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Doubts in valuation of share premium upon conversion of shares are per se insufficient grounds to frame additions u/s 68: ITAT

2019-TIOL-1640-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘D’ MUMBAI

ITA No.1706/Mum/2017
Assessment Year: 2011-12

INCOME TAX OFFICER-9(3)(1)
419, 4TH FLOOR, AAYAKAR BHAVAN
MUMBAI-400020

Vs

M/s DESTIMONEY INDIA SERVICES PVT LTD
5 SAHJEEVAN CHS, N M JOSHI MARG
NEXT TO YAMAHA SHOWROOM
ELPHINSTONE ROAD (W)
MUMBAI-400013
PAN NO:AACCD1326K

Shamim Yahya, AM & Amarjit Singh, JM

Date of Hearing: May 16, 2019
Date of Decision: July 31, 2019

Appellant Rep by: Shri Sanjay Singhm, DR
Respondent Rep by: 
Shri Vinay Deshman/Pawan Sharma

Income Tax – Sections 68 & 271(1)(c).

Keywords – Conversion of preference shares – Unexplained cash credit – Penalty proceedings.

The assessee company engaged in the business of providing advisory services, filed the return of income for relevant AY. The assessee company converted 1,43,33,281/- Preference Shares of Rs.10 each held by NSR Alpha Mauritius LLC into 57,33,313/- equity-shares of Rs.10 each at a premium of Rs.15 per share on 27.05.2010. The conversion was resulted into the gain in sum of Rs.8,59,99,680/- which was not offered to tax by assessee but had directly credited to the General Reserves under the head Share Premium. It was seen that the investment by NSR Alpha was claimed as in the nature of FDI under automatic route and if that was the case, then as per the FDI norms, the rate of conversion of such preferential shares ought to have been fixed at the time of issue of these preference shares itself. However, no such conversion price was fixed at the time of such issue and even at the time of the purported conversion, no share valuation had been carried out to fix the conversion price. The very purpose of conversion was to transfer the shares to the other group company M/s.Destimoney Enterprises Limited [DEL, India) so as to make the assessee company as subsidiary of DEL, India. It was further seen that the shares were initially issued as Cumulative Non- Convertible Redeemable Preference Shares at par and then converted into Cumulative Convertible Preference Shares which in turn were converted into Equity Shares at a premium. The arrears of fixed dividend amounting to Rs.2,20,95,117/- which was in arrears also become no longer payable since the shares had been converted already. The assessee company had, by way of such conversion, gained a sum of Rs. 8,59,99,680/- as “Premium” in addition to the arrear dividend of Rs.2,20,95,117/-. The total gain in the hands of the assessee company was Rs.10,80,94,797/-. The AO held that the total gain of Rs.10,80,94,797/- in the hands of the assessee company claimed as on account of conversion of preference shares but was not substantiated as to its true nature was brought to tax as the unexplained cash credit in the hands of the assessee company u/s 68 and assessed accordingly. Penalty proceedings u/s 271(1)(c) were initiated separately for furnishing inaccurate particulars of income and concealment on the issue. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who allowed the claim of the assessee and deleted the addition in sum of Rs.10,80,94,797/- u/s 68 of the Act, therefore, the revenue filed appeal before Tribunal.

On appeal, Tribunal held that,

Whether upon conversion of shares, mere doubt on valuation of charging of shares premium can be the basis for making addition u/s 68 – NO : ITAT

