Bharathi Cement Corporation Pvt. Ltd vs. The Pr. Commissioner of Income Tax-2

The instant batch of appcals in ITTA Nos.245 and 246 of 2Ol9 are filed by the revenue and ITTA Nos.367 and 366 of 2OL9 a-re filed by the assessee, challenging the very same common order E II I II I E I ! i I I I I I i I I I I i i

The brief facts ofthe case are that the assessee is engaged in the business of manufacture and sale of cement. For the Assessment Year 20lO-11, it filed its return of income on 15.10.2010 declaring a loss of Rs. 189,25,94,4g5/_. The assessment was completed by the Assessing Officer by making addition of Rs. 182,OO,0O,OOO/- under Section 68 of the Income Tax Act, 1961 (for short .the Act).

During the assessment year 2O1O-11, the assessee claimed to have received share premium aggregating to Rs.182,00,0O,000/- from five companies i.e., India Cements, Dalmia cements (Bharat) Lirnited, Gilchrist Investment pvt. Ltd., Alpha villas Pvt. Ltd. and Alpha Avenue hrt. Ltd. and pursuant to the said investments, the assessee allotted O% convertible

The Assessing Oflicer passed assessment orders dt.

L2.20lr (AY-2009-10) and dt.31.03.2O13 (AY 2010-11) stating that despite investing Rs.185 crores, the above investor companies were allotted only O.3o/o of the equity shareholding, whereas the main promoter of the company i.e., Sri Y.S. Jagan Mohan Reddy and the other promoter namelg M/s Silicon Builders, who had invested about Rs.45 crores, held 99.7o/o of the shareholding.

The Assessing Officer recorded statements of key personnel of the investor companies, to examine the justification for such substantial investments, more particularly when the assessee had not even commenced commercial production during the relevant period and although the face value of each share was Rs.1O/-, the shares were allotted at a high premium of Rs.94/-, Rs.llo/-, Rs.175/- and Rs.t,44O/-per share without any prior valuation of the equity shares in the comp€uly, which had no operational track record at the relevant point of time. :,

Further, the Assessing officer herd that the said investments were not genuine commercial transactions of purchase of equity shares and the said amount was deposited by the investor companies, who had derived certain benefits such as sanctions and approvals from the Government of Andhra pradesh, as a quid pro quo deal as the then chief Minister was the father of the main promoter, by showing the said amount as investment of purchase of equity shares. The Assessing Authority further held that the assessee adopted the said mechanism and received the said amount s towards a mutual arrangement and cleverly designed it as purchase of equity shares and thus, the Assessing Oflicer, added Rs. 182,00,00,000/- to the income of the assessee under Section 68 of the Act and the Assessing oflicer has arso assessed the said amount as income from other sources and passed the impugned assessment orders

Challenging the said assessment orders, the assessee preferred appeals before the commissioner of Income Tax (Appeals) (for short 'the crr(A)J and the GIT(A) dismissed the said appeals uide separate orders, dt.2S.O2.2Ol4, holding tllat the 5 entire amount was liable to be assessed as income from other sources under Section 56 of the Act.

Aggrieved, thereupon the assessee preferred appeals before the learned ITAT in ITA Nos.6g6l2o14 and 69r/2014 and the learned ITAT after proper appreciation of material on record allowed the assessee's appeals and remanded the matter to the Assessing officer for fresh consideration by directing the Assessing oflicer not to follow human probabilities, but on actual evidence of passing of the benefit to the shareholders/directors. challenging the said orders of remand, both the Revenue and Assessee have filed the present appeals before this court.

The appeals filed by the Revenue in ITTA.N o.24s and 246 of 2ol9 were admitted for determination of the following substantial questions of law: whether, on the facts and in the circumstances of the case, the Tribunal is right in observing that the issue and allotment of shares, and the procedure of share premium payrnent by investors are according to law, while itself expressing doubt about the soundnf"" of the investment decision and the reasonableness of huge premium paid by investor companies? whether, on the facts and in the circumstances of the case, the Tribunal is correct in not conrirming the order of Ao and GIT(A) by observing that proper .irid..r"" o. cogent material is to be brought on record, despite the "i) ii) I I 1 ! i t *{!jI It !

