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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI DUVVURU RL REDDY & SHRI G. MANJUNATHA
This appeal filed by the Revenue and Cross Objection filed by the assessee are directed against the order of the learned CIT(A)-1, Coimbatore dated 28.03.2019 and pertains to assessment year 2016-17. Since, facts are identical and issues are common, for the sake of convenience, the appeal filed by the Revenue and Cross Objection filed by the assessee were heard together and are being disposed off by this consolidated order.
2. The Revenue has raised the following grounds of appeal:-
The Order of the learned Commissioner of Income tax (Appeals)-1, Coimbatore is against facts and circumstances of the case.
2. The Learned Commissioner of Income-tax (Appeals)-l, Coimbatore has erred in holding that the sec.56(2)(viib) of the Act is not applicable to the assessee’s case in view of para no.4 of the Notification GSR 127 (E) dated 19.02.2019, without considering the scope given vide para no.6 of the abovementioned Notification, wherein it has been clarified that, para. no.4 is not applicable to the shares in respect of which an addition made u/s 56(2)(viib) of the Act has been made in a assessment order made under the Act before the date of issue of Notification.
3. The Ld. CIT(A) has erred in the light of para no.6 of the Notification GSR 127 (E) dated 19.02.2019 as the assessment order making an addition of Rs.2,72,80,664/- under section 56(2)(viib) was passed on 15.12.2018, whereas the date of issue of Notification is 19.02.2019. Hence, para no.4 of the Notification based on which the Ld. CIT(A) has given relief to the assessee is not applicable to this assessee’s case as the assessment order was passed before the date of notification.
4. The learned Commissioner of Income tax (Appeals)-1 Coimbatore has erred in holding that the AO has not given any finding on the satisfaction about the genuineness of the credit which could be assessed u/s 68, when in fact, despite being given opportunity assessee failed to provide any documents to support the creditworthiness of the subscribers. Even before the Ld. CIT(A) brief profile of eight subscribers, out of the thirteen subscribers, were only provided, reflecting the failure on the part of the assessee to properly discharge its responsibility/onus to prove the genuineness of the transaction.
5 On the facts and circumstances of the case, since the assessee has not proved the genuineness of the transaction with the subscribers and their creditworthiness, the Hon’ble ITAT is requested to uphold the addition of Rs.2,72,80,664/- under section 68 of the IT Act,1961.
6. The Hon’ble ITAT is requested to cancel the order of the learned CIT(A)-1, Coimbatore and uphold the order of the Assessing Officer on the issue of addition to the made u/s 68 of the IT Act.”
3. At the outset, learned AR for the assessee submitted that the cross objection filed by the assessee is time barred by 20 days for which necessary petition for condonation of delay along with affidavit explaining the reasons for the delay has been filed. The AR further submitted that the assessee could not file cross objection within the time allowed under the Act, due to the fact the Authorized Representative was fell ill with chicken pox. The delay in filing cross objection is neither intentional nor willful but for the unavoidable reasons, therefore, delay may be condoned in the interest of advancement of substantial justice.
The learned DR, on the other hand, strongly opposing condonation of delay petition filed by the assessee submitted that the reasons given by the assessee do not come within the ambit of reasonable and bonafide reasons, which can be considered for condonation of delay and hence, cross objection filed by the assessee may be dismissed as not maintainable.
5. Having heard both sides and considered the petition filed by the assessee for condonation of delay, we are of the considered view that reasons given by the assessee for not filing the cross objection within the time allowed under the Act comes under reasonable cause as provided under the Act for condonation of delay and hence, delay in filing of cross objection is condoned and the cross objection filed by the assessee is admitted for adjudication.
Brief facts of the case are that the assessee company is start up company engaged in the business of print and digital media filed its return of income for the assessment year 2016- 17 on 28.09.2016 declaring loss of Rs.2,54,15,860/-. The assessee has obtained certificate of recognition as a startup from Department of Industrial Promotion and Partnership.