++ representative of the revenue has argued that the AO has rightly raised the addition in sum of Rs.10,10,80,94,797/- but the CIT(A) has wrongly allowed the claim of the assessee, therefore, in the said circumstances, the finding of the CIT(A) is not justifiable and is liable to be set aside. However, on the other hand, the Representative of the assessee has strongly relied upon the order passed by the CIT(A) in question. It is apparent on record that the assessee has credited the amount of preference shares in the earlier year which has now converted into equity-shares capital. The AO nowhere doubt over the identity and creditworthiness of the investor and genuineness of the transaction. The only doubt is that the value of share premium charged is not truly reflecting the intrinsic value of the equity shares of the company. Valuation of charging of shares premium could not be basis for making addition u/s 68 of the Act. The assessee nowhere credited the cash/sum in the books of accounts which is the essential condition to apply the provisions of u/s 68 of the Act. The assessee submits the certificate obtained from the CA in which the valuation of the share has been duly assessed. The assessee also produced the letter dated 14.06.2010 produced before the RBI and also submitted the certified copy of resolution of Extra Ordinary Meeting of Member’s for obtaining consent for conversion which has been marked as annexure-C. The assessee has also produced the concerned letter of preference shareholder for conversion marked as annexure-D. The Representative of the assessee has relied upon the decision of ITAT in case of DCIT Vs. Piramal Realty Pvt. Ltd. Taking into account of all the facts and circumstances, it was held that the CIT(A) has decided the matter of judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, this issue is being decided in favour of the assessee against the revenue.

Revenue’s appeal dismissed

ORDER

Per: Amarjit Singh:

The revenue has filed the present appeal against the order dated 22.12.2016 passed by the Commissioner of Income Tax (Appeals)-12, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2011-12.

2. The revenue has raised the following grounds: –

“1. Whether on the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition made the AO u/s 68 of the Act whereas the AO had rightly concluded that the assessee did not submit proper explanation about the nature and source of sums credited in its books and was liable for addition u/s 68 of the I.T. Act.”

3. The brief facts of the case are that the assessee company was a private Limited company incorporated on 18.03.2005 with the main object to carry on the business of providing advisory services. The assessee filed the return of income on 27.09.2011 relevant to the A.Y.2011-12 showing the total income at loss in sum of Rs.5,79,50,090/-. The return of income was revised on 31.03.2013 u/s139(5) showing the taxable income as nil after claiming the set-off brought forward losses. The return was processed u/s 143(1) of the I.T. Act, 1961. Thereafter, the case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act were issued and served upon the assessee. The assessee company converted 1,43,33,281/- Preference Shares of Rs.10 each held by NSR Alpha Mauritius LLC into 57,33,313/- equity-shares of Rs.10 each at a premium of Rs.15 per share on 27.05.2010. The conversion was resulted into the gain in sum of Rs.8,59,99,680/- which was not offered to tax by assessee but has directly credited to the General Reserves under the head Share Premium. It is seen that the investment by NSR Alpha was claimed as in the nature of FDI under automatic route and if that is the case, then as per the FDI norms, the rate of conversion of such preferential shares ought to have been fixed at the time of issue of these preference shares itself. However, no such conversion price was fixed at the time of such issue and even at the time of the purported conversion, no share valuation has been carried out to fix the conversion price. The very purpose of conversion was to transfer the shares to the other group company M/s.Destimoney Enterprises Limited [DEL, India) so as to make the assessee company as subsidiary of DEL, India. It is further seen that the shares were initially issued as Cumulative Non- Convertible Redeemable Preference Shares at par and then converted into Cumulative Convertible Preference Shares which in turn were converted into Equity Shares at a premium. The arrears of fixed dividend amounting to Rs.2,20,95,117/- which was in arrears also become no longer payable since the shares have been converted already. Effectively speaking, the assessee company has, by way of such conversion, gained a sum of Rs.8,59,99,680/- as “Premium” in addition to the arrear dividend of Rs.2,20,95,117/-. The total gain in the hands of the assessee company is Rs.10,80,94,797/-.

