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Income Tax Appellate Tribunal, “H”
Before: HON’BLE SH. SANDEEP GOSAIN, JM & HON’BLE SH. N. K. PRADHAN, AM
M/s Homeshine Properties ITO 7(1)(3), Pvt. Ltd. R. no. 11, Ground Floor, बिधम/ 6/603, Mantri Corner, Aayakar Bhavan, M. K. Vs. Sayani road Dadar (w), road, Mumbai-400 020 Mumbai-400028 स्थायीलेखासं./जीआइआरसं./ PAN No. AACCH)443D (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant : Shri Rajeev K. Gubgotra, Sr. DR by प्रत्यथीकीओरसे/Respondentby : Shri G. C. Lalka, AR सुनवाईकीतारीख/ : 29.03.2019 Date of Hearing घोषणाकीतारीख / : 10.04.2019 Date of Pronouncement आदेश / O R D E R
Per Sandeep Gosain, Judicial Member:
The present Appeal has been filed by the revenue against the order of Commissioner of Income Tax (Appeals)-13, Mumbai, dated 18.01.17 for AY 2009-10 on the grounds mentioned herein below:-
M/s Homeshine Properties Pvt. Ltd. 1. "On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in treating share application money and share premium receipts as genuine wherein some of the share holders sold the shares back to the assessee company in loss"
2. "On the facts and in the circumstances of the case and in law, the Id. CIT (A) has erred in considering the Discount Cash Flow Method for valuation of shares as correct. Which were based upon the hypothetical data and never been materialized and considering share premium Rs. 1150/- per shares as genuine transaction"
"On the facts and in the circumstances of the case and in law, the Id CIT (A) has erred in treating share application money and share premium receipts are on account of capital receipts, wherein each investors does not have the capacity to invest on allotment of nominal value of shares, likewise, recipient company does not have capacity to return the sum of investments to each share holders"
4. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in considering the share premium Rs. 4,50,80,0007- as genuine, even though, it was used for giving an interest free loan and advances and not used for within the meaning of section 78(2) of the company Act, 1956"
M/s Homeshine Properties Pvt. Ltd. 5. "On the facts and in the circumstances of the case and in law, the Id CIT(A) has erred in relying on judgments in the cases of CIT Vs Lovely Exports Pvt Ltd (216CTR195) (SC). Vodafone India Services (P) Ltd (50 Taxman 30) and Green Infra Ltd Vs ITO (38 Taxman 253 )(Mumbai ITAT) wherein facts are distinguishable from the cases of the assessee"
"On the fact and in the circumstances of the case and in law, the Ld CIT(A) erred in holding that proviso to section 68 of the Act is prospective in nature in spite of the fact that the proviso is clarifactory in nature and thus, retrospective"
7 The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.
As per the facts of the present case, the assessee is engaged in the business of buying /selling/marketing of real estate and during the year under consideration, the assessee had received share application money (including premium) of Rs. 5 crores. Subsequently, after providing sufficient opportunity to the assessee and after verifying the claim, additions u/s 68 of the Act M/s Homeshine Properties Pvt. Ltd. were made by the AO in the order of assessment u/s 143(3) r.w.s. 147 of the I.T. Act.
3. Aggrieved by the order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of both the parties partly allowed the appeal of the assessee, but set aside the additions made by the AO u/s 68 of the Act.
Aggrieved by the order of Ld. CIT(A), revenue has filed appeal before us on the grounds mentioned herein above.
Ground No. 1 to 6 5. All the grounds raised by the revenue are inter connected and inter related and relates to challenging the order of Ld. CIT(A) in deleting the additions made by AO u/s 68 of the Act, therefore we thought it fit to dispose of the same by this common order.
6. Ld. DR while relying upon the order passed by AO submitted that Ld. CIT(A) had erred in treating share application M/s Homeshine Properties Pvt. Ltd. money and share premium as genuine whereas some of the share holders had sold the shares back to the assessee in loss. It was further submitted that ld CIT (A) had fail in error in considering the Discount Cash Flow Method for valuation of shares as correct, which were based upon the hypothetical data and never been materialized and considering share premium Rs. 1150/- per shares as genuine transaction. It was also submitted that Ld. had wrongly treated the share application money and share premium on account of capital receipts. It was also submitted that Ld. CIT(A) each investors does not have the capacity to invest on allotment of nominal value of shares, likewise, recipient company does not have capacity to return the sum of investments to each share holders. Ld. AR submitted that share premium of Rs. 4,50,80,000/- was not genuine, but then then it was used for giving an interest free loan and advances and was not used for within the meaning of section 78(2) of the company Act, 1956. It was also submitted that the judgments cited by AR were distinguishable and were not applicable of the facts of the present case and Ld CIT(A) further erred in holding that proviso to 6 M/s Homeshine Properties Pvt. Ltd. section 68 of the Act was prospective in nature in spite of the fact that the proviso is clarifactory in nature and thus, retrospective.
