-7 in ITA No. 227/2015 {2015-TIOL-906-HC-DEL-IT] and also of CIT vs. Nova Promoters & Fin lease (P) Ltd. (2012) 342 ITR 169(Del), the AO held that the addition had to be made under Proviso to Section 68 of the Act. Accordingly, the AO proposed an addition of Rs. 14.93 crores with the following observations:- “3.6 Therefore, taking into consideration the failure on the part of the assessee and King Merchandise P. Ltd. to file confirmations and bank statements of the above 5 parties and the adverse facts emerging from the accounts of these 5 parties, I have no hesitation in concluding that the assessee has failed to discharge its onus of establishing the creditworthiness of the creditors and genuineness of the transactions in terms of section 68 of the I.T.Act, 1961 and Proviso I to this section. I am satisfied that the funds received through King Merchandise (P) Ltd and BGS Credit (P) Ltd., which have actually been received from the above 5 companies are assessee’s own unaccounted money, which has been introduced through these companies. As has already been ITA No.2678/Del/2019 8 pointed that not only the assessee but the other Group companies are in a systematic manner introducing their unaccounted for money in the form of securities/share premium year after year without having corresponding matching income and profitability. Therefore, the assessee fails the test of section 68. It is explained that these 5 companies owed these funds to King Merchandise (P) Ltd through earlier years and it was in F.Y. 2012-13 (A.Y. 2013-14) that these were received back, which were either invested in assessee company against shares or given to the extent of Rs. 18 lakhs to BGS Credit (P) Ltd., which also invested the amount of Rs. 18 lakhs in assessee company against shares. The important question is that the amount of Rs. 14.93 crores has been credited in the accounts of the assessee company during the FY 2012-13 relevant to AY 2013- 14. The explanation of the assessee has not been found satisfactory in terms of section 68 and proviso I to this section. Therefore, I proceed to make the addition of Rs. 14,93,00,000/-, being unexplained credits introduced as share capital/share premium in the books of accounts of assessee, in respect of which the assessee has failed to satisfactorily explain the nature and source of such credits. As the assessee has concealed / furnished inaccurate particulars of its income, provisions of penalty u/s 271(1)(c) of the IT Act, 1961 are attracted in its case.” 3.2 With the above observations, the AO ultimately made the addition u/s. 68 of the Act and added a sum of Rs. 14,93,00,000/-, being the higher amount as emerging through the application of the aforesaid two sections with the following observations:- “4. The addition of Rs. 12,08,73,280/- made in para 2 is on account of excess of consideration received for shares over FMV of such shares and addition of Rs. 14,93,00,000/- u/s 68 is with respect of the same amount of Rs. 14,93,00,000/- shown as having been ITA No.2678/Del/2019 9 received as share capital / share premium. Adding both these amounts to the declared income would lead to double addition. Therefore, for removal of doubts, it is clarified that only Rs. 14,93,00,000/- shall be added to the declared income, which would however, represent both the additions made in para 2 as well as in para 3.” 3.3 On appeal by the assessee the Ld. CIT(A) confirmed the addition made by the Assessing Officer under Section 56(2)(viib) and Section 68 of the Act. The addition made u/s. 68 of the Act at Rs.14,93,00,000/-, being the higher amount was confirmed by the Ld. CIT(A). While so doing the Ld. CIT(A) relied upon the decisions of the Apex Court in Konark Structural Engineers Pvt. Ltd. vs. DCIT (2018) 96 taxmann.com 255 (SC), Pavankumar M. Sanghvi vs. ITO (2018) 97 taxmann.com 398 (SC), CIT vs. Durga Prasad More (1971) 82 ITR 540 (SC), Delhi High Court in CIT vs. Nova Promoters & Fin lease (P) Ltd. (2012) 342 ITR 169, CIT vs. Ultra Modern Exports (P) Ltd. (2013) 220 taxman 165, Delhi Tribunal in Pee Aar Securities Ltd. vs. DCIT (2018) taxmann.com 602 and Agro Portfolio (P) Ltd. (2018) 94 Taxman.com 112. 