4. As pointed out earlier, there is neither any underlying assets nor intrinsic value to the premium so fixed except the fact that the converted shares were transferred as “Gift” on the same day to DEL India so as to make the assessee company a 100% subsidiary of the latter. The issue of genuineness or otherwise of the impugned ‘gift’ was an issue before consideration in the case of DEL India as well and a finding of fact has been given that the impugned transfer is not a genuine transaction. The assessee company has accumulated losses to the extent of Rs.42 crore as at the beginning of the year which was more than the paid up capital of the company. If the investment from N513 in the form of share premium was ignored, then the valuation of FMV of the shares would also be negative. The share premium so claimed is therefore not truly reflective of the intrinsic value of the equity shares of the company, the ostensible purposes for which the said FDI was brought in at such a huge premium. The real worth of the equity share are as found from the above in the negative and hence the issue price is not justified in this case.

5. It is settled legal position that the onus is on the assessee to prove that the stated purposes for which the huge sums were introduced in its books are real and that the nature of such receipts is also truly stated which has not been so discharged in this case. The nature of receipts is best known to the parties concerned and their failure to establish the true nature thereof, the said receipt is ought to be held as unexplained in the hands of the assessee company only being the recipient thereof. In view of the above, the total gain of Rs.10,80,94,797/- in the hands of the assessee company claimed as on account of conversion of preference shares but was not substantiated as to its true nature is hereby brought to tax as the unexplained cash credit in the hands of the assessee company u/s.68 and assessed accordingly. Penalty proceedings u/s.271(1)(c) are initiated separately for furnishing inaccurate particulars of income and concealment on the issue. After certain disallowances the income of the assessee was assessed in sum of Rs.18,16,28,888/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who allowed the claim of the assessee and deleted the addition in sum of Rs.10,80,94,797/- u/s 68 of the Act, therefore, the revenue has filed the present appeal before us.

6. We have heard the arguments advanced by the Ld. Representative of the parties and perused the record. The Ld. Representative of the revenue has argued that the AO has rightly raised the addition in sum of Rs.10,10,80,94,797/- but the CIT(A) has wrongly allowed the claim of the assessee, therefore, in the said circumstances, the finding of the CIT(A) is not justifiable and is liable to be set aside. However, on the other hand, the Ld. Representative of the assessee has strongly relied upon the order passed by the CIT(A) in question. Before going further, we deem it necessary to advert the finding of the CIT(A) on record.:-

“10 I have carefully perused the assessment order and the submission of the appellant. It is seen that the AO is aware of the fact that the appellant has converted preferences shares into equity shares. The amount Of preference shares is already credited in earlier years which is now converted into equity shares capital. The AO has 110 doubt over the identity & creditworthiness of the investor, genuineness of the transaction. The only doubt is that the value of share premium charged is not truly reflecting the intrinsic value of the equity shares of the company, i.e, issue price is not justified but only the valuation of charging of share premium could not be a basis for making addition u/s 68 of the Act. In view of section 68 of the Act, AO can added the any sum found credited in the books of appellant if the appellant does not have explanation about the nature and source of it. But, in the instant case, the appellant has converted its preference shares into equity shares and the source of fund which is NSR AIph’ whose identity, creditworthiness is not doubted. Therefore, it is held the transaction is genuine. I find force in the submission of the appellant. As all the requirements of section 68 has been fulfilled, i.e, identity & creditworthiness of the investor and genuineness of the transaction, hence, no addition can be called for. A.O is directed to delete the addition. The Ground of Appeal No 3 is allowed.”

7. On appraisal of the above mentioned order, It is apparent on record that the assessee has credited the amount of preference shares in the earlier year which has now converted into equity-shares capital. The AO nowhere doubt over the identity and creditworthiness of the investor and genuineness of the transaction. The only doubt is that the value of share premium charged is not truly reflecting the intrinsic value of the equity shares of the company. Valuation of charging of shares premium could not be basis for making addition u/s 68 of the Act. The assessee nowhere credited the cash/sum in the books of accounts which is the essential condition to apply the provisions of u/s 68 of the Act. The assessee submits the certificate obtained from the CA in which the valuation of the share has been duly assessed. The assessee also produced the letter dated 14.06.2010 produced before the RBI and also submitted the certified copy of resolution of Extra Ordinary Meeting of Member’s for obtaining consent for conversion which has been marked as annexure-C. The assessee has also produced the concerned letter of preference shareholder for conversion marked as annexure-D. The Ld. Representative of the assessee has relied upon the decision of Hon’ble ITAT in case of DCIT Vs. Piramal Realty Pvt. Ltd. (ITA. No.2317/M/2017) The relevant finding is hereby reproduced as under.:-

