Delhi Bench of Income Tax Appellate Tribunal (ITAT) upheld the rejection of valuation report submitted by the assessee on the grounds that it violated the rule 11UA of Income Tax Rules.
The appeal was preferred against the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] on upholding the addition made by the Assessing Officer (AO) amounting to Rs. 1,49,60,000 under section 56(2)(viib) of the Income Tax Act, 1961.
According to the facts of the case presented before the Bench by the counsel of the assessee, the appellant company was founded in 1995 and has not conducted any business since that time. Instead, it solely provides accommodation entries.
Further, during the year, in spite of zero business activities, the assessee company issued 8 lakhs shares, each of face value of Rs. 10/- to two companies, namely, M/s Elecon Securities Pvt Ltd and M/s Ordinary Financial Services Pvt Ltd.
The authority noted that the issue of 8 lakhs shares was in consideration of 60,000 shares received by the assessee from the two companies to whom shares were allotted. These two companies have allotted 60,000 shares for Rs. 6 crores with a staggering Rs. 1,000/- per share.
Since the assessee has received shares of value Rs. 6 crores each from M/s Elecon Securities Pvt Ltd and M/s Ordinary Financial Services Pvt Ltd., it valued its own shares at Rs. 75/- each, which comprises of face value of Rs. 10/- and premium of Rs. 65/-
The AO rejected the assessee’s report and response because he was of the firm opinion that the basis for the valuation—the balance sheet as of March 31, 2014—had not been adopted by the company’s annual general meeting and was therefore not in accordance with Rule 11UA of the Income Tax Rules.
Further proceeded to value the shares in accordance with the Rules, determining the price at 65.6447 per share and adding the difference, or Rs. 75 less Rs. 65/-, to arrive at Rs 1,49,60,000.
The bench observed that for a company, it is impossible to get its accounts audited on 31st March and present the same for approval in the AGM on March 31st .
The counsel of the assessee submitted the certificate of the auditors saying that the shares were issued at a fair market value according to the Rule 11UA of Income Tax Rules.
The bench of Kul Bharat (Judicial Member) and N.k. Billaiya (Accountant Member) found that there is no fault with the AO that the assessee violated the Rule 11UA and shall be entitled to the addition made.
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