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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI C.N. PRASAD & SHRI S. RIFAUR RAHMAN
PER S. RIFAUR RAHMAN, A.M.
The present appeal has been filed by the assessee challenging the impugned order dated 27.03.2019, passed under section 263 of the Income Tax Act, 1961 (for short "the Act") by the learned Principal Commissioner of Income Tax–6, Mumbai, for the A.Y. 2014–15.
The assessee has filed this appeal on the following grounds of appeal:–
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“1. On the facts and circumstances of the case and in law, the Principal Commissioner Income-tax - 6, Mumbai ("the Pr.CIT") erred in assuming jurisdiction under section 263 and holding the assessment order, under section 143(3) of the Income-tax Act, 1961 ("hereinafter referred to as "the Act") dated 15.12.2016 (hereinafter referred to as "the assessment order"), as erroneous and prejudicial to the interest of the revenue. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law; 2. The Pr. CIT failed to appreciate that the Assessing Officer after due application of mind as regards the nature & source and justification for valuation relating to receipt of monies amounting to Rs.673 crores against issuance of Compulsorily Convertible Debentures (hereinafter referred to as "CC1amed the assessment order without making any addition on the said count; 3. The Pr, CIT failed to appreciate that, where two views are possible and the Assessing Officer, after conduct of due enquiry, has taken one view with which the Pr. CIT does not agree, the assessment order cannot be treated as erroneous and prejudicial to the interest of the revenue; 4. Assuming without admitting that the present case was a case of inadequate enquiry, the Pr. CIT failed to appreciate that the power of revision envisaged under section 263 of the Act and the Explanation 2 thereto can be exercised only where no enquiry as required under the law is done and that it is not open to invoke the said provisions in cases of inadequate enquiry; 5. The Pr. CIT erred in holding that the receipt of securities premium of Rs. 605.70 crores is taxable under the provisions of section 56(2)(viib) for reasons which are wrong, contrary to facts and provisions in law. The conclusion drawn is based on incorrect appreciation of facts and circumstances in law.”
The brief facts of the case are, the assessee filed its return of income for assessment year 2014–15 on 25.09.2014, declaring total loss of ₹ 3,84,344/–. The case was selected for scrutiny and notice under section 143(2) and 142(1) of the Income Tax Act, 1961 (in short “the Act”) were issued and served on the assessee. Based on the
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information collected during the assessment proceedings, the assessment under section 143(3) of the Act was completed on 15.12.2016, assessing the returned loss at ₹ 3,84,344/–. On a perusal of the records, the learned Principal Commissioner of Income Tax–6, Mumbai, observed that the company is incorporated on 11.06.2013, i.e., during current assessment year. The object of the business is to construct, maintain, develop or control building, factories, highways, railways, bridges etc. the Ld. Pr. CIT observed that income tax return of income filed by the assessee does not show any business activities being carried out. The Ld. Pr. CIT from the record observed that the assessee company had issued share capital of ₹ 5 lakhs and no share premium was charged on the shares. The assessee company issued and allotted zero percent compulsory convertible debentures (CCDs) of ` 673,00,000, at a face value of ₹ 10 each at a premium of ₹ 90 per CCD to Edisons Utility Works Pvt. Ltd. He observed that the assessee received securities premium of ₹ 605.70 crore on CCD equivalent to issue of shares for ₹ 67.30 crore. The assessee has shown ₹ 67.30 crore as long-term borrowings and ₹ 605.70 crore is credited to securities premium under reserves and surplus. From the notes to the Balance Sheet, he observed that during the year Edisons Utility Works Pvt. Ltd. had transferred the CCDs worth of ₹ 67 crore carrying zero percent interest thereon to Essel Landmark Pvt. Ltd. on 19.03.2014 and received total amount of ₹ 67.3 crore. According to the Ld. Pr. CIT
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the Assessing Officer has not examined the valuation of such huge share premium received during the year, now the Assessing Officer has called for the valuation report of the share, debenture deed. Based on the above observation he issued notice under section 263 of the Act on 28.02.2019 with the observation that the Assessing Officer has failed to carry out proper investigation of the premium money as well as the debentures/shares. In response, the assessee filed submission dated 11.03.2019 that during the course of assessment proceedings the Assessing Officer sought various details, information and explanation through various notices issued under section 142(1) of the Act and to which assessee has filed detailed explanation, replies and information.