3.4 Before us, Ld. Counsel for the assessee vehemently submitted that the actions of the authorities below are erroneous and untenable both on facts and in law. It is contended that since the Appellant Company and the two subscribing companies belonged to ITA No.2678/Del/2019 10 the same group and the monies subscribed emanated from a common pool, therefore, there was no scope for any manipulation or malpractice of any sort. Ld. Counsel pointed out that the statement on oath of the Director of the Company, Sh. Ashwini Kumar had been recorded by the AO (placed at pages 23-36 of the Paper Book) which remains un-repudiated by the Authorities below. The Ld. Counsel explained that this inter-company share capital adjustments were made to re-structure the shareholding pattern so as to avoid their being clubbed in the wake of the new Companies Act, 2013 coming into force later in this year. The Appellant Company had obtained share capital from the Subscribing Companies viz. M/s King Merchandise (P) Ltd. and M/s BGS Credit (P) Ltd. both of which were registered NBFCs. These two Subscribing Companies were existing income tax assesses and in the case of M/s BGS Credit (P) Ltd. scrutiny assessment was completed U/s 143(3) of the Act. The share subscription was paid out of the reserves and surplus accumulated by these companies over the years, which was substantiated by their audited accounts. The Ld. Counsel emphasized that at no point of time any aberration or malpractice had been alleged by the respective AOs of the Subscribing Companies. ITA No.2678/Del/2019 11 3.5 The Ld. Counsel further submits that the share premium as charged was fully justified in the context of the calculations made as per the applicable Rule 11UA(2) which had come into force in this year. It is the contention of the Ld. Counsel that the AO was wrong in discarding that value on the ground that the said Rule itself had come into force after the date of allotment of shares to the two companies on 29.11.2012 and so the older system of valuation by the Net Asset Value method as per Rule 11UA(1) of the Act was alone applicable. In this context the AO referred to Notification No. 52/2012dated 29.11.2012 of the Board. The Ld. Counsel pointed out that since change in the Rules was procedural in nature and the assessment was pending as on the date of Notification of new Rule it was applicable to the pending assessments. In support of this contention, the Ld. Counsel referred to the Supreme Court’s decision in CWT vs. Shravan Kumar Swarup (1994) 218 ITR 886 (SC),where the Lordships held that the Rules being procedural in nature and not substantive would apply to all pending cases. It is also submitted that the Circular itself provided for the Rule to come into force from 29.11.2012. Therefore it is contended that since the assessment in this case was pending on that date and so even as per the Notification the amended Rule had to be applied. The Ld. ITA No.2678/Del/2019 12 Counsel argued that the ratio of the case laws cited by the AO in CIT v. Alom Extrusions (2009) 185 Taxman 416(SC) and CIT v. Vatika Township (2014) 49 Taxman.com 249 were based on substantive provisions of the Act, and thus, were not applicable to procedural Rules. 3.6 The Ld. Counsel further submitted that the choice under Rule 11UA provided an option to the assessee for adopting the higher valuation based on the alternatives envisaged by the Rule. The Appellant Company had obtained a valuation certificate from a Chartered Accountant (CA) as prescribed in clause (b) of Rule 11UA(2),which indicated a share value of Rs.106/- per share based on the Discounted Cash Flow (DCF) method. Ld. Counsel submits that the AO’s objections to the valuation report were erroneous and untenable in that the alternative multiples or ratios suggested by the AO were neither standard nor were as per any approved norms. The Ld. Counsel pointed out that since the transaction was between group Companies there was no variation in the risk factor which may be involved in the transaction. Thus the beta-multiple, as pointed out by the AO, was inapplicable. It is submitted that as to the expected rate of return, the AO himself had acknowledged that it would be around 12% which was below the acceptable figure of ITA No.2678/Del/2019 13 15-16%. According to the Ld. Counsel the difference was contingent and nominal. In a case where there is recalibration of capital inter se Companies the rate of return is not relevant factor for consideration. It is the contention of the Ld. Counsel that the allegation of the AO that the Assessee had manipulated lower cost of capital in order to have a higher present value was again erroneous, in as much as, such a consideration is inapplicable in the case of closely related companies. The further allegation of the AO that the valuation was a blatant and crude attempt to somehow justify the FMV of Rs.100/-was fallacious. Ld. Counsel submits that in such circumstances the objections as raised by the AO, who as per the Act is not a designated authority for working out the value of shares, was extraneous and superfluous and merited to be ignored. The Ld. Counsel asserted that the valuation report prepared by the CA was binding on the AO, as per sub-clause (b) of Rule 11UA(2). Ld. Counsel submitted that the Authorities below had erred in invoking