On the other hand, Ld. AR reiterated the same arguments as were raised by him before Ld. CIT(A) and relied upon the orders passed by Ld. CIT(A). It was submitted that the assessee had proved the identity, genuineness, creditworthiness of the investors. It was submitted that the assessee had placed on record all the documentary evidences in the shape of PAN Nos, I.T. Return, computation of income with capital account, balance sheet, copy of balance sheet, copy of bank statement of all the 13 subscribers to whom notices could not be served by the revenue. The said documents are annexed with the paper book at serial no. 1 to 194. It was submitted that the valuation of shares by M/s R. H. Nisar & Co. Charteed Account, who had sought to value the shares of the assessee on ADCF basis. As per the said valuation, the face value of Rs. 100 comes to Rs. 1369/-. It was further argued that as opposed to this valuation, the assessee had collected 1,250/- per share. It was further submitted that assessee had filed copy of confirmation from one A. B. Singh, who had M/s Homeshine Properties Pvt. Ltd. acted as broker for the property deal, suppose to have been entered into by the assessee. Ld. AR submitted the extract of Board Resolution of the assessee passed on 24.05.08 for issue of shares at premium for the proposed purchase and leasing out of property and also relied upon the decision in the case of ACIT vrs. Gagandeep Infrastructure Pvt. Ltd. and Green Infra Ltd. vrs. ITO ITA no. 7762/Mum/12.
We have heard the counsels for both the parties at length and we have also perused the material placed on record, judgment cited by the parties as well as the orders passed by revenue authorities. Before we decide the merits of the case, it is necessary to evaluate the orders passed by Ld. CIT(A). The Ld. CIT(A) has dealt with the above grounds raised
by the revenue in para no.
5. (5.1 to 5.9) of its order and the same is reproduced below:-
Decision - I have carefully considered the AO's order as well as the AR's submissions. Let me first briefly examine the AO's case. According to the AO, the whole exercise of collection of share subscription (including a hefty premium) was not a genuine and M/s Homeshine Properties Pvt. Ltd. transparent exercise. The appellant had clearly no standing in the business of purchasing and leasing real estate. It was hence unbelievable that third parties would have made substantial investments simply on account of having known the promoters either in business or in community circles. He pointed out that there was no documentation to establish that the investors had been appraised of the details of the appellant's project and had then committed to invest in it. The AO also disbelieved the DCF valuation given by the appellant, holding it to be wild and unrealistic. The AO also held that mere furnishing of PANs and assessment details of the investors did not make it a case of investors whose identity, genuineness and creditworthiness has been proven. It did not explain the nature and source of the investments either. Lastly, he held that just because certain transactions had been made through banking channels did not make them genuine transactions.
5.1 Let me now briefly examine the contentions of the appellant. Before me, the AR has made extensive submissions, apart from placing certain material in terms of a valuation, a Board Resolution and two confirmations of the broker and the seller of the property in which the appellant was interested, all of which had been placed before the AO. He has also M/s Homeshine Properties Pvt. Ltd. filed an abstract of all the investors to explain the details of the investments as also the modus of confirming the investments. According to the AR, the appellant had more than adequately discharged its onus in every possible way and had established the nature and source of the investments. He has filed a copy of the Board Resolution which had authorized the collection of the share subscription -including the premium - for the purposes of purchase and lease of a property. He has filed confirmations from thirteen investors in whose case the notices under section 133(6) of the Act had been returned unserved, the balance twenty-nine cases having replied to the notices issued by the AO. He had also demonstrated the audit trail through the banking transactions insofar as the investments were concerned. Also, the PANs and the assessment details of the investors filed before the AO would easily demonstrate the identity, genuineness and the creditworthiness of those parties. The basis for quantification of the premium had been a DCF valuation which pegged the value of the shares of the appellant company at Rs. 1,369/- per share as opposed to the subscription collected of Rs 1,250/- per share. Lastly, he has chosen to rely on two decisions of the Mumbai Bench of Hon'ble Tribunal in the cases of ACIT v. Gagandeep Infrastructure Pvt. Ltd (supra) and 10 M/s Homeshine Properties Pvt. Ltd. Green Infra Ltd. v. ITO (supra) which had granted relief to the respective assessees on substantially similar facts.
