Impossible For A Company To Get Its Accounts Audited On 31st March And Get The Approval In AGM On The Same Date: ITAT Upholds Addition

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that it is impossible for a company to get its accounts audited on 31st March and present the same for approval in the Annual General Meeting on March 31st.

The two-member bench of Kul Bharat (Judicial Member) and N.K. Billaiya (Accountant Member), while upholding the addition under Section 56(2)(viib), observed that the certificate of the auditors nowhere says that the valuer has considered the audited balance sheet. The certificate of the auditors was based on the statement and documents furnished by the company, which were neither audited nor certified by the auditors.

The assessee/appellant company was incorporated in 1995 and, since then, has not done any business but is only engaged in providing accommodation. In spite of zero business activities, the assessee company issued 8 lakh shares, each with a face value of Rs. 10/-, to two companies, namely, M/s Elecon Securities Pvt Ltd and M/s Ordinary Financial Services Pvt Ltd.

Since the assessee received shares with a face value of Rs. 10 and a premium of Rs. 65 from M/s Elecon Securities Pvt Ltd. and M/s Ordinary Financial Services Pvt Ltd., it valued its own shares at Rs. 75 each.

When the Assessing Officer confronted the assessee to explain the issue of 60,000 shares at Rs. 75 per share, the assessee justified it by submitting a valuation report as per Rule 11UA of the Income Tax Rules.

The A.O. rejected the assessee's report and response, believing that the basis of the valuation, the balance sheet, had not been adopted at the company's annual general meeting. Hence it was not as per Rule 11UA, and it proceeded by valuing the shares, determining the price at 65.6447 per share, and making an addition of the difference.

The issue raised was whether the assessee has valued the shares as per the balance sheet as of the valuation date of March 31, 2014, in accordance with Rules 11U and 11UA of the Income Tax Rules.

The ITAT cited the Finance Minister's speech, which called for taxing share premiums above fair market value and increasing the burden of proof for closely held businesses receiving funds from shareholders. The assessee has miserably failed in discharging the onus.

Case Title: M/s Sagitarius Securities Pvt. Ltd. Versus I.T.O.

Citation: ITA No. 6353/DEL/2018 [A.Y. 2014-15]

Date: 05.01.2023

Counsel For Appellant: Advocate Anunav Kumar

Counsel For Respondent: Sr. DR Maninder Kaur

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