M/S RETAIL QUOTIENT RESEARCH PVT. LTD.,CHANDIGARH vs. ACIT, C-5(1), CHANDIGARH

ORDER आदेश आदेश PER DIVA SINGH The present appeal has been filed by the assessee wherein the correctness of the order dated 07.03.2019 of CIT(A)-2, Chandigarh pertaining to 2013-14 is assailed on the following Grounds :

2. That the Ld. Commissioner of Income Tax (Appeals) has failed to appreciate that the provisions of Section 56(2)(viib) are not attracted in the instant case and as such upholding of the addition is arbitrary and unjustified.

3. That the Ld. Commissioner of Income Tax (Appeals) has without appreciating the facts and submissions as placed before him in respect of valuation been done by the statutory auditor, Multi-Sector Seed Capital Fund was a SEBI registered venture capital, India

ITA 901 /CHD/2019 A.Y. 2013-14 Page 2 of 15 Venture partnership Limited was a non resident and as such provisions of Section 56(2)(viib) were not attracted upheld the addition, which is arbitrary and unjustified. 4. That the order of the Ld. CIT (A) is erroneous, arbitrary, opposed to the facts of the case and thus untenable. 2. Ld. AR at the outset inviting atte ntion to the Paper Book filed on record submitted that the assessee has moved an application for admission of additional evidence on 24.03.2021. Referring to the same, it was submitted that the supporting documents are essential and crucial for determining the issue and hence these may be admitted. It was also his submission that these could not be filed earlier as these have been obtained only after the assessee received the order of dismissal of its appeal before the First Appellate Authority. The documents sought to be admitted, it was submitted, are genuine and relevant and need to be considered for proper adjudication.

These documents, it was submitted, would show that the status of the assessee already stood duly recognized as a Startup and hence it was covered under the statutory provisions for establishing its claim. Attention was invited to the relevant documents which demonstrate that the assessee is recognized as a Startup by the Government and supporting certificate of recognition as Startup issued by the Department of Industrial Policy and Promotion dated 27.03.2019 it was his prayer that this may be admitted as additional evidence.

Inviting further attention to the Gazette Notification of Ministry of Commerce and Industry dated 19.02.2019 it

ITA 901 /CHD/2019 A.Y. 2013-14 Page 3 of 15 was submitted that its genuineness cannot be questioned and it also needs to be admitted as fresh evidence as it is on the basis of this document that exe mption to be considered in terms of Clause (viib)of sub-section (2) of Section 56 of the Act. It was also his prayer that the letter dated 04.04.2019 intimating that the assessee has been so considered by CBDT Vide F. No.173/147/2019-ITA-I may also be admitted as fresh evidence.

3. In the background of these relevant documents, it was submitted that considering the facts and the issue involved in the present appeal, infact at this Forum itself a finding can be arrived at as no addition on facts could have been made . At the First Appellate stage, it was submitted that there has been a mis-appreciation of facts and since these documents were obtained only after the receipt of the impugned order while preparing the file and the appeal set that these lapses were noticed. In support of the prayer that the issue infact can be decided by the ITA T itself, attention was invited to the order dated 24.06.2021 in ITA 1562/Chennai/2019 in the case of DCIT Vs M/s Kovai Media Pvt. Ltd. The Chennai Bench, it was submitted, had an occasion to consider similar addition made by the AO which stood deleted by the CIT(A). This was challenged before the ITAT.

The order passed by the CIT(A) in near similar facts, it was ITA 901 /CHD/2019 A.Y. 2013-14 Page 4 of 15 submitted, was upheld by the ITAT. Accordingly, it was his prayer that infact admitting the fresh evidences, the prayer of the assessee that the addition was not maintainable, may be allowed directing that the addition made on facts may be deleted, hence can be considered and may be directed to be deleted.

4. The ld. Sr.DR on considering the impugned order and the copy of the additional evidence submitted that he has no objection if the additional evide nce is admitted for fresh consideration of the issues. However, it was his prayer that the matter may be restored for verification as Tax Authorities have not had an occasion to consider the facts in the light of these documents and see how they are applicable to the assessee. The prayer without affording an opportunity to the Revenue to consider their relevance and applicability was strongly opposed.

