BHARATHI CEMENT CORPORATION PRIVATE LIMITED,,HYDERABAD vs ACIT, CIRCLE 2(3), HYDERABAD

Income Tax Appellate Tribunal, HYDERABAD BENCHES “B” : HYDERABAD

Before: SMT. P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN

PER Smt. P. MADHAVI DEVI, J.M. : This is assessee’s appeal against the order of the Commissioner of Income Tax-II, Hyderabad, dated 24-03-2014 u/s. 263 of the Income Tax Act [Act].

Brief facts of the case are that, the assessee-company, engaged in the business of manufacture and sale of cement, filed its return of income for the AY. 2009-10 on 30-09-2009 admitting income of Rs. 2,91,01,250/- under the head ‘Income from Other Sources’ being interest earned on Fixed Deposits. During the assessment proceedings u/s. 143(3) of the Act, the Assessing Officer observed that the assessee has claimed to

:- 2 -: ITA. No. 1050/Hyd/2014

have received a total sum of Rs. 70,32,63,855/- which included share capital of Rs. 48,50,080/- and share premium of Rs. 69,84,11,520/- from three companies i.e., Dalmia Cements Ltd., New Delhi, India Cements Ltd., Chennai and Suguni Constructions Pvt. Ltd., Hyderabad. He examined the issue in detail and taking note of the fact that the assessee- company had no business operations, huge funds were infused towards share premium and share application money he made further investigation. He observed that the face value of the 0% convertible preferential shares which were applied for by the respective parties was Rs. 10/-, while the share premium was Rs. 1,440/- per share. After detailed examination of the parties and the material on record, the Assessing Officer held that the company’s rate per share at Rs. 10/- is reasonable and acceptable, but the premium amount of Rs. 1,440/- is towards receiving benefits from the then Government in the form of clearances, approvals and allotment of projects without expecting anything from the assessee-company i.e., Bharathi Cement Corporation Private Limited. Therefore, he treated the entire amount received towards share premium as income of the assessee-company u/s. 28(iv) of the Act, vide order dt. 30-12-2011.

Thereafter, the CIT assumed jurisdiction u/s. 263 of the Act and perused the assessment records of the assessee. He observed that the assessment order is erroneous insofar as it is prejudicial to the interest of the Revenue for the following reason:

:- 3 -: ITA. No. 1050/Hyd/2014

“(a) On verification of assessment record, it is seen that during the F.Y. 2008-09 relevant to the A.Y. 2009-10, the assessee has received share application money of Rs. 50 crores from M/s. India Cement Ltd., while adding the share capital u/s. 28(iv) in the hands of M/s. Bharathi Cement Corporation Ltd., on the ground that the transaction was not genuine, the AO has failed to treat the amount received towards share application money from M/s. India Cement Ltd., as benefit accrued to the assessee”.

Thus, a show cause notice u/s. 263 of the Act was issued to the assessee. In response to the same, assessee appeared and filed written submissions through its AR. However, CIT was not satisfied with the contentions of assessee and held that the Assessing Officer having recorded that the investments made by India Cements Ltd., are not in the nature of capital investment but are the payments made for certain benefits, has erred in not bringing the full amount to tax on receipt basis. He held that the book entry of treating certain portion as share application money and certain portion as share capital has no bearing on the real nature of the transaction and non-taxation of the share application money caused prejudice to the Revenue. Accordingly, he directed the Assessing Officer to bring the sum of Rs. 50,00,00,705/- to tax. Against this revision order of the CIT, assessee is in appeal before us, raising the following grounds of appeal:

“1. Because, the Learned Commissioner of Income-tax-II, Hyderabad (“Ld. CIT”) has erred in law as well as on facts while directing addition of Rs.50,00,00,000/- towards share application money received in Assessment Year (“AY”) 2009-10;

Because, the Ld. CIT has erred on facts in concluding that the Learned lower authorities have added the entire investment made in shares to income of assessee when in fact it is only share premium that has been added on the ground that it is not justified.

