ITO 9(3)(1), MUMBAI vs. DESTIMONEY INDIA SERVICES P.LTD, MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

1. Whether on the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition made the AO u/s 68 of the Act whereas the AO had rightly concluded that A.Y.2011-12 the assessee did not submit proper explanation about the nature and source of sums credited in its books and was liable for addition u/s 68 of the I.T. Act.

3. The brief facts of the case are that the assessee company was a private Limited company incorporated on 18.03.2005 with the main object to carry on the business of providing advisory services. The assessee filed the return of income on 27.09.2011 relevant to the A.Y.2011-12 showing the total income at loss in sum of Rs.5,79,50,090/-. The return of income was revised on 31.03.2013 u/s139(5) showing the taxable income as nil after claiming the set-off brought forward losses. The return was processed u/s 143(1) of the I.T. Act, 1961. Thereafter, the case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act were issued and served upon the assessee. The assessee company converted 1,43,33,281/- Preference Shares of Rs.10 each held by NSR Alpha Mauritius LLC into 57,33,313/- equity-shares of Rs.10 each at a premium of Rs.15 per share on 27.05.2010. The conversion was resulted into the gain in sum of Rs.8,59,99,680/- which was not offered to tax by assessee but has directly credited to the General Reserves under the head Share Premium. It is seen that the investment by NSR Alpha was claimed as in the nature of FDI under automatic route and if that is the case, then as per the FDI norms, the rate of conversion of such preferential shares ought to have been fixed at the time of issue of these preference shares itself. However, no such conversion price was fixed at the time of such issue and even at the time of the purported conversion, no share valuation has been carried out to fix the conversion price. The very purpose of conversion was to transfer the shares to the other group company M/s.Destimoney Enterprises Limited [DEL, India) so as to make the assessee company as subsidiary of DEL, India. It is 2 A.Y.2011-12 further seen that the shares were initially issued as Cumulative Non- Convertible Redeemable Preference Shares at par and then converted into Cumulative Convertible Preference Shares which in turn were converted into Equity Shares at a premium. The arrears of fixed dividend amounting to Rs.2,20,95,117/- which was in arrears also become no longer payable since the shares have been converted already. Effectively speaking, the assessee company has, by way of such conversion, gained a sum of Rs.8,59,99,680/- as "Premium" in addition to the arrear dividend of Rs.2,20,95,117/-. The total gain in the hands of the assessee company is Rs.10,80,94,797/-.

4. As pointed out earlier, there is neither any underlying assets nor intrinsic value to the premium so fixed except the fact that the converted shares were transferred as "Gift" on the same day to DEL India so as to make the assessee company a 100% subsidiary of the latter. The issue of genuineness or otherwise of the impugned 'gift' was an issue before consideration in the case of DEL India as well and a finding of fact has been given that the impugned transfer is not a genuine transaction. The assessee company has accumulated losses to the extent of Rs.42 crore as at the beginning of the year which was more than the paid up capital of the company. If the investment from N513 in the form of share premium was ignored, then the valuation of FMV of the shares would also be negative. The share premium so claimed is therefore not truly reflective of the intrinsic value of the equity shares of the company, the ostensible purposes for which the said FDI was brought in at such a huge premium. The real worth of the equity share are as found from the above in the negative and hence the issue price is not justified in this case.

3 A.Y.2011-12 5. It is settled legal position that the onus is on the assessee to prove that the stated purposes for which the huge sums were introduced in its books are real and that the nature of such receipts is also truly stated which has not been so discharged in this case. The nature of receipts is best known to the parties concerned and their failure to establish the true nature thereof, the said receipt is ought to be held as unexplained in the hands of the assessee company only being the recipient thereof. In view of the above, the total gain of Rs.10,80,94,797/- in the hands of the assessee company claimed as on account of conversion of preference shares but was not substantiated as to its true nature is hereby brought to tax as the unexplained cash credit in the hands of the assessee company u/s.68 and assessed accordingly. Penalty proceedings u/s.271(1)(c) are initiated separately for furnishing inaccurate particulars of income and concealment on the issue. After certain disallowances the income of the assessee was assessed in sum of Rs.18,16,28,888/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who allowed the claim of the assessee and deleted the addition in sum of Rs.10,80,94,797/- u/s 68 of the Act, therefore, the revenue has filed the present appeal before us.

