DCIT-7(1)(1), MUMBAI, AAYAKAR BHAWAN vs. HBS REALTORS PRIVATE LIMITED, CEEJAY HOUSE ,DR ANNIE BESANT ROAD WORLI

The brief facts of the case are that the assessee, HBS Realtors Private Limited, filed its return of income for A.Y. 2008-09 on 29.08.2008 declaring total income of ₹49,09,824/-.

The Assessing Officer reopened the assessment under section 147 by issuing notice under section 148 of the Act.

During the course of reassessment proceedings, the Assessing Officer examined the share capital and share premium received by the assessee. The Assessing Officer noticed that the net asset value of the assessee's shares as on 31.03.2007 was ₹12.05 per share. During the relevant previous year, the assessee issued 5,74,720 shares. The assessee issued 2,95,000 shares to M/s Arihant Developers, a resident investor, at ₹100 per share, having the face value of ₹1 and share premium of ₹99 per share. The assessee also issued 2,79,720 shares to Mr. Sunil Puri, a non-resident investor, at ₹429 per share, comprising the face value of ₹1 and share premium of ₹428 per share. The Assessing Officer compared the issue prices with the net asset value of ₹12.05 per share and computed an excess premium at ₹96.95 per share in the case of Arihant Developers and ₹425.95 per share in the case of Sunil Puri. On this basis, the Assessing Officer computed the aggregate excess premium at ₹14,77,46,984/-.

The assessee submitted before the Assessing Officer that share premium constituted a capital receipt and relied upon the decisions in Green Infra Ltd. and Vodafone India Services Pvt. Ltd. The assessee also pointed out that section 56(2)(viib) of the Act had no application to A.Y. 2008-09 since that provision became applicable only from A.Y. 2013-14. The assessee further submitted a valuation report valuing the shares at ₹429 per share as on 01.10.2007. 6. The Assessing Officer did not accept the explanation. The Assessing Officer held that the assessee had failed to justify the large premium when the net asset value was only ₹12.05 per share. The Assessing Officer further questioned the difference between the premium of ₹99 per share charged from Arihant Developers and the premium of ₹428 per share charged from Sunil Puri, particularly since the Board resolution relating to the allotments was dated 19.09.2007. The Assessing Officer held that section 68 of the Act required the assessee to explain not only the source but also the nature of the credit and the Assessing Officer held that the assessee had failed to explain the "unjustified share premium". The Assessing Officer accordingly added ₹14,77,46,984/- to the total income under section 68 of the Act.

In appeal, on the merits of the addition under section 68 of the Act, the learned CIT(A) examined the two share subscriptions separately. The learned CIT(A) observed that the assessee issued 2,95,000 shares to Arihant Developers, a resident investor, at ₹100 per share, including premium of ₹99 per share, for an consideration of ₹2,92,05,000/-. The learned CIT(A) further observed that the assessee issued 2,79,720 shares to Sunil Puri, a non-resident investor, at ₹429 per share, including premium of ₹428 per share, for an aggregate consideration of ₹11,97,20,160/-.

In relation to the shares issued to Sunil Puri, the learned CIT(A) observed that the assessee had obtained a valuation report dated 01.10.2007 from K.B. Shah & Associates, Chartered Accountants, which valued the equity shares at ₹429 per share under the FEMA framework applicable to investment by a person resident outside India. The learned CIT(A) further noticed that the assessee issued the shares to Sunil Puri at the same price of ₹429 per share and the parties had executed a Share Subscription-cum-Shareholders Agreement on 10.11.2007.

The learned CIT(A) observed that the assessee had furnished the financial statements, returns of income, statements of total income, tax audit report, statutory audit report, bank statements showing receipt of share application money, Form No. 2 filed with the Registrar of Companies showing allotment of shares, details of the face value and premium and the valuation report. On consideration of these documents, the learned CIT(A) held that the assessee had established the identity of the investors, their creditworthiness and the genuineness of the transactions. The learned CIT(A), therefore, held that section 68 of the Act could not be invoked merely in respect of the premium component and deleted the addition of ₹14,77,46,984/-.

