Movefast Automobiles Pvt Ltd vs ITO – Dispute Over Share Premium and Unexplained Cash Credits Under Section 68 and 56(2)(viib) – ITA No. 6183/DEL/2019

Case Summary: Movefast Automobiles Pvt Ltd vs ITO, Ward-1(5), Faridabad

Case Number: ITA 6183/DEL/2019

Appellant: Movefast Automobiles Pvt Ltd, Faridabad

Respondent: ITO, Ward-1(5), Faridabad

Assessment Year: 2015-16

Date of Filing: 22nd July 2019

Order Type: Final Tribunal Order

Date of Pronouncement: 18th August 2023

This case concerns Movefast Automobiles Pvt Ltd and the issues raised by the Income Tax Department regarding the addition of share capital and share premium under Section 68 of the Income Tax Act, 1961, and the valuation of shares under Section 56(2)(viib) for the assessment year 2015-16. The dispute arose primarily due to the large share premium received by the appellant, which the Assessing Officer (AO) deemed as unexplained cash credits.

Background of the Case

Movefast Automobiles Pvt Ltd is a private company that, during the financial year 2014-15, received share capital and premium from several investors amounting to Rs. 98,25,000/-. The AO observed that the appellant company had not carried out any significant business activities during the relevant assessment year. Despite this, the company had received substantial share premiums, which raised suspicion about the genuineness of the transactions and the creditworthiness of the investors.

The AO issued notices under Section 133(6) to the investors to verify the transactions. Although the investors responded and provided the necessary documentation, including PAN details, bank statements, and financial records, the AO concluded that these companies were shell entities with no real business activity. Consequently, the AO added the entire amount of share capital and premium to the income of the appellant under Section 68, treating it as unexplained cash credits. Additionally, the AO considered making an alternative addition under Section 56(2)(viib) for the share premium received, but refrained from doing so, considering that the entire amount had already been added under Section 68.

CIT(A) Ruling

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] partially upheld the AO’s decision. The CIT(A) acknowledged that the appellant had received Rs. 55 lakhs in previous assessment years and granted relief for this amount, as it was outside the purview of the current assessment year. However, the CIT(A) sustained the addition of Rs. 43,25,000/- under Section 68, agreeing with the AO that the investor companies were shell entities. The CIT(A) further enhanced the income by an additional Rs. 17 lakhs, which was also received from the same investors during the year.

Tribunal Findings

The case was then brought before the Income Tax Appellate Tribunal (ITAT), where the appellant’s counsel argued that the share premium was justified based on a Discounted Cash Flow (DCF) valuation method, as per Rule 11UA of the Income Tax Rules, 1962. The counsel also contended that the identity and creditworthiness of the investors and the genuineness of the transactions had been adequately established through the documentation provided.

The Tribunal carefully reviewed the evidence, including the bank statements and financial records of the investor companies. It was noted that the investor companies had a significant net worth and had reflected their investments in the appellant’s company in their financial statements. The Tribunal emphasized that the assessee had discharged its onus under Section 68 by proving the identity, creditworthiness, and genuineness of the transactions. The Tribunal also addressed the CIT(A)’s rejection of the DCF method, noting that if the authorities found the DCF method flawed, they were obligated to rework the valuation themselves, which they failed to do.

Final Decision

The ITAT ultimately ruled in favor of Movefast Automobiles Pvt Ltd. The Tribunal directed the AO to delete the addition of Rs. 43,25,000/- under Section 68, as well as the enhanced addition of Rs. 17 lakhs made by the CIT(A). The Tribunal also concluded that the addition under Section 56(2)(viib) was not justified, as the share premium charged by the appellant was not excessive when compared to the Net Asset Value (NAV) method.

Conclusion: The Tribunal’s ruling in this case highlights the importance of following prescribed valuation methods under Rule 11UA and underscores the necessity for tax authorities to substantiate their claims when rejecting a taxpayer’s valuation method. This case sets a precedent for how the valuation of shares and the treatment of share premium should be handled in tax assessments.

Movefast Automobiles Pvt Ltd vs ITO – Dispute Over Share Premium and Unexplained Cash Credits Under Section 68 and 56(2)(viib) – ITA No. 6183/DEL/2019