“5. We have heard rival contentions and gone through the facts and circumstances of the case. The facts of the case are that the assessee company issued 59,850 1% NCCPs having face value of 10/- at a premium of Rs.99,990/- to PCPL. These shares were issued in two tranches of 20,000 and 39,850/- shares respectively. In respect of first tranche of issue of shares was applied by PCPL and money for the same was received in earlier year i.e. year ended 31st March 2011, which was disclosed as application money received pending allotment under the current liabilities in the FY ended 31.03.2011. The second tranche was received in the previous year 2011-12 relevant to AY 2012-13. The assessee company filed statutory forms with ROC in form No. 2 for each tranche separately disclosing the number of shares, face value and premium per share and also the name of the allottee. The assessee also filed its annual return of with ROC in form No. 20B disclosing the details of accounts of number of shares, face value and premium of share, name and address of shareholders. The AO during the course of assessment proceedings issued notice under section 133(6) of the act dated 28.03.2014 requiring the assessee to furnish details in respect of shares issued at premium. The assessee replied and filed following details: –

“Annexure1- details of share allotment Annexure 2 – form 2 filed for each tranche of allotment filed with RoC Annexure 3 – Annual return filed in Form 20B filed with RoC Annexure 4 – Details of applicant (including PAN and address) shares allotted, consideration, etc.”

6. The AO required the assessee to explain as to why the share premium is not added to the returned income of the assessee. The assessee filed its reply dated 16.03.2015, wherein it is submitted that the return of income filed by PCPL and also audited financial statement for the AY 2012-13. The AO invoked the provisions of section 68 of the act and added share premium of Rs.598,44,01,500/-, without disputing the face value of shares to the total income of the assessee on the ground that the assessee has failed to establish the nature and source of the credit on the account of the share premium. The CIT(A) deleted the addition after considering the submissions of the assessee as noted above.

7. We have noted that during the course of hearing of this appeal, the Ld CIT-DR in all fairness admitted that the identity, source and creditworthiness of the transaction is not in doubt but only dispute of the Department is as regards the nature of the transaction in light of the huge premium charged by the Assessee. The Ld CIT-DR placed heavy reliance on the decision of Co-ordinate bench of Mumbai Tribunal in the case of Pratik Syntex (P.) Ltd. Vs. ITO (2018)94 taxmann.com 12. The Ld Counsel for the assessee Sh Thar explained that the said decision cannot be applied in the present case on facts of the case. He explained that the said decision is rendered on different set of facts as compared to the present case. He stated that the valuation of the share premium is to be looked into for the purpose of section 68 of the Act. The facts in that case were that equity shares were issued in the year under consideration to the promoters as well as three new parties. Both these classes of shareholders were issued equity shares. Promoters were issued shares 11 ITA No. 2317/Mum/2017 at par whereas premium of Rs. 4901- per share was charged from the new parties and for this the Tribunal has made specific note of the following: Despite making such huge investment in the company, the company did not know the whereabouts of those shareholders (para 6, page 10 of the order). Ld counsel stated that no justification for such different issue price even within this relevant year under consideration is brought on record. The Tribunal noted that no doubt the price can be different in genuine transactions as well however the case got aggravated since the shareholders to whom premium was charged could not be traced (para 6, page 10 of the order). The AO deputed an inspector to make field inquiries with respect to the shareholders. The inspector reported that these three new shareholders are not available at the given addresses and their whereabouts are not known. The assesse in that case was confronted with the adverse inspector report but the assessee could not produce current addresses of these three new shareholders (para 6. page 10 of the order). The creditworthiness of the shareholders was also not proved since the shareholders did not have their own money as every payments made by them towards share money in the favour of the assessee is preceded by deposit in the hank account and the balance maintained regularly by them was miniscule (para 6, page 14 of the order). The confirmations received from three parties were signed by the same person. The assessee in that case could not justify the chargeability of such a huge share premium received from three new shareholder vis-a-vis issuing shares at par to the original promoters within the same relevant year under consideration. To contend that Section 56(2)(viib) r.w.s. 2(24Xxvi) of the Act are placed in statute by Finance Act, 2012 w.e.f. 01-04-2013 and no question can he raised as to the valuation of shares at an huge share premium is not correct as in the instant case, the genuineness of the transaction of raising of share capital inclusive of share premium to the tune of Rs. 300 lacs from these three new shareholders is itself not proved.

