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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: SHRI ABY T. VARKEY & MS. PADMAVATHY S.
O R D E R PER : MS PADMAVATHY S. (AM)
This appeal of the Revenue is against the order of the Commissioner of Income- tax (Appeals)-53, Mumbai dated 20/12/2022 for assessment year 2014-15. The Revenue has raised the following grounds:- “1. On the facts and circumstances of the case and in law, Ld.CIT(A) has erred in deleting the addition made u/s 68 of the Income Tax A6t, 1961 ignoring the fact that charging of extra share premium from non-resident over and above valuation done by independent value has not been justified by the assessee company.
2 ITA 652/Mum/2023 M/s Jet Privilege Pvt Ltd 2. On the facts and circumstances of the case and in law, Ld.CIT(A) has erred in deleting the addition made u/s 68 of the Income Tax Act, 1961 ignoring the fact that it is a well settled law that the onus lies on the assessee to prove the genuineness of the transactions in order to discharge its onus u/s 68 of the Act. ”
The assessee is in the business of service sector and others. The assessee filed the return of income for the assessment year 2014-15 on 30/11/2014 declaring a loss of Rs.24,70,53,193/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. During the course of assessment, the Assessing Officer noticed that the assessee has received a sum of Rs.1612,15,35,263/- as share premium on the fresh allotment of 99,774 having a face value of Rs.10/- each. The details of the fresh allotment is as below:- Sr. Name of the Party Relationship No. of Rate of Rate of Total No. subscribing shares with the shares allotment premium amount of assessee allotted of shares charged premium during the per share per share (Rs.) year (Rs.) (Rs.) 1 M/s Jet Airways Joint holding 44,772 10 1,55,268 695,15,58,896 (India) Ltd company 2 M/s Etihad Joint holding 54,997 10 1,66,720 916,90,99,840 Airways company 3 Shri Apurva Shah Independent 5 10 1,75,306 8,76,530 subscriber
With regard to the share issued at a premium to Etihad Airways, the Assessing Officer treated the difference between the premium at which shares were issued to Jet Airways based on valuation and the premium received from Etihad Airways as excess. Thus the Assessing Officer added the excess share premium of Rs.121,452 (Rs.1,66,720- (-) Rs.1,55,268/-) under section 68. Aggrieved, the assessee filed appeal before the CIT(A). Before the CIT(A), the assessee submitted that the excess share premium has been computed by the Assessing Officer cannot be added under section 68 since the First Proviso to section 68 inserted by the Finance Act, 2012 is applicable only 3 ITA 652/Mum/2023 M/s Jet Privilege Pvt Ltd to resident shareholders. The assessee further submitted that the premium charged over and above the fair value of shares as on the date of issue of fresh share capital to resident shareholders, i.e. Jet Airways and Apurva Shah was already offered to tax as Income from other sources as per the provisions of section 56(2)(viib) of the Act. However, the excess premium received from Etihad was not offered to tax since the provisions of section 56(2)(viib) were not applicable to receipt from non residents. The CIT(A), after considering the submissions of the assessee deleted the additions by holding that - “5.3.3 The AO has accepted the identity and creditworthiness of the transaction. However, he has not accepted the genuineness of the transaction. The investor i.e. Etihad Airways has stake in Jet Airways India Ltd. and has become a majority shareholder in the appellant company by way of fresh infusion of funds. Thus, there is a certain business background to the entire Investment which has to be considered in entirety. Besides, it is a fact that the 1st proviso to Sec. 68 requiring to explain the source of source is not applicable to non-residents. No independent evidence has been brought out by the AO in any manner to question the genuineness of the transaction apart from the fact that excess premium has been paid by M/s. Etihad Airways. The appellant has given a reasonable explanation that its' purchase consideration was fixed at USD 150,000,000 and that the effect of foreign exchange conversion has to be taken into account. It is also noted that the investor i.e. Etihad Airways has become a majority shareholder pursuant to the above investment. The totality of the facts point towards the genuineness of the transaction. 5.3.4 The appellant's contention as regards demerger is not looked into as the issue under consideration before the undersigned is of Sec. 68 addition on share premium and the same is not relevant at this point of time. This would be looked into as and when grounds for the same arise, if at all. 5.3.5 Once the appellant has furnished a reasonable explanation and there is no concrete material to doubt the genuineness of such a transaction, I am of the view that Sec. 68 addition does not lie. 5.3.6 No addition can be made u/s. 56(2)(viib) either as the said provision is applicable only in respect of consideration received from a resident.”