During the year under consideration, the assessee has issued equity shares at share premium of Rs.124.67 per share to 13 individuals. The case has been taken for scrutiny and during the course of assessment proceedings, the Assessing Officer called upon the assessee to justify issue of shares at premium of Rs.124.67 per share. In response, the assessee submitted that it is a startup company and has valued its shares on the basis of discounted cash flow method and such valuation has been determined by the registered valuer at Rs.125.7 per equity share. The Assessing Officer vide his notice dated 08.11.2018 called upon the assessee to explain as to why excess premium charged on issue of equity shares shall not be brought to tax, as per provisions of section 56(2)(viib) of the Income Tax Act, 1961, as evidences filed by the assessee in support of value of shares is not in accordance with Rule 11UA(2)(b) of the Income Tax Rules, 1962. In response, the assessee has submitted that it has obtained a certificate from statutory auditor, as per which valuer has determined share price on the basis of discounted cash flow method by considering future prospective of the company . The assessee further submitted that it has also obtained a certificate from independent auditor to support valuation fixed for issue of shares. The Assessing Officer, however, not convinced with explanation furnished by the assessee and according to him, although, the assessee has filed valuation report in support of issue of share capital at premium, but such valuation report is not obtained as required under rule 11UA(2)(b) of the I.T.
Rules, 1962 and further projected figures adopted in the discounted cash flow method is also without any basis.
Therefore, he opined that market value of equity shares as worked out by the company is arbitrary and without any justification and hence, he invoked provisions of section 56(2)(viib) of the Act and excess premium charged from resident investors/subscribers totaling to Rs.2,72,80,664/- is brought to tax as income of the assessee.
Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee reiterated its arguments taken before the Assessing Officer and claimed that it is a start up company and hence, provisions of section 56(2(viib) of the Act does not apply, where consideration for issue of shares is received from class of persons notified by Central Government, subject to such other conditions as may be specified. The assessee further submitted that it has obtained a certificate of recognition as a startup company from DIPP and as per Gazette Notification dated 19.02.2019, startup companies are outside the scope of section 56(2)(viib) of the Act.
The learned CIT(A), after considering relevant submissions of the assessee and has also taken note of circular issued by CBDT vide Notification No.F.45/2016/F.No.173/103/2016 dated 14.06.2016 and also Gazette Notification GSR No. 127(E) dated 19.02.2019 held that provisions of section 56(2)(viib) of the Act would not be applicable where the assessee is a recognized startup company from DIPP. He further held that the assessee being a recognized startup company is covered by Gazette Notification GSR No. 127(E) dated 19.02.2019 and hence, it is clearly outside the scope of section 56(2)(viib) of the Act in respect of share premium collected on issue of shares .The relevant findings of the learned CIT(A) are as under:-
“5.0. On going through the submissions of the appellant and the assessment order, I find that the Assessing Officer has not addressed the issue whether the provisions of section 56(2)(viib) is applicable to the appellant. The AC has proceeded to assess the premium as income on a technical ground that the Valuation has not been done as per the provisions contained in Rule 11UA(2)(b) of the IT Rules 1962. Before we proceed to analyse whether the provisions contained in the Rules are satisfied or not, it is necessary to see whether the section 56(2)(viib) is applicable to the appellant. To analyse the same the following facts are relevant.
1. The appellant has obtained a certificate of Recognition as a ‘Start Up’ from the DIPP.
The aggregate amount of paid up share capital and share premium of start up after issue is less than 25 crores as required under notifications.
The provisions of section 56(2)(viib) does not apply where consideration for issue of shares is received by a company from class of persons notified by the Central Government subject to such other conditions as may be specified. Accordingly, the CBDT vide notification No.45/2016/F.No.173/103/2016, notified the persons to be the persons defined u/s.2(31), being a resident, who is making an investment at premium in case of a “start-up” company.
4. This company is one in which the public are not substantially interested and fulfills the conditions specified in the Gazette notification number GSR 180(E) dated 17.02.2016.