The Ld. Pr. CIT in his order observed that the assessee is a Private Limited Company and issued compulsory convertible debenture which is equal to issue of equity shares to Edisons Utility Works Pvt. Ltd., Group Company by charging premium amount which is credited to general reserve account. If the securities premium is debt, he observed that should be reported and classified as loan and advances in the Balance Sheet, which was not done in this case. Even there is no explanation from the company as to why the security premium money was taken to its reserves and surplus if it was somebody else money further observed that as per the debenture
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certificate dated 22.07.2013, the total number of debentures being 6,73,00,000 having face value of ₹ 10/– each were issued without mentioning therein any amount of premium charged. The total value of debenture is ₹ 67.3 crore whereas premium charged and received is ₹ 605.70 crore. The above CCDs are automatically converted to redeemable preference shares in the ratio of 1:1 at the end of the 7th year from the date of allotment of CCD. He observed that it is known as preference share, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid to shareholders before common stock dividends are issued. Thus, preference shares are also like equity shares or on the shares with certain benefits of receiving the dividend on profit before equity shareholders. Section 56 (2)(viib) of the Act stipulates rule 11UA of the Income Tax Rules, 1962, for determination of market value of the shares, which include both equity and preference shares. According to the Ld. Pr. CIT, the assessee has failed to justify the share premium received and thus infringed the aforementioned section of the Act. Further, the Ld. Pr. CIT observed that the CCD can be treated as debts as long as investors earn interest on the CCD. The conversion here is compulsory and the investor is earning zero percent interest on the CCD, therefore, it should be treated as share. The fully convertible debentures are added to the equity capital of the company on conversion of shares. In this case, the assessee has added the amount
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to the reserves and surplus instead of loan and advances in the Balance Sheet as convertible debentures, issued by the assessee are to be fully converted into preference shares on allotment or after a certain period and the money received by the assessee is in the form of share application money, as it will never be repaid to the subscribers thereof. Thus, the money received becomes the part of the funds of the company in the form of equity and company is gaining an advantage.
With the above observations, the Ld. Pr. CIT issued revised notice under section 263 of the Act on 19.03.2019, and observed in the notice that as seen from the record for assessment year 2014–15, since the debenture carries zero percent interest and premium has been received, which does not need to be repaid, hence, the same represents income which is to be taxed in the year of receipt itself. In response, the assessee submitted its submission vide letter dated 26.03.2019 stating that in the earlier notice under section 263 of the Act, the Ld. Pr. CIT had proposed to revise the assessment order alleging to be erroneous and prejudicial to the interests of Revenue for non-enquiry into the premium received on issue of compulsory convertible debentures. Further it submitted as below:–
“1. The assessee is incorporated on 11.062013 i.e. FY 2013-14 relevant to AY 2014-15. It is engaged in the business to construct, maintain develop or control any buildings, factories, highways, railways,
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bridges etc. and other building for housing work and otherwise assists to any infrastructure related projects. The assessee had c-filed its return of income for the assessment year 2014-15, declaring total income at Rs. 3,84,3441-) as per normal provisions of the Act and Rs. (4,40,6871-) as book profit u/s 115J of the Act on 25.09.2014. 2. During the year, the assessee issued and allotted 6,73,00,000 0% CCDs of fact value Rs. 10/- each at a premium of Rs. 90 per CD to Edisons Utility Works Private Limited vide its board resolution passed at the meeting of board of directors on 22.07.2013, The said amount received on issue of CCDs is utilized for purchase of equity shares of Essel Publishers Private Limited of even amount (i.e. 67.30 croi-e shares at Rs. 10 per share). 3. The terms of the CCDs are as under: – CCD s shall carry a zero coupon rate – CCDs shall automatically be converted to Redeemable Preference Shares in the ratio of 1:1 at the end of 7th year from the date of allotment of CDs. – Converted Redeemable Preference Shares shall be redeemed at the end of 81h year from the date of conversion of C6Ds at a premium of Re. 150 per share. – The CCD's are filly transferrable. 4. The case of the assessee was selected for scrutiny assessment under ASS for reason of "Large receipt of share premium," and 'Low income in comparison to high investment in unlisted equities during the ygr" and consequently, notice u/s 143(2) dated 04.09.2015 was duly issued and served upon the assessee. During the course of assessment proceedings, the AO issued and served upon the assessee. During the course of assessment proceedings, the AO has sought various details, information and explanation through various notice u/s 142(1) of the Act vide dated 17.06.2016, 16.08.2016, 08.09,2016, 20.10.2016 and 09.11.2016 from time to time and through order sheet noting, to which the assessee filed detailed replies, information and explanation vide letter dated 22.06.2016, 24.08.2016, 23.11.2016, 29.11.2016 and 14.12.2016. The same is mentioned below in short for your ready reference: Vide notice dated 17.06.2016, the AO has sought various details including the Audited financial statement of the assessee company for the year ended 31.03.2014. In response to this, the assessee submitted vide letter dated 22.06.2016 a copy of financial statement which disclosed the fact that the assessee has issued 0% CODs of Rs. 10 at premium of Rs.90 and purchased 67.30 crore equity shares of Essel Publishers Private Limited at Note 13
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and 14 respectively. Thereafter, three similar notices dated 08,09.2016, 20.10.2016 and 09.11.2016 were received wherein the AO has sought details of unsecured loans and receipt of share premium.”