5.1 Considering the reply of the assessee the AO did not agree with the valuation of the assessee and required the assessee to show why the provisions of Section 56(2)(viib) of the Act should not apply. The assessee submitted that the Clause shall not apply as the consideration was received from the exempted parties namely venture capital undertaking. Considering the submissions, the CIT(A) summed up the factual position requiring to be addressed as under :

1) Copy of the return and financial statement for the AY 2013-14 2) The pleas taken by you is that it is a venture capital undertaking with a startup capital of 1.14 crores (in the shape of Preference Shares and Equity Shares). Please provide necessary evidence i.e. D.I.P.P. registration certificate, if any to bolster your claims. 3) In the course of appeal proceedings another plea taken up is that one of the investors is a venture capital undertaking as per DIPP guideline. Evidence in this regard may also be submitted. 4) During the appellate proceedings it is noticed that your company has received an investment of Rs. 23,49,478/- from a Venture Capital Fund namely Multi Sector Seed Capital Fund. Evidence in this regard may be submitted. 5) One of the alternative pleas taken is that the difference between (i) the premium of Rs. 3860.64 at which shares were issued and (ii) valuation of Rs. 2600 should be taxed. You may please explain why this may not be assumed as a concession of taxability of the difference equally applicable to the investments made by the non resident. 6) Further details of India Venture Partnership Limited may be provided that inter alia bring out the names of the directors of the company etc. 7) It has also been claimed that the company is providing services involving techno logy. What Technology is being adopted? The services being provided and the ensuring income during the year and in subsequent years may be provided to enable the department appraise the issues in a holistic manner.

ITA 901 /CHD/2019 A.Y. 2013-14 Page 6 of 15 5.2. The assessee in response thereto is found to have given the following reply :

As per clause ii of section 56(2)(viib) of the Income Tax Act, 1961 in case where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund, the aforesaid section is not applicable. The assessee company had allotted the shares to venture capital funds. The copy of relevant certificates of the shareholders is attached herewith. The assessee is a venture capital undertaking as per AS per Clause 2(n) of Venture Capital regulations. As per Clause 2(n) of Venture Capital regulations. (n)

Venture capital undertaking" means a domestic company (i) whose shares are not listed on a recognised stock exchange in India; (ii) which is engaged in the business for providing services, production or manufacture of article or things or does not include such activities or sector which are specified in the negative list by the Board with the approval of the Central Government by notification in the Official Gazette in this behalf. With all the above justifications and certificate submitted. There is no requirement for any D.I.P.P. registration.

3. As per proviso to Section 56(viib), it has been provided, that the provisions are not applicable where venture capital fund invests in a venture capital undertaking. Attaching herewith License of India Partnership Ltd. issued by Republic of Mauritius and SEBI Certificate issued for Multi Sector Seed Fund.

4. Copy of Ledger Account from Multi Sector Seed Fund is enclosed herewith for your reference and records. Showing investments made by them.

5. In case of investments made by the non-residents, section 56(2)(viib) of the income tax act, 1961 is not applicable as the section only covers the investment made by the resident. The text of section is reproduced as under: "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: Provided that this clause shall not apply where the consideration for issue of shares is received. (i) By a venture capital undertaking from a venture capital company or a venture capital fund" (ii) By a company from a class or classes of persons as may be notified by the Central Government in this behalf "

6. The India Venture Partnership Limited is a non-resident concern in respect of which the aforesaid section is not applicable. "

ITA 901 /CHD/2019 A.Y. 2013-14 Page 7 of 15 5.3. The CIT(A) considering the submissions did not agree with them and instead came to the following conclusion :

