Dayalu Iron & Steel Pvt. Ltd. vs. ITO Ward-1(2), Faridabad: Share Premium Dispute and Tribunal’s Decision (ITA 6173/DEL/2019)

Case Overview

The case of Dayalu Iron & Steel Pvt. Ltd. vs. Income Tax Officer, Ward-1(2), Faridabad, pertains to the assessment year 2015-16. The appellant, Dayalu Iron & Steel Pvt. Ltd., challenged the addition of Rs. 12,00,000 under Section 68 of the Income Tax Act, 1961, which was made by the Assessing Officer (AO) on account of unexplained share premium and share capital. Furthermore, the Commissioner of Income Tax (Appeals) [CIT(A)] enhanced the income of the appellant by an additional Rs. 76,00,000 under Section 56(2)(viib) of the Act. The appellant contested these additions before the Income Tax Appellate Tribunal (ITAT), Delhi Bench.

Background and Proceedings

The appellant, Dayalu Iron & Steel Pvt. Ltd., filed its return of income for the assessment year 2015-16, declaring an income of Rs. 5,95,220. The case was selected for limited scrutiny under the Computer-Assisted Scrutiny Selection (CASS) to verify the large share premium received during the year. The appellant had allotted 1,90,000 equity shares at a premium of Rs. 40 per share to seven entities, raising funds to revive its business activities.

During the assessment proceedings, the appellant provided various documents to substantiate the genuineness of the share capital and premium received. These included the certificate of incorporation, Memorandum of Association, Articles of Association, independent auditor’s report, financial statements, income tax returns, and a valuation report prepared under Rule 11UA(2)(b) of the Income Tax Rules, 1962, using the Discounted Cash Flow (DCF) method.

Assessment and CIT(A) Proceedings

The Assessing Officer (AO) questioned the genuineness of the transactions and the creditworthiness of the investors, ultimately making an addition of Rs. 95,00,000 under Section 68 of the Act. The appellant appealed to the CIT(A), who partly allowed the appeal, reducing the addition to Rs. 12,00,000 but also enhancing the income by Rs. 76,00,000 under Section 56(2)(viib) by rejecting the valuation method adopted by the appellant.

The CIT(A) invoked Section 56(2)(viib), which deals with the taxability of share premium received by a closely held company if the consideration received exceeds the fair market value of the shares. The CIT(A) determined that the premium charged by the appellant was without basis and rejected the DCF valuation method used by the appellant, instead enhancing the income based on his own assessment.

Appeal Before the ITAT

Aggrieved by the order of the CIT(A), the appellant filed an appeal before the ITAT, challenging both the addition under Section 68 and the enhancement under Section 56(2)(viib). The appellant argued that the CIT(A) erred in rejecting the DCF valuation method and enhancing the income without issuing a valid show-cause notice as mandated under the law.

ITAT’s Observations and Decision

The ITAT carefully examined the submissions made by both parties and reviewed the materials on record. The tribunal noted that the appellant had provided substantial documentary evidence to prove the identity, creditworthiness, and genuineness of the transactions, including details of the investors, financial statements, and a valuation report prepared by a qualified chartered accountant.

The ITAT observed that the AO and the CIT(A) had not conducted any further inquiry or brought any material evidence to contradict the documents provided by the appellant. The tribunal emphasized that once the appellant discharges its initial burden of proof, the onus shifts to the Revenue to bring contrary evidence to disprove the appellant’s claims. In this case, the ITAT found that the Revenue had failed to do so.

The ITAT further observed that the CIT(A) had erred in rejecting the DCF valuation method and enhancing the income without following due process. The tribunal noted that the CIT(A) did not provide the appellant with an opportunity to explain the valuation before making the enhancement. The ITAT relied on various judicial precedents, including the Supreme Court’s decision in CIT vs. Lovely Exports Pvt. Ltd., which held that the Revenue cannot treat the share premium as undisclosed income if the identity of the investors is established, and the transactions are genuine.

Conclusion

In conclusion, the ITAT allowed the appellant’s appeal, deleting the addition of Rs. 12,00,000 under Section 68 and setting aside the enhancement of Rs. 76,00,000 under Section 56(2)(viib). The tribunal emphasized the importance of following due process and respecting the documentary evidence provided by taxpayers. The ITAT’s decision highlights the principle that the Revenue must substantiate its claims with concrete evidence before making additions under the Income Tax Act.

This case serves as a reminder to taxpayers and tax authorities alike that the burden of proof is a crucial element in tax proceedings, and that additions should not be made arbitrarily without proper justification. The ITAT’s decision in ITA 6173/DEL/2019 reaffirms the importance of adhering to legal principles and ensuring fairness in tax assessments.

Dayalu Iron & Steel Pvt. Ltd. vs. ITO Ward-1(2), Faridabad: Share Premium Dispute and Tribunal’s Decision (ITA 6173/DEL/2019)