The Department is in appeal before us against the order of the learned CIT(A) insofar as the learned CIT(A) deleted the addition of ₹14,77,46,984/- made by the Assessing Officer under section 68 of the Act on account of alleged excessive or unexplained share premium.

We have heard the rival submissions and perused the material available on record. On going through the assessment records, we find that the assessment order is based on the premise that the share premium charged by the assessee was excessive when compared with the net asset value of ₹12.05 per share. The Assessing Officer also placed reliance upon the fact that the assessee charged premium of ₹99 per share from Arihant Developers and premium of ₹428 per share from Sunil Puri, although the Board resolution relating to the allotments was passed on the same date. The Assessing Officer, therefore, treated the difference between the net asset value and the issue price as unexplained under section 68 of the Act.

In our view, the approach adopted by the Assessing Officer mixes up two distinct concepts. Under section 68 of the Act, the Assessing Officer is required to examine the nature and source of a credit appearing in the books of the assessee. In the case of share capital or share premium, the assessee was required to establish the identity of the subscriber, the creditworthiness of the subscriber and the genuineness of the transaction. However, once these ingredients are explained, the Assessing Officer could not treat the premium as unexplained merely because, according to him, the premium was excessive or was higher than the net asset value. The capital nature of a receipt by itself does not exclude the operation of section 68 of the Act where the nature and source remain unexplained, section 68 cannot be converted into a provision for substituting the Assessing Officer's opinion regarding the appropriate valuation or commercial wisdom of the parties where the nature and source of the credit stand satisfactorily established.

In the present case, the learned CIT(A) has given a categorical factual finding that the assessee established the identity and creditworthiness of both investors and the genuineness of the transactions. The assessee furnished the financial statements, returns of income, statutory and tax audit material, bank statements showing movement of funds, statutory return of allotment filed with the Registrar of Companies and the valuation report. The Department has not brought before us any material to show that these findings of the learned CIT(A) are factually incorrect or perverse. The Assessing Officer has not brought any material on record to establish that the money ostensibly received from the investors was the assessee's own unaccounted money routed back in the garb of share premium.

The issue is also required to be examined in the context of the law applicable to A.Y. 2008-09. Section 56(2)(viib) of the Act, which specifically brought within the tax net consideration received by a closely held company from a resident for issue of shares to the extent such consideration exceeded the fair market value of the shares, came into operation only from A.Y. 2013-14. Similarly, the special proviso to section 68 of the Act dealing with share application money, share capital and share premium received by a closely held company was also introduced by the Finance Act, 2012 with effect from 01.04.2013. The Assessing Officer, therefore, could not indirectly import into section 68 for A.Y. 2008-09 a statutory fair-market-value test which the Legislature itself introduced only prospectively from A.Y. 2013-14.

The Hon'ble jurisdictional High Court in CIT v. Green Infra Ltd. [2017] 78 taxmann.com 340/392 ITR 7/292 CTR 233 (Bom.) considered the applicability of section 68 of the Act to share premium. The Hon'ble High Court noticed that the identity of the subscribers, genuineness of the transactions and financial capacity of the subscribers had been established and declined to interfere with the deletion of the addition even though the Revenue contended that the quantum of premium was not commercially prudent. The Court that once the transaction satisfies the requirements of section 68 of the Act, the Revenue cannot substitute its commercial judgment for that of the company and the subscriber merely because the premium appears high.

The same principle has been explained by the Mumbai Bench of the Tribunal in ITO v. Chiripal Poly Films Ltd. [2019] 104 taxmann.com 172/[2019] 177 ITD 441 (Mum.-Trib.). In that case also, the Tribunal dealt with substantial share subscription and premium, including investment from Orange Mauritius Investments Ltd., a non-resident investor. The Tribunal noticed the statutory filings, banking transactions and compliance with the RBI requirements and held that once the assessee had established the transaction and discharged the requirements of section 68 of the Act, the addition could not be sustained merely because of the quantum of premium. The Tribunal also held that section 56(2)(viib) of the Act could not be applied to an assessment year preceding A.Y. 2013-14.

