ACIT-4(1)(1), MUMBAI, MUMBAI vs. AUTOTECH-SIRMAX INDIA PRIVATE LIMITED, MUMBAI

The brief facts of the case are that the assessee, Autotech-Sirmax India Private Limited, formerly known as Autotech Polymers India Private Limited, is engaged in the business of manufacturing specialty thermoplastic materials. The assessee filed its return of income for A.Y. 2018-19 on 17.10.2018 declaring total income of ₹12,66,01,540/-. The case was selected for limited scrutiny to examine the large share premium received during the year.

During the year, Sirmax India Plastics Private Limited (SIPPL), an Indian company and a subsidiary of Sirmax SPA, Italy, entered into a Share Purchase-cum-Share Subscription Agreement with the assessee and its existing shareholders. Under the agreement, the assessee issued 13,31,444 fresh equity shares of face value of ₹10 each to SIPPL at a price of ₹264.68 per share, which included share premium of ₹254.68 per share. The assessee received a total amount of ₹35,24,06,597.92 against the issue of these shares. According to the assessee, the shares were issued at their fair market value and the valuation was supported by a valuation report.

During the assessment proceedings, the Assessing Officer noticed that Sirmax SPA, Italy had remitted about ₹46 crore to SIPPL. Out of these funds, SIPPL subscribed to the fresh shares issued by the assessee and also purchased shares directly from some of the existing shareholders of the assessee. The Assessing Officer treated the investment as a downstream foreign investment and examined the transaction mainly from the point of view of FEMA and RBI regulations. According to the Assessing Officer, there were deficiencies relating to the manner of downstream investment, reporting requirements, Forms DI, FLA, FC-GPR and FC-TRS, valuation requirements and other FEMA compliances. The Assessing Officer was therefore of the view that the transaction could not be regarded as a valid capital investment. On this basis, he treated the entire amount of ₹46 crore remitted by Sirmax SPA, Italy to SIPPL, and not merely the amount received by the assessee, as an unexplained credit under section 68 of the Act. The Assessing Officer accordingly computed the total income at ₹58,66,01,540/-.

The assessee carried the matter in appeal before the learned CIT(Appeals). The learned CIT(A) examined the actual flow of funds and found that the assessee-company had received only ₹35.24 crore from SIPPL towards subscription to fresh shares. The balance amount forming part of the ₹46 crore remitted by Sirmax SPA to SIPPL was not received by the assessee as share capital. Part of the amount was utilised by SIPPL for purchasing existing shares directly from the existing shareholders. The learned CIT(A) therefore found that the assessee could not be treated as the recipient of the entire ₹46 crore. He further found that the source of the ₹35.24 crore received by the assessee was explained. SIPPL was an Indian company; its PAN and other particulars were available; its bank statement had been furnished; and the foreign inward remittance received by SIPPL from its parent company, Sirmax SPA, Italy, had also been placed on record. The nature of the receipt was also evident from the financial statements and the documents relating to allotment of shares. The learned CIT(A) accordingly held that the basic requirements for invoking section 68 of the Act were absent in the instant facts. He further observed that even if there was any violation of FEMA, the same was a matter falling within the domain of the authorities administering FEMA and could not, by itself, make an explained credit taxable under section 68 of the Act. He therefore deleted the addition of ₹46 crore and allowed the appeal of the assessee.

The Department is in appeal before us against the order passed by the CIT(Appeals) allowing the appeal of the assessee.

We have heard the rival submissions and perused the material on record. The Revenue has challenged the deletion of the addition mainly on the ground that SIPPL was an Indian company controlled by its foreign parent, Sirmax SPA, Italy, and that the downstream investment was not compliant with FEMA/RBI requirements. The Ld. DR contended that the assessee failed to establish the nature and source of the funds.

Section 68 of the Act applies where a credit appearing in the books of the assessee is not explained. In the case of share capital or share premium received from a resident shareholder, the assessee is also required to establish the nature and source of the funds in the hands of such shareholder. The Hon'ble Supreme Court in PCIT v. NRA Iron & Steel Pvt. Ltd. (2019) 412 ITR 161 (SC) has held that the assessee must establish the identity and creditworthiness of the investor and the genuineness of the transaction.

Applying the above test, we find that the assessee has discharged its burden. The identity of SIPPL is not disputed. SIPPL is an Indian company having PAN and is a subsidiary of Sirmax SPA, Italy. The investment was made through banking channels. The assessee furnished the bank statement of SIPPL as well as the foreign inward remittance advice showing receipt of funds from SirmaxSPA, Italy. In fact, the Assessing Officer himself traced the funds to the remittance of ₹46 crore made by Sirmax SPA, Italy to SIPPL. Thus, the immediate source as well as the source of the funds in the hands of SIPPL (who in turn subscribed to the shares of the assessee) was identified.

The decision in NRA Iron & Steel Pvt. Ltd. (supra) does not assist the Revenue because, unlike that case, there is no material here to show that SIPPL was a paper company, it did not have financial capacity or the assessee's own unaccounted money had been routed back in the form of share capital. The Hon'ble Bombay High Court in CIT v. Orchid Industries (P.) Ltd. (2017) 397 ITR 136 (Bom.) has also held that documentary evidence relating to identity, banking transactions and share allotment cannot be rejected merely on suspicion without contrary material.

We also find no merit in the Revenue's reliance on alleged FEMA/RBI violations. In Mapei Construction Products (India) Pvt. Ltd. v. DCIT, IT(TP)A No.828/Bang/2022, order dated 23.02.2023, the Tribunal held that where the identity of the investor and source of the funds are established, an addition under section 68 of the Act cannot be sustained merely on the basis of non-compliance with FEMA/RBI requirements. Any such violation may be examined by the authority administering FEMA, but it does not by itself convert an explained share-capital receipt into unexplained income under section 68 of the Act.

Similarly, the allegation that the was failure in filing of Forms DI, FLA, FC-GPR or FC-TRS does not prove that the source of the amount received by the assessee was unexplained. The Assessing Officer has also not pointed out any specific defect in the valuation report supporting the issue price of ₹264.68 per share.

In view of the above, we find that the learned CIT(A) correctly appreciated the facts. The assessee received ₹35.24 crore from an known resident company through banking channels; the source of SIPPL's investment from Sirmax SPA, Italy was established; and no material has been brought on record to show that the transaction was not genuine or was an accommodation entry.

Accordingly, Ground Nos. 1 to 7 raised by the Revenue are dismissed and the order of the learned CIT(A) deleting the addition of ₹46 crore under section 68 is upheld. Ground No. 8 is general in nature and requires no separate adjudication.

In the result, the appeal of the Revenue is dismissed.