INCOME TAX OFFICER-16(1)(2), MUMBAI vs. GAMA ENTERTAINMENT SYSTEMS PVT. LTD., MUMBAI

PER OM PRAKASH KANT, AM

M/s Gama Entertainment Systems Pvt. Ltd. M/s Gama Entertainment Systems Pvt. Ltd. 2 ITA No. 7175/M/2018 i. Whether on the facts, in the circumstances of the case and as per Whether on the facts, in the circumstances of the case and as per Whether on the facts, in the circumstances of the case and as per law, the Hon’ble ITAT was justified in directing to delete the law, the Hon’ble ITAT was justified in directing to delete the law, the Hon’ble ITAT was justified in directing to delete the addition of Rs.1,99,99,815/ addition of Rs.1,99,99,815/- made u/s.68 of the Income made u/s.68 of the Income-tax Act, 1961, treating the Share Capital & Security Premium' received by 1961, treating the Share Capital & Security Premium' received b 1961, treating the Share Capital & Security Premium' received b the assessee as unexplained credits' in the assessment order, the assessee as unexplained credits' in the assessment order, the assessee as unexplained credits' in the assessment order, without appreciating that the same is covered by the ratio laid without appreciating that the same is covered by the ratio laid without appreciating that the same is covered by the ratio laid down in the judgment of the Bombay High Court in the case of down in the judgment of the Bombay High Court in the case of down in the judgment of the Bombay High Court in the case of Major Metals Vs. Union of India? Major Metals Vs. Union of India? ii. Whether on the facts, in the Whether on the facts, in the circumstances of the case and as per circumstances of the case and as per law, the Hon’ble ITAT was justified in directing to delete the law, the Hon’ble ITAT was justified in directing to delete the law, the Hon’ble ITAT was justified in directing to delete the addition of Rs.1,99,99,815/ addition of Rs.1,99,99,815/- made u/s.68 of the Income made u/s.68 of the Income-tax Act, 1961, without appreciating that the same is covered by the ratio 1961, without appreciating that the same is covered by the ratio 1961, without appreciating that the same is covered by the ratio laid down in the judgment laid down in the judgment of the Bombay High Court in the case of the Bombay High Court in the case of Major Metals Vs. Union of India wherein the judgment of the of Major Metals Vs. Union of India wherein the judgment of the of Major Metals Vs. Union of India wherein the judgment of the Hon'ble Supreme Court in the case of CIT Vs Lovely Exports Pt. Ltd. Hon'ble Supreme Court in the case of CIT Vs Lovely Exports Pt. Ltd. Hon'ble Supreme Court in the case of CIT Vs Lovely Exports Pt. Ltd. (2008) 319 ITR 5 (SC) has been duly discussed and distinguished? (2008) 319 ITR 5 (SC) has been duly discussed and distinguished? (2008) 319 ITR 5 (SC) has been duly discussed and distinguished? iii. Whether on the facts, Whether on the facts, in the circumstances of the case and as per in the circumstances of the case and as per law, the Hon"ble ITAT was justified in directing to delete the law, the Hon"ble ITAT was justified in directing to delete the law, the Hon"ble ITAT was justified in directing to delete the addition of Rs.1,99,99,815/ addition of Rs.1,99,99,815/- made u/s.68 of the Income made u/s.68 of the Income-tax Act, 1961, without appreciating that in the instant case, the amounts 1961, without appreciating that in the instant case, the amounts 1961, without appreciating that in the instant case, the amounts which were realized which were realized by the assessee claimed to be in the nature of by the assessee claimed to be in the nature of share capital & security premium were not in the context of a share capital & security premium were not in the context of a share capital & security premium were not in the context of a public issue of share capital but essentially in the nature of a public issue of share capital but essentially in the nature of a public issue of share capital but essentially in the nature of a private placement? private placement?