5.2 Let me now analyze the factual matrix of this case. Though a certain piece of property was proposed to be purchased and leased out by the appellant, the said transaction had never actually materialized. This had in fact led to considerable discontent among the investors, some of whom had later sold their shares at a loss. The AO found it difficult to believe that the investors would have placed their faith in the appellant when it had no track record of similar real estate transactions. In my considered view, the intent and belief of the investors are best left out of any investigation which should concentrate solely on the facts. And the facts are that the appellant has been able to demonstrate that all the investors were genuine, that there was an audit trail the investment transactions and that all the investors were regular tax payers and return-filers. In fact, the AO has nothing to say about the confirmations filed by all the investors either by way of responses to the notices under section 133(6) of the Act or by way of physical filling of confirmations through the AR in case of non-service of notices under section 133(6) of the Act. This is effect a silent acceptance of the fact of identity, genuineness and M/s Homeshine Properties Pvt. Ltd. creditworthiness of the investors. I find myself unable to subscribe to the view of AO that there has to be documentation to demonstrate the interest of a potential investor in a company, failing which an addition on account of his investment therein could be contemplated under section 68 of the Act, notwithstanding the PANs, assessment details and details of transactions through banking channels which had been duly furnished. Let me now turned to the various legal / statutory provisions in this regard.
5.3 Share subscription amounts - not being in the nature of income - have to be treated as having been received on the capital account. Section 78 of the Companies Act, 1956 provides that a company can issue shares at a premium and that the said securities' premium has to be treated as if it were the paid-up capital of the company. The relevant provision by way of subsection (1) of section 78 of the Companies Act, 1956 is seen to be as follows.
"(1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shall be transferred to a "securities' premium account" and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in M/s Homeshine Properties Pvt. Ltd. this section, apply as if the securities' premium account were the paid-up share capital of the company ..."
(Emphasis supplied)
5.4 From a plain reading of the above provision, it would be apparent that the Companies Act, 1956 too treats the share premium lying in the securities' premium account on par with shares regularly issued. It would then follow that if share subscription is not chargeable to tax, it being a capital receipt, share premium too has to be treated similarly.
5.5 Section 68 of the Act envisages the addition of a sum found credited in the books of account when no satisfactory explanation is offered as to the source and nature thereof. Various superior judicial authorities have held this provision to be applicable where the assessee had failed to satisfactorily explain both the identity and the creditworthiness of the payer of that amount as also the genuineness of the transaction. In the instant case, as has been explained in detail in the preceding sub-paragraphs, this onus has been duly discharged by the appellant through responses to notices under section 133(6) of the Act and through confirmation letters. I also find that the appellant had been able to establish an audit trail of the investments which had been made through banking channels. This M/s Homeshine Properties Pvt. Ltd. would also demonstrate the identity and the creditworthiness of the investors as also the genuineness of the impugned transactions. In these circumstances, after careful consideration, I do not find any basis for invoking the provisions of section 68 of the Act.
5.6 It would also be important to briefly discuss the recent amendment in section 68 of the Act. A proviso to section 68 of the Act has been inserted with effect from 1st April 2013. It lays down certain conditions for treatment of share premium as an unexplained cash credit under section 68 of the Act. However, as has been made clear in the Explanatory Notes to the Finance Act 2012, the said amendment shall be prospectively applicable from AY 2013-14 onwards. In these circumstances, it would be clearly inapplicable to the case at hand, it being related to AY 2009-10. The said amendment is accordingly not discussed any further, it being inapplicable to the case at hand.
5.7 From the discussion in the preceding four sub- paragraphs, it would be apparent that the addition as made by the AO would not be feasible in view of the various statutory provisions discussed therein. Let me now turn to the various judicial pronouncements on this subject.