After considering the submissions of the assessee, the Ld. Pr. CIT found not acceptable with the observation that the assessee had neither furnished debenture deed & share valuation report nor the Assessing Officer has called for. He observed that the total number of CCD issued was 6,73,00,000 instead of share, issued on 22.07.2013 to Edisons Utility Works Pvt. Ltd. at a face value of ₹ 10/– each. The premium was charged at ₹ 90/– per debenture/share and thereby the assessee company has received total premium money of ₹ 605.70 crore. As per the financial statement ended with 31.03.2014, the valuation of per share is in negative (–₹ 8.81/–). Thus, the fair market value of shares is ₹ (–)8.81/– whereas premium is charged at ₹ 90/– per debenture/share. Hence, the premium in excess of the fair market value is to be treated as income as per section 56(2)(viib) of the Act. Further, he observed that CCD includes premium amount which is no longer payable by the assessee, the money changes its character when such amount becomes the assessee’s own money as the assessee itself has treated and accounted it as its own money and credited to Reserves and Surplus of Balance Sheet as at 31.03.2014. It is like taxing the liability which is no longer payable resulting in a
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definite business surplus and thereby the assessee company has become richer by the amount of premium. He observed that if the CCDs are to be converted to redeemable preference shares after the end of 7th year from the date of allotment of CCD and the converted redeemable preference shares to be redeemed after eight years from the date of conversion of CCDs at a premium of ₹ 150 per share. The Assessing Officer not verified the receipt of share premium during the said financial year made the assessment order erroneous and prejudicial to the interests of the Revenue. Further, he observed that the assessment was made without application of mind in all perspective and there is consequential loss of revenue, it is clear from the above discussions that proper enquiry was not made by the Assessing Officer and non-enquiry by the Assessing Officer is a good ground for initiating proceedings under section 263 of the Act. Also, the assessee has failed to avail the opportunities provided to explain its contention and provide the required details. The Assessing Officer has accepted the valuation of share premium received, without carrying out any enquiry regarding them. Based on the above observations, the Ld. Pr. CIT was of the opinion that the assessment order is erroneous to the extent of non-verification of share premium received by the assessee. Accordingly, he directed the Assessing Officer to verify the valuation of the share premium received during the year by passing the order of fresh by giving an opportunity to the
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assessee and, therefore, he set aside the order passed under section 143(3) of the Act for assessment year 2014–15.
Aggrieved, the assessee is in appeal before us.
Before us, the Ld. AR argued in detail and submitted written submission, which for the sake of clarity, is reproduced below:–
“2.1.1. At outset, it is submitted that the case of the assessee was selected for scrutiny assessment under CASS for reason of "Large receipt of share premium" and "Low income in comparison to high investment in unlisted equities during the year" as is evident from show-cause notice under section 263 of the Act of the Pr.CIT (Pg 54 of the Paper Book) and revised show cause notice under section 263 of the Act. 2.1.2. In the course of assessment proceedings, in response to specific queries / details required by the AO, the assessee submitted following details: (a) financial statement which disclosed the fact that the assessee has issued 0% CCDs of Rs. 10 at premium of Rs. 90 and purchased 67.30 crore equity shares of Essel Publishers Private Limited at Note 13 and 14 respectively (b) Details of issue of CCD along with copy of debenture certificate (c) Return of Income, financials, relevant extract of bank statement of Edison evidencing the nature and source of monies received by the assessee towards CCD5. (d) Extract of bank statement of the assessee highlighting relevant transactions showing receipt of money towards CCDs from Edison to prove the genuineness of the transaction. (e) Board Resolution for issuance of CCDs. (f) The source of sources of monies received towards CCDs was from Essel Corporate Resources Pvt. Ltd. and Jayneer Capital Pvt. Ltd. Their return of income, financials and relevant extract of bank statements were provided to establish the genuineness of source of source. (g) Submitted justification of premium on CCD5 whereby the assessee, inter alia, specifically mentioned that the amount received by it on issue of CCD5 with premium is actually loan, which is to be repaid with interest in the form of a premium. Hence, the assessee is paying more than the amount received on issue of CCD5. 2.1.3. After perusing and considering the aforesaid explanations of the assessee, the AO completed the assessment vide order dated 15.12.2016 under section 143(3) of the Act without making
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any addition / disallowance. 2.1.4. In view of the above, the Appellant submits that the AO has made full enquiry into the issue of CCD5 including receipt of premium and after applying his mind, passed the assessment order under section 143(3) of the Act. Therefore, the Appellant submits that the assumption of jurisdiction under section 263 by the Pr. CIT is bad in law. Reliance is placed on the various decisions. 2.2. On the merits of the issue, the appellant submits that the impugned order passed by the PUT is not sustainable and, on the very least, the issues is debatable and, hence, the PCIT had no jurisdiction under section 263 of the Act- Applicability of section 56(2)(viib) of the Act - 2.2.1. The Appellant submits that the provision of section 56(2)(viib) of the Act apply to case of issue of shares and not to a case of issue of debentures even if they are subsequently convertible into shares. In view of the aforesaid principle, provisions of section 56(2)(viib) cannot be applied in the year under consideration of issue of debentures. Reliance is placed on the following decisions: CIT Vs. Havells India Ltd. (352 ITR 376) (Delhi) CIT Vs. Secure Meters Ltd. (321 ITR 611) (Raj.) Pr. CIT Vs. Reliance Natural Resource Ltd. (111 taxmann.com 413) (Born.) 2.2.2. The legislature has consciously used the term "shares" in the section as opposed to "securities". Debentures although convertible, are "securities" as defined in Securities Contracts (Regulations) Act, 1956 cited at the time of hearing which makes it clear that the term "shares" and "securities" connote different meaning. Where the legislature intended a particular section to apply to both shares and securities they have made it clear by incorporating in the section both the terms "shares" and "securities". For example, (a) in section 56(2)(vii)(c), the word "property" defined in Explanation to the said section includes both shares and securities. (b) Conversion of debentures into shares was treated as transfer for the purposes of capital gain but for Section 47(x) which exempts such conversion from capital gains which makes it clear that "shares" and "debentures" are distinct. Therefore, only "shares" are covered within the provisions of section 56(2)(viib) and other securities such as "debentures" are outside the ambit and scope of section 56(2)(viib) of the Act.
