DCIT 6(2)(1), MUMBAI vs. CHIRIPAL POLY FILMS LTD., MUMBAI

This appeal in A.Y.2012-13 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-12, Mumbai in appeal No.CIT(A)-12/IT 298/DCIT 6(2)(1)/2015-16 dated 31/03/2016 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/03/2016 by the ld. DCIT-6(2)(1), Mumbai (hereinafter referred to as ld. AO).

We have heard rival contentions and gone through the facts and circumstances of the case. As regards to the introduction of share application money amounting to ₹ 4,47,10,385/- from Orange Mauritius Investment Ltd. of Republic of Mauritius, the same was received by assessee on 25.03.2011. This share money was pending allotment as on 31.03.2011 in the balance sheet. From the assessment order it is noticed that the allegation of the AO that the authorized share capital of the assessee was only ₹ 3 crore out of which the assessee company is already issued share capital worth ₹ 1,78,71,100/- as on 31.03.2011 and subsequently also the company has not increased authorized share capital or filed any application for increasing the authorized share capital. The allegation of the AO as that out of the balanced authorized share capital, the assessee could have issued and allotted the shares to Orange Mauritius Investment Ltd. to the extent of ₹ 1,21,28,900/- only. This allegation of the AO, according to us and the facts of the case, that the assessee is not having sufficient authorized share capital and the whole allegation for treating the investment transaction as unexplained, is without any basis. From the factual position, according to us under the Income Tax Act, there is no requirement for increasing the share capital for allotment of shares of 1.98 lakhs to Orange Mauritius Investment Ltd. but in any case the shares were ultimately allotted only on 11.07.2011 i.e. during the previous year relevant to next assessment year. Even otherwise, under the provisions of section 68 of the act, the only requirement is that the transaction should be genuine, identity of the party should be established and credit worthiness of the party should be proved. We find that the assessee entered into share holder agreement dated 15.03.2011 with Orange Mauritius Investment Ltd. is to be allotted 1.98 lakh shares of ₹ 10 each at a premium of ₹ 990 by the assessee company. The allotment of equity shares was to be made by the assessee company to the investor on receipt of full payment of ₹ 19.8 crores. We also find that the assessee has filed all the requirements complying with RBI guidelines by filing FIRE with RBI and also filed unique identification No. from RBI. Further, it has also filed FCGPR with RBI in this connection. Hence, there was no requirement of increasing the authorized share capital as the assessee was having sufficient authorized share capital to issue shares to the investor. During the year under consideration, the assessee received fund of ₹ 4,47,10,385/- on 25.03.2011 out of total investment of ₹ 19.80 crores. The balanced funds were remitted by the investor in subsequent years, which is already mentioned in FCGPR attached in assessee’s paper book. We find from the case records and the assessment order and the order of CIT(A) that the assessee has filed complete paper book in respect to these investments like the following details: - Sr. Name of the No. of Amount of Details submitted No. shareholders share premium Particulars Paper Paper Paper Book 1 Book 2 Book 3 Page Page Page No. No. NO 1. M/s Orange 44,710,385 1. Letter issued by 232-239 Mauritius RBI in connection Investment Ltd. with FCGPR (Share Application money 2. FIRC issued by 240-245 IDBI in the case of NR investors 3. Complete address 513 4. shareholder’s 514-552 666-704 agreement 5. Share application 553-554 705-706 form received from investor 6. FIRC issued by 555-560 bank 7. Letter issued by 246-249 561-564 RBI allotting UIN No.