8. We have gone through the case laws relied by the Assessee have been distinguished by the Tribunal while rendering the aforesaid decision. We seek to specifically address how the Tribunal dealt with the decision of Hon’ble Jurisdictional High Court in case of CIT Vs. Gagandeep Infrastructure (P.) Ltd. (2017) 394 ITR 680 = 2017-TIOL-584-HC-MUM-IT. The Hon’ble Tribunal has held that in the case of Gagandeep (supra) the Hon’ble Bombay High Court considered the factual matrix of the case wherein it was observed that the taxpayer satisfied the three ingredients of Section 68 of the Act which stood proved namely identity and creditworthiness of shareholders and genuineness of the transaction and on that factual matrix decision of the tribunal was accepted wherein tribunal ruled in favour of the assessee by holding that the taxpayer did satisfied all the three ingredients of Section 68 of the Act.

9. Now let us go through the decision relied on by the assessee of Hon’ble Bombay High Court in case of Gagandeep (supra) which reads as under:-

“(c) Being aggrieved, the Revenue carried the issue in the appeal to the Tribunal. The impugned order of the Tribunal holds that the respondent assessee had established the identity, genuineness and capacity of the shareholders who had subscribed to its shares. The identity was established by the very fact that the detailed names, addresses of the shareholders, PAN numbers, bank details and confirmatory letters were filed. The genuineness of the transaction was established by filing a copy of share application form, the form filed with the Registrar of Companies and as also bank details of the shareholders and their confirmations which would indicate both the genuineness as also the capacity of the shareholders to subscribe to the shares. Further the Tribunal while upholding the finding of CIT(A) also that the amount received on issue of share capital alongwith the premium received thereon, would be on capital receipt and not in the revenue field. Further reliance was also placed upon the decision of Apex Court in Lovely Exports (P) Ltd. (supra) to uphold the finding of the CIT(A) and dismissing the Revenue’s appeal”.

10. Now, in the present case of the assessee, the main crux of the facts that the assessee filed sufficient evidences viz, return of income, share allotment, annual return, details including name, address and PAN of the shareholder which are not negated by the AO. The AO in the present case has himself assessed the preference shareholder for the assessment year under consideration and after scrutiny has passed the order u/s 143(3) of the Act around the same date and has neither made any addition nor made any adverse remarks. The AO has not questioned the preference share capital to the extent of the face value but has only questioned the share premium. By this action of the AO himself, the ‘nature’ of transaction as that of ‘preference share allotment’ is proved beyond doubt and merely because he feels that the share premium is high the genuineness of the transaction cannot be doubted for the purpose of section 68 of the Act.