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2.2.3. Notwithstanding the fact that provision of section 56(2)(viib) is inapplicable to the assessee, the assessee has justified the premium vide letter dated 29.11.2016 (Pg 41-56 of the Paper Book) in the course of assessment proceedings. The assessee has issued CCDs at Rs. 100/- each, and allotted 6.73 crore CCDs of Rs. 10/- at a premium of Rs. 90 each on 22.07.2013 to the Edison. Further, the CCD5 are convertible into redeemable preference shares which are to be redeemed at a premium of Rs. 150 per share. Hence, the valuation is justified as one has to see the redemption value to determine as to whether the receipt of the premium was justified in the first place. 2.2.4. Once, it is found that the provisions of section 56(2)(viib) cannot be applied, the receipt of share premium being a capital receipt cannot be taxed. [Refer: The decision of the Hon'ble Bombay High Court in the case of Vodafone India Services P. Ltd. Vs. UOI (368 ITR 1) and Pr. CIT Vs. Apeak Infotech (397 ITR 148) cited at the time of hearing wherein it has been held that receipt of share premium is a capital receipt and not chargeable to tax. 2.2.5. Further, the Appellant further submits that Department cannot re-characterize the transaction relating to issue of debentures to issue of equity shares in the absence of any enabling provisions in the Act. [Refer: DIT Vs. Besix Kier Dabhol SA (26 taxmann.com 169)(Bom.)].. W.e.f. AY 2018-19, under the Chapter X-A (GAAR), the department can re- characterize a transaction under specified circumstances. Since, in the present case, we are concerned with AY 2014-15, the provisions of this section are not applicable. 2.2.6. Therefore, the Appellant submits that on the issue of applicability of section 56(2)(viib) of the Act is concerned the impugned order of the PCIT is clearly unsustainable in law, nevertheless, the AO has adopted one of the permissible views. 3. Rebuttal to findings of the Pr.CIT 3.1 In para 4.3. of the order of the Pr.CIT, it is alleged that the assessee company has neither furnished Debenture Deed and Share Valuation Report nor has the AO called for it. The Pr.CIT has further alleged that the premium is in excess of the book value of the assessee company. Reply: The Appellant submits that in terms of section 117A of the Companies Act, 1956 (Pg 133 of Paper Book-11), only secured debentures require a debenture trust deed and therefore, the question of there being a trust deed in the instant case of unsecured debentures does not arise. Further, since the present
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case is a case of issue of debentures, there is no requirement of obtaining a share valuation report. The premium has already been justified vide letter dated 29.11.2016 (Pg 41-56 of the Paper Book) submitted in the course of assessment proceedings. The comparison made by the PCIT with respect to the book value of the assessee is completely unjustified since the same is a method of valuing equity shares and not debenture / preference shares, particularly, when the CCDs are convertible into preference shares and not equity shares. The debentures or preference shares are valued inter alia on the basis of the redemption value of the security and on such basis, the premium of Rs. 90 for the issue of debenture was certainly justified. 3.2. In Para 4.4. of the order of the Pr.CIT, it is alleged that the premium on issue of CCDs is no longer payable by the assessee company and that the AO has not verified the receipt of share premium. Reply: The assessee has issued CCD5 at Rs. 100/- each, and allotted 6.73 crore CCDs of Rs. 10/- at a premium of Rs. 90 each on 22.07.2013 to the Edison. The CCD5 are convertible into redeemable preference shares at the end of 7 years which are to be redeemed at a premium of Rs. 150 per share after another 8 years. The premium on issue of debentures has been classified under the head "securities premium" in the financial statements in line the section 78 of the Companies Act, 1956 (Pg 132 of the Paper Book-11). In terms of section, the securities premium would be utilized in repaying premium on redemption of preference shares. Hence, it cannot be said that the premium is not repayable. 3.3. In para 4 of the Show Cause Notice under section 263 of the Act (Pg 81 of the Paper Book), the Pr.CIT has questioned as to how 0% CCD5 can be issued at a premium rather than a discount. Reply: The Pr. CIT failed to appreciate that the CCDs issued at Rs. 100 are convertible into equivalent preference shares which are to be redeemed at Rs. 160. The interest is embedded in the premium on redemption of preference shares. Therefore, it is not strictly a case where no interest is payable on the CCD5.”
