DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-4(1), CENTRAL RANGE-4, MUMBAI vs. M/S.RUNWAL PROJECTS PRIVATE LIMITED, MUMBAI

Apart from that, one very important fact as seen from the records are that, the assessee before the AO had given the detailf of the various investors including the source of funds in the hands of IL&FS India Realty Fund, which are as under:-

Apart from that, it was also brought on record that this fund had also made investment with various real estate companies in India not only with the assessee company, the details of which have been given at page nos. 12 & 13 of the assessment order. However, Ld. AO has simply disbelieved the high premium and without reverting to the explanation given by the assessee as incorporated

Ld. CIT(A) after incorporating the submissions made by the assessee which are appearing at page no. 14 to 31 of the appellate order and discussed in detail has accepted the assessee’s explanation and deleted the addition. The relevant extractions of his findings which are entire edifice of his relief are as under:-

I have considered the facts of the case, submissions of the assessee as well as the order of. the AO. From the perusal of the facts of the case, it appears that assessee has received total share Others M/s Runwal Developers Pvt. Ltd application money including share premium of Rs. 165 crs, from IIRF Realty India IX Ltd, including share premium of Rs. 160.39 cr as under :-

The share premium shown to have received during the year of Rs 43,74,27,284/- was treated as unexplained credits within the meaning of section 68 of the Act and the same was added to the total income of the assessee by the AO . Further, this share premium ranges from Rs. 116 to Rs. 6720 , which in the opinion of the AO was highly excessive and unreasonable . During the course of appellate proceedings, the Id.AR has argued that share capital received by it from IIRF Ltd. to the tune of Rs 160 cr. was in the form of foreign direct investment (FDI) from a fund set up by well-known IL & FS, which is India's first private sector developer of infrastructure projects and has a large presence in financial services space in India. The assessee has argued that this FDI was received in the SPY, to develop a specific project viz. Tony Project at Andheri (W) and therefore, such an investment could not be seen from the angle of share premium alone. The assessee has submitted that at the time of making investment, the investor was Others M/s Runwal Developers Pvt. Ltd only looking at the return and in fact, investment made by them to the extent of Rs. 40 cr. has been redeemed in A.Y. 2013-14. It is also been argued by the assessee that entire FDI was received as per the RBI guidelines and has been accrued by concerned government authorities. The assessee has argued that entire investment has come through automatic route through banking channels and therefore, the genuineness of the investment is not in doubt. The assessee has further argued that the company, IIRF Ltd. and IL & FS group are well known investors in realty market in India and have invested in more than 20 projects in India over the last several years and therefore, their identity is not in doubt. 14. xxxx 15. The AO in this case has primarily placed reliance on the fact of merely the shares being issued at a premium which in his opinion is unjustifiable. AO has made the addition u/s.68 of the Act towards share capital received by the Appellant of Rs. 43,74,27,284/- from said party merely on the issue of unjustifiable premium being received by the appellant. However AO has not made any enquiry to corroborate his findings except for issuing the notice / summon for conducting enquiry. As mentioned in para4.16 of his assessment order, summons u/s.131 of the Act was served on Smt. Archana Hingorani, Non Executive Director of the said overseas investor by affixture since she was not present at that time at her stated address. The AO has taken this as apparently negative conclusion instead of Others M/s Runwal Developers Pvt. Ltd appreciating that it was vacation time for investment bankers (Christmas Week) and she was accordingly travelling. Moreover, as informed by the appellant, the investor company's Indian counterpart has responded to the notice / summons issued to them and has duly complied with the same by attending before the AO. Despite the same, no specific reasoning has been given by the AO other than issue of alleged unjustifiable share premium for arriving at the said conclusion.

A perusal of the background of the investor brought on record by the Appellant show that the onus of proving the genuineness of transaction, identity and capacity of the lenders and share applicant has been discharged by the Appellant. The same is evident from the antecedents of the investor submitted by the Appellant before AO with respect to money received from share applicant. From the details submitted it can be seen that the share applicant has made payments from regular banking channels, relevant disclosure of which as required by law has also been made to RBI, therefore these transactions cannot be treated as bogus. The AO has not been able to bring on record any valid material or evidence to discredit the evidences and explanation given by the appellant other than merely relying on a hunch of the shares being allotted at premium without himself making any other efforts to bring on record any valid or corroborative or concrete evidence against the appellant. The other reasons adduced by the AO have no real connection with the addition under section 68 of the Act made in case of the appellant.