Gazette notification GSR 127(E) dated 19.02.2019 clearly exempts start up from the ambit of section 56(2)(viib) of the Income Tax in section 4 of the said notification. Section 4 is reproduced below: “4. A Startup shall be eligible for notification under clause (ii) of the proviso to clause (viib) of sub-section (2) of section 56 of the Act and consequent exemption from the provisions of that clause if it fulfils the following conditions: (i) It has been recognized by DPHT under para 2(iii)(a) or as per any earlier notification on the subject (ii) aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue of share, if any, does not exceed, twenty five crore rupees”.
5.1. The AO has at no point of time questioned and doubted that the appellant is a startup company. Proceeding on the assumption that the company is a startup company and one which satisfied all conditions given in the relevant notifications referred above, I hold that the provisions of section 56(2)(viib) would not be applicable in the light of CBDT notification No.45/2016 (supra) and section 4 of the Gazette notification GSR 127(E) dated 19.2.2019. The issue of non applicability of Rule 114A(2)(b) of the IT Rules is therefore becomes infructuous. Since the AO has not given any finding on the satisfaction about the genuineness of the credit which could be assessed u/s.68, the issue is not adjudicated.”
The learned DR submitted that the learned CIT(A) has erred in deleting additions made by the Assessing Officer towards excess share premium charged on issue of shares by invoking the provisions of section 56(2)(viib) of the Act, by holding that the assessee is outside scope of provisions of section 56(2)(viib) of the Act, without considering the fact that as per Gazette Notification GSR No. 127(E) dated 19.02.2019 vide para no.6, if the assessee issues shares at premium before the date of notification i.e 19.2.2019, then para 4 of said Notification is not applicable, hence the assessee is not outside the scope of section 56(2)(viib) of the Act. The learned DR further submitted that assuming for a moment, the assessee is covered by Gazette Notification GSR No. 127(E) dated 19.02.2019, but fact remains that whether it has satisfied conditions prescribed in para 4 of said Notification or not has to be seen. Since the assessee has not bought out evidence before the Assessing Officer at the time of assessment proceedings, matter may be set aside to the file of the Assessing Officer to verify facts with reference to CBDT circular No. 45/2016/F.No.173/103/2016 and Gazette Notification GSR No. 127(E) dated 19.02.2019.
The learned A.R for the assessee, on the other hand, strongly supporting the order of learned CIT(A) submitted that the learned CIT(A) has rightly appreciated the facts by considering certificate issued by DIPP to recognize the assessee as a startup company and held that the provisions of section 56(2)(viib) of the Act does not apply where consideration for issue of shares received by the company from class of persons notified by the Central Government, subject to other such conditions as may be specified. The assessee has satisfied all conditions prescribed to recognize as a startup company and after considering relevant facts, the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Govt. of India has issued a certificate recognizing the assessee as a startup company. Therefore, the learned CIT(A) has rightly held that the assessee is outside the scope of provisions of section 56(2)(viib) of the Act. The learned AR further referring to paper book filed by the assessee submitted that the CBDT vide its notification No.173/354/2019 dated 9th August, 2019 has clarified applicability of para 6 of Gazette Notification No.127E dated 19.02.2019, after considering hardships considered by startup companies involving application of section 56(2)(viib) of the Act and clarified that said notification will be applicable to those startup companies also, where addition u/s. 56(2)(viib) of the Act has been made in assessment order under the Income Tax Act before 19th February,2019, provided the assessee has specifically submitted declaration in Form No.2 that it fulfilled conditions mentioned in para 4 of the above referred notification. The assessee thereafter, has filed Form No.2 in pursuance of para 5 of Notification dated 19.02.2019 on 23rd August, 2019 and in response, the CBDT vide its notification F.No.173/147/2019-ITA-1 dated 28th August, 2019 has clarified that assessee is a recognized startup as per DPIIT and hence, is outside scope of provisions of section 56(2)(viib) of the Act.
Therefore, he submitted that there is no merit in the arguments of the learned DR that the assessee’s case is not covered under Gazette Notification dated 19.02.2019 and is very much covered under the provisions of section 56(2)(viib) of the Act.
