Dayalu Fashions Pvt. Ltd. vs ITO, Faridabad: Dispute Over Unexplained Share Premium and Share Capital for AY 2015-16

Case Summary: Dayalu Fashions Pvt. Ltd. vs ITO, Faridabad

Case Details

• Case Number: ITA 6174/DEL/2019
• Appellant: Dayalu Fashions Pvt. Ltd., Faridabad
• Respondent: ITO, Ward- 1(2), Faridabad
• Assessment Year: 2015-16
• Case Filed On: 2019-07-22
• Order Type: Final Tribunal Order
• Date of Order: 2022-07-12
• Date of Pronouncement: 2022-07-12

Introduction

The case of Dayalu Fashions Pvt. Ltd. vs ITO, Ward-1(2), Faridabad revolves around a significant dispute regarding the addition of share premium and share capital under Section 68 of the Income Tax Act for the assessment year 2015-16. The appellant, Dayalu Fashions Pvt. Ltd., contested the assessment order passed by the Assessing Officer (AO), which was later upheld and further enhanced by the Commissioner of Income Tax (Appeals) [CIT(A)].

Background of the Case

Dayalu Fashions Pvt. Ltd., located in Faridabad, filed its income tax return declaring an income of ₹5,95,220 for the financial year 2014-15. The return was processed under Section 143(1) of the Income Tax Act. However, 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 AO, during the assessment proceedings, questioned the genuineness of the transactions related to the share premium and share capital. Dayalu Fashions Pvt. Ltd. had allotted 1,90,000 equity shares at a face value of ₹10 per share, with a premium of ₹40 per share, to seven entities. The total share premium received amounted to ₹76,00,000.

The appellant provided several documents to substantiate the genuineness of the transaction, including the Certificate of Incorporation, Memorandum of Association (MOA), Articles of Association (AOA), independent auditor’s report, balance sheet, profit and loss account, income tax returns of the shareholders, and a valuation report prepared under Rule 11UA(2)(b) as per the Discounted Cash Flow (DCF) method.

Assessment Order and Appeal to CIT(A)

Despite the appellant’s submissions, the AO was not convinced about the creditworthiness of the investors and the genuineness of the share premium. Consequently, an addition of ₹95,00,000 was made under Section 68 of the Income Tax Act. The AO assessed the total income of the appellant at ₹1,00,95,220, significantly higher than the declared income.

Dayalu Fashions Pvt. Ltd. appealed against the AO’s order before the CIT(A). The CIT(A) partly allowed the appeal but sustained the addition of ₹12,00,000 under Section 68, related to the unexplained share premium and share capital. Moreover, the CIT(A) enhanced the income of the appellant by ₹73,12,500 under Section 56(2)(viib) of the Income Tax Act, rejecting the DCF method adopted by the appellant for valuation of the shares.

Grounds of Appeal before the Tribunal

Aggrieved by the order of the CIT(A), Dayalu Fashions Pvt. Ltd. filed an appeal with the Income Tax Appellate Tribunal (ITAT). The appellant raised several grounds, including:

1. The CIT(A) erred in confirming the addition under Section 68 of the Income Tax Act without considering the documentary evidence provided by the appellant.
2. The CIT(A) erred in enhancing the income by invoking Section 56(2)(viib) of the Income Tax Act, which was not justified as the valuation method adopted by the appellant was as per the prescribed rules.
3. The CIT(A) did not issue a valid show-cause notice before enhancing the income, which violated the principles of natural justice.
4. The CIT(A) relied on incorrect facts and disregarded the evidence furnished by the appellant.

ITAT’s Observations and Ruling

The ITAT reviewed the case in detail, considering the submissions made by both the appellant and the respondent. The Tribunal noted that the appellant had provided comprehensive evidence to prove the identity, creditworthiness, and genuineness of the transactions. The AO and CIT(A) failed to conduct any further inquiries to verify the documents submitted by the appellant, which were publicly available on the Ministry of Corporate Affairs (MCA) website.

The ITAT referred to the Supreme Court’s ruling in the case of CIT vs. Lovely Export Pvt. Ltd., where it was held that if share capital money is received from alleged bogus shareholders, the department is free to proceed against them, but the same cannot be regarded as undisclosed income of the company. The ITAT found that the CIT(A) had erroneously rejected the valuation report under Rule 11UA(2)(b), which was prepared by a qualified Chartered Accountant as per the prescribed method.

Further, the ITAT emphasized that the CIT(A) had enhanced the income without providing an opportunity to the appellant to present its case, which is a violation of Section 251(1) of the Income Tax Act.

Conclusion and Final Judgment

The ITAT allowed the appeal of Dayalu Fashions Pvt. Ltd. and deleted the addition of ₹12,00,000 made under Section 68 of the Income Tax Act. The Tribunal also set aside the order of the CIT(A) that enhanced the appellant’s income by ₹73,12,500 under Section 56(2)(viib) of the Income Tax Act.

This case underscores the importance of adhering to the principles of natural justice and the need for tax authorities to conduct thorough inquiries before making significant additions to an assessee’s income. The judgment also reinforces that valuation methods prescribed under the Income Tax Rules must be respected, and arbitrary rejections of such valuations are not permissible.

The ruling serves as a crucial precedent for similar cases involving share premium and capital, particularly in the context of Section 68 and Section 56(2)(viib) of the Income Tax Act.

In summary, the Tribunal’s decision in favor of Dayalu Fashions Pvt. Ltd. highlights the importance of evidence-based assessment and the necessity for tax authorities to follow due process before arriving at conclusions that significantly impact taxpayers.

Dayalu Fashions Pvt. Ltd. vs ITO, Faridabad: Dispute Over Unexplained Share Premium and Share Capital for AY 2015-16