ASST CIT 6 (2)(1), MUMBAI vs. M/S CHIRIPAL POLY FILMS LTD., MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH, MUMBAI SHRI OM PRAKASH KANT, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER Assistant Commissioner of Income-tax, 6 (2)(1), Mumbai, Room No. 504, Aaykar Bhavan, M.K. Road, Churchgae, Mumbai - 400020 …………. Assessee M/s Chiripal Poly Films Ltd., Vs 109/110, Peninsula Centre , Dr. S.S. Rao Road, Parel, Mumbai - 400012 Respondent …………. [PAN: AADCC7403M] CO No. 152/MUM/2022 (Arising out of ITA No. 258/Mum/2020) (Assessment Year: 2014-15) M/s Chiripal Poly Films Ltd., 109/110, Peninsula Centre , Dr. S.S. Rao Road, Parel, Mumbai - 400012 [PAN: AADCC7403M] …………. Assessee Assistant Commissioner of Income-tax, Vs 6 (2)(1), Mumbai, Room No. 504, Aaykar Bhavan, M.K. Road, Churchgae, Respondent …………. Mumbai - 400020 Appearance For the Assessee/Assessee : Shri Tushar Hemani, Sr. Advocate Shri Parimal Singh Parmar For the Respondent/Department : Shri K.C. Selvamani CO No.152/Mum/2022 (Assessment Year: 2014-15) Date Conclusion of hearing : 14.07.2023 Pronouncement of order : 11.10.2023

O R D E R Per Rahul Chaudhary, Judicial Member: The present appeal filed by the Revenue and Cross-Objection filed 1. by the Assessee pertaining to the Assessment Year 2014-15 arise from the order, dated 03/09/2019, passed by the Ld. Commissioner of Income Tax (Appeals)-12, Mumbai [hereinafter referred to as ‘the CIT(A)’], whereby the CIT(A) had partly allowed appeal of the Assessee against the Assessment Order, dated 30/12/2016, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).

The Revenue has raised following grounds of appeal: 2. 1. "On facts and circumstances of the case in deleting the addition of Rs. 2,20,54,200/- on account of introduction of share application money treated as unexplained credit u/s 68 of the Income Tax Act, 1961 without appreciating the fact that genuineness & Creditworthiness of foreign entities from which these funds received were not properly established by the assessee. The assessee has failed to discharge its onus to prove the genuineness of these transactions. Even the source of these investments remained unexplained as most of the entities did not have its own fund to invest and money trail revealed that main source of these funds were routed through various accounts. 2. On facts and circumstances of the case in deleting the addition of Rs.35,00,05,950/- on account of the share premium collected on issue of shares treated as unexplained credit u/s 68 of the Income Tax Act, 1961 without appreciating the fact that genuineness & Creditworthiness of entities from which these funds received were not properly established by the assessee. The assessee has failed to discharge its onus to prove the genuineness of these transactions. Even the source of these investments remained unexplained.

2 CO No.152/Mum/2022 (Assessment Year: 2014-15)

2.1. The Assessee has raised following grounds of cross objection: “1.1 In law and in the facts and circumstances of the appellant's case, Hon'ble ITAT may direct the Ld. Assessing officer to compute the correct total income by reducing the capital receipt received by the assessee during the year under consideration in the form of Electricity duty subsidy for Rs. 2,80,68,707/-.

1.2 In law and in the facts and circumstances of the appellant's case, Hon'ble ITAT may direct the Ld. Assessing officer to reduce the book profit computed under section 115JB by the 3 CO No.152/Mum/2022 (Assessment Year: 2014-15) capital receipt received by the assessee during the year under consideration in the form of Electricity duty subsidy for Rs. 2,80,68,707 /-. It has been a settled position of law that any fiscal incentive provided which is not in the nature of income perse shall not liable to tax under the deeming provisions of section 115JB of the Act. 2.1 In law and in the facts and circumstances of the appellant's case, Hon'ble ITAT may direct the Ld. Assessing officer to compute the correct total income by reducing capital receipt received by the during the year under consideration in the form of MEIS / SEIS incentive for Rs. 90,16,813/-. 2.2 In law and in the facts and circumstances of the appellant's case, Hon'ble ITAT may direct the Ld. Assessing officer to reduce the book profit computed under section 115JB by a capital receipt received by the assessee during the year under consideration in the form of MEIS/SEIS incentive for Rs. 90,16,813/-. It has been a settled position of law that any fiscal incentive provided which is not in the nature of income perse shall not liable to tax under the deeming provisions of Section 115JB of the Act.”

