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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: Shri Joginder Singh & Shri G Manjunatha
remains that in order to escape from the rigors of provisions of section 68, the assessee has to prove the nature and source of credit found in its books of account. In this case, the AO has brought out clear facts to the effect that the very basic identity and nature of transaction is in doubt, therefore, the sum found credited in the books of account of the assessee is added as unexplained income and accordingly, his order should be upheld.
The Ld.AR, on the other hand, strongly supported the order of Ld.CIT(A) and submitted that there is no merit in the ground taken by the revenue in the light of Rule 46A of the I.T. Rules, 1962 as the assessee has not filed any additional evidences on its own, but such additional evidence has been filed on a specific query from the Ld.CIT(A), vide her order sheet entry dated 26-08-2013. The Ld.CIT(A) has dealt with the issue of Rule 46A in the light of various judicial precedents and categorically observed that the Ld.CIT(A) has wide discretion u/s 250(4) to make further enquiry as he thinks fit or to direct the AO to make
13 ITA 2943/Mum/2014 further enquiry and report the result to him. The Ld.AR further submitted that the Ld.CIT(A) has discussed the issue in detail in the light of circular No.108 dated 20-03-1973 which explains the position of introduction of Rule 46A. Even otherwise, the Ld.CIT(A) has forwarded all evidences filed by the assessee to the AO for his verification. Therefore, the question of admission of additional evidence behind the back of the AO in violation of principles of natural justice does not arise. The Ld.AR further submitted that when the assessee has filed certain additional evidences as per the directions of the Appellate Commissioner, the said evidence is governed by rule 46A(4) which is not required to satisfy the condition of Rule 46A(1). Therefore, there is no merit in the ground taken by the revenue challenging violation of Rule 46A. In this regard, he relied upon various judicial precedents including the decision of Hon’ble Karnataka High Court in the case of Shankar Kandassari Sugar Mills Ltd vs CIT 193 ITR 669(Kar). The Ld.AR further submitted that the Ld.CIT(A) has admitted additional evidence, when the AO has refused to admit additional evidence filed before him. Therefore, there is no question of violation of Rule 46A and hence, the ground taken by the revenue may be dismissed.
Insofar as addition made by the AO towards share application money received from Xander Group Inc, the Ld.AR submitted that the 14 ITA 2943/Mum/2014 assessee has filed enormous details to prove the identity, creditworthiness and genuineness of the subscriber to the share capital which is evidenced from the fact that the Ld.CIT(A) has dealt with the issue at length in the light of evidences filed by the assessee, therefore, the AO was totally incorrect in making addition towards share application money only for the reason that the assessee has issued shares at a high premium. The Ld.AR further submitted that the assessee has filed complete details of names and address of the subscriber to the share capital and also filed confirmations from Xander Investment Holding XV Ltd confirming the investment in the equity shares of the assessee company. The assessee also filed bank statement along with foreign inward remittance certificate to prove the genuineness of transactions.
The assessee also filed financial statements of the investor for last two financial years to prove the capacity of the investor in share application money. Therefore, once the assessee has discharged its initial burden cast upon u/s 68 of the Act, then the burden shifts on the revenue to prove otherwise. In this case, the AO has not brought out any evidence on record to disbelieve investment in share application money.
Therefore, merely for the reason that the shares found issued at a higher premium, addition cannot be made u/s 68 of the Act.
15 ITA 2943/Mum/2014
The Ld.AR, further referring to the Proviso inserted to section 68 of the Act, by the Finance Act, 2012 wef 01-04-2013 submitted that the Proviso inserted to section 68 of the Act is prospective in nature which is applicable from AY 2013-14, therefore, the said amendment cannot be applied to the assessment year in question. The Ld.AR further submitted that the Hon’ble Bombay High Court in the case of Vodafone India Services Pvt Ltd vs UOI 368 ITR 1 (Bom) made it very clear that amount received on account of share application money is a capital receipt and the nature and source of the investment is explained, then there is no scope for making addition u/s 68 of the Income-tax Act, 1961.