“10 I have carefully perused the assessment order and the submission of the appellant. It is seen that the AO is aware of the fact that the appellant has converted preferences shares into equity shares. The amount Of preference shares is already credited in earlier years which is now converted into equity shares capital. The AO has 110 doubt over the identity & creditworthiness of the investor, genuineness of the transaction. The only doubt is that the value of share premium charged is not truly reflecting the intrinsic value of the equity shares of the company, i.e, issue price is not justified but only the valuation of charging of share premium could not be a basis for making addition u/s 68 of the Act. In view of section 68 of the Act, AO can added the any sum found credited in the books of appellant if the appellant does not have explanation about the nature and source of it. But, in the instant case, the appellant has converted its preference shares into equity shares and the source of fund which is NSR AIph' whose identity, creditworthiness is not doubted. Therefore, it is held the transaction is genuine. I find force in the submission of the appellant. As all the requirements of section 68 has been fulfilled, i.e, identity & creditworthiness of the investor and genuineness of the transaction, hence, no addition can be called for. A.O is directed to delete the addition. The Ground of Appeal

No 3 is allowed.”

7. On appraisal of the above mentioned order, It is apparent on record that the assessee has credited the amount of preference shares in the earlier year which has now converted into equity-shares capital. The AO nowhere doubt over the identity and creditworthiness of the investor and genuineness of the transaction. The only doubt is that the value of share premium charged is not truly reflecting the intrinsic value of the equity shares of the company. Valuation of charging of shares premium could not be basis for making addition u/s 68 of the Act. The assessee nowhere credited the cash/sum in the books of accounts which is the essential condition to apply the provisions of u/s 68 of the Act. The assessee submits the certificate obtained from the CA in which the valuation of the share has 5 A.Y.2011-12 been duly assessed. The assessee also produced the letter dated 14.06.2010 produced before the RBI and also submitted the certified copy of resolution of Extra Ordinary Meeting of Member’s for obtaining consent for conversion which has been marked as annexure-C. The assessee has also produced the concerned letter of preference shareholder for conversion marked as annexure-D. The Ld. Representative of the assessee has relied upon the decision of Hon’ble ITAT in case of DCIT Vs. Piramal Realty Pvt. Ltd. (ITA. No.2317/M/2017) The relevant finding is hereby reproduced as under.:-

5. We have heard rival contentions and gone through the facts and circumstances of the case. The facts of the case are that the assessee company issued 59,850 1% NCCPs having face value of 10/- at a premium of ₹ 99,990/- to PCPL. These shares were issued in two tranches of 20,000 and 39,850/- shares respectively. In respect of first tranche of issue of shares was applied by PCPL and money for the same was received in earlier year i.e. year ended 31st March 2011, which was disclosed as application money received pending allotment under the current liabilities in the FY ended 31.03.2011. The second tranche was received in the previous year 2011-12 relevant to AY 2012-13. The assessee company filed statutory forms with ROC in form No. 2 for each tranche separately disclosing the number of shares, face value and premium per share and also the name of the allottee. The assessee also filed its annual return of with ROC in form No. 20B disclosing the details of accounts of number of shares, face value and premium of share, name and address of shareholders. The AO during the course of assessment proceedings issued notice under section 133(6) of the act dated 28.03.2014 requiring the assessee to furnish details in respect of shares issued at premium. The assessee replied and filed following details: - “Annexure1- details of share allotment Annexure 2- form 2 filed for each tranche of allotment filed with RoC Annexure 3- Annual return filed in Form 20B filed with RoC Annexure 4- Details of applicant (including PAN and address) shares allotted, consideration, etc.