The relevant facts in brief are that the Assessee is a private limited 3. company engaged in the business of the manufacturing of Bi-axially Oriented Polypropylene (for short ‘BOPP’) and trading in fabric. The Assessee filed return of income for the Assessment Year 2014-15 on 29/11/2014 declaring total loss at INR 55,47,89,293/- and offering income of INR 24,79,61,362/- to tax under Section 115JB of the Act.

3.1. The case of the Assessee was selected for regular scrutiny and assessment under Section 143(3) of the Act was completed by the Assessing Officer vide order, dated 30/12/2016, after making, inter alia, (a) addition of INR 37,20,60,150/- under Section 68 of the Act in respect of share capital and premium received by the Assessee

4 CO No.152/Mum/2022 (Assessment Year: 2014-15) during the relevant previous year, and (b) disallowance of INR 29,57,924/- being depreciation claimed by the Assessee on intangible assets. Further, the Assessing Officer also concluded that INR 23,71,34,031/- was taxable in the hands of the Assessee under Section 56(2)(viib) of the Act read with Rule 11UA of the Income Tax Rules, 1962 [for short ‘the Rules’] holding the same to be share capital/premium received by the Assessee from resident companies in excess of the fair market value determined under Rule 11UA using Net Asset Valuation Method. However, no separate addition was made by the Assessing Officer since addition of INR 35,00,05,950/- being entire amount of share capital/premium, was made by the Assessing Officer under Section 68 of the Act.

3.2. Being aggrieved, the Assessee preferred appeal against the Assessment Order, dated 30/12/2016, before the CIT(A) which was partly allowed by the CIT(A) vide order, dated 03/09/2019. The CIT(A) deleted the above addition of INR 37,20,60,150/- made by the Assessing Officer under Section 68 of the Act, and directed the Assessing Officer to delete the disallowance of INR 29,57,924/- made by the Assessing Officer in respect of depreciation on intangible assets. Further, the CIT(A) also concluded that alternate addition of INR 23,71,34,031/- under Section 56(2)(viib) of the Act proposed by the Assessing Officer was also not correct under law.

3.3. Being aggrieved, the Revenue is now in appeal before us against the above relief granted by the CIT(A) vide order, dated 03/09/2019, on the grounds reproduced in paragraph 2 above. The Assessee has also filed cross objection, delayed by 1046 days as per the registry, whereby the Assessee has raised a fresh claim for the first time before the Tribunal seeking exclusion of (a) electric

5 CO No.152/Mum/2022 (Assessment Year: 2014-15) duty subsidy of INR 2,80,68,707/- and (b) capital receipt of INR 90,16,813/-, received in the form of MEIS/SEIS incentives, while computing book profits under Section 115JB of the Act. The grounds raised by the Assessee are reproduced in paragraph 2.1 above.

We have considered the rival submissions, perused the material on 4. record including the judgments/decisions cited during the course of hearing and examined the position in law.

We would first take up the appeal preferred by the Revenue. 5. Ground No. 1 to 5 Ground No. 1 to 5 raised by the Revenue involve overlapping 6. factual and legal aspects and therefore, the same are taken up together.

Ground No. 1 to 3 raised by the Revenue are directed against the 7. order of CIT(A) deleting the addition of INR 37,20,60,150/- made by the Assessing Officer under Section 68 of the Act. While Ground No. 4 & 5 pertain to alternative addition of INR 23,71,34,031/- proposed by the Assessing Officer under Section 56(2)(viib) of the Act.

The facts relevant to the adjudication of the grounds under 8. consideration, as emerging from the perusal of the records including the paper-book filed by the Assessee, are that during the assessment proceedings the Assessing Officer noticed that the Assessee had raised share capital from 1 non-resident investor and 7 resident companies. The details of shares issued and share capital

6 CO No.152/Mum/2022 (Assessment Year: 2014-15) & premium received are as under: Non-Resident Investor Sl. Investor Share Face Issue Consideration Share Premium Allotted Value Price 1 Platinummic 21,004 10 1,050 2,20,54,200 2,18,44,160 FZE, UAE