The Ld.AR further submitted that the assessee has filed various details to prove valuation of shares and such valuation is based on valuation of the development rights historically possessed by the assessee and not on the basis of the balance-sheet of the company. The assessee has filed various details to prove that the company is having a development right of a prime place which is having potential and investor has considered all those factors to make investments in assessee company which is evident from the fact that a sale purchase agreement is entered into between the parties specifying the terms and conditions of the investment, therefore, the AO was incorrect in disbelieving all these evidences to make addition u/s 68 of the Income-tax Act, 1961.
16 ITA 2943/Mum/2014
We have heard both the parties, perused the material available on record and gone through the orders of authorities below. We shall first deal with the issue of ground taken by the revenue challenging violation of Rule 46A of I.T. Rules, 1962. The Ld.CIT(A) has dealt with this issue in detail in the light of evidences filed by the assessee to came to the conclusion that such additional evidence has been filed on the directions of the CIT(A) and not voluntarily by the assessee. We further notice that the Ld.CIT(A) has called for additional details regarding the creditworthiness of the subscriber vide her order sheet entry dated 26- 08-2013 for which the assessee, vide letter dated 07-09-2013 had filed additional evidence including confirmation from the subscriber, bank statements, the financial statements of Xander Investment Holding XV Ltd and share certificate issued by the assessee company. All the aforesaid evidences have been filed at the instance of the Ld.CIT(A) and, therefore, the said evidence is covered by Rule 46A(4) which does not require to satisfy the conditions of Rule 46A(1) of Income-tax Rules, 1962. We further notice that under the provisions of section 250(4), the CIT(A) has wide discretion to make such further enquiry, as he thinks fit or to direct the AO to make further enquiry in the light of grounds taken by the assessee. Even rule 46A(4) clarifies that nothing contained in Rule 46A(1) shall curtail the CIT(A)’s power to direct the production of 17 ITA 2943/Mum/2014 any document or the examination of any witness to enable him to dispose of the appeal. This fact has been further clarified by the Board vide circular No.108 dated 20-03-1973. Therefore, we are of the considered view that there is no merit in the ground taken by the revenue in the light of Rule 46A as the CIT(A) had given an opportunity to the AO to comment on additional evidence filed by the assessee by way of a remand report. Accordingly, the ground taken by the revenue is rejected.
Coming to the issue in hand. The AO has made addition towards share application money received from Xander Investment Holding XV Ltd, a Mauritius based non-resident investor on the ground that the assessee has failed to prove the identity, genuineness of transaction and creditworthiness of the investor which is a pre-condition to escape from the rigors of provisions of section 68 of the Income-tax Act, 1961.
The AO has given various reasons to disbelieve investments made by Xander Investment Holding XV Ltd. According to the AO, although the assessee has furnished certain evidences to prove the identity of the party, but fact remains that the assessee failed to file further evidences to justify issue of shares at a high premium of Rs.9,99,900 per share.
Therefore, he came to the conclusion that the alleged capital received from Xander Investment Holding XV Ltd is a non genuine transaction
18 ITA 2943/Mum/2014 entered through the process of accommodation or bogus entries to bring in assessee’s own money under the guise of capital in the company.
The AO has basically questioned documentation furnished by the assessee to prove the credit found in its books of account. According to the AO, although the assessee has filed bank statement to prove the transfer of money through banking channel, but the bank statement does not give details of investments. The AO further observed that the identity of the alleged subscriber has not been established voluntarily.
The genuineness of the transaction and creditworthiness of the alleged subscriber and the purpose for which the money has been invested has not been proved and established. The assessee has not offered any plausible explanation about the nature and source thereof and the explanations offered by the assessee are not satisfactory and not supported by any authentic evidences.