As regards to the addition of share application money of ₹ 23,47,38,900/- by the AO and deleted by CIT(A), the facts relating to this dispute is that the assessee has issued 2,37,100 shares to ten different shareholders along with evidences filed by assessee are as under: - Ground of Appeal

FCGPR submitted to RBI 511-512 4.. Ms/s Sparrow Exports 70,000 69,300,000 1. PAN and complete address 20 Pvt. Ltd. 2. Confirmation of Accounts 21 3. Return of income 28 4. Letter issued by RBI in 52-53 connection with FCGPR 5. Minutes recorded in board 59-67 meeting for allotment of shares 6. Share application from 70-73 received from investor 7. Share allotment certificate 89-90 issued to investor 7. Notice 01.11.2013, 828-833 24.12.2013 and 04.02.2014 issued under section 133(6) of the Income Tax Act. 8. Response to notice issued 834-845 under section 133(6) of the Income Tax Act. 5. M/s BhushanPetrofils 35,000 34,650,000 1. PAN and complete address 20 Pvt. Ltd. 2. Confirmation of Accounts 22 3. Return of income 29 4. Minutes recorded in board 59-64 meeting for allotment of shares 5 Share application from 74-75 received from investor 6. Share allotment certificate 87 issued to investor 7. Response to notice issued 846-856 under section 133(6) of the Income Tax Act. 6. M/s Shanti Educational 5,500 5,445,000 1. PAN and complete address 20 Initiatives Ltd. 2. Confirmation of Accounts 23 3. Return of income 30 4. Minutes recorded in board 59-64 meeting for allotment of shares 5 Share application from 68-69 received from investor 6. Share allotment certificate 84 issued to investor 7. Response to notice issued under section 133(6) of the Income Tax Act. 8. Response to notice issued under section 133(6) of the Income Tax Act. 7. M/s Chiripal Textile 30,000 29,700,000 1. PAN and complete address 20 Mills Pvt. Ltd 2. Confirmation of Accounts 24 3. Return of income 31 4. Minutes recorded in board 59-64 meeting for allotment of shares 5 Share application from 76-77 received from investor 6. Share allotment certificate 88 issued to investor 7. Notices dated 01.11.2013, 789-792 24.12.2013 and 04.02.2014 issued under section 133(6) of the Income Tax Act.

M/s Prakash Calendar 30,000 29,700,000 1. PAN and complete address 20 Pvt. Ltd.

M/s Vijay 1,000 990,000 1. PAN and complete address 20 SubhamContrade Pvt. Ltd.

Confirmation of Accounts 27 3. Return of income 34 4. Minutes recorded in board 59-64 meeting for allotment of shares 5 Share application from 82-83 received from investor 6. Share allotment certificate 91 issued to investor We also find that the assessee has filed details with respect to balance with ROC for share issuance in term of form No. 2 and annual return filed with ROC. As regards to non-resident investors i.e. namely (i) Desert Diamond General Trading LLC (ii) Mrs. Neelam Sharma (iii) Mr. Shyamsunder Sharma, the assessee has filed the details in form No. 2 and Annual Return filed with ROC in respect of share allotted to these non-residents.

We have noted that the AO has simply relied on the provisions of Section 56(2)(viib) of the Act for treating the share premium as unexplained. We find that Clause (viib) of sub section (2) of section 56 was inserted vide finance Act, 2013 w.e.f 01 .04.2013 i.e. for and from A. Y. 2013-14 to provide that where a closely held company issues its shares at a price which is more than its fair market value then the amount received in excess of fair market value of shares will be charged to tax in the hand of the company as income from other sources. This amendment was made keeping in view the practice of closely held companies to brought in undisclosed money of promoters/directors by issuing shares at high premium which is normally over and above the book value of share of the company, and moreover which escaped the provisions of section 68 of the Act. Moreover, in case of many closely held companies and even in new companies promoters used to issue share at premium with the main purpose of keeping share capital low, yet capital base stronger so that breakup value and market value is high. This leads to advantage of low cost of servicing share capital and also improved prospects to issue share at premium in future by way of initial issue of offering by promoters. One more practical advantage was to save on account of cost of fees payable on increase of authorized capital. When shares are issued at premium, number of shares and authorized capital increase lesser in comparison of capital raised by way of capital and premium. These provisions are deeming provisions as otherwise share premium and capital is a capital receipt which cannot be taxed as income. However, w.e.f A. Y. 2013-14 for closely held companies share premium or share capital is deemed to be normal income if shares are issued exceeding fair market value of shares. But, in any case the amendment will apply for and from AY 2013-14 and not to earlier Assessment Year because the amendment is prospective and not retrospective. Hence, on the issue of share premium, the provisions of section 56(2) (viib) of the Act cannot be applied for making addition even under section 68 of the Act.