Resident Investors/Companies Sl. Investor Share Face Issue Consideration Share Premium Allotted Value Price (INR) @ INR 1,040 (INR) (INR) per Share 1 Bhushan 47,620 10 1,050 5,00,01,000 4,95,24,800 Petrofils Pvt. Ltd., New Delhi 2 Dindayal 47,620 10 1,050 5,00,01,000 4,95,24,800 Processors Pvt. Ltd. 3 Sparow 47,620 10 1,050 5,00,01,000 4,95,24,800 Exports Pvt. Ltd. 4 Shanti 47,620 10 1,050 5,00,01,000 4,95,24,800 Spintex Pvt. Ltd., Bldaj 5 Bhavna 47,620 10 1,050 5,00,01,000 4,95,24,800 Textiles Pvt. Ltd., New Delhi 6 Chiripal 47,620 10 1,050 5,00,01,000 4,95,24,800 Textiles Mills Pvt. Ltd. 7 Quality 47,620 10 1,050 5,00,01,000 4,95,24,800 Exim Pvt. Ltd. Total 35,00,05,950 346672560

8.1. The Assessing Officer asked the Assessee to prove identity and 7 CO No.152/Mum/2022 (Assessment Year: 2014-15) creditworthiness of the investors and genuineness of the transaction with regards to provisions contained in Section 68 of the Act. The Assessee was specifically asked to furnish documents such as confirmation from the investors, copy of the balance sheet, income tax return and also to provide justification for the high premium of INR 1,040/- per share charged/received by the Assessee. In response, the Assessee filed reply letters dated 23/09/2016, 06/10/2016, 05/12/2016/ and 16/12/2016 providing various details, documents and explanation including the following: (a) Vide letter dated 23.09.2016, in relation to resident companies, the Assessee provided: (a.1.) Table containing basic details w.r.t. increase in share capital viz. name, address, PAN, date of transaction, number of shares, issue price, total consideration and share premium, (a.2.) Relevant page of audited financial statements ; (a.3.) Details of directors who attended board meeting, (a.4.) PAN of all resident companies, (a.5.) Share application forms, (a.6.) Share certificates, (a.7.) Bank statements – highlighting each banking transaction for funds received from investors, (a.8.) Board resolution for allotment of shares, (a.9.) Form 2 along with G.A.R. 7 challan and (a.10.) Annual returns filed with ROC. [placed at Pg 33 to 121 of paper-book] (b) Vide letter, dated 23.09.2016, in relation to Non-Resident

8 CO No.152/Mum/2022 (Assessment Year: 2014-15) Investor the Assessee also provided: (b.1.) Intimation to RBI regarding issue of equity shares to non-resident investors (b.2.) Reporting made to RBI in the form of FCGPR (b.3.) Foreign Inward Remittance Certificate (FIRC) [placed at Pg 72 to 85 of paper-book] (c) Vide letter filed on 05.12.16, the Assessee placed on record Project Appraisal Report issued by Gujarat Industrial and Technical Consultancy Organization Limited (GITCO). [placed at Pg 122 to 271 of paper-book] (d) Vide letter dated 16.12.2016, the Assessee provided Acknowledgment of ITR, Balance-Sheet and Profit & Loss Account in relation to resident companies. Further, the Assessee also filed Assessment Orders of Bhushan Petrofils Pvt. Ltd., Sparow Exports Pvt. Ltd., Chiripal Textiles Mills Pvt. Ltd., M/s Quality Exim Private Limited for the Assessment Year 2014-15. [placed at Pg 272 to 338 of paper-book] 8.2. However, the Assessing Officer rejected the claim/contentions of the Assessee. The Assessing Officer observed that the Assessee had failed to furnish copy of balance sheet & financials of the non- resident investor; and had also failed to furnish any evidence regarding the source of funds invested by the non-resident investor. In view of the aforesaid observations, the Assessing Officer concluded that the Assessee failed to prove the source of the share capital & premium received by it from the non-resident investor and had failed to discharge the onus cast upon the Assessee under Section 68 of the Act. Further, since the Assessee had failed to produce any records regarding the due-diligence done

9 CO No.152/Mum/2022 (Assessment Year: 2014-15) by the Assessee before issuing shares to non-resident investor, the source of the investment in the form of share capital & premium received by the Assessee from the non-resident investor remained unverified. As the identity & creditworthiness of the non-resident investor and genuineness of the transaction remained to be proved, the provisions of Section 68 of the Act were attracted. Therefore, amount of INR 2,20,54,200/- received by the Assessee from non- resident investor (i.e. Platinummic FZE, UAE) was to be added as income in the hands of the Assessee being unexplained cash credit under Section 68 of the Act.

