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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
AadoSa / O R D E R महावीर स ुंह, न्याययक दस्य/ PER MAHAVIR SINGH, JM:
This appeal filed by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-24, Mumbai [in short CIT(A)], in appeal No. CIT(A)-24/ACIT-15(1)(1)/IT-24/2015-16, dated 01.11.2017. The Assessment was framed by the Asst. Commissioner of Income Tax, Circle-15(1)(1), Mumbai (in short ITO/ AO) for the A.Y. 2012-13 vide order 2 dated 28.03.2015 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
2. The only issue in this appeal of Revenue is against the order of CIT(A) deleting the addition made by AO of share premium as unexplained under section 68 of the Act as the assessee could not prove the genuineness of the transactions. For this Revenue has raised the following two grounds: - “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of share premium amounting to Rs.2,69,25,000/- made under section 68 of the Income tax Act, ignoring the fact that the assessee company had a total accumulated loss of Rs.4,48,41,365/- as on 31.03.2011 and during the year incurred further loss of Rs.2,57,238,608/-, thus having total accumulated loss of Rs.7,25,69,973/-, and these losses being known to the investing companies, the investments made by these parties cannot be treated as genuine.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of share premium amounting to Rs.2,69,25,000/- made under section 68 of the Income Tax Act, holding that the appellant has proved the genuineness of the transactions in the form of confirmations, PAN, return of income, bank statement etc., ignoring the recent decision of the Hon'ble Supreme Court of India in the case of Navodaya Castle (P) Ltd. [2015] 56 taxmann.com 3 18 (SC), wherein the Apex Court has upheld the Delhi High Court decision holding that certificate of incorporation, PAN etc., were not sufficient for purpose of identification of subscriber company. "
Briefly stated facts are that the AO during the course of assessment proceedings noticed from the balance sheet of the assessee company as on 31.03.2012 for the relevant AY 2012-13 that the assessee company has issued 2,22,500/- equity shares and accordingly charged share premium on these shares at Rs. 2,69,25,000/-. The AO noted that the assessee company has also charged huge share premium to the tune of Rs. 5.26 crores during the earlier previous years. The AO also noted from the schedule of balance sheet that the assessee company has total accumulated losses of Rs. 4,68,41,365/- as on 31.03.2011. Therefore, the total accumulated losses in these including this year loss as on 31.03.2012 stand at 25,69,973/-. The AO require the assessee to explain the share premium i.e. the basis and justification of charging such huge share premium of allotment of shares afresh. The assessee in response file details and tred to explain the charging of share premium but according to the AO as per earning per share (eps) and net asset value NAV and net present value (NPV), the right value of shares as on 31.03.2011 and 31.03.2012 is as under: - Contents As on 31.03.2011 As on 31.03.2012 Total number of 10,20,000 12,42,500 shares issued, subscribed and paid up. (B) Total accumulated ₹ 46841365 ₹ 72,56,9973 profit/ (loss) (A) Earnings per share ₹ (-) 45.92 ₹ (-) 58.40 (EPS) – A/B 4 4. The AO also noted that the assessee has received share premium from following parties: - “1. 2. Premji K. Mange.
3. Deepali A. Bhanushali
Kishore Porwal
6. Utaknatha Trading Pvt. Ltd.”
5. According to the AO, the assessee is not been able to provide any basis for charging of such huge premium on the issue of its shares and there is no factual analysis done by the assessee so as to establish that the share premium charged by it is genuine. Hence, he treated the share premium charged by assessee and credited to the books of account of the assessee as unjustified within the meaning of section 68 of the Act and made addition of Rs. 2,69,25,000/-. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) after considering the submissions of the assessee and evidences deleted the addition by observing in Para 2.4.1 and 2.4.2 as under: - “2.4.1 I have given my careful consideration to the rival submissions, perused the material on record and duly considered the factual matrix of the case as also the applicable legal position. I have gone through the contentions of the Assessing officer and also contentions of the appellant.