On the other hand, the Ld. DR argued in detail and submitted written submission of synopsis which is reproduced below:–
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Debentures Edison Utility 6,73, 00,000 in no. Money Borrowed from Issued to Works Pvt. Ltd. Face Value Rs. 10 i. Jayneer Capital Pvt.Ltd. [PB 16] Premium Rs. 90 On ii. Esssel Corporate 22. 07. 2013 Resources Pvt. Ltd. (Group Companies) [PB41] Total Amount Rs. 673,00,00,000 [PB 12/16/23] Redeemable @ Rs. Transferred to Essel 10 Preference Share Landmarks Pvt. Ltd. [PB 16] [PB 12] On 19.03. 2014 For Rs. 67,30,00,000 [Para 2.1 CIT] Purchased Essel 67,30,00,000 Face Merged with Zee Media Share in Publishers Pvt. Value Rs. 1 Premium Corporation Pvt. Ltd. Ltd. . Rs. 9 [PB13] on 02.05.2014 (Subsidiary Receives 2 shares for every Company) 11 shares of Rs. 1 each
CIT has invoked Section 263 of the Act for the reasons: [Para 2.1 CIT] AO has i. not examined the valuation of Share Premium ii. not called for valuation report / share debenture deed iii. not verified the Source of funds / Capacity of the Investors. The assessee has failed to justify the share premium received. i.AO has not examined the valuation of Share Premium A. AO issues Questionnaire to the assessee on 17.06.2016 : Questionnaire issued without any application of mind This is the first year of incorporation of the assessee company, the questionnaire calls for Mast five years assessment details) [Query 9, Page 2 of Assessee's Paper Book (APB for short)] II. AO issues another Questionnaire on 08.09.2016 : a.___Questionnaire issued again without any application of mind The AO has called for details related to Share Premium received vide Query 2,2, [APB Page 17] whereas the Note 13 |APB Page
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16] forming part of Balance sheet states that the Company has issued Debentures of Rs. 10 each at a premium of Rs. 90 each. No specific query raised as regards the premium on debentures. Calls for details of Share Application Money Query 2.9 [APB Page 17] whereas the assessee has not received any share application money during the year. b. General Query raised for justification of Premium Charged [Query 2.2.5 APB Page 17] Assessee submits reply vide letter dated 23.09.2016, offers no justification for premium charged [APB Page 20] except submitting Debenture Certificate [APB Page 23] and Resolution passed by the Board of Directors of the Assessee Company [APB Page 39]. Assessee submits another reply vide letter dated 29.11.2016, offers no justification for premium charged [APB Page 41] and to the contrary claims that "premium is actually loan, which is to be repaid by the assessee with interest in the form of premium." [It validates the observation of the CIT(A) that "If the securities premium is debt, then it should be reported and classified as Laon and Advances in the Balance Sheet" | Para 4 ] ii. AO has not called for valuation report share debenture deed A. Assessee company was incorporated on 11.06.2013 [APB Page 6|, i.e. it is first year of its business B. Assessee company has not carried out any business activity during the year [APB Page 6], Even the funds raised by the assessee by issue of Debenture were not applied for purpose of business. C. Net worth of the company was at best Rs. 5 lac and it has issued Debenture worth Rs. 67.30 Cr. on 22.07.2013 [PB 12 / 16 /23] with no corresponding assets, and with no corresponding assets further received premium of Rs. 605.70 Cr. which according to assesse is "actually Uun, which is to be repaid by the assessee with interest" [APB Page 42] Thus, the assessee has failed to justify the share premium received with supporting evidence.
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iii. AO has not verified the Source of funds / Capacity of the Investors. A. The assessee has placed on record Acknowledgement of return filed by the allottee M/s Edison Utility Works Pvt. Ltd. alongwith Balance sheet and Profit and Loss account without any enclosures. B. Bank statement of Edison Utility Works Pvt. Ltd. is not on record. C. Ledger. Accounts of Edison Utility Works Pvt. Ltd. are from the books of accounts of Group companies, and not from the books of accounts of Edison Utility Works Pvt. Ltd i. Jayneer Capital Pvt. Ltd. ii. Esssel Corporate Resources Pvt, Ltd. D. Edison Utility Works Pvt. Ltd. has all the elements of shell company: Reserves and Surplus have suddenly turned positive i.e. Rs. 30,15,92,961 on 31.03.2014 from negative of (-) Rs. 3,28,39,314 as on 31.03 2013 even though total revenue received during the year is Rs. 13,56,056. The revenue and the expenditure do not match at all. LIABILITIES Amount (in Rs.) ASSETS Amount (in Rs.) Non Current 677,76,95,830 Investments Long term 905,65,00,000 Long term Loans 146,53,00,000 Borrowings and Advances Short Term 676,18,90,000 Short Term Loans 855,17,71,136 Borrowings and Advances Finance Cost 30,60,81,878 Revenue 13,56,056
Lending for an interest & 0% without any security is not something which people d_o for rank outsiders. The level of turnover and the expenditure incurred on achieving such high turnover do not match at all. The operational expenditure are Rs. 9,30,2 53 on 31.03.2014 vis-a-vis Rs. NIL Las on 31.03 2013. A shell entity is generally an entity without any significant trading, manufacturing or service activity, or with high volume low
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margin transactions- to give it colour of a normal business entity, used as a vehicle for various financial manoeuvres. The operations carried out by these entities, are only to facilitate financial manoeuvring tor the benefit of its clients, or, with that predominant underlying objective, to give the colour of genuineness to these entities. Pavankumar M. Sanghvi v, ITO [2017] 165 1TD 260 (Ahmedabad - Trib.) confirmed in [20181 404 ITR 601 (Gujarat) affirmed in [2018] 97 taxmann.com 398 (SC) (SLP Dismissed) E. There is no presumption that merely because the payment is made by cheque, it is a genuine transaction: C1T vs. P. Mohanakaia & Ors. (2007) 2911TR 278 (Supreme Court) "The transactions though apparent were held to be not real one. May be the money came by way of bank cheques and paid through the process of banking transaction but that itself is of no consequence." Naresh K. Pahuja vs. ITAT: (2015) 375 ITR 526 (Bombay) "mere routing of a gift through a banking channel would not by itself establish that the gift is genuine and the genuineness or non-genuineness of the gift would have to be established by other evidence." CIT & Ors. vs. Saravana Constructions (P.) Ltd. [2012] 72 DTR 258 (Karnataka) "there is no presumption that merely because .the payment is made by cheque, it is a genuine transaction," CIT vs. Maithan International (2015] 56taxmann.com 283 (Calcutta): "mere examination the pass book or the bank statement or the letter of confirmation or the balance sheet of the lender was not enough." 3. Reason [CIT Page 4]: The assessee has credited the premium to General Reserve, the Debenture Holder cannot claim the money. Schedule I to Debenture Certificate : Transferability Restricted: It is subject to approval of the Board of Directors of Assessee Company Assessee exercise full control over transfer of Debentures. One debenture of Rs. 10 convertibles into one Preference Share of Rs. 10/- only. Allottee has no control over premium of Rs. 90 paid per CCD.
