Brash Steels Pvt Ltd vs ITO – Dispute Over Share Premium Addition Under Section 68 and 56(2)(viib) – ITA No. 6181/DEL/2019

Case Summary: Brash Steels Pvt Ltd vs ITO, Ward-1(2), Faridabad

Case Number: ITA 6181/DEL/2019

Appellant: Brash Steels Pvt Ltd, Faridabad

Respondent: ITO, Ward-1(2), Faridabad

Assessment Year: 2015-16

Date of Filing: 22nd July 2019

Order Type: Final Tribunal Order

Date of Pronouncement: 17th August 2021

This case revolves around the assessment of the appellant, Brash Steels Pvt Ltd, regarding the share premium received during the assessment year 2015-16. The key issue involved is the addition made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961, on account of unexplained share capital and share premium and further enhancement of income under Section 56(2)(viib) of the Act by the Commissioner of Income Tax (Appeals) [CIT(A)].

Background of the Case

Brash Steels Pvt Ltd filed its return of income on 10th September 2015, declaring a total income of Rs. 1,35,560/-. During the assessment proceedings, the AO observed that the company had received a share premium of Rs. 40,07,500/- on 57,250 shares issued at a premium of Rs. 70/- per share on 31st March 2015. The shares were allotted to five entities, including individuals and companies. The AO suspected the transactions to be non-genuine, based on the lack of substantive business activities of the investing companies and the absence of credible financial records. Therefore, the AO added the entire share capital and premium amounting to Rs. 45,80,000/- to the income of the assessee under Section 68 of the Income Tax Act, citing the inability of the assessee to substantiate the creditworthiness and genuineness of the transactions.

CIT(A) Ruling

The CIT(A) partially allowed the appeal by deleting the addition of Rs. 22,90,000/-, which was received in the previous assessment years, while confirming the balance addition of Rs. 22,90,000/-. However, the CIT(A) also invoked Section 56(2)(viib) of the Act and enhanced the income by Rs. 40,07,500/-, treating the share premium received as income from other sources. This enhancement was based on the belief that the share premium charged was not justified due to the lack of business worth of the appellant, as reflected in the financials.

Tribunal Findings

The case was brought before the Income Tax Appellate Tribunal (ITAT), where the appellant’s counsel argued that the valuation of the shares was in accordance with Rule 11UA of the Income Tax Rules, 1962, which should have been accepted by the AO and CIT(A). The appellant submitted that the premium was justified based on a valuation report provided by a Chartered Accountant.

The Tribunal observed that the AO and CIT(A) had rejected the valuation report without properly applying the statutory provisions. The Tribunal noted that the authorities below had failed to compute the fair market value of the shares as per the prescribed method under Rule 11UA, and their actions were based on assumptions and presumptions, which were not sustainable in law.

The Tribunal further analyzed the addition of Rs. 22,90,000/- under Section 68 and observed that while the identity of the shareholders was established, the genuineness and creditworthiness of two shareholders—Mr. Lekh Nath Pandey and Best Buildmart Pvt. Ltd.—were not satisfactorily explained. The Tribunal directed the AO to re-examine these specific cases and provide the assessee with another opportunity to substantiate their claims.

Final Decision

The ITAT ultimately allowed the appeal in part. The addition under Section 56(2)(viib) was deleted, and the case was remanded back to the AO for reassessment concerning the addition under Section 68. The Tribunal emphasized the need for the AO to strictly adhere to the statutory provisions and give the assessee due opportunity to present their case.

This ruling underscores the importance of following the prescribed procedures for share valuation and the rigorous standards required to make additions under Section 68 of the Income Tax Act.

Conclusion: The ITAT’s decision in the case of Brash Steels Pvt Ltd vs ITO highlights the criticality of adhering to statutory valuation methods and ensuring fair play in assessing the genuineness of share transactions. The Tribunal’s direction for reassessment of certain aspects of the case also reflects the judiciary’s commitment to ensuring justice through meticulous scrutiny.

Brash Steels Pvt Ltd vs ITO – Dispute Over Share Premium Addition Under Section 68 and 56(2)(viib) – ITA No. 6181/DEL/2019