8.3. Similarly, the Assessing Officer rejected the claim/contentions of the Assessee in relation to share capital & premium received from 7 resident companies and made an addition of INR 35,00,05,950/- in the hands of the Assessee under Section 68 of the Act. While doing so the Assessing Officer observed that as per the amended provisions of Section 68 of the Act (effective from 01/04/2013), the Assessee was required to prove the ‘source of source’ of share capital & premium received from the resident companies during the relevant previous year. The reasoning given by the Assessing Officer while making the above addition was that the Assessee had failed to furnish copy of confirmation, Balance Sheet, ITR and Financials of the resident companies and therefore, failed to prove, both, the source of share capital & premium received as well as the ‘source of source’ of such share capital & premium. Thus, the Assessee had failed to discharge the onus cast upon the Assessee as per the provisions to Section 68 of the Act, and therefore, the share capital & premium received from resident companies aggregating to INR 35,00,05,950/- was to be added as income in the hands of the Assessee under Section 68 of the Act.

10 CO No.152/Mum/2022 (Assessment Year: 2014-15) 8.4. Further, the Assessing Officer also proposed an alternative addition of INR 23,71,34,031/- under Section 56(2)(viib) of the Act read with Rule 11UA of the Rules. While doing so the Assessing Officer rejected the value of INR 1,050/- per share determined by the independent valuer as per Rule 11UA of the Rules by using Discounted Cash Flow Method (DCF) holding that (a) the valuation report was a cryptic two page valuation report that contained no data or basis on which projection of net expected distributable income was made by the valuer; (b) the Project Appraisal Report issued by GITCO was based on projected analysis of the Assessee’s financials from Financial Years 2012-13 to 2023-24, and the net profit after tax and depreciation for Financial Year 2014-15 to Financial Year 2017-18 as per GITCOs Report were less than the valuation report furnished by the Assessee, and (c) the valuation report submitted by the Assessee also did not match with the actual result of the Assessee. In view of the aforesaid, the Assessing Officer rejected the independent valuer’s report as not reliable and determined value of shares of the Assessee under Rule 11UA of the Rules at INR 338.61 per share by adopting Net Asset Valuation (NAV) method. Since the shares were issued by the Assessee at INR 1,050/-, being a price higher than the Fair Market Value of INR 338.61 determined by the Assessing Officer, alternative addition at the rate of INR 711.39/- [INR 1050 – INR 338.61] per share issued to the resident companies was proposed. Thus, the Assessing Officer proposed aggregate addition of INR 23,71,34,031/- under Section 56(2)(viib) of the Act read with Rule 11UA of the Rules. However, since the Assessing Officer had disallowed entire amount of share capital & premium received from resident companies aggregating to INR 35,00,05,950/- under Section 68 of the Act no 11 CO No.152/Mum/2022 (Assessment Year: 2014-15) separate addition was made by the Assessing Officer.

Being aggrieved, the Assessee challenged the aggregate addition of 9. INR 37,20,60,150/- made by the Assessing Officer under Section 68 of the Act holding the same to be unexplained cash credit, in appeal before CIT(A). Before the CIT(A), it was contended on behalf of the Assessee that the Assessing Officer had ignored the documents and details filed along with reply dated 23/09/2016 and 14/12/2016 submitted by the Assessee during the assessment proceedings. It was contended on behalf of the Assessee that all the details called for by the Assessing Officer during the assessment proceedings were furnished by the Assessee. However, the Assessing Officer rejected the contentions of the Assessee and ignored the documents/details submitted by the Assessee without carrying out any enquiry/verification. Despite having details about the resident/non-resident investors, the Assessing Officer did not issue any notice or call for any information/details/documents under Section 133(6) of the Act from the investors. The Assessing Officer also overlooked the fact that Bhushan Petrofils Pvt. Ltd, Dindayal Processor, Sparrow Exports Ltd. and Chiripal Textiles Mills Pvt. Ltd. had made investments in the Assessee-company during the previous year relevant to the Assessment Year 2011-12. Though the Assessing Officer had made similar additions under Section 68 of the Act the same were deleted by CIT(A) and the order of CIT(A) was confirmed by the Tribunal in ITA No. 2671/Mum/2016 vide order, dated 19/02/2019. Thus, the Assessee had discharged the initial onus cast on the Assessee under Section 68 of the Act and provided documentary evidences to prove identity and creditworthiness of the investors as well as genuineness of the transaction. Accordingly, the addition of INR 37,20,60,150/- made

12 CO No.152/Mum/2022 (Assessment Year: 2014-15) by the Assessing Officer under Section 68 of the Act cannot be sustained.