7.4 I have considered the submission of the Counsel and perused the order of the Assessing Officer. Briefly the findings of the AO are that the case involves issuance of shares at a premium. The AO thereafter on negating the report of the statutory auditors had taken recourse to invoking provisions of section 56(2) (viib) of the Act and calculated the share premium involved as per Rule 11UA of the IT Rules, 1962. The reasons for arriving at the conclusion briefly are enumerated in para '7.1' above. Some of the important features of the AO's findings wee: (i) the audit report was discussed at length with the AR of the assessee and was found not to be acceptable on the ground that it was prepared by an accountant who happened to be the statutory auditor of the company under section 224 of Companies Act, 1956 and as per Rule 11U of Income Tax Rule, 1962. (ii) No documentary evidence was furnished by the assessee i.e. certificate of registration by SEBI etc. to show that the shares shown to be allotted to Venture capitalist's are venture capital company or venture capital fund or venture capital undertaking as described in clause (a), clause (b) and clause (c) respectively of Explanation to clause (23FB) of section 10 of the Income Tax Act, 1961. (iii) When confronted with all this, vide reply dated 23.02.2016, the AR of the assessee filed a completely new and different report from a new accountant regarding the valuation of shares dated 05th April 2012. The act of the assessee, completely changing it's stand has been found to be dubious and unreliable. Valuation report filed by the assessee is dated 5th April 2012 and the former report was dated 20th July 2012. Form 2 submitted to the ROC for return of allotment, dated 10/09/2012 for issuance of 1473 preference shares submitted by the assessee in the assessment proceedings also seem to be dubious as the premium per share is stated to be 0 (zero) as against premium of Rs. 3860.64/- collected by the assessee. Both Equity shares and preference shares were allotted to the investors on 15 July 2012 and 10 November, 2012. So the valuation report dated 20 July 2012 was nearer to allotment dates, as against the valuation report dated April 5th 2012. In the entire backdrop of events both the reports were liable to be negated. 7.4.1 The assessee on the other hand has contended that it was not covered by the provision of section 56(2)(viib) since: (i) It is a venture capital undertaking which had investment from a venture capital fund (ii) It had received investment from a Mauritius based entity that was not resident, and (in) In this case, one of the fund, who had invested at the same share price, was SEBI registered Venture Capital fund and If the price is ITA 901 /CHD/2019 A.Y. 2013-14 Page 8 of 15 commercially agreed upon and is considered right w.r.t. the Venture Capital fund the same cannot be considered as not genuine for other resident Investors. 7.4.2 The case pertains to a company which has seen substantial investments from the directors, a fund that is claimed to qualify as a venture capital fund and a Mauritius based company. From records available on the public domain apart from submissions made during the course of hearings the character of the company has been severally projected/claimed as a market research agency, a venture capital undertaking and subsequently as a startup. The assessee has not buttressed how its activities get covered by the definition u/s 10(23FB) of "a venture capital -undertaking". Details of 'charges registered' from ROC reveal that the company was a small branch for innovation and Start-Up Ginance. The second aspect clearly partakes the character of a non-banking financing which is specifically precluded from the definition of a venture capital undertaking u/s 10{23FB) of the Act. This facet severely impinges its claims for exemption from the operability of section 56(2)(viib) on the basis that it was f a venture capital undertaking. Moreover, as an alternative, it has been claimed that its receipts are not covered by the section as it received the consideration for issue of shares from a venture capital fund as defined under explanation to Section 10(23FB) of the Act. While the submissions and ledger and accounts depict the entity which has invested as "Multi Sector Seed Capital Fund" details of SEBI Registration provided is that of "Blume Ventures Fund c/o IL&FS Trust Company Limited". It is confounding how the two entities have been passed off as one and the same. Clearly the entity 'Multi-sector Seed Fund' is not registered with SEBI. So far as the Mauritius based company is concerned the assessee has appended a certificate of global business licence in the name of "India Venture Partnership Limited" issued by the Financial Services Commission which is responsible for the regulation, supervision and inspection of all financial services other than banking institutions and global business in Mauritius. It's also not evidenced whether the investment fund and the assessee had undertaken the required permissions under Indian Laws and whether the investments were in sync with the regulations guiding India- Mauritius DTAA. In view of the above it is clear that the assessee has not been able to buttress its claims that its activities of selling shares at a premium do not attract the provisions of Section 56(2) (viib). It is clear that the findings of the department that a substantial share premium was involved was not rebutted. Neither do the reasons canvassed suffice to overturn the conclusion arrived at by the AO to rework the premium involved under Rule 11UA of the IT Rules, 1962. The assessee itself in the ledger provided w.r.t 'Multi Sec Seed Fund' acknowledges the premium involved was Rs. 3860/-. Thereafter the alternative plea canvassed, that the second valuation, (which pre-dates the valuation rejected by the AO) and where premium of Rs. 2600/-