:- 4 -: ITA. No. 1050/Hyd/2014

Because, even if it be assumed (without admission) that the share premium actually represents income of the assessee, the same can be brought to tax only when the shares are actually allotted and not on receipt basis.

Because, without prejudice to the above and in the facts and circumstances of the case, revisionary proceedings are bad in law because the assessee has disclosed the fact of receipt of the share application money in its submissions made on 21.04.2011 and the Ld. AO has not added this amount only after due consideration of the submissions of the assessee;

Because, the view taken by the Ld. AO in not adding the aforesaid amount of Rs. 50 crores to income of assessee is one possible view of the matter and is not unsustainable in law and has been reached after conducting extensive enquiries;

Because, insofar as receipt of share application money is concerned, there is no incorrect assumption of facts by the Ld. AO;

Because, section 263 does not visualize substitution of the judgment of the Ld. CIT for that of the Ld. AO who passed the order u/s 143(3) when the order is not unsustainable in law;

Because, when the notice that was served on assessee by the Ld. CIT refers to addition u/s 28(iv), it is not open to the Ld. CIT to pass an order directing the Ld. AO to add the amount under "appropriate head of income" without determining the applicable section.

The above grounds are independent and without prejudice to each other. The Appellant craves leave to add to, alter, supplement, amend, vary, withdraw or otherwise modify the grounds mentioned hereinabove at or before the time of hearing”.

Ld.AR, while reiterating the submissions made before the authorities below, has drawn our attention to the assessment order, wherein the Assessing Officer had called for the details of share capital and share application money received by the assessee and after thorough examination of the same, has treated the share premium only as income u/s. 28(iv) of the Act. He submitted that Assessing Officer has accepted the

:- 5 -: ITA. No. 1050/Hyd/2014

share capital of Rs. 10/- per share as a genuine transaction and it is only the share premium, which has been doubted by the Assessing Officer. He submitted that once the Assessing Officer has examined and considered the whole of the issue, the order cannot be treated as erroneous order unless and until it is against the law. It is submitted that findings of CIT are only an alternate opinion that there was no cross enquiry by the Assessing Officer. Therefore, he prayed that the assessment order be restored.

The Ld. Standing Counsel for the Department, on the other hand, supported the revision order u/s. 263 of the Act. She also brought to our notice the order of the Tribunal against the original assessment order for the AY. 2009-10, wherein the Tribunal has remitted the issue to the file of the Assessing Officer with certain directions. Therefore, according to her, the assessment order is clearly erroneous insofar as it is prejudicial to the interest of Revenue and the order u/s. 263 should be sustained.

Having regard to the rival contentions and the detailed written submissions filed by them and also the material on record, we find that the issues in the assessment order u/s. 143(3) of the Act for the AY. 2009-10 had come up for adjudication before the Co-ordinate Bench of the Tribunal vide order dt. 10-08-2018, wherein the Tribunal had remitted the matter to the file of Assessing Officer with the following directions:

:- 6 -: ITA. No. 1050/Hyd/2014

“9.2 We notice that AO has invoked section 28(iv) to convert the capital receipt as revenue. This section refers to any benefit/perquisite arising from business or exercise of a profession. This capital receipt is not generated in the business whereas ld. CIT(A) confirmed the capital receipt as income from other sources without establishing that this is income of the assessee when the assessee has not even commenced the business. The alleged receipt is the benefit intended to pass on to the director/shareholdes of the company. We noticed that this capital investment was received by the assessee as 0% convertible preferential shares. No doubt there is no immediate outflow to the company in terms of dividend but it is convertible in the near future as equity share capital. There are certain aspects of this investment which certainly raises eyebrows as they are not the best of investment decision like:-

i) no participation in the management considering only 0.43% shares were allotted to outsiders (no controlling interest is compromised) ii) without yielding the controlling interest, investment of such huge share premium iii) no basis for issuing shares at such huge premium Apart from this aspect, the investment is legal and within the provisions of Companies Act, 1952. We are not in a position to accept the contention of the ld. AR that the investors have actually earned the profit by investing in the assessee company. We noticed that the shares were allotted with share premium of Rs. 1,440/- and the same shares were sold at Rs. 671.20. We have to compare the same shares which were sold and not compared with the portfolio of investment. We also noticed that in the subsequent submission, AO found that these shares were sold without having any say by the investors. All the negotiations were made by the directors and the proceeds were also reinvested in the assessee company as loans etc.