The AO has been unable to refute the clear cut and cogent evidence submitted by the appellant and available on the AO's record, testifying to the genuineness of the share capital. The source of the said money thus stands proven. As has been held in several decisions of superior judicial authorities {MurlidharLahorimal v CIT [28O ITR 512 (guj)],LabhchandBohra v ITO [219 ITr 571 (Raj)] and CIT v Dwarkadhish Investment Private Limited [299 ITR 268 (Del)], the assessee cannot be called upon to prove the source of the source of this money.

Regarding the issue of having charged very high premium, it has been brought to my notice by the AR that it is the potential in the development and in turn the profitability of the project that was the key in this case which got the investor to invest in the company. It has been further pointed out that out of their investment of Rs. 160 crores, a sum of Rs.4O crores (cost to overseas investor company) has been bought back by the Runwal Group (a), Rs.84.39 crores thus yielding a very good ROI to the investor.

In view of the above and based on the facts in the case on hand, I find that the appellant has indeed proven the genuineness of the share applicant. Accordingly the addition made by the AO u/s.68 of the Act on that count to the tune of Rs.43,74,27,284/- cannot be sustained. 27.xxx 28.xxx Others M/s Runwal Developers Pvt. Ltd 29.xxx 30.xxx 31. Another aspect to be seen here is that the said case before me is merely since the shares were issued at premium. There is no barring really if the shares are issued at a premium in the case of a corporate entity. The information received by the AO or the limited enquiry conducted by the AO has not made out any specific allegation that the said party had provided any entry to the appellant company cither in form of share capital. In the present case the appellant had produced before AO all the relevant details to justify that share capital was received from the known, existing identifiable parties, the transactions were done through banking channel and the relevant party had own sufficient funds to invest money in the appellant which was not controverted by the AO by reliable evidences.

Thus, it has to be said that the appellant had done everything in its power to prove the 3 ingredients required to prove the satisfactory nature of the said share application transactions. In these circumstances, the onus had shifted to the AO. If the AO was still not satisfied, he had the option of making further inquiries from available sources. He has opted not to comment on the reply furnished by the parties who were summoned nor has he relied on the same. He has also opted not to comment on the contents of the report of the FT&TR reference. However, in my opinion this is not right since such credible material was available Others M/s Runwal Developers Pvt. Ltd with him and which was in fact filed at his insistence since he issued the notices seeking relevant information. Further, if the AO was not satisfied with what had been given to him by the appellant, he was duty bound to specify what more material he wanted the appellant to furnish. The AO never asked for any further material, though time and again the appellant asked in their submissions. This leads to the inescapable conclusion that the AO could not think of any further material to ask for and proceeded to reject the appellant's claims. The only adverse remark / observation that the AO has been able to gather is the fact of 2 varied valuation reports being submitted by the appellant. However, as discussed above already, this aspect cannot be enough to treat the share capital received as unexplained. The pros in the present case outweigh the only con identified by the AO. Thus, the unequivocal conclusion is that all the 3 ingredients having been satisfied, the impugned share capital has to be treated as explained satisfactorily and the AO was not justified in having disregarded overwhelmingly supportive evidence. No cogent material was adduced by the AO to show that share capital was unexplained. Therefore, the impugned additions, made in the assessment order, has to fail on several counts - (1) reliance on evidence that is totally inadequate; (2) failure to make available any credible incriminating material (reports, statements etc.) forming basis for action by the AO; (3) failure to recognize the satisfactory nature of the explanation /evidence tendered by the appellant to explain identity of said Others M/s Runwal Developers Pvt. Ltd party, creditworthiness and the genuineness of the share capital transactions.

It is gathered that the issue of share premium was referred by the AO to the Foreign Taxation division (FT & TR) of the CBDT and they did not find any anomaly in the share premium charged by the assessee or investment made by the foreign investor. Besides, it is noticed that the assessee has submitted full and complete details in respect of the above FDI investment which includes the following :- i. Copy of the shareholder's agreement entered into with the investor was provided, ii. Copy of the valuation report obtained from the approved valuer prior to allotment of the shares was furnished, iii. The detailed working for arriving at the basis of the share premium which in fact is based directly on the potential of the project which in turn was based on the total area possible to be developed in the said project, iv. The financial projections of the said project are as per the valuation report obtained, were also furnished in reply to item No. (ii) above, v. The proof of compliance with all statutory norms/conditions for taking FDI was clarified to be in the form of no action /enquiry initiated till date. Further, Others M/s Runwal Developers Pvt. Ltd copy of the relevant RBI correspondence as regards the receipt of the said FDI was also furnished, vi. It was stated that all compliance has been done with applicable Indian Statutory Laws prior to receiving the funds under FDI. vii. It was further clarified that to the best of the knowledge of the appellant, there were no compliances required with Mauritian Statutory Laws prior to the incoming investment and that in case of any such compliance, the same may have been done at the end of IL&FS. viii. It was also clarified that to the best of the knowledge of the appellant, they were compliant as regards the minimum capital investment and minimum area to be developed under investments received through FDI route. ix. Copies of the Financials of the Overseas investor as available with the appellant were shared with the Id.AO. x. The details of the beneficiaries shareholders of the said overseas investors have also been subsequently shared (though the same were not available initially with the appellant) xi. The proof of the payment received through FDI from time to time in the form of the relevant bank account extract duly highlighting the said payments was provided, xii. Complete details the project from the time of acquisition of the land upto Others M/s Runwal Developers Pvt. Ltd date (being still under WIP state as on date) were also furnished.