Heard Sri. B. Narasimha Sharma, the learned Additional Solicitor General of India appearing for the revenue in ITTA. Nos.245 and,246 of 2019 and for the respondents in ITTA.Nos .366

Learned Additional Solicitor General of India further contend.ed that the learned ITAT has not appreciated the material on record in proper perspective, despite the entire record being available before it and the learned ITAT being the last appellate

The learned Additional Solicitor General of India praced reliance on judgment of the Honble Supreme court in the case of Commissloner of Income Tax o. p.Mohanatcalcrr wherein the Hon'ble Supreme Court held as under: "Doubtful nature of tle transaction and. the manner in which tle sums were found credited in the books of acrriunts maintained bg tle assessee haue been duly taken into consideration bg tle aathorities belout-prtma facie euidene against assessee-Zio bte to be assessed u/ Section6g _ Appeal of Reuenue Deptt. Allowed"

The learned Additional Solicitor General of India also placed reliance in the case of the J\Iatlonal Alumlnum Compang Ltd. o. State of Andhra prc,desh & Otherse wherein the Honble supreme court has herd t].at "utittaut ang mateiar to rard *nt | 2OO7 (2911rTR 278 (SC) 2 (2OO8l 4 Supreme Court Cases 490 ^\

Further, drawing a clue from the aforesaid judgments, learned Additional Solicitor General of Ind.ia, Mr.B.Narasimha Sharma, contends that in the instant case though there is no substantial evidence to show that the said amount of Rs.185 Crores was a genuine transaction for the purchase of equity shares and deposited in the account of the assessee purporting to be tJle sale price of equity shares, more so, vvhen the assessee- compa.ny i.e., Bharati Cement, has not even started its operations of production at the relevant time and at any stretch of imagination of a prrrdent person, the sale proceeds of equity shares will not be that high as calculated deposited by the respective companies of Rs.185 Crores into the accounts of the assessee-company. In that view of the matter, it is contended that remand to the very same Assessing Authority by the ITAT is unwarranted and the said findings of the learned ITAT are perverse and liable to be set aside. ii:r&c** I I i :

Per contra, Sri D.D.Nageshwar Rao, the learned counsel representing Sri Rajesh Maddy, learned counsel for the assessee has submitted that in fact, the companies, which have deposited the sum of Rs. 185 Crores into the assessee-company, all are reputed companies, who are in the market from many years, and out of their rich expertise anticipating that the assessee would do good business, have purchased the equity shares of the assessee- company by investing the said amount towards the purchase of the equity shares and it is for those companies to decide the sale price of the equity shares and the balance sheet of the said companies in fact have properly shown the said amount as investment in the assessee-company and a proper procedure has been followed in purchase of the said equity shares and apparently, all the amounts were deposited into the account of the assessee, which is still lying in the credit of the assessee-comp€rny as on today and there is no deviation of any procedure. Further, upon proper evaluation of the prospects of the company only, the said amount was invested towards purchasing the equity shares and that in any way, the said addition cannot be maintained and the learned ITAT has erred in not appreciating the facts in proper i

L,earned counsel Sri D.D.Nageshwar Rao, has placed reliance on the decision of the Honble High crcurt of MatJhya pradesh in commissioner of rncome Tqx u, chqin House rnternational Pttt. Ltd.3 wherein it was held as under:

Issuing the share at a premium w^as a ammercial decision. It is th.e prerogatiue of the Board. of Directors of a compana to decide the premiuin amount and. it is tle wisdom of sharelwtder whether *rcg want to subscribe tLrc shares at such a premium or not. This uas a mufital d.ecision between bothtl""e companies" 2L. Further, in the case of shendrq. Adttlsory serutces p. Ltd. u- the Deputg commlssioner of rncome Toxq the Honble High Court of Bombay held as under:

Therefore, since tte Act does not stipttlate th.e non- amptiane of any proubion of other Act utould resuk in turntng a capital reeipt into a reuenue receipt, euen assuming for tle sake of argument that the appeilant had. breacled tle prouision of section 7g(2) of tle companies Act, 1956,it utould not tum the share premium amount reeiued. into a reuenue reeipt. As obserued. in credit suisse Business Analgsls (rndia) (p.) Ltd,. v/s. Assistcnt commissioner of rncome Tax(2o16) z2 toxmann.am 3 (2018) 408 rTR 561 a 2O24:BHC-OS:2554-DB : : : : : i I ! : : i :i II I ! i t i I i

Learned counsel for the assessee has further placed reliance on the judgment of the Honble High Court of Delhi in Principal Commissloner of Income Tox-72 tt. Smt. Krishnq. Deuis, which held as under: "......share price and other factors may be enough to show circumstances that might create suspicion; however the Court has to decide an issue on the basis of evidence and proof, and not on suspicion alone. The theory of human behavior and preponderance of probabilities cannot be cited as a basis to turn a blind eye to the evidence produced by the Respondent"

Further, in the case of Commissioner of Income-Tax a. Lanco Industries Ltd.6 the erstwhile High Court of Andhra Pradesh held as under: "If the ostensible shareholders failed to explain the means of investment, that should have been treated as unexplained income in their hands. In order to add it to the income of the assessee there must be a further finding that in fact the shareholders were mere narne- lenders and the money allegedly invested by them really belonged to the directors of the assessee-company. In the absence of a finding that the persons to whom the share certificates were issued on receipt of consideration as per the book entries were in fact dummies or stooges of the directors of the assessee-company, the sanne s 12O2Ll 126 taxmann.com 80(Delhi) o 12000) 1lO Taxman 172 (Andhra Pradesh)

It is clear from the above, the commission for providing entries to beneficiaries would be the real income of Jain Brothers and there is no material to indicate that the Assessee had earned any commission income. This is so because, according to the AO, the Assessee compa.ny was a conduii operated by Jain Brothers 14- It is also apparent that there was income in the hands of the Assesee and it was merely a conduit. The credit, which has been introciuced in the books of the Assessee uras matched by . debit to the other entities used to route the funds to the ultimate beneficiaries. In the aforesaid context the CIT(A) and the learned ITAT had held that the unexplained credits were liable to be tared. in the hands of the beneficiaries. And, since the s€une had been done, there is no occasion of taxing the channels through which the amounts were routed."

By drawing a clue from the smt Krishna Deuirs case (supra), learned counsel for the assessee would contend that this court has to decide the issue on evidence and proof, but not on suspicion alone and the theory of human behaviour and ? (20251 174 taxmann.com t22T {Detht) t i It' I I i n t, i

The learned counsel for the assessee would contend that in fact proper procedure has been followed by the respective investor companies while purchasing the equity shares of the assessee- compa.ny and deposited the said amounts towards the equity shares purchased, and as such, it would only amount to capital receipt and cannot be taxed as revenue receipt and thus, learned counsel has prayed to dismiss the appeals filed by the revenue.

But however, learned counsel supported the substantial questions in the appeals filed by the assessee and contends that the very remittance for re-verification before the Assessing Officer is not warranted and in fact, the appeals are to be allowed by setting aside the assessment orders for the respective years of 2OO9-10 and 2OlO-11, and thus, prayed the indulgence of this Court to quash the assessment orders by setting aside the orders of the CIT(A) as well as the learned ITAT.