9.1. Before the CIT(A), it was further submitted on behalf of the Assessee that the Assessing Officer erred in rejecting the valuation report of the independent valuer as the Assessing Officer had failed to appreciate that the valuation was based upon the Project Appraisal Report received from GITCO which was a leading Techno Economic Feasibility analyst set up by All India Financial Institution, State Industries Promotion Corporation and 7 Nationalized Banks. While reconciling the figures taken in Share Valuation Report with the Project Appraisal Report by GITCO, the Assessing Officer took into consideration projections in respect of existing BOPP Projects instead of projections of the combined project which included the BOPP Lines to be set up by the Assessee. The profitability projections of the combined project (as appearing at page 67 of the Project Appraisal Report) were same as the projections taken by the independent valuer to arrive at the value of INR 1,050/- per share using DCF Method which is one of the method notified by the Central Board of Direct Taxes (CBDT) vide Notification No. 52/2012, dated 29/11/2012 for the purpose of Rule 11UA of the Rules. On the basis of the aforesaid, it was contended that the alternative addition of INR 23,71,34,031/- worked out by the Assessing Officer under Section 56(2)(viib) of the Act was also not sustainable in law.

9.2. The above submissions of the Assessee found favour with the CIT(A) as the CIT(A) agreed with the Assessee and deleted the addition of INR 37,20,60,150/- under Section 68 of the Act. Further, the CIT(A) also concluded that DCF Method was one of the Method notified under Rule 11UA (2)(b) of the Rules and therefore,

13 CO No.152/Mum/2022 (Assessment Year: 2014-15) the Assessing Officer was not justified in rejecting the valuation done by the independent valuer using DCF Method and adopting NAV Method for valuation of shares. Further, the CIT(A) observed that DCF Method was based on projections and estimates which cannot be replaced by the actual figures by the Assessing Officer. Thus, the Assessing Officer had no justification for rejecting the declared valuation of shares and proposing addition of INR 23,71,34,031/-.

The Revenue is now in appeal before the Tribunal Challenging the 10. above relief granted by the CIT(A) by deleting the addition of the INR 37,20,60,150/- made by the Assessing Officer under Section 68 of the Act, and by holding that the alternative addition of INR 23,71,34,031/- proposed by the Assessing Officer was not sustainable in law.

10.1. The Ld. Departmental Representative appearing before us submitted that Assessee had failed to discharge its onus cast upon him with respect to issue of share capital to the foreign party during the assessment proceedings. Huge premium of INR 1,040/- per share was charged by the Assessee which was not commensurate with the Fair Market Value determined by the Assessing Officer. The valuation report submitted by the Assessee based upon DCF Method was flawed. As pointed out by the Assessing Officer, the valuation report submitted by the Assessee did not provide the basis for arriving at the projected profits; the projections were much more than the projections stated in the Project Appraisal Report of GITCO; and the projections were made on the premise that there were 3 production lines whereas only 2 BOPP Lines were installed and commissioned during the relevant

14 CO No.152/Mum/2022 (Assessment Year: 2014-15) previous year. Further, the projections for the financial year did not match with the actual results of the same financial year. Elaborating upon the aforesaid, the Learned Departmental Representative submitted that the CIT(A) proceeded on the incorrect understanding that the Assessing Officer had rejected the valuation report submitted by the Assessee only for the reason that the projections did not confirm to the actual financial results without appreciating that the aforesaid reasoning given by the Assessing Officer while rejecting the valuation report submitted by the Assessee. The Learned Departmental Representative also emphasized upon the fact that the Assessing Officer had noted that the Assessee did not submit the financial results of the non-resident investor.

10.2. Per Contra, the Learned Senior Counsel appearing for the Assessee reiterated the submissions made by the Assessee before the CIT(A) and contended that the order passed by the CIT(A), wherein all the relevant aspects have been considered, deserves to be upheld. He submitted that the identity and creditworthiness of the non- resident-investor and genuineness of transaction was proved by the Assessee during the assessment proceedings. Taking us though the reply filed during the assessment proceedings, he submitted that the Assessee had filed all the relevant details and documents asked for by the Assessing Officer which included details of investors, PAN No., share application form, share certificate, Board Resolution for allotment of shares, Form No. 2 along with GAR Challan, Annual Return filed with