11. We find that in the given facts of the case the decision of Hon’ble Jurisdictional High Court in case of Gagandeep (supra) squarely applies to the assessee’s case. The decision of Hon’ble Jurisdictional High Court in case of CIT vs Green Infra Ltd 78 taxmann.com 340 is squarely applicable to the case of the assessee. Despite being the specific argument of the CIT-DR that the share premium defies commercial prudence, Hon’ble Jurisdictional High Court has held that genuineness of the transaction is proved since the entire transaction is recorded in the books of the assessee and the transaction has taken place through banking channels. The decision of the Hon’ble High Court has specifically held that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land. The Tribunal after examining the ingredients of section 68 of the Act held that the addition of share premium under section 68 of the Act cannot be sustained. We hereunder reproduce the relevant paragraph of the decision of Hon’ble Jurisdictional High Court in ease of Green Infra (supra) for ready reference: 3.Regarding question no.(ii): (a)Before the Tribunal, the Revenue raised a new plea viz. that the so called share premium has also to be judged on the touchstone of Section 68 of the Act which provides for cash credit being charged to tax. The impugned order of the Tribunal allowed the issue to be raised before it for the first time, overruling the objection of the respondent-assessee. (b)The impugned order examined the applicability of Section 68 of the Act on the parameters of the identity of the subscriber to the share capital, genuineness of the transaction and the capacity of the subscriber to the share capital. It found that the identity of the subscribers was confirmed by virtue of the Assessing Officer issuing a notices under Section 133(6) of the Act to them. Further, it holds that the Revenue itself makes no grievance of the identity of the subscribers. So far as the genuineness of the transaction of share subscriber is concerned, it concludes as the entire transaction is recorded in the Books of Accounts and reflected in the financial statements of the assessee since the subscription was done through the banking channels as evidenced by bank statements which were examined by the Tribunal. With regard to the capacity of the subscribers the impugned order records a finding that 98% of the shares is held by 15 ITA No. 2317/Mum/2017 IDFC Private Equity Fund which is a Fund Manager of IDFC Ltd. Moreover, the contributions in IDFC Private Equity Fund-II are all by public sector undertakings. (c) Mr.Chhotaray the learned counsel for the Revenue states that the impugned order itself holds that share premium of Rs.490/per share defies all commercial prudence. Therefore it has to be considered to be cash credit. We find that the Tribunal has examined the case of the Revenue on the parameters of Section 68 of the Act and found on facts that it is not so hit. Therefore, Section 68 of the Act cannot be invoked. The Revenue has not been able to show in any manner the factual finding recorded by the Tribunal is perverse in any manner. (d) Thus, question no.(ii) as formulated does not give rise to any substantial question of law and thus not entertained”.

12. In view of the aforesaid, we are of the view that valuation is not relevant for determining genuineness of the transaction for the purpose of section 68 of the Act. We are of the view that CIT(A) has rightly deleted the addition on account of the share premium relying on the decision of Hon’ble Jurisdictional tribunal in case of Green Infra Ltd. Vs. ITO (2013) 145 ITR 240 = 2013-TIOL-1117-ITAT-MUM. It is a settled position that what is apparent is real unless proved otherwise. It is a settled legal position that “apparent is real” and the onus to prove that the apparent is not the real is on the party who claims it to be so as held by Hon’ble Supreme Court in case of CIT Vs. Daulat Ram Rawatmull (1973) 87 ITR 349 = 2002-TIOL-1540-SC-IT.

13. In the present case, the overwhelming evidence proves that the ‘nature’ of receipt is share premium. The audited accounts of both parties, the statutory since it was the department which claimed that the share premium is not in fact so, despite the statutory forms viz. Form 2 for return of allotment and Form 20B for annual return filed with the ROC all show the ‘nature’ as share premium. If the Department wants to contend that what is apparent is not real, it is the onus of the department to prove that it was Assessee’s own money which was routed through a third party. Only then can the provisions of section 68 of the Act be invoked. This aspect is considered in the decision of Mumbai Tribunal in case of Green Infra Ltd. Vs. ITO (2013) 145 ITD 240 = 2013-TIOL-1117-ITAT-MUM, wherein Tribunal has held that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land. The said decision has been affirmed by Hon’ble Jurisdictional high Court in case of Green Infra Ltd (Supra).