M/s Gama Entertainment Systems Pvt. Ltd. M/s Gama Entertainment Systems Pvt. Ltd. 3 ITA No. 7175/M/2018 ₹19,27,150/-. This is a company formed by IIT . This is a company formed by IITian ian i.e. Mr. Puneet Kumar for developing gaming machines as a startup company for developing gaming machines as a startup company for developing gaming machines as a startup company along with founder of “Indiagames Indiagames” Mr. Vishal Gondal i.e. Sweat . Sweat & Blood Ventures Group. Out of 5000 shares, 4999 equity shares of Out of 5000 shares, 4999 equity shares of ₹10/- Out of 5000 shares, 4999 equity shares of and one equity share of and one equity share of ₹10/- each were allotted and fully paid to each were allotted and fully paid to M/s Sweat & Blood Ventures Group M/s Sweat & Blood Ventures Group and Mr. Puneet Kumar Mr. Puneet Kumar respectively. Thereafter, in view of the respectively. Thereafter, in view of the prospectus of entering into designing and manufacturing designing and manufacturing arcade gaming machines, gaming machines, the assessee- company valued its shares at shares at ₹1080.84 as on 31.03.2011. In view of 1080.84 as on 31.03.2011. In view of the valuation, the company further invited share capital along with the valuation, the company further invited share capital along with the valuation, the company further invited share capital along with share premium from share premium from following entities :

Date No. of Shares No. No. of of Name of share Face value Issue Issue price price Total payment applied shares shares holder with premium with premium received allotted allotted 15/06/2011 1108 1108 1108 Hope Island Pvt. Ltd. 10 3000.76 3000.76 33,24,847/- 27/08/2011 559 559 Hope Island Pvt. Ltd. 10 2999.37 2999.37 16,74,969/- 27/08/2011 4166 4166 4166 GHIOF 10 4166 4166 1,50,00,000/- Total Total 1,99,99,816/-

M/s Gama Entertainment Systems Pvt. Ltd. M/s Gama Entertainment Systems Pvt. Ltd. 4 ITA No. 7175/M/2018

“4.2 During the course of appellate proceedings, it has been the 4.2 During the course of appellate proceedings, it has been the 4.2 During the course of appellate proceedings, it has been the submission of the assessee that submission of the assessee that the assessee Company was formed by the assessee Company was formed by IITians, Mr. Puneet Kumar and Mr. Vaibhay Goel. The assesse company IITians, Mr. Puneet Kumar and Mr. Vaibhay Goel. The assesse company IITians, Mr. Puneet Kumar and Mr. Vaibhay Goel. The assesse company diluted 28% of stake of company for Rs. 200 lakhs to Non diluted 28% of stake of company for Rs. 200 lakhs to Non diluted 28% of stake of company for Rs. 200 lakhs to Non- resident companies. The inward remittance of share capital was reported to the companies. The inward remittance of share capital was reported to the companies. The inward remittance of share capital was reported to the Reserve Bank of Reserve Bank of India in the appropriate forms. This being first venture India in the appropriate forms. This being first venture of the technocrats / promoters, the question of accumulated black of the technocrats / promoters, the question of accumulated black of the technocrats / promoters, the question of accumulated black money being brought back to India, does not arise. The money was money being brought back to India, does not arise. The money was money being brought back to India, does not arise. The money was M/s Gama Entertainment Systems Pvt. Ltd. M/s Gama Entertainment Systems Pvt. Ltd. 6 ITA No. 7175/M/2018 parked in ICICI bank till the same was utilised towards business an parked in ICICI bank till the same was utilised towards business an parked in ICICI bank till the same was utilised towards business and later on the same was used for the business purpose only. It was also later on the same was used for the business purpose only. It was also later on the same was used for the business purpose only. It was also submitted by the assessee that in the initial years all start up companies submitted by the assessee that in the initial years all start up companies submitted by the assessee that in the initial years all start up companies incur heavy losses and the same is funded by investors with issue of incur heavy losses and the same is funded by investors with issue of incur heavy losses and the same is funded by investors with issue of shares at premium. In this regard the as shares at premium. In this regard the assessee has cited the examples of sessee has cited the examples of some startups like the Ola cabs company's ANI Technologies Private some startups like the Ola cabs company's ANI Technologies Private some startups like the Ola cabs company's ANI Technologies Private Limited, Flipkart etc. It was also contended by the assesse that the Limited, Flipkart etc. It was also contended by the assesse that the Limited, Flipkart etc. It was also contended by the assesse that the Parliament consciously has not brought to tax amount received from a Parliament consciously has not brought to tax amount received from a Parliament consciously has not brought to tax amount received from a non - resident for resident for issue of shares and the capital receipt on account of issue of shares and the capital receipt on account of share premium is not income. Section 68 is not applicable as source of share premium is not income. Section 68 is not applicable as source of share premium is not income. Section 68 is not applicable as source of credit is proved and is accepted. It is also contended credit is proved and is accepted. It is also contended by the assessee that by the assessee that Section 68 is not applicable as the source of credit Section 68 is not applicable as the source of credit is proved and is accepted and the amendment is wef AY 2013 accepted and the amendment is wef AY 2013-14 and year 14 and year under consideration is AY 12 consideration is AY 12-13.The share application is by Non 13.The share application is by Non-resident and section 68 is applicable for resident investor only. Section 56(2Xvib) was 68 is applicable for resident investor only. Section 56(2Xvib) was 68 is applicable for resident investor only. Section 56(2Xvib) was not applicable not applicable for AY 2012-13 as the said section was introduced w.e. the said section was introduced w.e.f A.Y 2013-14. Vide 14. Vide notification No. 45 / 2016 dated 14.06.2016. The notification No. 45 / 2016 dated 14.06.2016. The assessee has relied on the assessee has relied on the case of Nova Promoters & Finlease (P.) Ltd. | case of Nova Promoters & Finlease (P.) Ltd. | 2012 | 206 Taxman 207/19 2012 | 206 Taxman 207/19 taxmann.com 217 ( Delhi) and Fair Finvest taxmann.com 217 ( Delhi) and Fair Finvest Ltd | ITA 232 OF 2012 Dated: 232 OF 2012 Dated: 22.11.2012 (Delhi).