4 ITA 652/Mum/2023 M/s Jet Privilege Pvt Ltd 4. Aggrieved, the Revenue is in appeal before the Tribunal. The Ld.DR submitted that though the assessee has proved the identity and the creditworthiness of the transactions, the Assessing Officer has made the addition under section 68 questioning the genuineness of the transaction. In this regard, the Ld.DR drew our attention to the relevant findings of the Assessing Officer which is extracted below:- “5.2 Further, on perusal of the aforesaid chart, it is seen that the assessee company has issued shares to Etihad Airways & Shri Apurva Shah at a premium which is well above the share valuation done before the allotment of shares, i.e. Rs.1,55,246/- (including face value of Rs.10/-) as per valuation report submitted by the assessee. The assessee company, by itself has added an amount of Rs.22,09,044/- as income from other sources u/s 56(2)(viib) of the I. T. Act, 1961, in case of excess share premium received from Shri Apurva Shah and M/s Jet Airways (India) Limited since, the shares issued to Shri Apurva Shah and M/s Jet Airways (India) Limited were issued at a price of Rs. 1,75/316/- and Rs. T.,55,278/- per share which is more fair market value of the shares as per the valuation report done by the : valuer and submitted bv the assessee. 5.3 However, in the case of shares premium received from Etihad Airways, which is also well above the valuation price, no such addition has been made u/s. 56(2)(viib) of the Act as the same is received from a foreign entity. However, the fact remains that the assessee company has charged share premium over and above its actual value of shares, and hence there ought to be some reason for doing so. No prudent business would invest money in any project which is over and above the fair market value of such project unless and until there is some reason behind it and if it gets some benefits which is not considered in the valuation report. In these scenario, the transaction which does not pass the law of prudency and common | business sense has to be looked into deeply to understand the true nature of the same as well as the look them from the perspective of the law in this regard.”
The Ld.DR submitted that the assessee has already offered Rs.22,09,044/- as excess premium with respect to resident shareholders whereas no such disallowance was made for receipts from Etihad Airways only for the reason that Etihad Airways being a non resident. This would mean that the assessee is accepting that there is excess share premium receipt in the transaction entered into and, therefore, the Assessing Officer has rightly invoked the provisions of section 5 ITA 652/Mum/2023 M/s Jet Privilege Pvt Ltd 68 since the assessee has not disallowed the excess amount received from Etihad Airways.
The Ld.AR, on the other hand, vehemently argued that the addition made by the Assessing Officer under section 68 is not tenable since the First Proviso to section 68 is not applicable to non residents. The Ld.AR further submitted that the genuineness of the transaction cannot be questioned for a portion of the transaction since the Assessing Officer himself has admitted and allowed more than 90% o the transaction value to be genuine and that there is no prohibition to bring in more than the fair market value of the shares. The Ld.AR further submitted that the assessee has not disallowed any amount of the excess share premium received from Etihad Airways under section 56(2)(viib) for the reason that the provisions of section are very clear that the receipts from residents attract the provisions of this section. The Ld.AR relied on the decision of the Hon'ble Bombay High Court in the case of Green Infra Ltd (2017) 392 ITR 7 (Bom) wherein it has been held that where the transactions are recorded in the books of account reflected in the financial statements and the subscription was done, through banking channel as evidenced by bank statements, then the genuineness o the transaction was not hit by section 68. The Ld.AR also relied on the decision of the co-ordinate bench in the case of DCIT vs Piramal Realities Pvt Ltd (2019) 174 ITD 633 (Mum) where it is held that when the Assessing Officer had not questioned the share capital to the extent of funds value, but had only questioned the share premium and where the assessee had filed sufficient evidences including the details of shares, then the genuineness of the transaction could not be doubted for the purpose of section 68 merely because the Assessing Officer felt that share premium received by the assessee was high with regard to the money received in excess of the valuation certificate. Further reliance is placed on the decision in the case of DCIT vs 6 ITA 652/Mum/2023 M/s Jet Privilege Pvt Ltd Varsity Education Management (P) Ltd, [2019] 105 taxmann.com 291 (Mumbai) where it is held that the share premium amount worked out in valuation certificate is minimum amount that can be collected by the assessee and hence, there is no bar on collecting higher amount as share premium.