The provisions of section 68 of the Income-tax Act, 1961 gives a statutory recognition to the principle that cash credits which are not satisfactorily explained may be assessed as income. This provision empowers the AO to make enquiry regarding the cash credit. If he satisfied with these entries are not genuine, he has every right to add the amount as ‘Income from other sources’. The satisfaction of the AO is 19 ITA 2943/Mum/2014 the basis for making addition u/s 68 and the satisfaction must be derived from the relevant factors on the basis of proper enquiry. It is well settled that the assessee is required to prove prima facie the transactions which results in cash credits in its books of account. Such proof includes the proof of identity of its creditor, the capacity of such creditor to advance money and lastly, the genuineness of the transaction. These things must be proved prima facie by the assessee and only after assessee has adduced evidence, the onus shifts to the department. In this legal background, when we examine the facts of the present case, whether the AO was right in making addition towards share application money received from Xander Investment Holding XV Ltd, under section 68 of the Income-tax Act, 1961. The assessee has filed various details including names and address of the subscribers to the share capital.
The assessee also filed number of documents including share purchase agreement between the assessee and Xander Investment Holding XV Ltd, financial statements of the investors, bank statement and foreign inward remittance certificate to prove the transfer of money through proper banking channels. The assessee further filed confirmation from Xander Investment Holding XV Ltd. On perusal of details filed by the assessee including share purchase agreement, we find that the parties have entered into share purchase agreement setting forth terms and 20 ITA 2943/Mum/2014 conditions of investment. As per the said agreement, Xander Investment Holding XV Ltd has to invest in assessee company for the purpose of development of a health park. The agreement further stated that the assessee shall issue share at a premium of Rs.9,99,900 per share. To support this, the assessee has filed bank statements alon gwith financial statements of investors to prove the capacity of investors.
We further notice that the assessee has filed number of other details in respect of Xander Investment Holding XV Ltd to prove that the said company is part of Xander group which is having more than USD 1.2 billion investments in India in various sectors including real estate, hospitality, infrastructure, entertainment, etc. The group is an active investor in India since 2005 in joint ventures with Reliance group, Tata -- Trent, Mantri Developers, NHAI and other projects. The assessee has filed various newspaper reports in respect of Xander group investments in India in various sectors. All these evidences go to prove an undoubted fact that the investment received from Xander Investment Holding XV Ltd is a genuine transaction which is supported by valid evidences. Had it been a case of the AO that the identity of the investor is not known and the genuineness and creditworthiness of the investor is doubtful, then the matter would be different. In this case, the AO has doubted the identity and genuineness of transaction, but the finding of 21 ITA 2943/Mum/2014 the AO is based on a suspicion and surmises and not on any cogent evidence. The AO has failed to bring on record any evidence to prove that the transactions between the assessee and Xander group is a sham transaction and the assessee has introduced its own money in form of share capital. The findings of the AO is purely based on suspicious and surmises which is evident from the fact that the AO disbelieved complete details including share purchase agreement between the parties to make addition on flimsy grounds. Moreover, when a credit is received from a non-resident the statue has given wide powers to the AO to conduct necessary enquires through competent authority, i.e. FT&TR, Department of Revenue, Ministry of finance, Govt. of India. But, the AO neither conducted required enquiries on its own nor resorted to the proper mechanism provided under the statue for exchange of information under bilateral tax treaty from the county from where the funds has come in order to verify genuineness of transaction. The AO without exercising his option provided under the statue simply came to the conclusion that the amount of investment received from a non- resident is non-genuine transaction on suspicious and surmises manner.
Therefore, we are of the considered view that once the initial burden cast on the assessee has been successfully proved with necessary evidence, then there is no reason for the AO to doubt a genuine
22 ITA 2943/Mum/2014 business transaction between two parties as a sham transaction to make addition u/s 68 of the Income-tax Act, 1961.