Now let us go through the decision relied on by the assessee of Hon'ble Bombay High Court in case of CIT vs. Gagandeep Infrastructure (P) Ltd. (2017) 394 ITR 680 (Bom) which reads as under:- “(c) Being aggrieved, the Revenue carried the issue in the appeal to the Tribunal. The impugned order of the Tribunal holds that the respondent assessee had established the identity, genuineness and capacity of the shareholders who had subscribed to its shares. The identity was established by the very fact that the detailed names, addresses of the shareholders, PAN numbers, bank details and confirmatory letters were filed. The genuineness of the transaction was established by filing a copy of share application form, the form filed with the Registrar of Companies and as also bank details of the shareholders and their confirmations which would indicate both the genuineness as also the capacity of the shareholders to subscribe to the shares. Further the Tribunal while upholding the finding of CIT(A) also that the amount received on issue of share capital along with the premium received thereon, would be on capital receipt and not in the revenue field. Further reliance was also placed upon the decision of Apex Court in Lovely Exports (P) Ltd. (supra) to uphold the finding of the CIT(A) and dismissing the Revenue's appeal”.

We find that in the given facts of the case the decision of Hon'ble Jurisdictional High Court in case of Gagandeep Infrastructure P. Ltd. (supra) squarely applies to the assessee's case. The decision of Hon’ble Jurisdictional High Court in case of CIT vs. Green Infra Ltd [2017] 392 ITR 7 (Bombay) is squarely applicable to the case of the assessee. Despite being the specific argument of the CIT-DR that the share premium defies commercial prudence, Hon'ble Jurisdictional High Court has held that genuineness of the transaction is proved since the entire transaction is recorded in the books of the assessee and the transaction has taken place through banking channels. The decision of the Hon’ble High Court has specifically held that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land. The Tribunal after examining the ingredients of section 68 of the Act held that the addition of share premium under section 68 of the Act cannot be sustained. We hereunder reproduce the relevant paragraph of the decision of Hon'ble Jurisdictional High Court in ease of Green Infra (supra) for ready reference: 3.Regarding question no.(ii): (a)Before the Tribunal, the Revenue raised a new plea viz. that the so called share premium has also to be judged on the touchstone of Section 68 of the Act which provides for cash credit being charged to tax. The impugned order of the Tribunal allowed the issue to be raised before it for the first time, overruling the objection of the respondent-assessee.

In view of the aforesaid, we are of the view that valuation is not relevant for determining genuineness of the transaction for the purpose of section 68 of the Act. We are of the view that CIT(A) has rightly deleted the addition on account of the share premium relying on the decision of Hon'ble Jurisdictional tribunal in case of Green Infra Ltd. (supra). It is a settled position that what is apparent is real unless proved otherwise. It is a settled legal position that "apparent is real" and the onus to prove that the apparent is not the real is on the party who claims it to be so as held by Hon'ble Supreme Court in case of CIT Vs. Daulat Ram Rawatmull (1973) 87 ITR 349.

In the present case, the overwhelming evidence proves that the 'nature' of receipt is share premium and share application money. The audited accounts of both parties, the statutory since it was the department which claimed that the share premium is not in fact so, despite the statutory forms viz. Form 2 for return of allotment and Form 20B for annual return filed with the ROC all show the 'nature' as share premium. If the Department wants to contend that what is apparent is not real, it is the onus of the department to prove that it was Assessee's own money which was routed through a third party. Only then can the provisions of section 68 of the Act be invoked. This aspect is considered in the decision of Mumbai Tribunal in case of Green Infra Ltd. Vs. ITO (2013) 145 lTD 240, wherein Tribunal has held that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land. The said decision has been affirmed by Hon'ble Jurisdictional high Court in case of Green Infra Ltd (Supra).