4.3 Having considered the assessement order of the A0 and the 4.3 Having considered the assessement order of the A0 and the 4.3 Having considered the assessement order of the A0 and the submissions of the assessee, I lind that during the year 2011 of the assessee, I lind that during the year 2011 of the assessee, I lind that during the year 2011-12, the assessee had allotted assessee had allotted 4166 shares at face value of Rs. 3600.58 to GHIOF 4166 shares at face value of Rs. 3600.58 to GHIOF Mauritius and 1667 shares to Hope Island PTE Ltd. at a face value of Rs. Hope Island PTE Ltd. at a face value of Rs. I0 and premium of Rs. 3000.76 for I0 and premium of Rs. 3000.76 for 11O8 shares and a premium of 11O8 shares and a premium of 2996.37 for 559 shares. Despite being given 2996.37 for 559 shares. Despite being given proper opportunity by the proper opportunity by the AO, the assessee was not able to satisfy the AO as to AO, the assessee was not able to satisfy the AO as to on what b on what basis such a high premium was paid on the shares when the assessee high premium was paid on the shares when the assessee high premium was paid on the shares when the assessee company was M/s Gama Entertainment Systems Pvt. Ltd. M/s Gama Entertainment Systems Pvt. Ltd. 7 ITA No. 7175/M/2018 making huge losses. Therefore, the AO has made the additions making huge losses. Therefore, the AO has made the additions making huge losses. Therefore, the AO has made the additions u/s68 of the Act. However, in his assessment order, the AO has recorded a the Act. However, in his assessment order, the AO has recorded a the Act. However, in his assessment order, the AO has recorded a categorical finding that the source of fund categorical finding that the source of funds was not doubted. It was not s was not doubted. It was not the case of the AO that genuineness of transactions or credit worthiness case of the AO that genuineness of transactions or credit worthiness case of the AO that genuineness of transactions or credit worthiness of the creditors was not proved by the assessee. It was also not the case creditors was not proved by the assessee. It was also not the case creditors was not proved by the assessee. It was also not the case of the AO that the assessee was not a start O that the assessee was not a startup company. It is a common up company. It is a common knowledge that that most of the start up companies make losses in the most of the start up companies make losses in the beginning but their shares beginning but their shares are valued at a very high premium because of are valued at a very high premium because of their potential to make huge their potential to make huge profits in the future. The investors in the profits in the future. The investors in the case of start up companies like the case of start up companies like the assessee are guided assessee are guided by the future prospects of projects and their potential to prospects of projects and their potential to earn high incomes. Merely earn high incomes. Merely because the assessee company was a loss making because the assessee company was a loss making company, its shares company, its shares could not be sold on premium can not be a ground for could not be sold on premium can not be a ground for making additon making additon w/ s 68 of the Act especially when w/ s 68 of the Act especially when the payers of the premium the payers of the premium are non residents and no doubt has been raised as to the credit worthiness etc. residents and no doubt has been raised as to the credit worthiness etc. residents and no doubt has been raised as to the credit worthiness etc. of the creditors.