ITA 901 /CHD/2019 A.Y. 2013-14 Page 9 of 15 per share had been arrived at, should be given credence to if the appellate authority didn't concede to the request for non-invocation of 56(2)(viib), is a clear concession that the provisions were applicable to the facts of the case. Moreover, there is no reason to intervene with AO's finding out the question of premium. This has to be seen further in light of the financial statements for the year revealing that the earning per share was Rs. (-)55. Clearly the financial statements depict a state of affairs where the earning per share was in the negative and therefore clearly it was a case where outlandish premiums were involved. On that basis the claims, that if the price of shares was considered as right in the case of investment by a venture capital fund the same should be held genuine in the case of resident investors, also fall.”

5.4. On a reading of the above, it is seen that the relevant documents on which the assessee seeks a reliance for a favourable view have not been considered by the tax authorities. It is seen that the documents whose relevance to the issue and genuineness cannot be under suspicion, however, the fact re mains that these were not brought to the notice of the tax authorities. The application dated 24.03.2021 prays for admission of the following evidences : Sr.No. Description 1. Copy of the Gazette Notification dated 19.02.2019 of Ministry of Commerce and Industries, New Delhi.

2. Copy of the Certificate of Recognition dated 27.03.2019 3. Copy of the intimation dated 04.04.2019 under clause (ii) of the proviso to section 56(2)(viib) issued by the CBDT.

5.5. The admission of these documents has not been opposed by the Revenue. We have also seen in the light of the decision of the order of the Co-ordinate Bench sitting at Chennai in the case of Kovai Media Pvt. Ltd. (cited supra) that these documents go to the very root of the matter.

Accordingly, accepting the prayer of ld. Sr.DR who not ITA 901 /CHD/2019 A.Y. 2013-14 Page 10 of 15 opposing their admission has requested that these may be remanded back for consideration afresh at the end of the AO.

Accepting the prayer, we set aside the impugned order in toto and restore the issue back to the file of the AO with a direction to pass a speaking order in accordance with law after giving the assessee reasonable opportunity of being he ard. Said order was pronounced in the presence of the parties via Webex.

ITA 901 /CHD/2019 A.Y. 2013-14 Page 11 of 15 6.1 On a perusal of the order of the Co-ordinate Bench, it is seen that in the facts of the said case, the AO had made an addition under the provisions of Section 56(2)(viib) of the Act for the excess premium charged from resident investors/subscribers. We notice that near similar dispute was raised by the AO on the valuation of the shares in the facts of that case also. On a reading from the order it is noticed that the submissions advanced on behalf of the assessee before the CIT(A) were a reiteration of the arguments as advanced before the AO namely, that the assessee was a Startup and the provisions of Section 56(2)(b) were not applicable. In the facts of the present case, the claim of being a Startup let alone availability of supporting evidence was not made. For ready reference, facts as summed up by the Co-ordinate Bench are extracted he reunder for completeness:

“7. 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 & C.O. No.83/Chny/2019 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.” (emphasis supplied) 6.2 A perusal of para 8 of this order shows that Gazette Notification dated 19.02.2019 as relied upon in the present

ITA 901 /CHD/2019 A.Y. 2013-14 Page 12 of 15 proceedings was relied upon and also taken into consideration by the CIT(A). Similarly CBDT Notification of i.e. Ministry of Commerce and Industry dated 19.02.2019 was also taken up for consideration. These facts emerging from the order of the ITAT in para 8 are extracted hereunder again for completeness :

"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.

ITA 901 /CHD/2019 A.Y. 2013-14 Page 13 of 15 5. 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."

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." 6.3 The Revenue in the appeal it is seen specifically took the objection before the ITA T that it was necessary to verify whether the conditions as set out in para 4 of the Gazette Notification were satisfied or not. This fact is evident from para 9 of the aforesaid order and it is extracted hereunder for the sake of completeness:

Order pronounced on 04 January, 2022.