The position of Sunil Puri stands on an even stronger factual footing. Sunil Puri is a non-resident and is not a related party of the assessee. The assessee issued 2,79,720 shares to him at ₹429 per share, including premium of ₹428 per share. The assessee supported that price by a valuation report dated 01.10.2007 issued by K.B. Shah & Associates, Chartered Accountants, which computed the value of the shares at ₹429 per share under the FEMA framework applicable at the relevant time. The assessee thereafter issued the shares at precisely ₹429 per share and executed the Share Subscription-cum-Shareholders Agreement dated 10.11.2007. There is no finding of the Assessing Officer that Sunil Puri did not exist, that he did not have the financial capacity to make the investment, that the funds did not move through normal banking channels or that the money belonged to the assessee. Once these facts are established, the mere fact that a non-related non-resident investor agreed to subscribe to shares at a substantial premium cannot by itself convert the receipt into an unexplained cash credit under section 68 of the Act.

We may also refer to the judgment of the Hon'ble Bombay High Court in SLS Energy (P.) Ltd. v. ITO [2023] 154 taxmann.com 400 (Bom.), wherein the assessee had issued preference shares of face value of Re.1 at a premium of ₹999 per share to a sister concern. The Assessing Officer questioned the premium on the ground that it was excessive and was not justified by the intrinsic value or net asset value of the shares. The Hon'ble High Court held that receipt of share capital including premium was on capital account and that, for the assessment years preceding the amendments introduced by the Finance Act, 2012, the mere allegation that the premium was excessive could not constitute a basis for treating the receipt as income. Though the said judgment was rendered in the context of reassessment, the principle relevant for the present controversy is clear that excessive premium, by itself, cannot substitute for material showing that the transaction or the source of the credit is not genuine.

The issue has subsequently been considered in considerable detail by the Hon'ble Bombay High Court in Shendra Advisory Services (P.) Ltd. v. Dy. CIT [2024] 159 taxmann.com 557/[2024] 298 Taxman 261/[2025] 482 ITR 385 (Bom.). In this case, the assessee therein had issued shares to Indian as well as foreign promoters on different commercial terms. The Assessing Officer questioned the premium and made an addition under section 68 of the Act. The Hon'ble High Court held that money received upon issue of shares at premium constituted a capital account receipt and, for the assessment year involved therein, there was no statutory provision taxing the premium merely because it was perceived to be excessive. The Hon'ble High Court further held that a contravention of another statute, even if assumed, would not convert a capital receipt into a revenue receipt. The Revenue's challenge to the said judgment did not succeed before the Hon'ble Supreme Court and SLP filed by the Department was dismissed.

In the present case, Arihant Developers is a related party and a resident investor, whereas Sunil Puri is an unrelated non-resident investor. The commercial circumstances governing the two subscriptions were therefore not identical. The fact that Arihant Developers subscribed at ₹100 per share while Sunil Puri subscribed at ₹429 per share does not, without anything more, establish that either transaction was bogus or that any part of the premium represented the assessee's unaccounted income. There was no statutory requirement in A.Y. 2008-09 compelling a company to issue shares to every investor at an identical premium for the purposes of section 68 of the Act. In the case of Sunil Puri, the issue price of ₹429 was also supported by the valuation report fixing the value at that very amount.

Accordingly, looking into the present facts, the observations made by learned CIT(A) in his order, the documentary evidence available on record and the law laid down by the Hon'ble jurisdictional High Court in Green Infra Ltd. (supra), SLS Energy (P.) Ltd. (supra) and Shendra Advisory Services (P.) Ltd. (supra), and the decision of the Mumbai Tribunal in Chiripal Poly Films Ltd. (supra), we find no infirmity in the order of the learned CIT(A) deleting the addition of ₹14,77,46,984/- made under section 68 of the Act.

We accordingly uphold the order of the learned CIT(A) on this issue and dismiss the grounds raised by the Department.

In the result, the appeal filed by the Department is dismissed.