The Ld. Counsel for the assessee made another argument that the power of carrying valuation is not envisaged by the Legislature for the purpose of Section 68 of the Act. He argued that, wherever the Legislature intended to give the power to determine the value to the AO, it either prescribes Rule for valuation of a particular thing or vested upon the AO the power to refer to the Valuation officer. The power of AO to make a reference to the Valuation Officer is contained in section 142A of the Act. Section 142A of the Act as it stood for the year under consideration reads as under: “142. (1) For the purposes of making an assessment or reassessment under this Act, where an estimate of the value of any investment referred to in section 69 or section 6911 or the value of any bullion, jewellery or oilier valuable article referred to in section 69A or section 6911 or fair market value of any property referred to in sub-section (2) of section 56 is required to be made, the Assessing Officer may require the Valuation Officer to make an estimate of such value and report the same to him”.

We have considered the issue and find that this section does not cover section 68 of the Act. Thus, the Legislature does not envisage any sort of valuation for the purpose of section 68 of the Act. Indeed, valuation of preference shares is a completely different exercise as compared to valuation of equity shares. The AO makes the mention of the reserves and loss while challenging the charge of share premium on preference shares. "Reserves" could be relevant for valuing equity shares. They are not relevant for valuing preference shares. Preference shareholders get priority over the equity shareholders in terms of payment of dividend and during winding up. They get only a fixed rate of dividend. The redemption amount depends on the terms of issue. The conversion depends on the terms of issue. The terms of issue are relevant for valuing preference shares. Even the present Rule 11UA of the Income Tax Rules 1962 are applicable only to section 56(2) of the Act, requires valuation of preference shares by the merchant bankers. The AO has not even attempted to do any sort of valuation of preference shares. His addition is based entirely on conjectures and surmises. It is settled law that the assessment cannot he made on mere suspicion, conjectures and surmises.

Even amendment to section 68 brought by Finance Act, 2012 does not refer to valuation. The insertion of the proviso to section 68 of the Act by Finance Act, 2012 casts an additional onus on the closely held companies to prove source in the shareholders subscribing to the shares of companies. During the course of the hearing, the Ld Counsel explained that the explanatory memorandum to the Finance Bill 2012 makes it clear that the additional onus is only with respect to source of funds in the hands of the shareholders before the transaction can be accepted as a genuine one. Even the amended section does not envisage the valuation of share premium. This is further evident from a parallel amendment in section 56(2) of the Act which brings in its ambit so much of the share premium as charged by a company, not being a company in which the public are substantially interested, as it exceeds the fair market value of the shares. If one accepts the Ld CIT-DR's contentions that section 68 of the Act can he applied where the transaction is proved to be that of a share allotment that here the valuation for charging premium is not justified, it will make the provisions of section 56(2)(viib) of the Act redundant and nugatory. This cannot be the intention of the Legislature especially when the amendments in the two sections are brought in at the same time.

In view of the matter, the Ld Counsel explained that it is a settled law that where two views are possible, the view favorable to the assessee should be adopted as held by Hon’ble Supreme Court in case of CIT Vs. Vegetable Products Ltd. (1973) 88 ITR 192. In view of the above facts and circumstances, we are of the view that the assessee has discharged its onus by adequately disclosing the transaction in its books of accounts, filing statutory forms as regards allotment of shares, providing name, address and PAN of the shareholders, etc. the assessee has sufficiently discharged the onus cast upon it for the purpose of section 68 of the Act and no addition can be made on this account. Hence, we are of the view that the CIT(A) has rightly deleted the addition and we confirm the same. These two common issues of Revenue’s appeal are dismissed."

