AI-Yaseen Trading Co.P.Ltd, Meerut V. ITO, Ward-1(1), Meerut

ITA 6244/DEL/2017

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The case involves M/s AI-Yaseen Trading Co. P. Ltd., which appealed against the order of the Income Tax Officer (ITO) and the Commissioner of Income Tax (Appeals) (CIT(A)), which had added Rs.48,45,000 to the company's income under section 56(2)(viib) of the Income Tax Act. This addition was based on the ITO's valuation of shares issued at a premium, which was significantly lower than the fair market value determined by the company using the DCF method. The Tribunal examined the valuation methods used and found that the DCF method was appropriate and correctly applied, leading to the decision to allow the appeal and remove the addition to the company's income.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131001 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 11-04-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 08-10-2017
• Other Referred Cases: Cinestaan Entertainment (P.) Ltd. vs. ITO
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MONIT KUMAR
• Keywords: Fair market value; Valuation report; Commercial expediency

Judgement Text

Page 1 of 9 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘A’: NEW DELHI BEFORE, SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER ITA No.6244/Del/2017 (ASSESSMENT YEAR 2013-14) M/s AI- Yaseen Trading Co. Pvt. Ltd., 68/7, Alavee Nagar, Meerut. PAN-AAICA 2752N Vs. Income Tax Officer, Ward-1(1), Meerut (Appellant) (Respondent) Appellant by Mr. Monit Kumar, Advocate Respondent by Mr. Kanv Bali, Sr. DR Date of Hearing 12/04/2023 Date of Pronouncement 28/06/2023 ORDER PER M. BALAGANESH AM: This appeal of the assessee arises out of the order of the Learned Commissioner of Income Tax (Appeals), Meerut, [hereinafter referred to as ‘Ld. CIT(A)’] in Appeal No.51/2016-17 dated 18/09/2017 against the order passed by Income Tax Officer, Ward-1(1), Meerut (hereinafter referred to as the ‘Ld. AO’) u/s ITA No.6244/Del/2017 M/s AI-Yaseen Trading Co. P. Ltd. vs. ITO Page 2 of 9 143(3) of the Income Tax Act (hereinafter referred to as ‘the Act’) on 29/03/2016 for the Assessment Year 2013-14. 2. The assessee has raised sole ground of appeal: “1. In the facts and circumstances of the case the Ld. A.O. has erred in law in making addition of Rs.48,45,000/- U/s 56(2)(viib) of the Income Tax Act, 1961 ignoring the fact that the Share Application money pending allotment was received in F.Y.2010-11, which ought to be deleted and CIT(A) also in error in confirming the same. 2. That the assessee has right to add, modify or delete any ground during the appeal proceeding.” 3. The only issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in confirming the addition made u/s 56(2)(viib) of the Act in the sum of Rs.48,45,000/- in respect of share capital and premium received by the assessee. 4. We have heard the rival submissions and perused the material available on record. The assessee company is engaged in the business of wholesale trading of live buffalo. During the year under consideration, the assessee company issued 5000 shares at premium Rs.980/- per share to certain investors. Factually, the share application money has been received from the following five share holders in Financial Year: 2010-11: ITA No.6244/Del/2017 M/s AI-Yaseen Trading Co. P. Ltd. vs. ITO Page 3 of 9 (i) Mohd. Anees Rs.9,90,000 (ii) Haji Raheesu Rs.9,90,000 (iii) Mrs. Sama Rs.9,90,000 (iv) Mrs. Rahisa Rs.9,90,000 (v) Mrs. Shanoo Rs.9,90,000 All these people have deposited money in their bank account out of their available capital balances in F.Y.2010-11. The assessee had furnished the copy of income tax return filed by these shareholders together with their copy of capital account for the F.Ys. 2010-11 to 2012-13. Against these monies, the shares were allotted to these shareholders during the F.Y.2012-13 relevant to A.Y.2013-14 comprising of 5000 shares of face value of 10 each at a share premium of Rs 980 per share. The Ld. AO directed the assessee to furnish the following information as under: (i) Details & complete identity of the persons who shares have been allotted on premium. (ii) Furnish share application form, proof of allotment of shares and copy of resolution passed in AGM. (iii) Explain motive/justification on issue of share at high premium. ITA No.6244/Del/2017 M/s AI-Yaseen Trading Co. P. Ltd. vs. ITO Page 4 of 9 (iv) Furnish calculation of share premium. (v) Please explain as to why consideration received in excess of fair market value for issue of shares in view of provision u/s 56(2)(vii)(b) of I.T. Act. 1961 be not treated income from other sources. 