We heard the parties and perused the material on record. To recapitulate the facts, the Assessing Officer noticed that the assessee based on the valuation report had sold shares for an amount of Rs.1612,15,35,258/- where the shares having face value of Rs.10/- each has been issued at a premium of Rs.1,58,268/- per share to Jet Airways India Ltd and Apurva Shah and at a premium of Rs.1,66,720/- to M/s Etihad Airways. The Assessing Officer has observed that the purchase consideration was fixed at USD 150 million lump sum showed that no reliance was placed on the fair market value of the shares. Accordingly, the Assessing Officer questioned the genuineness of the transaction and that charging extra premium from the non resident over and above the valuation done by independent valuer has not been justified by the assessee company. On further appeal, the CIT(A) did not accept the contentions of the assessee with regard to the non- applicability of section 56(2)(viib) to the impugned addition for the reason that the assessee itself has offered income to the extent of Rs.22,09,044/- under section 56(2)(viib) towards transaction with the other two resident shareholders. However, the CIT(A) has allowed the appeal in favour of the assessee for the reason that the transaction is genuine and that the First Proviso to section 68 requiring to explain the source is not applicable to the non resident. The CIT(A) further held that the Assessing Officer has not brought anything contrary on record to question the genuineness of the transactions.
7 ITA 652/Mum/2023 M/s Jet Privilege Pvt Ltd 8. In order to make an addition under section 68, the onus is on the assessee to prove the identity, the creditworthiness and the genuineness of the transactions. In the given case, the Assessing Officer has accepted the identity and creditworthiness of the transaction and has made the addition since he has not accepted the genuineness of the transaction. In this regard, it is pertinent to note that the Assessing Officer has not questioned the genuineness of the entire transaction, but has not accepted only a portion of the transaction which, according to the AO is excess. We, therefore, see merit in the submissions of the Ld.AR that the genuineness of a portion of the transaction cannot be questioned when the Assessing Officer himself has accepted a major portion of the transaction to be genuine. It is also submitted that the assessee has not offered any income towards excess premium in the case of Etihad Airways for the reason that the provisions of section 56(2)(viib) are not applicable to non residents. On perusal of the said section, we notice that the provisions are very clear as to the receipts from only resident assessees are subject to section 56(2)(viib). Therefore the submissions that this being the reason for not making any disallowance under section 56(2)(viib) with regard to transactions with Etihad Airways has merit.
We also notice that the coordinate bench in the case of Varsity Education Management (P.) Ltd (supra) has considered the issue of excess share premium being added under section 68 and held that – 32. The Ld D.R also argued that the assessee has not explained "nature" of excess premium amount of Rs.358/- per share, i.e., according to Ld D.R/AO, the share premium was justified only to the extent of Rs.672/- only. Accordingly she contended the excess amount of Rs.358/- collected by the assessee cannot be considered as share premium. Since the "nature" of this excess collection is not explained by the assessee to the satisfaction of the AO, the Ld D.R contended that the same was rightly assessed u/s 68 of the Act.
8 ITA 652/Mum/2023 M/s Jet Privilege Pvt Ltd 33. Section 68 of the Act is a deeming fiction to assess cash credits, if the same was not declared by the assessee as his income and further, if the assessee offers no explanation or the explanation offered by the assessee is not satisfactory to the AO. The provisions of sec.68 read as under:— 68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the "nature and source" thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.' It is the contention of the Ld D.R that the excess premium of Rs.358/- per share cannot be considered as "share premium" and further the assessee has failed to explain the "nature" of amount of Rs.358/- per share. Accordingly it was contended that the same was rightly assessed as income of the assessee.
There is no dispute with regard to the fact that the assessee has received the impugned funds by way of "Share Premium" on issue of preference shares. In the books of accounts also, the assessee has credited "share premium account" only with the amount received. The investor has also given the funds only towards share premium. Hence, according to the assessee as well as investor company, the nature of receipt/payment is "Share premium" on the preference shares.
Since the revenue is contending that the "nature" of excess amount of premium is not proved, we shall examine the meaning or context in which the word "nature" is used in sec.68 of the Act. The courts have time and again held that if an assessee proves three essential ingredients with regard to cash credits, viz., the identity of the creditor, credit worthiness of the creditor and genuineness of transactions, then the "nature and source" of cash credit stands proved. In that case, the said cash credit cannot be assessed as income of the assessee. As observed earlier, if any cash credit is offered as income by the assessee himself, the question of applying sec.68 does not arise. The requirement of applying provisions of sec.68 shall arise only if any cash credit is not offered as income by the assessee.