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Term for Redemption of share at a premium of Rs. ISO/- NOT communicated to allottee [ APBPage39]. 4. Reason [CIT Page 4] : To avoid the provision of section 56(2)(viib) of the Income-tax Act,1961, the instrument has been called as CCD instead of equity share. In case there is an arrangement, the substance of the transaction have to be deciphered, rather than form [CIT Page 5] Debenture represents debt of the Company [CIT Page 4]. The debenture holder gets interest. In the instant case, the investor is not earning any interest. Therefore, it should be treated as share. o Money received by assessee is in form of share application money [CIT Page 4| as debentures are fully convertible into preference share after 7 years of date of allotment. Debenture is issued at a discount in order to compensate for the interest payable upfront. [CITPage6] In the instant case, Debenture carries 0% interest and premium has been received, which is not to be repaid, the same represents income which is to be taxed in the year of receipt itself [CITPage7] 5. As regards plea that share premium not taxable as income because the money was received on capital account, similar additions have been confirmed in the case of closely held company by the Hon'ble Bombay High Court in the case of Konark Structural Engineering (P.) Ltd. v. Dy. C1T 9(2) [2018] 90 taxmann.com 56 (Bombay) SLP Dismissed/Rejected in [2018] 96 taxmann.com 255 (SC)/[2018] 257 Taxman 262 (SC) and Royal Rich Developers (P.) Ltd. v. Pr C1T [2019] 108 taxmann.com 382 (Bombay). This plea is also rejected in Rajmandir Estates (P.) Ltd. v. Principal Commissioner of income-tax, Kolkata-IIl [2016] 386 ITR 162 (Calcutta)/ [2016] 70 taxmann.com 124 (Calcutta) affirmed in [2017] 77 taxmann.com 285 (SC). Further also, similar additions have been confirmed in by the Hon'ble Apex Court in the case of Pr C1T (Central)-l v. NRA Iron & Steel (P.) Ltd. [2019] 103 taxmann.com 48 (SC/[2019] 412 ITR 161 (SC).
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Similar actions u/s 263 have been affirmed in : Rajmandir Estates (P.) Ltd. v. Principal Commissioner of Income-tax, Kolkata-IIl [2016] 386 ITR 162 (Calcutta)/ [2016] 70 taxmann.com 124 (Calcutta) affirmed in [2017] 77 taxmann.com 285 (SC) rejecting the plea "that any further investigation is futile because the money was received on capital account" [Para 29] Subhlakshmi Vanijya (P.) Ltd. v. Commissioner of Income- tax-t, Kolkata 12015] 155 ITD 171 (Kolkata - Trib.) S. Manickavasagam v. Income-tax Officer, Ward-1, Salem |2010] 123 ITD 235 (Chennai) - Agro Portfolio (P.) Ltd. v. Income Tax Officer, Ward 1 (4), New Delhi ; [2018] 171 ITD 74 (Delhi-Trib.)”
In rebuttal, the Ld AR submitted as below:–
“4. Rebuttal to Contentions of the Id. Departmental Representative 4.1. The impugned order has questioned the genuineness of the transaction as well as applicability of section 68 of the Act Reply: At outset, we submit that the Pr.CIT has not raised any question of the genuineness of the transaction and has only alleged that the AO has not enquired into the issue of share premium [Refer Para 6 at Pg 11 of his order]. Therefore, it is not open the Department to go beyond the order of the Pr.CIT and now question the genuineness of the transaction when the same has not been questioned by the Pr.CIT. [Refer Para 13 of the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Jagadhri Electric Supply& Industrial Co. (140 ITR 490) cited at the time of hearing. Without prejudice to the above, we submit the nature and source of the credit stands explained in the course of assessment proceedings to the satisfaction of the AO on the following established parameters of identity of subscriber, creditworthiness of subscribed and genuineness of transaction from the various details filed in the course of assessment proceedings summarized at para 2.1.2. at Pg 1-2 of this submission 4.2. The premium is not justified Reply: Refer Para 2.2.3 at Pg 2-3 of this submission 4.3. Edison is shell company and has transferred the CCDs at a
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loss which has not been disclosed in its books Reply: In the instant case, we are concerned with the assessment of ARM Infra & Utilities Private Limited and not with the case of the subscriber to CCDs, Edison. Nevertheless, the assessee in the course of assessment proceedings has provided the relevant details for explaining the identity & creditworthiness of the subscriber and relevant extract of bank statement of the company. It has transferred CCD5 of the assessee were transferred by Edison to Essel Landmark Private Limited at cost and not at a loss. Hence, there is no question of non-disclosure of the loss in the return of income I financials. A copy of the ledger account of the investment in CCD5 of the assessee is the books of Edison as exhibited at the time of hearing is enclosed herewith as Annexure A. Edison has been assessed under section 143(3) and for this very issue has been even reassessed under section 143(3) r.w.s 147. 4.4. The DR has relied on various case laws which are fact specific and distinguishable as rebutted at the time of hearing. We crave leave to rebut the same in written submission when called upon.”