M/s Homeshine Properties Pvt. Ltd. 5.8 The Hon'ble Supreme Court has had occasion to go into this matter. In the case of CIT v. Allahabad Bank Ltd.(73 ITR745), it had been held that the share premium account had to be included in the paid-up capital account, thus leading to it being treated on a par with the paid-up capital. In the case of CIT v. Standard Vacuum Oil Co. (59 ITR 865), it had been held that premium realized on issue of shares is not in the nature of a revenue receipt and is hence not chargeable to tax. In the case of CIT v. Lovely Exports Pvt. Ltd. (216 CTR 195), it had been held that no addition can be contemplated in the hands of the assessee-company even when share-holders have been held to be bogus. It is noteworthy that share-holders have not even been held to be bogus in the case at hand. The Hon'ble Bombay High Court too had occasion to go into this matter in its decision rendered in the case of Vodafone India Services (P) Ltd. (50 Taxmann 300). It had then unequivocally held that the amounts received on issue of share capital - including the premium - are undoubtedly on the capital account. In a relatively recent judgment, the Mumbai Bench of the Hon'ble Tribunal had occasion to examine this very issue once more in the case of Green Infra Ltd. v. ITO (38 Taxmann 253). It had cited the judgments of the Hon'ble Supreme Court discussed earlier in this order.
M/s Homeshine Properties Pvt. Ltd. It had then examined the facts of that case and stated that a non est and zero balance company asking for premium of Rs. 490/- per share with a face value of Rs. 10/- defies commercial prudence. Nevertheless it had concluded that it was the prerogative of the Board of the assessee-company to decide the quantum of the premium and it was the wisdom of the shareholders to invest on those terms. Thus, the Revenue was barred from charging the said premium to tax in the absence of any explicit legislative sanction. It is hence clear that there is no judicial basis for adding back the share application money (inclusive of the premium) as has been done by the AO.
5.9 After taking into account all the factual and legal aspects of this case as discussed in this order and after respectfully following the aforecited superior judicial authorities, the sole addition of Rs. 5,00,00,000/- as made by the AO in this case is set aside. The AO is so directed.
After having gone through the facts of the present case and hearing the parties at length, we find that according to AO, the whole exercise of collection of share subscription and premium was not a genuine and transparent exercise. Whereas on the M/s Homeshine Properties Pvt. Ltd. contrary, the assessee had placed on record certain material in terms of a valuation, a Board Resolution and confirmations of broker and also that of the seller of the property in which the assessee was interested. All these documents were already before both the revenue authorities. Apart from that, the assessee had also filed an abstract of all the investors to explain the details of the investments as also the modus of confirming the investments. According to us, the assessee had adequately discharged its onus by establishing the nature and source of the investments.
We have appreciated that the copy of Board Resolution of the assessee authorized the collection of the share subscription including the premium. We have also gone through the details contained in the paper book, which includes confirmations from thirteen investors in whose case the notices under section 133(6) of the Act were returned unserved. However, the balance twenty- nine investors had replied to the notices issued by the AO and at the same time, the assessee had demonstrated the audit trail through the banking transactions insofar as the investments were concerned. We have also considered the PANs and the assessment details of the investors filed before the revenue M/s Homeshine Properties Pvt. Ltd. authorities, which directly demonstrates the identity, genuineness and the creditworthiness of those parties. As far as the basis for quantification of the premium is concerned, the same was based on a DCF (Discounted cash flow) valuation, which pegged the value of the shares of the assessee company at Rs. 1,369/- per share as opposed to the subscription collected of Rs 1,250/- per share. The Mumbai Bench of Tribunal in the cases of ACIT v. Gagandeep Infrastructure Pvt. Ltd (supra) and Green Infra Ltd. v. ITO (supra), had granted the relief to the respective assessees on identical facts. 11. From the records, we also notice in the present case that though a certain piece of property was proposed to be purchased and leased out by the assessee, the said transaction had never actually materialize and because of that, considerable discontent among the investors was there and because of which, some of the investors, later sold their shares at a loss. The assessee on the basis of documents and circumstances had demonstrated that all the investors were genuine and supported by audit trail of the transactions. All the investors were regularly tax payers and return-filers. It is important to note here that AO could not bring M/s Homeshine Properties Pvt. Ltd. on record to prove that the confirmation filed by the investors either by way of responses to the notices under section 133(6) of the Act or by way of physical filling of confirmations through the AR in case of non-service of notices under section 133(6) of the Act were not genuine. As far as, subscription amount are concerned, the same have to be received on the capital account. In this respect, we rely upon Section 78 of the Companies Act, 1956, wherein it is provided that a company can issue shares at a premium and that the said securities' premium has to be treated as if it were the paid-up capital of the company. The relevant provision by way of subsection (1) of section 78 of the Companies Act, 1956 is seen to be as follows:-
"(1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shall be transferred to a "securities' premium account" and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities' premium account were the paid-up share capital of the company ..."