Sec.56(2)(viib) of the Act, which was intended to prevent laundering of black money through the manipulation of fair market value of shares. It is submitted that in the present case, there was no involvement of any external funds, and the monies ITA No.2678/Del/2019 14 involved came from the reserves of the Subscribing Companies as at close of the preceding year. 4. The Ld. Counsel also strongly objected to the invocation of the proviso to Section 68 of the Act. It was submitted that the right to examine the source of capital invested in a private Company was limited to examining the funds of the Subscribing Companies. The AO did not have the authority to probe further into the source of the secondary Companies providing funds to the Subscribing Companies. The two subscribing Companies had not received any share capital from external sources during the year. Instead, they had called back the loans and deposits from their clients in the preceding year itself, and the payments made to the Appellant Company were out of the opening balance of their Reserves. The Ld. Counsel reiterated that the two Subscribing Companies had duly filed their income tax returns for the subject year and the previous years, which had been accepted by their respective AOs without any comments. Finally, the Ld. Counsel argued that both Section 56(2)(viib) and the proviso to Section 68 of the Act were not applicable to the facts of the case, and the cases cited by the authorities were distinguishable on facts. ITA No.2678/Del/2019 15 4.1 Ld. Counsel further adverting to those cases cited by the Authorities below, pointed out that the decision of the apex Court in Konark Structural Engineers Pvt. Ltd. vs. DCIT (2018) 96 taxmann.com 255(SC) was clearly distinguishable on facts. In that case, the shareholders could not be contacted, who were first-time assesses without sufficient income which could hardly justify the deposits for share capital made by them. In contrast, in the present case, the two Subscribing Companies were existing assesses, with their respective AOs. Furthermore, for M/s BGS Credit (P) Ltd., there was a scrutiny assessment order for the subject year which had not assailed the legitimacy of the present transactions. 4.2 The Ld. Counsel further pointed out that the decision of the Apex Court in Pavan kumar M. Sanghvi vs. ITO (2018) 97 taxmann.com, 398 (SC) was also inapplicable to the facts of the Assessee’s case. In case before Hon’ble Apex Court, the companies providing the financial accommodation had failed to produce the lenders for verification. However, in the case on hand, the identity of the Subscribing Companies was never in doubt, as they had duly confirmed the transactions, being part of the same group. 4.3 The Ld. Counsel submitted that the decision in the case of CIT vs. Ultra Modern Exports (P) Ltd. (2013) 40 taxmann.com 458, ITA No.2678/Del/2019 16 of the Delhi High Court, was also distinguishable on facts. In that case, the notices sent to the confirming parties could not be served, and yet they had provided confirmations, which raised doubts about their genuineness. In contrast, in the present case, the Subscribing Companies were able to provide verifiable confirmations, with no such issue regarding the authenticity of the transactions being ever raised. 4.4 As regards Pee Aar Securities Ltd. vs. DCIT (2018) 96 taxmann.com 602 (Delhi-Trib.) Ld. Counsel submits that the Company in that case had contended that it had no knowledge of its subscribers to its capital. This, however, is not the situation in the present case, where the identity of the Subscribing Companies is clear, and the transactions are transparent which have been duly confirmed by them. 4.5 Regarding Agro Portfolio (P) Ltd. vs. ITO (2018) 94 taxmann.com 112 (Delhi-Trib.) it is submitted that the data concerning the share valuation was not supported by any evidence. It is in the absence of evidence that the rejection of the DCF method occurred in that case. However, in the present case, the report of the valuer is duly supported by relevant data justifying the ITA No.2678/Del/2019 17 value as worked out by the valuer. The objections by the AO in this regard were misconceived and erroneous. 4.6 The Ld. Counsel further submitted that the decisions relied upon by the Ld. CIT(A) are inapplicable to the facts of the present case. The decision in CIT vs. Durga Prasad More (1971) 82 ITR 540 (SC) is distinguishable on facts as it was based on dubious evidence as to the Assessee’s conduct. In the present case, there is no dispute regarding the existence, creditworthiness or genuineness of the transactions of the Subscribing Companies. Also the decisions cited by the Ld. CIT(A) in CIT vs. Nova Promoters & Fin lease (P) Ltd. (2012) 342 ITR 169 (Del) and CIT vs. Navodaya Castle Pvt. Ltd.