14. The Ld. Counsel for the assessee made another argument that the power of carrying valuation is not envisaged by the Legislature for the purpose of Section 68 of the Act. He argued that, wherever the Legislature intended to give the power to determine the value to the AO, it either prescribes Rule for valuation of a particular thing or vested upon the AO the power to refer to the Valuation officer. The power of AO to make a reference to the Valuation Officer is contained in section 142A of the Act. Section 142A of the Act as it stood for the year under consideration reads as under:

“142. (1) For the purposes of making an assessment or reassessment under this Act, where an estimate of the value of any investment referred to in section 69 or section 6911 or the value of any bullion, jewellery or oilier valuable article referred to in section 69A or section 6911 or fair market value of any property referred to in sub-section (2) of section 56 is required to be made, the Assessing Officer may require the Valuation Officer to make an estimate of such value and report the same to him”.

15. We have considered the issue and find that this section does not cover section 68 of the Act. Thus, the Legislature does not envisage any sort of valuation for the purpose of section 68 of the Act. Indeed, valuation of preference shares is a completely different exercise as compared to valuation of equity shares. The AO makes the mention of the reserves and loss while challenging the charge of share premium on preference shares. “Reserves” could be relevant for valuing equity shares. They are not relevant for valuing preference shares. Preference shareholders get priority over the equity shareholders in terms of payment of dividend and during winding up. They get only a fixed rate of dividend. The redemption amount depends on the terms of issue. The conversion depends on the terms of issue. The terms of issue are relevant for valuing preference shares. Even the present Rule 11UA of the Income Tax Rules 1962 are applicable only to section 56(2) of the Act, requires valuation of preference shares by the merchant bankers. The AO has not even attempted to do any sort of valuation of preference shares. His addition is based entirely on conjectures and surmises. It is a settled Iaw that the assessment cannot he made on mere suspicion, conjectures and surmises.

16. Even amendment to section 68 brought by Finance Act, 2012 does not refer to valuation. The insertion of the proviso to section 68 of the Act by Finance Act, 2012 casts an additional onus on the closely held companies to prove source in the shareholders subscribing to the shares of companies. During the course of the hearing, the Ld Counsel explained that the explanatory memorandum to the Finance Bill 2012 makes it clear that the additional onus is only with respect to source of funds in the hands of the shareholders before the transaction can be accepted as a genuine one. Even the amended section does not envisage the valuation of share premium. This is further evident from a parallel amendment in section 56(2) of the Act which brings in its ambit so much of the share premium as charged by a company, not being a company in which the public are substantially interested, as it exceeds the fair market value of the shares. If one accepts the Ld CIT-DR’s contentions that section 68 of the Act can he applied where the transaction is proved to be that of a share allotment that here the valuation for charging premium is not justified, it will make the provisions of section 56(2)(viib) of the Act redundant and nugatory. This cannot be the intention of the Legislature especially when the amendments in the two sections are brought in at the same time. In view of the matter, the Ld Counsel explained that it is a settled law that where two views are possible, the view favorable to the assesse should be adopted as held by Hon’ble Supreme Court in case of CIT Vs. Vegetable Products Ltd. (1973) 88 ITR 192 = 2002-TIOL-574-SC-IT-LB. In view of the above facts and circumstances, we are of the view that the assessee has discharged its onus by adequately disclosing the transaction in its books of accounts, filing statutory forms as regards allotment of shares, providing name, address and PAN of the shareholders, etc. the assessee has sufficiently discharged the onus cast upon it for the purpose of section 68 of the Act and no addition can be made on this account. Hence, we are of the view that the CIT(A) has rightly deleted the addition and we confirm the same. This issue of Revenue’s appeal is dismissed.”

8. Taking into account of all the facts and circumstances mentioned above, we are of the view that the CIT(A) has decided the matter of judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, this issue is being decided in favour of the assessee against the revenue.

9. In the result, the appeal filed by the revenue is hereby ordered to be dismissed.

(Order pronounced in the open court on 31.07.2019)

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