In the case of Major Metals Ltd. (supra) relied upon by the AO, the In the case of Major Metals Ltd. (supra) relied upon by the AO, the In the case of Major Metals Ltd. (supra) relied upon by the AO, the amount of share application money which had been received earlie of share application money which had been received earlier as of share application money which had been received earlie loan and then converted into share application money was added u/s 68 converted into share application money was added u/s 68 of the Act by the of the Act by the Settlement Commission, mainly on the ground that Settlement Commission, mainly on the ground that genuineness of the genuineness of the transaction was not proved and credit worthiness of transaction was not proved and credit worthiness of the creditors was also not the creditors was also not proved. However, in the present appeal, that in the present appeal, that was not the case of the AO. In fact, was not the case of the AO. In fact, the A0 had accepted the source of the A0 had accepted the source of funds

4.3.1 In the case of Nova Promoters & Finlease (P.) Ltd. | 2012 | 206 4.3.1 In the case of Nova Promoters & Finlease (P.) Ltd. | 2012 | 206 4.3.1 In the case of Nova Promoters & Finlease (P.) Ltd. | 2012 | 206 Taxman 207/19 taxmann.com 217 ( Delhi », it has been concluded that 207/19 taxmann.com 217 ( Delhi », it has been concluded that 207/19 taxmann.com 217 ( Delhi », it has been concluded that ratio of a decision is to be understood and appreciated in the ecision is to be understood and appreciated in the ecision is to be understood and appreciated in the M/s Gama Entertainment Systems Pvt. Ltd. M/s Gama Entertainment Systems Pvt. Ltd. 8 ITA No. 7175/M/2018 background of the facts of background of the facts of that case. Thus, where the complete that case. Thus, where the complete particulars of the share applicants have particulars of the share applicants have been furnished to the A.0. and been furnished to the A.0. and the .O. has neither conducted any enquiry nor the .O. has neither conducted any enquiry nor has any material in his has any material in his possession to show that the particulars furnished by the possession to show that the particulars furnished by the possession to show that the particulars furnished by the assessee are false and, therefore, cannot be relied upon, in such a case no false and, therefore, cannot be relied upon, in such a case no false and, therefore, cannot be relied upon, in such a case no addition can be made in the hands of assessee. can be made in the hands of assessee.

Further, the High Court of Delhi in the case of Fair Finvest Ltd (ITA 232 Further, the High Court of Delhi in the case of Fair Finvest Ltd (ITA 232 Further, the High Court of Delhi in the case of Fair Finvest Ltd (ITA 232 OF 2012 DATED 22.11.2012 ( Delhi), has held that attracting the ratio 2012 DATED 22.11.2012 ( Delhi), has held that attracting the ratio 2012 DATED 22.11.2012 ( Delhi), has held that attracting the ratio of Lovely Exports (supra) to all cases of share capital without Exports (supra) to all cases of share capital without Exports (supra) to all cases of share capital without considering the facts, considering the facts, evidences and materials is not understandable. It evidences and materials is not understandable. It seems to be justified, as it is seems to be justified, as it is necessary that due regard should be given regard should be given to the facts and circumstances of to the facts and circumstances of each case, which generally differ from each case, which generally differ from case to-case and, thus, no standard rule case and, thus, no standard rule can be applied to all cases can be applied to all cases ignoring the facts, evidences and materials that form ignoring the facts, evidences and materials that form ignoring the facts, evidences and materials that form the very foundation of a case foundation of a case.