We have given earnest consideration to the submissions made by the learned counsel appearing on either side and perused the material on record. 9; & i

On appreciation of factual matrix of the case, evidently, the assessee-company has received an amount of Rs. 1gS Crores from the investor companies i.e., India Cements, Dalmia Cements (Bharat) Limited, Gilchrist Investment pvt. Ltd., Alpha Villas pvt. Ltd. and Alpha Avenue Pvt. Ltd., and the said amounts alleged to have been deposited in the account of the assessee towards the purchase of equity shares to the extent of 0.03% in the assessee_ company. However, the Assessing Authority initially passed tJre assessment orders by making addition of Rs. 1g2 Crores under Section 68 of the IT Act, upon which the assessee has filed appeals before the CIT(A), and the CIT(A), after due enquiry, has dismissed the said appeals by confirming the orders passed by the Assessing Authority, against rvhich, the appeals were filed by the assessee-company before the learned ITAT and the tearned ITAT after appreciation of facts and by appreciating the judgments relied upon by both the revenue as we[ as the assessee, remitted the issue to the Assessing officer for re-verification in simpre terms by verifying the cash flow management of the company for both the assessment years 2009-lO and 2O1O_11. It however directed that the Assessing Officer not to resort to rely on the circumstantial evidence or on test of human probabilities, but on 79 factual evidence of passing of . the benefit to t,.e shareholders/directors, and thus, the grounds raised by the assessee were alrowed by the learned ITAT for statistical purposes for both the respective assessment years, which are identical to each other. 32- Now that since there was a remand by the learned ITAT to the Assessing officer, the revenue as well as the assessee have filed two sets of appears for two assessment years and though the said appeals were admitted on different substantial questions of law, however, the only question of raw that falrs for consideration of this court is whether the learned ITAT was justified in remanding the matter for re-verification of a, the accounts including the funds and cash flow management of the assessee for both the respective years of assessment and further directing not to resort to rery on the circumstantiar evidence or on test of human probabilities but on factuar evidence of passing of benefit to the shareholders/directors.

In that view of the matter, though the revenue as well as the assessee have placed reliance on a catena of judgments, the principre of the said judgments wotrld show that the findings

It is well settled by the Hon'ble Supreme Court and various High Courts that when a matter is remittecl to the Assessing Authority for reconsideration or re-verification of the material on record, with a view to arriving at a fair and proper conclusion on 21 the real dispute between the parties, such an order of remand does not give rise to a substantial question of law fsee:Hero vinoth t), sesham mq.r8 and Kondiba Dagadu Kadam a. Sauitribai Sopan Guiarel. It is trite law that remand cannot be a substantial question of law, where 1) factual adjudication is incomplete, 2) fresh evidence is required, 3) lower authority has not considered the material evidence, and thus, remand cannot be routinely interfered, if there is no statutory violation and procedural violation by the authorities.

In the instant case, the Assessing officer has applied the test of human probabilities and circumstantiat evidence, therefore, the learned ITAT, upon appreciation of the material available on record, has remanded the matter for determination by the Assessing officer to verify the cash flow management of the assessee-company and pass orders based on factual evidence, but not on human probabirities, and directed the Assessing officer to decide the issues comprehensively based on material on record and also the Assessing officer can direct the assessee-company to 8 (2006) 5 SCC 545 e (1999) 3 SCC 722An i

The said findings arrived by the learned ITAT, in directing fresh examination of facts by the Assessing officer, is essential$ procedural in nature and falls within the domain of factual adjudication, to decide the issue comprehensively, solely basing on the material on record but not on human probabitities. Further, in view of the remand, both the Revenue as well as assessee can place sufficient material to pro\/e their respective contentions. Thus, in our considered opinion, the said findings are justified and do not warrant interference by this Court.

In that view of the matter, there ar'e no substantial questions of law involved in all these four appeals and they are liable to be dismissed.

Accordingly, all four appeals are dismissed. However, the Assessing officer is directed to decide the issue comprehensively, in simple terms basing on the appreciation of material on record, as directed by the learned ITAT. No order as to costs.

One CC to Ms. J Sunitha (SR SC for lncome Tax Department for Revenue) loPUCl

One CC to Sri D D Nageshwar Rao, Advocate [OPUC] n

Two CD Copies /L To, ADK/PSL Pntq,