We notice that the Hon'ble Bombay High Court, in the case of Major metals Ltd (supra) has also discussed about the scope of provisions of sec.68 of the Act as under:— 'Section 68 of the Income Tax Act provides that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year. The Supreme Court held as follows:
9 ITA 652/Mum/2023 M/s Jet Privilege Pvt Ltd "It is no doubt true that in all cases in which a receipt is sought to be taxed as income, the burden lies on the Department to prove that it is within the taxing provision and if a receipt is in the nature of income, the burden of proving that it is not taxable because it falls within exemption provided by the Act lies upon the assessee. [See : Parimisetti Seetharamamma [1965] 57 ITR 532 at page 536). But, in view of Section 68 of the Act, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income-tax as the income of the assessee of that previous year if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the Assessing Officer, not satisfactory. In such a case there is, prima facie, evidence against the assessee, viz., the receipt of money, and if he fails to rebut it, the said evidence being unrebutted, can be used against him by holding that it was a receipt of an income nature. While considering the explanation of the assessee the Department cannot, however, act unreasonably." A careful reading of the above observations would show that the term "nature" is used in sec.68 of the Act in the context of whether the cash credit is of "income nature" or is "not of income nature". As per the deeming provisions of sec.68 of the Act, all cash credits may be considered to be of "income nature", if the assessee offers no explanation or the explanations offered by the assessee is not to the satisfaction of the AO. While considering the explanation of the assessee, the department cannot, however, act unreasonably. Hence the meaning of the term "nature" is whether the cash credit bears the nature of income or not? Identical views have been expressed in the following cases also:- (a) Manindranath Dash v. CIT [1955] 27 ITR 522 (pat), wherein it was held as under:- In our opinion the argument of Mr. Gupta must be rejected as unsound. The principle is well established that if the assessee receives a certain amount in the course of the accounting year, the burden of proof is upon the assessee to show that the item of receipt is not of an income nature; and if the assessee fails to prove positively the source and nature of the amount of the receipt, the revenue authorities are entitled to draw an inference that the receipt is of an income nature. The burden of proof in such a case is not upon the department but the burden of proof is upon the assessee to show by sufficient material that the item of receipt was not of an income character. (b) Sreelekha Banerjee v. CIT [1963] 49 ITR 112 (SC):- If there is an entry in the account books of the assessee which shows the receipt of a sum on conversion of high denomination notes tendered for conversion by the assessee himself, it is necessary for the assessee to 10 ITA 652/Mum/2023 M/s Jet Privilege Pvt Ltd establish, if asked, what the source of that money is and to prove that it does not bear the nature of income. The department is not at this stage required to prove anything. It can ask the assessee to bring any books of account or other documents or evidence pertinent to the explanation if one is furnished, and examine the evidence and the explanation. If the explanation shows that the receipt was not of an income nature, the department cannot act unreasonably and reject that explanation to hold that it was income. If, however, the explanation is unconvincing and one which deserves to be rejected, the department can reject it and draw the inference that the amount represents income either from the sources already disclosed by the assessee or from some undisclosed source. The department does not then proceed on no evidence, because the fact that there was receipt of money is itself evidence against the assessee. There is thus, prima facie, evidence against the assessee which he fails to rebut, and being unrebutted, that evidence against him by holding that it was a receipt of an income nature. (c) Smt. Panna Devi Chowdhary v. CIT [1999] 75 Taxman 507/208 ITR 849 (Bom):- …..The Income tax Act imposes a liability to tax upon income. It does not provide that whatever is received by a person can be regarded as his income liable to tax. In all cases in which a receipt is sought to be taxed as income, the burden lies on the Department to prove that it is within taxing provision. It is only in a case where the receipt is in the nature of income, the burden of proving that it is not taxable lies upon the assessee.' 37. In the instant case, there is no dispute to the fact that the assessee has received the sum of Rs.1030/- per share as Share Premium. It is the case of the assessing officer is that he will accept the share premium only to the extent of Rs.672/- per share worked out as per Valuation certificate. Accordingly the AO has considered the amount of Rs.358/- per share as unjustified premium and assessed the same as income of the assessee u/s 68 of the Act. The question that requires to be considered is whether the alleged excess premium of Rs.358/- per share is in the "nature of income or not", within the meaning of sec.68 of the Act.