In view of the above discussion, it may be said that the share capital and share premium received by the assessee to the tune of Rs. 160 cr. including Rs. 87.48 cr. in the current year, has come from explained sources. This investment has come in the form of FDI from a Mauritius based company, IIRF Ltd. and the investment has been duly approved by the RBI. Therefore, there are no doubts about the genuineness of the share capital nor any doubts about the identity of the creditor. In fact, this issue was referred to by the AO to FT & TR, a foreign taxation division of the CBDT and apparently, nothing against the assessee has been reported. In the circumstances, addition made by the AO to the tune of Rs. 87.48 cr. in the hands of the assessee appears to be without any reasonable basis. The same is therefore directed to be deleted. Consequently, ground no. 2 taken by the assessee is allowed.

We have heard the rival submissions and on perusal of the relevant material placed on record and the findings of AO and Ld. CIT (A), we find that Ld. AO has not doubted the identity or creditworthiness of the Mauritius based investor company, IIRF Realty India IX Ltd for subscribing to the share capital of the assessee company, albeit has casted his doubt basically on the Others M/s Runwal Developers Pvt. Ltd ground that the assessee has received premium from the foreign investors without any credentials and the valuation report. One very important fact to be noted here is that, the assessee had furnished the source of the funds and who are investors on behalf IL&FS India Realty which are mainly US based funds and other entities owned and control by the respective state governments of Abu Dhabi, Singapore, etc. These entities are not based in any of the tax heavens. This IL&FS India Realty fund has also invested in other real estate companies and not alone in Assessee Company, the details of which has been given in the assessment order as well as in the appellate order and all the formalities of complying with the RBI requirement has been fulfilled. Another important fact is that IL&FS is a company promoted by a consortium of established and known Indian institutions comprising of LIC of India, HDFC Ltd, Central Bank of India, SBI, Orix Corporation, Japan and Abu Dhabi Investment Authority and others. The assessee had also provided copies of the financials for all the 3 years of the overseas investors before the AO to substantiate its genuineness and creditworthiness. Thus, it is not a case where identity, creditworthiness or genuineness could have been doubted or rather Others M/s Runwal Developers Pvt. Ltd it is not the case of the AO also. He has invoked deeming provision of section 68 on the premise of receiving of high premium on shares which according to him is without much credentials of the assessee company. In order to cover a situation where a company receives any consideration for issue of shares exceeding the face value, the statute has brought section 56(2)(viib) by Finance Act 2012, w.e.f. 1.04.2013, i.e., from AY 2103-14 and such deeming provision cannot be applied in AY 2009-10 to AY 2012-13. Thus, merely because Assessee Company has received high premium cannot be subject to tax under section 68, unless the genuineness of the transaction or creditworthiness of the subscriber is doubted, which is not case here at all.

Another very important fact is that the report from FT& TR division of CBDT did not find any anomaly in the share premium charged by the assessee or investment made by the foreign investor. There has been no adverse report doubting the genuineness of the fund or the source which fact has also been noted by the Ld. CIT(A) in para 32 of the said order. Thus, all the ingredients to prove the nature and source of credit as required under section 68 stands Others M/s Runwal Developers Pvt. Ltd discharged by the assessee and consequently no addition can be made.

In so far as charging of premium, the assessee has filed the copy of valuation report obtained from the Approved Valuer prior to allotment of shares and also certificate from E&Y. The Ld. AO has simply rejected the same to disbelieve the premium charged without bringing any material on record. In fact it has been brought on record that the investment which has been made by IL&FS in the assessee company had yielded huge dividend /profit from such investment, which shows that the premium on the shares stands justified and the valuation done on the DCF method by the Approved Valuer was correct. Accordingly, the aforesaid finding incorporated by the Ld. CIT(A) is confirmed as same is not only correct appreciation of fact and material on the fact and also in law and AO’s case is simply based his hypothesis without any inquiry or material. Accordingly, the additions in all the 3 assessment years deleted by Ld. CIT (A) are confirmed and the grounds raised by the revenue are dismissed.