(2014) 50 taxmann.com 110 (Del) are not applicable as they related to accommodation entry providers. 5. Per contra Ld. Sr. DR strongly supported the orders of the Authorities below. According to the Ld. Sr. DR the method of valuation as applicable at the relevant time for shares was the Net Asset Method as per Rule 11UA(1). The AO had correctly adopted that method. By virtue of the amendments carried out to Sec. 56(2)(viib) of the Act, the extra amount collected by the Appellant in the form of share premium was correctly brought to tax by the AO. Ld. Sr. DR further submitted that as per the amended Sec.68 of ITA No.2678/Del/2019 18 the Act the AO had been properly and correctly scrutinized for the creditworthiness of the Subscribing Companies. It was submitted that the AO had correctly examined the accounts of the entities which had subscribed to the funds of the two Subscribing Companies. Relying upon the decisions cited by the AO and the Ld. CIT(A) the Ld. Sr. DR submitted that the orders of the Authorities below passed in the context of Sec. 56(2)(viib) and the proviso to Sec.68 of the Act, be confirmed. 6. The rival submissions are considered including the written submission and the Paper Books and the other material on record. The Appellant Company had issued share capital on 26.09.2012 at Rs. 100/- per share with a premium of Rs. 90/-. The Appellant Company and the two Subscribing Companies viz. M/s King Merchandise Pvt. Ltd. and M/s BGS Credit Pvt. Ltd. are stated to be group Companies which fact remains undisputed. The shares have been acquired by the two Subscribing Companies out of the opening balance standing in their capital accounts. Those amounts are stated to have been collected and aggregated through the recall of loans and deposits extended by the two Companies in the preceding year. In this way, so far as the Subscribing Companies are concerned, any fresh infusion of capital by them in the current year ITA No.2678/Del/2019 19 so as to pay for the share subscriptions, is ruled out. The two Subscribing Companies are also Assessees with the Department and the fact of their filing their respective income tax returns for the subject year is placed on record. In the case of one of them viz. M/s BGS Credit (P) Ltd. there is a scrutiny assessment order for Assessment Year 2012-13 on record. 6.1 The basic dispute in the case before us is whether the valuation of shares at a premium of Rs. 90/- per share is representative of the fair market value. According to the Appellant the valuation of fair market value of the shares has been made on the basis of the Discounted Cash Flow (DCF) method which had been introduced as an alternative to the valuation based on Net Asset Value method during the assessment year under consideration. However, according to the AO, the same could not have been adopted for valuation purpose because the shares in question had been subscribed and allotted on 29.09.2012 which was before the date of the coming into effect of the DCF method, in the Rules. Ld. Counsel for the Assessee, however, contends that the option to the Assessee to adopt DCF method was available because the assessment in this case was pending on that date which was completed later on 29.03.2016. Ld. Counsel has cited the decision ITA No.2678/Del/2019 20 of the apex Court in CWT vs. Shravan Kumar Swarup (supra) in this behalf. We agree with the submission of the Ld. Counsel for the Assessee and hold that the DCF method could be applied for valuation purposes for the assessments pending at that time. Besides, the Circular stated that Rule would apply from the date of its publication. This assessment was pending on that date. The benefit of the DCF method of valuation was thus even otherwise available to the Assessee as per the Circular. Further Rule 11UA(2)(b) provides for the acceptance of the valuation made by Chartered Accountant as an acceptable mode for determining the fair market value of shares. Assessee has filed a report of CA, Sh. V.P. Tyagi which certifies the fair market value, higher than Rs. 100/- at Rs. 106/- per share. We notice that the attempt of the AO to locate and establish discrepancies or errors in that report of the Chartered Accountant is not based on any acceptable principle or approved standards. The discrepancies as pointed out by the AO are not relevant in the context of capital restructuring in the case of group companies. Valuation by itself is a specialized exercise which can be disputed only on the basis of the findings of another expert as recognized in law for that purpose. The valuation as proposed by the DCF method cannot, therefore, be faulted. There is no over- ITA No.2678/Del/2019 21 valuation of shares over the fair market value. Accordingly the invocation of the provisions of Sec.56(2)(viib) of the Act by the AO being erroneous cannot be upheld. Thus, the addition made by the Assessing Officer U/s 56(2)(viib) is directed to be deleted. 