Coming to the allegations made by the AO in respect of issue of shares at a premium. The AO has questioned issue of shares at a premium. According to the AO, there is no justification for issue of shares at a premium of Rs.9,99,900 per share, when there is no credible business and asset base. According to the AO, the assessee has not substantiated the issue of shares at a huge premium. We do not find any merit in the findings of the AO for the reason that the assessee has filed necessary evidence including share purchase agreement between the parties which explains the purpose of investment. The assessee further explained that the investment of Xander Investment Holding XV Ltd is on the basis of intrinsic worth of the company based on the valuation of development rights historically possessed by the assessee and not on the basis of balance-sheet. The development rights were acquired way back in 1999 whereas the investment has been based in the previous year 2010. It is obvious that the market value of the property would not be reflected in the books of account, as the accounts being prepared on historical cost basis. The mere fact that there is no income derived / earned by the company would not reduce or affect the valuation of the company on the basis of the market value of the assets.
23 ITA 2943/Mum/2014 The assessee has filed necessary details to prove the value of the property possessed by the company in current market price at Rs.49 crores and it is on this basis that a potential investor would consider investing in shares. We further observe that the decision of the investor to make investment into the company including interalia the premium paid by the investor is not dependent on the profit of the company as on the date of investment, but on the basis of its future potential. As claimed by the assessee, the company is in the process of developing a commercial project and such activity cannot commence almost immediately in view of the fact that various permissions and sanctions are required to commence operations. The assessee has explained reasons for delay in project. Therefore, we are of the considered view that valuation of shares of any enterprises does not depend upon book value, but it is based on various other factors, including good will, its business potential and assets. Hence, merely for the reason that there is a huge premium on shares, the genuine transaction between two companies cannot be doubted by the AO, more particularly, when the assessee has discharged its initial burden by filing necessary details to prove the identity, genuineness of transactions and creditworthiness of the parties. The issue of share capital with premium and subscription to such share capital is a commercial decision between two parties and the 24 ITA 2943/Mum/2014 AO does not have to play any role as long as the credit in respect of share application money passed the test of identity, genuineness of transaction and creditworthiness of the parties. In this case, on perusal of details available on record, we find that the identity of the subscriber to the share capital is not in doubtful because there is a share purchase agreement between the parties, which establishes the identity of the creditor. The genuineness of transactions and creditworthiness of the parties is also not in doubtful as the assessee has filed necessary evidences to prove the genuineness of transaction by filing bank statements and foreign inward remittance certificate. In respect of creditworthiness, the assessee has filed financial statement of investors which is self explanatory, as per which the investor has capacity to explain source of investment in share application money of the assessee.
Coming to another aspect of the issue, the AO has made addition towards share application money received from Xander Investment Holding XV Ltd u/s 68 of the Act, on the basis of higher premium charged on issue of shares. The provision of section 68 has been amended by inserting a Proviso by the Finance Act, 2012 w.e.f 01-04- 2013. As per the said amendment, where the assessee is a company and the sum so credited consists of share application money, share
25 ITA 2943/Mum/2014 capital, share premium or any such amount by whatever name called, any explanation offered by such assessee company shall be deemed not satisfactory unless the person being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited and such explanation in the opinion of the AO aforesaid has been found to be satisfactory. In this case, the assessee has explained the credit found in its books of account with necessary evidence to prove identity, creditworthiness and genuineness of transaction and, therefore, we are of the considered view that the share premium cannot be brought to tax within the ambit of provisions of section 68 before insertion of Proviso to section by the Finance Act, 2012 wef 01-04-2013 which is evident from the fact that the Hon’ble Bombay High Court in the case of CIT vs Gagandeep Infrastructure Ltd vs 394 ITR 680 (Bom) observed that the Proviso inserted wef 01-04-2013 is considered to be prospective in nature and applicable to AY 2013-14. This fact is further strengthened by the latest decision of Hon’ble Bombay High Court, Nagpur Bench in a series of tax appeals in Income-tax Appeals No. 26 to 31 of 2017 dated 08-06-2017, where the Hon’ble High Court has considered the question of addition made u/s 68 in respect of share premium and held that amendment to section 68 of the Act, by the insertion of Proviso thereto
26 ITA 2943/Mum/2014 took place wef 01-04-2013, therefore, it is not applicable to the subject assessment years prior to AY 2013-14. Hence, we are of the considered view that the AO was incorrect in making addition towards share application money including share premium u/s 68 of the Income-tax Act, 1961.