Considered the rival submissions and material on record. We noticed that the assessee issued and allotted 6,73,00,000, zero percent Compulsory Convertible Debentures at a face value of ₹ 10, each with a premium of ₹ 90, per CCD to Edison Utility Works Pvt. Ltd. The above CCDs were issued by passing its board resolution dated 22.07.2013. The fund so raised were utilised for the purpose of investment in equity shares of subsidiary company Essel Publishers Pvt. Ltd. of even amount. We also noticed that the debenture certificate as filed before us at Page–23 to 26 of the paper book and the board resolution, the terms of the CCDs are – (a) it shall carry a zero coupon rate; (b) it shall automatically be converted to redeemable preference shares in the ratio of 1:1 at the end of 7th year
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from the date of allotment of CCDs; and (c) the converted redeemable preference shares shall be redeemed at the end of 8th year from the date of conversion of CCDs at a premium of ₹ 150 per share. The above terms of issue and redemption is not the bone of contention before us since it is also confirmed by the Ld. Pr. CIT in his order.
The issue before us is, the assessment under section 143(3) was completed vide dated 15.12.2016 after considering various submissions in connection with the issue of CCDs by the Assessing Officer. The Ld. Pr. CIT after verification of the above assessment order invoked the provisions of section 263 and assumed the jurisdiction. We also noticed that the assessment was selected for scrutiny under CASS for the reason ”Large share premium received and low income in comparison to high loan/advances/investment in shares/investment in unlisted equities during the year”. In response to the notices issued by the Assessing Officer, the assessee has filed various information like details of issue of CCD, return of income, financial statements of Edison Utility Works Pvt. Ltd., bank statements of the assessee as well as Edison, board resolution for issue of CCD, details of money received of source of source toward CCD from Essel Corporate Resources Pvt. Ltd. and Jayneer Capital Pvt. Ltd., the return of income, financials and bank statements and also submitted justification of premium on CCD. The assessment was completed by
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the Assessing Officer by considering the above submissions, however, passed a non–speaking assessment order.
Before us, the Ld. AR submitted that the assessee submitted all the information before the Assessing Officer and the Assessing Officer made full enquiry into the issue of CCDs including receipt of premium and after applying his mind completed the assessment under section 143(3) of the Act. Therefore, he submitted that the assumption of jurisdiction under section 263 by the learned Principle CIT is bad in law. On the other hand, the Ld DR argued that the Assessing Officer has not examined the valuation of share premium and the Assessing Officer had in fact called for the details related to share premium received, but he has not considered Note–13 forming part of the Balance Sheet which states that company has issued debentures only at ₹ 10 per share. He submitted that the Assessing Officer raised the issues without any application of mind. He further submitted that in reply to the general query raised by the Assessing Officer, the assessee offered no justification for premium charged except submitting debenture certificates and board resolution. He submitted that in another reply, the assessee offered no justification for premium charged and makes contrary claim that premium is actually loan which is to be repaid by the assessee with interest in the form of premium. He supported the findings of the Ld. Pr. CIT that if the securities
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premium is debt, then it should be reported and classified as loans and advances in the Balance Sheet. He also submitted that Assessing Officer has not called for valuation report as well as share debenture deeds which are necessary documents to verify the genuineness of the transaction which the Assessing Officer has failed and he supported the findings of the Ld. Pr. CIT by relying on case law which are in line with the presumptions that the CCDs are in the form of equity. However, the case law relied by Ld DR is distinguishable on facts.