6.2 As to the other objection of the Assessee, to the action of the AO to add the share capital amount as collected by way of premium from the Subscribing Companies by invoking the proviso to Sec.68 of the Act, we are of the view that the proviso provides for the scrutiny and assessment of the funds of the immediate subscribing Company. The proviso does not extend that power to scrutinise the financial capacity of the secondary source which has provided funds to the Subscribing Companies. We also notice that in the case of some of the secondary sources, there are scrutiny assessment orders on record which are placed at pages 62 to 81 of the supplementary paper book. Further the fact that the investments as made by the Subscribing Companies were out of funds which they possessed at the beginning of the year and no fresh infusion of funds by the Subscribing Companies during the assessment year under consideration and the source of funds are all proceeds of investments made in earlier years in the course of business and have been recalled/encashed was corroborated by Shri ITA No.2678/Del/2019 22 Ashwani Kumar Bhatia who is the Director of M/s Kings Merchandise (P) Ltd and M/s BGS Credit (P) Ltd., the Subscribing Companies, in his statement recorded on oath which is placed at pages 23 to 26 of the paper book. Therefore with these facts remaining uncontroverted no addition could have been even otherwise validly made u/s 68 of the Act by the AO. We also noticed from the assessment orders placed on record that the AOs of the respective Subscribing Companies have not raised any objection to their returns of income relating to this year. As noticed earlier, in the case of M/s BGS Credit Pvt. Ltd. there is a scrutiny assessment order on record for the assessment year 2012-13. Considered holistically, in our view, invocation of the proviso to Sec.68 of the Act by the AO was, therefore, erroneous and not justified. The basic ingredients of Sec.68 of the Act of identity, creditworthiness and genuineness of the transactions are, in the circumstances of the case, apparently beyond doubt. There is no undisclosed income which could be charged u/s 68 of the Act. The addition as made by the AO u/s. 68 of the Act is also, therefore, directed to be deleted. Consequently Ground Nos. (i) & (ii) raised by the Assessee are allowed. 7. The third ground of appeal is with reference to a disallowance made u/s. 14A of the Act in a sum of Rs. 37,064/-. The disallowance ITA No.2678/Del/2019 23 was made by applying Rule 8D(b)(iii) of the Act. It is submitted that the dividend arose out of investments made in the mutual fund in Canara Reboco in earlier years and that in the subject year no expenditure had been incurred. The Ld. CIT(A) confirmed the disallowance by observing that the Appellant had made fresh investments during the year and also sold shares out of the opening investments. The Ld. CIT(A) further ruled that it was not possible to do so without incurring any expenditure on those transactions. Ld. Counsel submitted that the action of the Ld. CIT(A) was erroneous, in so far as, the link between the disallowance and the expenditure incurred was not established at both the levels. He pleaded that the disallowance was wrongly made. 7.1 As to the disallowance u/s. 14A of the Act Ld. Sr. DR strongly supported the orders of the AO and Ld. CIT(A). 7.2 Heard rival contentions and perused the order of the authorities below. It is the finding of the Assessing Officer that the Assessee has made fresh investment during the year under consideration. It is also the finding that the assessee sold shares out of the opening investments. Therefore the AO held that the assessee might have incurred expenditure for earning dividend income. These findings were not rebutted with evidences by the ITA No.2678/Del/2019 24 Assessee before us and only asserted that no expenditure was incurred to earn dividend income. After careful perusal of the orders of the authorities below we do not see any good reason to reverse the findings of the authorities below. Hence, the disallowance made by the AO U/s 14A r.w. Rule 8D2(iii) is sustained and Ground No.(iii) is dismissed. 8. In the result appeal of the assessee is partly allowed. Order pronounced in the open court on 19.03.2025 Sd/- Sd/- (NAVEEN CHANDRA) (C.N. PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 19.03.2025 *Kavita Arora, Sr. P.S. Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order Assistant Registrar, ITAT: Delhi Benches-Delhi "