The only effective Ground raised is against the addition made of Rs. 2,69,25000/- as unexplained 5 cash credit u/s 68 of IT Act, 1961. The Id AO has noticed that the appellant has during the year under consideration received share premium. The Ld AR has submitted that the appellant company has prepared detailed business plan and projections. This business plan and projections were provided to prospective investors. Based on this, investors have invested in shares of the Company at a premium. AO has accepted the genuineness of investment of shares to the extent of face value but added the share premium amount. AO has not cast doubts on capacity of investors. Thus, identity of investors, genuineness of transactions and capacity of investors is established. Addition is made only on the basis that shares are allotted at premium even though Company is making losses. It is pertinent to note that shares are issued at premium to promoters, their family members and group companies as well as outsiders. Group Company of Promoters, Yashraj Biotechnology Ltd., has been issued shares at the same premium as charged to outsiders. The detailed submissions and arguments of the appellant company are summed up as under: i) The appellant has discharged the primary onus cast upon it by providing all the details and necessary evidences. ii) The investors in their wisdom have made investment in the appellant company based on the detailed business plans and projections and provided to the prospective investors.
6 iii) The AO has not found any adverse findings/ irregularities on the details/ submissions made before him. iv) AO's contention that no prudent investor would invest in loss making company can not be the ground for not charging premium. Many start ups are issuing shares even to the foreign investors even when they have very meager revenues and huge losses.
V) The investment made in shares of the appellant company is small portion of total capital/reserves of the investors. vi) The appellant has completely explained the sources of funds in the hands of the investors by filing necessary evidences which the AO has not doubted. vii) The AO has accepted the genuineness of the investment in shares to the extent of face value, but doubted the premium amount invested by the same investors viii) The share application money/share premium is a capital receipt and cannot be liable to tax as revenue item. ix) The provisions of the newly introduced section 56(2)(viib) of the Act arc applicable from the assessment year 2013-14 onwards and cannot made applicable with retrospective effect for the asst. year under consideration.
7 X) If the identity of investors, genuineness of transactions and capacity of investors is established, addition u/s 68 is not sustainable without bringing out any incriminating material/ inquiry by the AO.
I find that the appellant has furnished evidences such as Form 2 filed with ROC wherein the details of fresh shares issued during the year are given and in this form details of all the share subscribers are given and stated that shares are allotted to them. Apart from this, the appellant has also furnished financial statements i.e. Balance Sheet with Annexures of all the investors of the relevant assessment year as also the relevant period bank statement of the investors to show that the amount invested is from their own funds and through banking channels. Appellant has also filed return of income acknowledgement of the subscribers thereby giving details of their PAN numbers thereby proving identity of the subscribers thus duly establishing their identity, genuineness and creditworthiness beyond any doubt. From the perusal of the details filed, in all the cases, the investors are having huge reserves and surplus.
2.4.2. On perusal of the assessment order, it is seen that the AO has not made any sort of enquiry in respect of the /transactions/investors. It could not be understood as to how the AO has without making any sort of enquiry come to the conclusion that shares issued at premium is sham and colorable transaction to introduce the own undisclosed income 8 in the garb of share application. I do not find any basis whatsoever to come to such conclusion. It is a matter on record that the appellant has filed return of income acknowledgement of all the subscribers wherein their PAN numbers are mentioned. The AO has not made any efforts to further verify from the AN database about their current status. Thus, in view of the above facts and circumstances, the AO has made the huge addition of ₹ 2.69 cr. Invoking the provisions of section 68 of the Act without making any proper enquiries and verification in the matter. I find that the AO has without bringing anything on record, merely made the addition under section 68 of the Act holding the transaction to be sham and colorable device to introduce own undisclosed income in the grab of share premium. The conclusions arrived by the Ld. AO is not justified in view of the fact that the appellant company has discharge the onus cast upon it by furnishing the necessary details and evidences establishing the three ingredients i.e. identity, creditworthiness and genuineness of the transactions.”
Aggrieved, now Revenue is in appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. We have noted the fact of the case and noted that the assessee company has received share premium during the year under consideration. During the assessment proceedings AO made detailed inquiry about share premium charged on allotment of shares. In reply, the assessee Company provided all the details like Share 9 application forms, allotment letters, Bank Statements of parties, Balance Sheets of parties etc. and explained the genuineness of transactions. The AO has not found any irregularity in the details submitted and still proceeded to make addition of Share premium account under section 68 of the Act only on the ground that shares are allotted at premium even though Company is making losses. We are of the view that making of losses can’t be a ground for not charging a premium as many startups are issuing shares even to international investors at huge premiums even when they have very meagre revenues and running huge losses year after year. Details of investments by investors in the share of assessee company and their Capital & Reserves are as under: - Name of investor PAN Capital & Amount invested in Reserves Appellant Company Shares Yashraj Biotechnology Ltd AAATY1474C 3273.78 200.00 Premji K. Mange AAHPM1224F 48.90 19.00 Deepali A. Bhanushali AAIPB4242P 168.83 293.00 (Promoter)
Kishore O. Porwal BBGPP8320L 85.08 25.00 Rigveda Properties Ltd. AAACR3845H 4594.98 45.00 Utkantha Trading Ltd. AAACU6984Z 250.31 30.00 From the above, it is seen that the investment in shares of Assessee company is small portion of total Capital & Reserves of the investors.