9.3 Again, we also cannot presume or apply test of human probabilities, we are dealing with the business transaction, it has to be based on cogent material. Considering the whole situation, in our considered view, the AO/CIT(A) have restricted themselves by stopping the investigation based on circumstantial evidence and applying test of human probabilities. In order to lift the corporate veil for the purpose of determining whether any benefit is passed on to the shareholders/directors, they have to bring on record proper evidence/cogent material. We direct the AO to redo the assessment keeping in mind that no doubt the assessee has received this capital receipt and what circumstances which lead to investment is not important but whether the assessee company was used as a vehicle

:- 7 -: ITA. No. 1050/Hyd/2014

to pass on the benefit to shareholders/directors. In this regard, we direct the AO to make the assessment as below:

a) We noticed that assessee has declared loss in AY 2010-11 as per Income-tax Act, Rs. 189.76 crores and in cash flow, they are declaring decrease in cash from operating activities to the extent of Rs. 71.94 crores. On careful analysis, it can be seen that assessee received through share capital Rs. 181.99 crores and secured borrowings Rs. 334.47 cores but made investment in fixed assets to the extent of Rs. 370.75 crores. The investment in fixed assets are already covered in secured borrowings, the decrease in cash from operation has to be verified properly. b) He has to verify whether any benefit is passed on to shareholders/directors through other means as the assessee is declaring huge loss in the initial years of operation itself.

Therefore, this issue is remitted back to the AO for re-verification as per above direction and in simple terms, verify all the funds and cash flow management of the company for both AYs 2009-10 & 2010-11. AO should not resort to rely on circumstantial evidence or on test of human probabilities but on factual evidence of passing of benefit to the shareholders/directors. Hence, grounds of appeal raised by the assessee are allowed for statistical purposes”.

6.1. Thus, we find that the Tribunal has directed the Assessing Officer to examine the acceptability of the share capital as well as share premium as ‘Income of assessee’. The order of CIT u/s. 263 is also to this effect only. On a query by us, both the parties submitted that the Assessing Officer has already passed the order consequent to the CIT’s directions u/s. 263 and therefore the issue is no longer open before the Assessing Officer and that the appeal against the same is pending before the CIT(A). Since the directions of the Tribunal to the Assessing Officer are on similar lines as given by the CIT u/s. 263 of the Act, we confirm the order of CIT and direct the CIT(A), before whom the appeal against the consequential

:- 8 -: ITA. No. 1050/Hyd/2014

order is pending, to examine the issue in line with our directions in assessee’s appeal for the AY. 2009-10 against the regular assessment made u/s. 143(3) of the Act. In view of the same, the appeal of assessee is dismissed.

Order pronounced in the open court on 20th February, 2019

Sd/- Sd/- (S. RIFAUR RAHMAN) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated 20th February, 2019 TNMM

:- 9 -: ITA. No. 1050/Hyd/2014

Copy to :

Bharathi Cement Corporation Private Limited, 8-2-696, Reliance Majestic, Road No. 10, Banjara Hills, Hyderabad.

Asst. Commissioner of Income Tax, Circle-2(3), Hyderabad.

CIT-II, Hyderabad.

D.R. ITAT, Hyderabad.

Guard File.

BHARATHI CEMENT CORPORATION PRIVATE LIMITED,,HYDERABAD vs. ACIT, CIRCLE 2(3), HYDERABAD