6. The AO required the assessee to explain as to why the share premium is not added to the returned income of the assessee. The assessee filed its reply dated 16.03.2015, wherein it is submitted that the return of income filed by PCPL and also audited financial statement for the AY 2012-13. The 6 A.Y.2011-12 AO invoked the provisions of section 68 of the act and added share premium of ₹ 598,44,01,500/-, without disputing the face value of shares to the total income of the assessee on the ground that the assessee has failed to establish the nature and source of the credit on the account of the share premium. The CIT(A) deleted the addition after considering the submissions of the assessee as noted above.

7. We have noted that during the course of hearing of this appeal, the Ld CIT-DR in all fairness admitted that the identity, source and creditworthiness of the transaction is not in doubt but only dispute of the Department is as regards the nature of the transaction in light of the huge premium charged by the Assessee. The Ld CIT-DR placed heavy reliance on the decision of Co-ordinate bench of Mumbai Tribunal in the case of Pratik Syntex (P.) Ltd. Vs. ITO (2018)94 taxmann.com 12. The Ld Counsel for the assessee Sh Thar explained that the said decision cannot be applied in the present case on facts of the case. He explained that the said decision is rendered on different set of facts as compared to the present case. He stated that the valuation of the share premium is to be looked into for the purpose of section 68 of the Act. The facts in that case were that equity shares were issued in the year under consideration to the promoters as well as three new parties. Both these classes of shareholders were issued equity shares. Promoters were issued shares 11 at par whereas premium of Rs. 4901- per share was charged from the new parties and for this the Tribunal has made specific note of the following: Despite making such huge investment in the company, the company did not know the whereabouts of those shareholders (para 6, page 10 of the order). Ld counsel stated that no justification for such different issue price even within this relevant year under consideration is brought on record. The Tribunal noted that no doubt the price can be different in genuine transactions as well however the case got aggravated since the shareholders to whom premium was charged could not be traced (para 6, page 10 of the order). The AO deputed an inspector to make field inquiries with respect to the shareholders. The inspector reported that these three new shareholders are not available at the given addresses and their whereabouts are not known. The assesse in that case was confronted with the adverse inspector report but the assessee could not produce current addresses of these three new shareholders (para 6. page 10 of the order). The creditworthiness of the shareholders was also not proved since the shareholders did not have their own money as every payments made by them towards share money in the favour of the assessee is preceded by deposit in the hank account and the balance maintained regularly by them was miniscule (para 6, page 14 of the order). The confirmations received from three parties were signed by the same person. The assessee in that case could not justify the chargeability of such a huge share premium received from three new shareholder vis-a-vis 7 A.Y.2011-12 issuing shares at par to the original promoters within the same relevant year under consideration. To contend that Section 56(2)(viib) r.w.s. 2(24Xxvi) of the Act are placed in statute by Finance Act, 2012 w.e.f. 01-04- 2013 and no question can he raised as to the valuation of shares at an huge share premium is not correct as in the instant case, the genuineness of the transaction of raising of share capital inclusive of share premium to the tune of Rs. 300 lacs from these three new shareholders is itself not proved.

8. We have gone through the case laws relied by the Assessee have been distinguished by the Tribunal while rendering the aforesaid decision. We seek to specifically address how the Tribunal dealt with the decision of Hon'ble Jurisdictional High Court in case of CIT Vs. Gagandeep Infrastructure (P.) Ltd. (2017) 394 ITR 680. The Hon’ble Tribunal has held that in the case of Gagandeep (supra) the Hon'ble Bombay High Court considered the factual matrix of the case wherein it was observed that the taxpayer satisfied the three ingredients of Section 68 of the Act which stood proved namely identity and creditworthiness of shareholders and genuineness of the transaction and on that factual matrix decision of the tribunal was accepted wherein tribunal ruled in favour of the assessee by holding that the taxpayer did satisfied all the three ingredients of Section 68 of the Act.

9. Now let us go through the decision relied on by the assessee of Hon'ble Bombay High Court in case of Gagandeep (supra) 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