4.3.2 In view of the above discussion and judicial precedents, I am of In view of the above discussion and judicial precedents, I am of In view of the above discussion and judicial precedents, I am of the view that the NO was not justified in making additon u/s 68 of the the view that the NO was not justified in making additon u/s 68 of the the view that the NO was not justified in making additon u/s 68 of the Act when the AO himself was satisfied as to the source of funds and no when the AO himself was satisfied as to the source of funds and no when the AO himself was satisfied as to the source of funds and no doubt had been raised by the NO as to (©) genuine been raised by the NO as to (©) genuineness of transaction i ness of transaction ii) identity of the identity of the creditors and ill) credit worthiness of the creditors. The creditors and ill) credit worthiness of the creditors. The addition made by the on made by the AO is therefore, deleted.”

7.1 We find that the Assessing Officer has mainly doubted the We find that the Assessing Officer has mainly doubted the We find that the Assessing Officer has mainly doubted the share premium received by the company. We obser share premium received by the company. We obser share premium received by the company. We observed that the company has been found by fresh IIT graduates as a startup company has been found by fresh IIT graduates as a startup company has been found by fresh IIT graduates as a startup

M/s Gama Entertainment Systems Pvt. Ltd. M/s Gama Entertainment Systems Pvt. Ltd. 9 ITA No. 7175/M/2018 company looking to the future potential to the future potential in online gaming business gaming business. The Assessing Officer has given categorically finding that the source The Assessing Officer has given categorically finding that the source The Assessing Officer has given categorically finding that the source of fund was not doubted. The Ld. CIT(A) has also considered the of fund was not doubted. The Ld. CIT(A) has also considered the of fund was not doubted. The Ld. CIT(A) has also considered the decision of the Hon’ble Bombay High Court in the case of decision of the Hon’ble Bombay High Court in the case of decision of the Hon’ble Bombay High Court in the case of Major Metal Ltd. v. UOI WP No. 397 of 2011 Ltd. v. UOI WP No. 397 of 2011 wherein the addition wherein the addition was sustained on the ground that genuineness of the transaction was not sustained on the ground that genuineness of the transaction was not sustained on the ground that genuineness of the transaction was not proved and creditworthiness of th proved and creditworthiness of the creditor was also not proved e creditor was also not proved whereas, in the present case the Assessing Officer has accepted the hereas, in the present case the Assessing Officer has accepted the hereas, in the present case the Assessing Officer has accepted the nature and source of funds. In our opinion, when th nature and source of funds. In our opinion, when the source of fund e source of fund is not doubted by the Assessing Officer then he is not doubted by the Assessing Officer then he is not justified in making addition in terms of section 68 of the Act. Any addition for making addition in terms of section 68 of the Act. Any addition for making addition in terms of section 68 of the Act. Any addition for receipt of share premium receipt of share premium having value more than the market value more than the market value of the shares could be made in terms o of the shares could be made in terms of section 56(2) 56(2) of the Act and not u/s 68 of the Act. The Ld. CIT(A) has passed a reasoned order not u/s 68 of the Act. The Ld. CIT(A) has passed a reasoned order not u/s 68 of the Act. The Ld. CIT(A) has passed a reasoned order and we do not find any error and we do not find any error in the same. Accordingly, we uphold the same. Accordingly, we uphold

M/s Gama Entertainment Systems Pvt. Ltd. M/s Gama Entertainment Systems Pvt. Ltd. 10 ITA No. 7175/M/2018 the same. The grounds raised by the Revenue are accordingly the same. The grounds raised by the Revenue are accordingly the same. The grounds raised by the Revenue are accordingly dismissed.