The Assessee Company has fully explained source of funds and AO has given clear finding of fact that investments in shares of assessee Company are reflected in the Balance Sheets of investor Companies & other entities. We have noted that AO has accepted the genuineness of 10 investment of shares to the extent of face value but added the share premium amount and hence AO has not cast doubts on capacity of investors. Thus, identity of investors, genuineness of transactions and capacity of investors is established. Addition is made only on the basis that shares are allotted at premium even though Company is making losses. We further noted that that share application money is a capital receipt liable to tax under Section 56(2)(viib) of the Act as deeming receipt of consideration for issue of shares in excess of face value in certain cases is applicable only for & from AY 2013-14. We have noted that the Tribunal has considered this issue in great detail by co-ordinate Bench of Mumbai Tribunal in the case of DCIT vs. Piramal Realty Pvt. Ltd. vs. DCIT for AY 2012-13 in vide order dated 16.11.2018, wherein Tribunal held as under: - “11. We find that in the given facts of the case the decision of Hon'ble Jurisdictional High Court in case of Gagandeep (supra) squarely applies to the assessee's case. The decision of Hon’ble Jurisdictional High Court in case of CIT vs Green Infra Ltd 78 taxmann.com 340 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 11 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.
(b)The impugned order examined the applicability of Section 68 of the Act on the parameters of the identity of the subscriber to the share capital, genuineness of the transaction and the capacity of the subscriber to the share capital. It found that the identity of the subscribers was confirmed by virtue of the Assessing Officer issuing a notices under Section 133(6) of the Act to them. Further, it holds that the Revenue itself makes no grievance of the identity of the subscribers.
12 So far as the genuineness of the transaction of share subscriber is concerned, it concludes as the entire transaction is recorded in the Books of Accounts and reflected in the financial statements of the assessee since the subscription was done through the banking channels as evidenced by bank statements which were examined by the Tribunal. With regard to the capacity of the subscribers the impugned order records a finding that 98% of the shares is held by IDFC Private Equity Fund which is a Fund Manager of IDFC Ltd. Moreover, the contributions in IDFC Private Equity FundII are all by public sector undertakings.
(c) Mr. Chhotaray the learned counsel for the Revenue states that the impugned order itself holds that share premium of Rs.490/- per share defies all commercial prudence. Therefore, it has to be considered to be cash credit. We find that the Tribunal has examined the case of the Revenue on the parameters of Section 68 of the Act and found on facts that it is not so hit. Therefore, Section 68 of the Act cannot be invoked. The Revenue has not been able to show in any manner the factual finding recorded by the Tribunal is perverse in any manner.
(d) Thus, question no.(ii) as formulated does not give rise to any substantial question of law and thus not entertained.
In view of the aforesaid, we are of the view that valuation is not relevant for determining 13 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. Vs. ITO (2013) 145 ITR 240. 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. 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 14 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 15 15. 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 a settled Iaw 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 16 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 assesse 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 17 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. This issue of Revenue’s appeal is dismissed.”
In view of the above given facts and circumstances of the present case and order of co-ordinate Bench of this Tribunal in the case of Piramal Realty Pvt. Ltd. (supra), we confirm the order of CIT(A) deleted the addition made by the AO on account of share premium under section 68 of the Act. The appeal of Revenue is dismissed.
In the result, the appeal of Revenue is dismissed.
Order pronounced in the open court on 21.05.2019. (एन. के. प्रधान/ NK PRADHAN) (महावीर ससंह /MAHAVIR SINGH) (लेखा सदस्य / ACCOUNTANT MEMBER) (न्याययक सदस्य/ JUDICIAL MEMBER) मुंबई, ददनांक/ Mumbai, Dated: 21.05.2019. दीप रकार, व.यनजी धिव / Sudip Sarkar, Sr.PS