There is no dispute with regard to the fact that the assessing officer was satisfied with the identity of the investor M/s NSR PR Mauritius LLC, its credit worthiness. With regard to the genuineness of transactions also, the assessee has proved the same by proving that the funds have been received through banking channels and there is no dispute on this fact. However, the AO has taken the view that the genuineness of the Share premium amount has been proved to the extent of Rs.672/- only and the AO has so taken the view, only for the reason that the share premium is determined only to the above said extent as 11 ITA 652/Mum/2023 M/s Jet Privilege Pvt Ltd per the valuation certificate, i.e., the AO has based his decision on the valuation certificate. The Ld A.R brought our attention to the Notification No.FEMA 205/2010-RB dated 07-04-2010, wherein it is stated the price of shares issued to persons resident outside India under this Schedule shall not be less than:— (a)** ** * (b) the fair valuation of shares done by SEBI registered Category-I Merchant banker or a Chartered Accountant as per the discounted free cash flow method, where the shares of the company is not listed on any recognised stock exchange in India; and….. Hence there is merit in the contention of the Ld A.R that the share premium amount worked out in the Valuation Certificate is the minimum amount that can be collected by the assessee and hence there is no bar on collecting higher amount as share premium. The Ld CIT(A) has rightly observed that there are several factors that are taken into consideration while issuing the equity shares to shareholders/investors, such as Venture capital funds and Private Equity funds. The Ld CIT(A) has also noticed that the actual financial results achieved by the assessee has exceeded the financial projections. Accordingly he has held that the premium of Rs.1030/- was determined between the parties on the basis of commercial considerations and agreed to by them, which cannot be questioned by the tax authorities. It is well settled proposition of law that the AO was not entitled to sit on the arm chair of a businessman and regulate the manner of conducting business. Hence, in our view, the AO was not justified in holding that he will accept the share premium amount only to the extent of Rs,672/- only. Hence the AO was not justified in partially not accepting the share premium and accordingly he could not have doubted the genuineness of transactions on this reason.
We have noticed that the AO has assessed the alleged excess premium u/s 68 of the Act. The Hon'ble Bombay High Court has held in the cases of Green Infra Ltd (supra) and Gagandeep Infrastructure (P.) Ltd. (supra) has held that the amount received on issuing of Shares should be examined by the AO within the parameters of sec.68 of the Act. Accordingly, once the AO was satisfied with the identity and credit worthiness of the investor and genuineness of transactions, the assessee can be said to have proved the "nature and source" of the cash credits. The amounts received as Share premium are in the nature of capital receipts as per the decision rendered by Hon'ble Bombay High Court in the case of Vodafone India Services (P.) Ltd. (supra) and the assessee has also discharged the onus placed upon it u/s 68 of the Act. In fact, the AO himself accepted the share premium to the extent of Rs.672/- per share as Capital receipt. Hence the "nature" of alleged excess share premium amount cannot be considered as receipt of income nature.
The amendment brought in sec.68 of the Act w.e.f. 1.4.2013 has been held to be applicable from AY 2013-14 onwards by Hon'ble Bombay High Court in the case of Gagandeep infrastructure (P.) Ltd. (supra). Even otherwise, the amendment will not 12 ITA 652/Mum/2023 M/s Jet Privilege Pvt Ltd apply to the assessee herein as the investor is a SEBI registered Venture Capital Fund. The amendment brought in sec. 2(24) and sec.56(2)(vii) of the Act relating to assessing of excess share premium as income, has been held to be applicable from AY 2013-14 onwards as held by Hon'ble Bombay High Court in the case of Apeak Infotech (supra). We have seen that the AO himself has accepted the quantum of share premium in AY 2014-15 and further the actual financial results have far exceeded the financial projections. 41. ****** 42. In view of the foregoing discussions, we are of considered view that the decision reached by Ld CIT(A) does not call for any interference. Accordingly we uphold the order passed by Ld CIT(A) on the reasons discussed above.
In the result, the appeal of the revenue is dismissed.
10. We further notice that the co-ordinate bench of the Tribunal in the case of Piramal Reality (P) Ltd (supra) has held a similar view. The relevant extract of the decision is as given below – “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 the hearing, the Ld Counsel explained that the explanatory memorandum to the Finance Bill 2012 makes 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 docs 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 C1T-DR 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.
13 ITA 652/Mum/2023 M/s Jet Privilege Pvt Ltd 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. In view of the above facts and circumstances, we are of the vie that the assessee has discharged its onus by adequately disclosing the transaction in its books of account filing statutory forms as regards allotment of shares, providing name, address and PAN of the shareholder etc. the assessee has sufficiently discharged the onus cast upon it for the purpose of section 68 of the Act an 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.”
9. In the given case, the assessee has accounted the transaction receipt of share premium in the books of accounts and the details from whom the said amount is received has also been established. The Assessing Officer has not questioned the genuineness of the entire transaction but has held only the amount received in excess of the amount mentioned in the valuation report as non-genuine. Therefore in our considered view, the ratio laid down by the above decisions of the coordinate benches are applicable to the present case, and that the CIT(A) has correctly deleted the addition on the ground that the assessee has discharged the onus of proving the genuineness of the transaction. We, therefore, see no reason to interfere with the decision of the CIT(A) and accordingly, the appeal of the Revenue is dismissed.
In the result, appeal of the Revenue is dismissed. Order pronounced in the open court on 22/06/2023.