Coming to another aspect of the matter. The Ld.AR for the assessee submitted that the amount received on account of share application money is capital in nature and could not be taxed u/s 68, if the explanation offered by the assessee of the nature and source is not satisfactory, in the opinion of the AO. We find that the issue of taxability of share premium has been considered by the Hon’ble Bombay High Court in the case of Vodafone India Services Pvt Ltd vs UOI 308 ITR 1 (Bom) and after considering relevant provisions including the provisions of section 56(2)(viib) of the Act held that although section 56(1) of the Act would permit including within its head any income not otherwise excluded, it does not provide for a charge to tax on capital account transaction of issue of shares as is specifically provided for in section 45 or section 56(2)(viib) of the Act and included within the definition of “income” in section 2(24) of the Act. It was further observed that amendment to section 2(24) and insertion of section 56(2)(viib) wef 01- 04-2013 relevant to AY 2013-14 and therefore, prior to insertion of 27 ITA 2943/Mum/2014 section 56(2)(viib), share premium cannot be charged to tax as it is in the nature of capital receipt. This legal position is further reiterated by the Hon’ble Bombay High Court, Nagpur Bench in a series of tax appeals in Income-tax Appeals No. 26 to 31 of 2017 dated 08-06-2017, where the Hon’ble High Court has considered the question of taxability of share premium in the light of its earlier decision in case of Vodafone India Services Pvt Ltd vs UOI (supra) and also considering the ratio of judgement of Hon’ble Apex Court in the case of G.S. Homes & Hotels Pvt Ltd vs DCIT in Civil Appeal No.7370 to 7380 of 2016 dated 09-08- 2016 held that definition of income as provided u/s 2(24) of the Act at the relevant time did not define as income in consideration received for issue of shares in excess of its fair market value. This came into the statute wef 01-04-2013 and thus would have no application to the share premium received by the respondent assessee in the previous year relevant to the AY prior to 2013-14. Similarly, the amendment to section 68 of the Act, by addition of Proviso was made subsequent to previous year relevant to the subject assessment year and cannot be invoked.
Therefore, we are of the considered view that even under this count no addition can be made towards share premium u/s 68 of the Act, as it is on account of capital a receipt does not come within the ambit of definition of “income”.
28 ITA 2943/Mum/2014
Coming to the case laws relied upon by the Ld.DR. The Ld.DR has relied upon the decision of Hon’ble Kerala High Court in the case of Sunrise Academy of Medical Specialities India Pvt Ltd vs ITO in W.A.
No.1297 of 2018 dated 12-07-2018 to argue that any premium received by a company on sale of shares come in excess of its face value, if the company is not one in which the public is substantially interested, would be treated as ‘Income from other sources’, as seen from section 56(2)(viib) of the Act, which we do not think can be controlled by the provisions of section 68 of the Act. We have gone through the case law relied upon by the Ld.DR in the light of facts of the present case and find that the case laws relied upon by the Ld.DR has no application as in the case considered by the Hon’ble Kerala High Court, there is no clarity whether the decision pertains to the position of law as enumerated in pre-amended or post amended provisions, therefore, the same cannot be applied to the facts of the present case because the issue involved in this case clearly fall within the ambit of pre-amended provisions of section 68 and section 56(2)(viib) of the Income-tax Act, 1961.
In this view of the matter and considering the ratios of case laws discussed herinabove, we are of the considered view that the AO was erred in making addition towards share application money received from Xander Investment Holding XV Ltd u/s 68 of the Act, despite the 29 ITA 2943/Mum/2014 assessee has proved three ingredients, i.e. identity, genuineness of transaction and creditworthiness of party with necessary evidences. The Ld.CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error in the findings of the Ld.CIT(A); hence, we are inclined to uphold the finding of Ld.CIT(A) and dismiss the appeal filed by the revenue.