(Emphasis supplied)
M/s Homeshine Properties Pvt. Ltd. 12. From the plain reading of the above provision, it would be apparent that the Companies Act, 1956 too treats the share premium lying in the securities' premium account on par with shares regularly issued. It would then follow that if share subscription was not chargeable to tax, it being a capital receipt, share premium too had to be treated similarly.
Now coming to question of explaining source and nature of the sum found credited of accounts is concerned, it is a settled law that this provision can only be applicable where the assessee had failed to satisfactorily explain the identity and the creditworthiness of the payer of that amount as also the genuineness of the transaction. However, as per the facts of the present case, the assessee had duly discharged it onus. The AO had got responses to the notice u/s 133(6) of the Act as well as through confirmation letters alongwith all the supporting documents.
We have also considered the recent amendment in section 68 of the Act. A proviso to section 68 of the Act, had been inserted with effect from 1st April 2013, which lays down certain M/s Homeshine Properties Pvt. Ltd. conditions for treatment of share premium as an ‘unexplained cash credit’ under section 68 of the Act. However, it is made clear in the Explanatory Notes to the Finance Act 2012, that the said amendment shall be prospectively applicable from AY 2013-14 onwards. In such circumstances, the same is inapplicable upon the facts of the present case as the present case relates to AY 2009-10 and thus accordingly, the said amendment is inapplicable. We have also considered the judgments of Hon’ble Supreme Court in the case of CIT v. Allahabad Bank Ltd.(73 ITR745), wherein it was held that the share premium account had to be included in the paid-up capital account, thus leading to it being treated on a par with the paid-up capital. In CIT v. Standard Vacuum Oil Co. (59 ITR 865), it was held that premium realized on issue of shares is not in the nature of a revenue receipt and is hence not chargeable to tax. In CIT v. Lovely Exports Pvt. Ltd. (216 CTR 195), it was held that no addition can be contemplated in the hands of the assessee- company even when share-holders have been held to be bogus. It is noteworthy that share-holders have not even been held to be bogus in the case at hand. The Hon'ble Bombay High Court had 21 M/s Homeshine Properties Pvt. Ltd. also decided similar facts in the case of Vodafone India Services (P) Ltd. (50 Taxmann 300), wherein it was held that had then unequivocally held that the amounts received on issue of share capital - including the premium - are undoubtedly on the capital account. In a recent judgment, the Cordinate Bench of ITAT, Mumbai had occasion to examine this very issue once more in the case of Green Infra Ltd. v. ITO (38 Taxmann 253), by citing the judgment of Hon’ble Supreme Court in its order. It had then examined the facts of that case and stated that a non est and zero balance company asking for premium of Rs. 490/- per share with a face value of Rs. 10/- defies commercial prudence. Nevertheless it had concluded that it was the prerogative of the Board of the assessee-company to decide the quantum of the premium and it was the wisdom of the shareholders to invest on those terms. Thus, the Revenue was barred from charging the said premium to tax in the absence of any explicit legislative sanction.
Therefore, considering the entirety of the facts, the Ld. CIT(A) had rightly held that the assessee had satisfied all the ingredients of cash credit i.e. identity, creditworthiness and M/s Homeshine Properties Pvt. Ltd. genuineness of transactions and accordingly deleted the additions. Even Hon’ble Apex Court in the case of M/s Lovely Exports Pvt. Ltd. reported in 216 CTR 195 (2008) had held as under:-
‘If share application money is received by assessee company from alleged bogus shareholders, whose names are given to Assessing Officer, then Department is free to proceed to reopen their individual assessments in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of the assessee company’.
Similar view was taken by the Courts that share application money cannot be brought to tax in the hands of the assessee company in the following decisions:- i) Steller Investment Ltd 115 Taxman 99 (SC) (2000) ii) Divine Lesing & Finance Ltd. 158 Taxman 440 (Delhi High Court) (2007) iii) Sophia Finance Ltd (Delhi) 70 Taxmann.69 (1993)
M/s Homeshine Properties Pvt. Ltd. 17. Moreover, no new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT (A). Therefore, there are no reasons for us to interfere into or deviate from the findings recorded by the Ld. CIT (A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. Resultantly, these grounds raised by the revenue stands dismissed.
Ground No. (7) 18. This ground raised by the revenue is general in nature, thus requires no specific adjudication.