The next issue to be decided in this appeal is as to whether the ld CITA was justified in deleting the disallowance of Rs 17,29,780/- made on account of depreciation on intangible assets in the facts and circumstances of the case.

The last issue to be decided in this appeal is as to whether the ld CITA was justified in deleting the addition made in the sum of Rs 6,12,92,931/- u/s 56(2)(viia) of the Act in the facts and circumstances of the case.

The third issue in this appeal of Revenue is against the order of CIT(A) deleting the addition made by AO by invoking the provisions of section 56(2)(vii)(a) of the Act. For this Revenue has raised the following ground No. 3: - “II. The learned CIT(A) has erred on facts and circumstances of the case in deleting the addition of ₹ 1,18,67,508/- under section 56(2)(viia) of the Income Tax Act, 1961.”

Aggrieved, assessee preferred the appeal before CIT(A), who deleted the addition by observing in Para 9.25 and 9.26 as under: - “9.25 It is seen that the Assessing Officer was allowed opportunity during the course of the assessment proceedings and he has filed a remand report. In the remand report no submissions have been made by the Assessing Officer on this issue. Therefore, the logical assumption is that the Assessing Officer has been unable to find out any discrepancy in the submissions made by the appellant- company. As mentioned above, the main contention of the appellant-company is that the reserves and surplus appearing in the balance sheet as on 1 April, 2010 and amounting to Rs.23,94,41,958/- entirely comprises of grant/subsidy received from the Government of India and, therefore, this amount cannot be taken into account while determining the fair market value of shares under Rule 11UA. In the submissions which have been reproduced above, the appellant-company has provided calculation of fair market value after ignoring the said subsidy and on this basis has contended that the fair market value does not exceed the face value of Rs.10. During the course of the appellate proceedings, it has been submitted on behalf of the appellant-company, that it is only a matter of presentation in the balance sheet as to how the Government grant is reflected. By following some different method, the Government grant could have been directly reduced from the cost of the assets and if the appellant had followed this method, the fair market value of the shares would have automatically come to a level which is not more than the face value of Rs.10. It is, therefore, contended that having regard to the entire facts and circumstances and the objective of thescheme of integrated Textile Park no income can be brought to the charge of tax u/s 56(2)(vii)(a) of the IT Act. 9.26 I have carefully considered the facts and circumstances relevant to this issue. I have also duly considered the basis provided in the assessment order for making this addition and also the detailed submissions made on behalf of the appellant-company which have been reproduced above. I find considerable force in the submission that the fair market value under Rule 11UA must be determined in an objective manner so as to reflect the correct market value of the shares. VITPL, as mentioned above, is a special purpose vehicle formed to facilitate the scheme of Integrated Textile Park mooted by the Ministry of Textiles, Government of India. It is not a profit making entity. The entire reserves and surplus appearing in the balance sheet as on 1.4.2010 are only on account of the grant received from the Government of India and not on the basis of any business profit earned by the company. In these circumstances, in my view, there can be no inference that the shares of VITPL have been acquired by the appellant- company at a price which is less than its fair market value. Considering the entire facts and circumstances the addition of Rs.1,18,67,508/- is deleted. Ground Appeal No.4 is allowed.” Aggrieved, now Revenue is in appeal before Tribunal.

We have heard rival contentions and gone through the facts and circumstances of the case. We have gone through the findings of CIT(A) and noted that the entire reserves and surplus appearing in the balance sheet as on 1.4.2010 are only on account of the grant received from the Government of India and not on the basis of any business profit earned by the company. In these circumstances, in my view, there can be no inference that the shares of VITPL have been acquired by the assessee at a price which is less than its fair market value. Hence, we find no reason to reverse the findings of CIT(A) and accordingly, the same is upheld.”

The Ground Nos. IV and V raised by the revenue are general in nature and does not require any specific adjudication.

In the result, the appeal of the revenue is dismissed.