After considering the submissions, we noticed that the Ld. Pr. CIT treated the transactions entered by the assessee as subscription of shares instead of subscription of debentures. We observed that the corporate arranges funds for its requirement through various instruments like equity shares, preference shares with various combinations of conversion and percentage of dividend, debentures with various combinations of conversion as well as percentage of interest and other similar bonds for its financial requirements. In the present case, the funds were arranged from internal sources within the group concerns. The assessee company through its Board passed a resolution to arrange funds by issue of compulsory convertible debentures with zero percent interest payout with premium. It is also important to notice that these debentures were issued at private placement and subscribed by Edison Utility Works Pvt. Ltd. which is a
24 Arm Infra & Utilities Pvt. Ltd. group concern and the monies borrowed by Edison Utility from Jayneer Capital Pvt. Ltd. and Essel Corporate Resources Pvt. Ltd., again these are group companies. These CCDs were issued with the promise of compulsory conversion after end of 7th year with equal redeemable preference shares and these redeemable preference shares will be redeemed at the end of 8th year. The Ld. Pr. CIT termed the above transactions as deemed subscription of shares instead of debentures. We are aware that corporate generate funds by adopting hybrid instruments which suits their requirements. In the given case, the board selected the instrument so that up to seven years, the funds arranged will have no burden on the company and will remain instrument of debt. From 8th year onwards, it will be converted into preference shares with no commitment on dividends and at the end of the 15th year, converted CCDs will be redeemed at a premium of ₹ 150 per share. This hybrid instrument will have no burden on the company until the 15th year and at the end of the 15th year, the company will repay to the subscribers of the debt instrument at a premium. The burden of premium will be a liability on the company. We observed that the Ld. Pr. CIT considered the premium received at the issue of debt instrument as free money available to the company considering the fact that the assessee has declared the same under the head reserves and surplus as security premium. We do not agree with the above observation of the Ld. Pr. CIT and even though the assessee
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discloses the above premium under the head reserves and surplus but as per the promise given in Board resolution clearly indicate that it is in fact a liability on the company until the 15th year and at the end of 15th year, these hybrid instrument has to be redeemed at the premium of ₹ 150 per CCD. That means the subscribers of the debt instrument will redeem ₹ 150 per CCD against the payment of premium ₹ 90 per CCD at the time of investment. Further, we noticed that the Ld. Pr. CIT invoked the provisions of section 56(2)(viib) of the Act in second notice issued under section 263 of the Act and directed the Assessing Officer to complete assessment as per the above section. He considered the hybrid instrument as issue of shares i.e., issue of equity rather than debt. The basic presumption made by the Ld. Pr. CIT is flaw that he treated the hybrid instrument as issue of equity shares in order to invoke the provisions of section 56(2) of the Act. The tax authorities, in order to invoke the provisions of section 56(2) of the Act, they have to bring on record that consideration was received for issue of shares exceeds the face value of such shares and the aggregate consideration received for such shares exceeds the fair market value. In the given case, in our view, is not an issue of equity shares rather it is issue of debt instrument with the condition of conversion to redeemable preference shares. We noticed that the Ld. Pr. CIT equated the preference shares with equity shares with reference in distribution of dividends. We do not agree with the
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observation that preference shares are nothing but equity shares. The preference shares do not carry any right to equity participation / business. It is only a type of capital without participation and having a preferential right over distribution of prescribed dividend and distribution of capital. Therefore, the preference shares can never be considered as equity shares unless it is converted and issued with promise to convert as equity. Till the preference shares are converted, it can never have the right of equity in the company. In our considered view, the provisions of section 56(2)(viib) of the Act has no application to the hybrid instrument issued by the assessee company, the hybrid instrument are in the nature of debt cum preference shares (which is not equity shares) is outside the definition of equity shares. We notice that the Ld. Pr. CIT observed in his order that the assessee has received the premium, which it does not need to pay and it has to be treated as income. We observe that provisions of section 52(2) of Companies Act, 2013, allows the companies to utilize the securities premium only in the below manner:–
“(a) towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares; (b) in writing off the preliminary expenses of the company; (c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;
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(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or (e) for the purchase of its own shares or other securities under section 68.”
The above manner of utilization clearly indicates that it is capital reserve and liability for the company to apply the reserve only in the specified manner. These reserve even though part of reserves and surplus, but can never be applied for any other purpose. In the given case, the assessee has issued promise to the CCD holders to redeem the preference shares after 15 years with premium of ` 150 per CCD. Therefore, technically, company can utilize the premium only for the above purpose. Merely because the assessee issued the CCD, which is hybrid instrument to arrange corporate funding thru group concerns, it does not mean that it has indulged in generation of unaccounted money. In this case, there is no finding by any authorities that the assessee has indulged in such activities except that they received premium in issue of CCDs and recorded the same under the head Reserves and Surplus. As discussed above, the assessee cannot utilize the premium other than the manner specified in section 52 of Companies Act, 2013. There is proper safety and binding specified in the Companies Act to monitor the funds generated by the companies. The tax authorities should apply the provisions selectively rather than
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on general terms without analyzing the real impact on management of funds and taxability.
As discussed above, in our view, the assessment was selected under CASS, main object of verification of issue of debentures on premium and low income in comparison to high investment in unlisted equities. In relation to above selection of the case, the Assessing Officer has issued several notices and the assessee has submitted relevant information as called for. The Ld. Pr. CIT considered the above verification and the information submitted by the assessee as improper and non-verification of share premium by the Assessing Officer to assume jurisdiction under section 263 of the Act. The Explanation–2 to section 263 of the Act was invoked by the Ld. Pr. CIT to come to the conclusion that the assessment order is passed without making enquiries or verification. After considering the above facts, in our considered view, the Assessing Officer has made enquiries and carried on with the verification even though passed non-speaking order. The Explanation–2 to section 263 of the Act can be invoked only when no enquiries or verification is carried on otherwise it cannot be invoked. In the given case, the Assessing Officer has carried on the enquiries and verification to his satisfaction which may not be to the satisfaction to the ld. Pr. CIT. Therefore, assumption of jurisdiction fails. We take force in the decision of the Hon'ble Delhi High Court in
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CIT v/s Brahma Centre Developments Pvt. Ltd., ITA no.116 of 2021 & ITA no.118 of 2021 (Del.), judgment dated 05.07.2021. Consequently, we set aside the impugned order passed by the learned PCIT by allowing the grounds of appeal raised by the assessee.
In the result, assessee’s appeal is allowed. Order pronounced in the open court on 12/11/2021 Sd/- Sd/- C.N. PRASAD S. RIFAUR RAHMAN JUDICIAL MEMBER ACCOUNTANT MEMBER
MUMBAI, DATED: 12/11/2021 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar ITAT, Mumbai