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The Assessing Officer has charged excess premium collected on issue of equity shares from resident individuals u/s.56(2)(viib) of the Act, as income of the assessee. The provisions of section 56(2)(viib) of the Act, deals with cases where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to tax as income of the assessee. The proviso provided to section 56(2(viib) has excluded certain category or class of companies from application on fulfillment of certain conditions. Further, for this purpose notified class of persons has been notified by CBDT vide its circular No.173/147/2018-ITA I dated 06.02.2018, as per which any startup company as recognized by DPIIT, Ministry of Commerce & Industry, Govt. of India is outside the scope of provisions of section 56(2(viib) of the Act. In this case, the assessee has filed necessary evidences to prove that it is a recognized startup from DPIIT. Further, the Gazette Notification No.GSR 127(E) dated 19.02.2019 has exempted startup companies from application of provisions of section 56(2(viib) of the Act, provided said startup companies are satisfied conditions prescribed in para 4 of said notification. The assessee has furnished a notification issued by CBDT vide reference No.230819001348 dated 28th August, 2019 u/s. 56(2(viib) of the Act, as per which the assessee has satisfied conditions prescribed in para 4 of said notification and further, the assessee is exempted from application of the provisions of section 56(2(viib) of the Act, on the amount received on consideration for issue of shares. The learned CIT(A), after considering relevant facts and also by taking note of circular issued by CBDT vide notification No.45/2016/F.No.173/103/2016 and also Gazette Notification No.GSR 127(E) dated 19.02.2019, has categorically stated that the assessee is exempt from ambit of section 56(2(viib) of the Act and hence, consideration received for issue of share capital and share premium is outside scope of section 56(2(viib) of the Act. He further observed that since the assessee is outside ambit of section 56(2(viib) of the Act, issue of non- applicability of Rule 11UA(2)(b) of the Income Tax Rules, 1962, therefore, become infructuous and hence, the question of substantiating value of shares does not arise. Therefore, we are of the considered view that the learned CIT(A) has rightly held that share premium collected by the assessee for issue of share capital is outside scope of the provisions of section 56(2(viib) of the Act.
As regards arguments of the learned DR in light of para 6 of Gazette Notification GSR 127(E) dated 19.02.2019, we find that the CBDT, after considering hardships faced by startup companies with regard to application of section 56(2(viib) of the Act, as per Gazette Notification dated 19.02.2019, has issued clarificatory notification dated 9th August, 2019 and clarified that said notification will be applicable to startup companies also where addition u/s. 56(2(viib) of the Act has been made in an assessment order before 19.02.2019, provided the assessee has subsequently submitted declaration in Form No.2 that it has satisfied conditions mentioned in para 4 of the above referred notification. In this case, the assessee has filed Form No.2 in pursuance of para 5 of Notification dated 19.02.2019 on 23rd August, 2019 and in response, the CBDT vide its notification dated 28th August, 2019 has clarified that assessee is a recognized startup from DPIIT and further, the provisions of section 56(2(viib) of the Act shall not apply to the assessee on the amounts received as consideration for issue of shares.
Therefore, we are of the considered view that there is no merit in arguments of the learned DR that the assessee is outside scope of Gazette Notification dated 19.02.2019 and hence, share premium issued on issue of shares is covered u/s. 56(2(viib) of the Act. In this view of the matter and considering facts and circumstances of the case, we are of the considered view that assessee is a recognized startup from DPIIT, Ministry of Commerce & Industry, Govt. of India and hence, it is outside scope of the provisions of section 56(2(viib) of the Act, in respect of consideration received for issue of shares at premium. The learned CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer. Hence, we are inclined to uphold findings of the learned CIT(A) and dismiss appeal filed by the Revenue.
The assessee has filed cross objection in support of order of the learned CIT(A). Since we have dismissed appeal filed by the Revenue, cross objection filed by the assessee becomes infructuous and hence, the same is dismissed as not maintainable.