5. In response to the said query, the assessee filed reply vide submission dated 15/02/2016 with the stating that the Fair Market Value (“FMV”) of the share at the time of issue of share was Rs.1136.92 per share and that the company had issued the shares at a price less than fair market value. In support of these, the assessee filed valuation report dated 28/02/2013 prepared by a Chartered Accountant, Sh. A.K. Agrawal, who had valued the shares using Discounted Cash Flow (DCF) valuation method. The Ld. A.O. observed that Sh. A.K. Agarwal is the Auditor of the assessee company and hence his valuation report cannot be accepted as an independent valuation report. Later, the assessee filed another valuation report from an independent Chartered Accountant, Sh. Deepak Kumar Agarwal, who had valued the shares at Rs.992 per shares using DCF valuation method. The Ld. A.O. observed that the valuation report submitted by the assessee ITA No.6244/Del/2017 M/s AI-Yaseen Trading Co. P. Ltd. vs. ITO Page 5 of 9 was based on various assumptions, assumption of projected revenues and that the actual figures did not match with the projections made in the valuation report. The AO observed that the valuation report done by the assessee is not in accordance with Rules 11U & 11UA of Income Tax Rules. The Ld. A.O. valued the share of assessee company by using Net Asset Value (“NAV”) method and arrived at Rs.21 per share to be the Fair Market Value. Hence, as against the total amounts received in the sum of Rs.49,50,000/- from five share holders (9,90,000 X 5), a sum of Rs.1,05,000/- was accepted as the fair market value (5,000 X 21 per share) and remaining sum of Rs.48,45,000/- was treated as amount received in excess of fair market value and consequentially brought to tax as income from other sources in terms of section 56(2)(viib) of the Act. 6. This action of the Ld. AO is upheld by the Ld. CIT(A). 7. It is not in dispute that the assessee had furnished the name of the share holders, address of the share holders, amount received from the share holders together with their PAN. The assessee has also furnished the bank accounts of the share holders, copy of income tax returns and copy of capital account of share holders ITA No.6244/Del/2017 M/s AI-Yaseen Trading Co. P. Ltd. vs. ITO Page 6 of 9 duly explaining the sources for making investment in share capital and share premium with the assessee company. The assessee has furnished during the course of assessment proceedings, valuation report from independent Chartered Accountant, Mr. Deepak Agarwal vide valuation report dated 22/02/2013, who had valued the shares using DCF method at Rs.992 per share to be the fair market value. Under the DCF method, obviously the valuation report if carried out by any person, had to value the shares by relying on certain assumptions and the projections about the performance of the company which would be only based on the representations made by the management of the such assessee company. The projections considered in the valuation report not matching with the actually performance in our considered view, is an irrelevant consideration. Usage of DCF method for the purpose of valuation of shares is an approved method in Rule 11U and 11UA of the Income Tax Rules. On perusal of the said Rules, an option is given to the assessee to choose either of the methods prescribed therein. Hence, the rejection of valuation report submitted by the assessee using DCF method by the lower authorities is hereby dismissed. As per DCF method of valuation, the fair market value of ITA No.6244/Del/2017 M/s AI-Yaseen Trading Co. P. Ltd. vs. ITO Page 7 of 9 the shares have been arrived at Rs.1136.92 and Rs.992 per share by Chartered Accountant namely Sh. A.K. Agarwal and Sh. Deepak Kumar Agarawal respectively. The assessee had ultimately issued shares to the aforesaid five share holders at a price below the fair market value of shares determined by the valuers in the valuation report. Obviously, the fair market value determined in the valuation report by the valuers represent the maximum value beyond which the shares could not be issued by any company. Hence, we do not find any justification in the action of the lower authorities in dismissing the DCF method of valuation and substitute it with any of the method of valuation and making addition u/s 56(2)(viib) of the Act. 8. Further, we find that the issue in hand is squarely covered by the decision of this Tribunal in the case of Cinestaan Entertainment (P.) Ltd. vs. ITO reported in 106 taxmann.com 300 (Delhi-Trib.) wherein it was held as per section 56(2)(viib) of the Act read with Rule 11U and 11UA of the Rules, the assessee has an option to do valuation of shares and determine fair market value either using DCF method or NAV method and Assessing Officer cannot examine or substitute his own value in place of value determined. ITA No.6244/Del/2017 M/s AI-Yaseen Trading Co. P. Ltd. vs. ITO Page 8 of 9 Further, it was also held that the Revenue cannot sit in armchair of businessman to decide what is profitable and how business should be carried out and that commercial expediency has to be seen from point of view of businessman and not from the point of view of the revenue. It was further held that when shares were issued at premium based on valuation report from prescribed expert using DCF method of valuation, the said sum cannot be disregarded merely because the projection of revenues thereon did not match with actual revenues of subsequent years. In view of the aforesaid observations and respectfully following the judicial precedent relied upon herein above, we direct the Ld. AO to delete the addition made in the sum of Rs.48,45,000/- u/s 56(2)(viib) of the Act. Accordingly, the ground raised by the assessee is allowed. 9. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 28 th June, 2023. Sd/- Sd/- (KUL BHARAT) (M. BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 28/06/2023 Pk/sps Copy forwarded to: 1. Appellant 2. Respondent 3. CIT ITA No.6244/Del/2017 M/s AI-Yaseen Trading Co. P. Ltd. vs. ITO Page 9 of 9 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI