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Income Tax Appellate Tribunal, MUMBAI BENCHES “H”, MUMBAI
Before: Shri Joginder Singh & Shri G Manjunatha
O R D E R Per G Manjunatha, Accountant Member
This appeal filed by the Revenue is directed against the order of CIT(A)-20, Mumbai, dated 04.11.2013, and it pertains to assessment year 2010-11. The Revenue has raised the following Grounds of appeal:
“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made by the AO of Rs. 96,00,000/- by treating the share application money as unexplained income u/s 56(1) of the Income-tax Act 1961 without appreciating the fact that the addition was made as share application money with premium totaling to Rs. .96,00,000/- was introduced in the books through book entry only without any banking transaction or actual receipts?
Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition without appreciating the fact that the assessee has failed to discharge its onus of explaining the charging of high premium @ Rs. 1100/- per share with proper explanation/ supporting?
Kem Liquors & Beverages Pvt. Ltd.
3. The appellant prays that the order of the CIT(A) on the grounds be set aside and that of the Assessing Officer be restored.
The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.” 2. The brief facts of the case are that the assessee is a private limited company engaged in the business of manufacturing of liquor on conducting basis. It filed its return of income for A.Y. 2010-11 on 27.09.2010 declaring total loss at ` 5,32,515/. The case was selected for scrutiny and notices u/s. 143(2) and 142(1) were issued. In response to the notices, AR for the assessee appeared and filed various details as called for. During the course of assessment proceedings, the Assessing Officer observed that the assessee has brought in share capital amounting to ` 96 lacs by allotting 8000 equity shares, at ` 1200/- per share, having face value of ` 100 per share with a premium of ` 1100 per share to M/s. Amber Distilleries Limited, an associate concern of the assessee. Therefore, the assessee was called upon to furnish necessary details including justification for issue of shares at premium. In response to notice, the assessee filed various details including Board Resolution for allotment of equity shares at a premium of ` 1100/- per share, valuation report from a registered valuer as per which the value of share shares had been determined at ` 1150 per share on net asset value method. In order to verify the genuineness of transactions, the Assessing Officer issued notice u/s. 133(6) to M/s. Amber Distilleries Limited, and called for various details for which the subscriber to the share capital M/s. Amber Distilleries Limited, vide their letter dated 31.12.2012 filed the details called for by the Assessing Officer.
The Assessing Officer after consideration of relevant submissions of the assessee and also analysing the valuation report filed by the assessee made addition of ` 96 lacs u/s. 56(1) of the Income tax Act, 1961 for the following reasons:
“Having established above facts and in law that the transaction in question is not genuine and the form in which it is brought in to the books of assessee (i.e the introduction of alleged share premium) the taxability of the same in the hands of assessee under section 56(1) under the head income from other sources is analyzed as under:
Kem Liquors & Beverages Pvt. Ltd.
(a) In response to a specific question as to why the amount involved should not be taxed as assessee’s income as income from other sources u/s.56(1) of the Act.,
(b) Having established the fact that the amounts received by assessee in the guise of Share premium is in fact is not a share premium but transfer of funds in the nature of revocable transfer of asset within the meaning of section 61 to 63, the same is well within the scope of income defined u/s. 5 and the charging provisions of section 4 of the income Tax Act. Therefore the income arising by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the assessee and shall be included in its total income.
(c) Further the assessee has no liability to repay this amount to the alleged investors considering the existence of conflict of interest among the assessee and the alleged investors, this transaction is nothing but diversion of income in guise of capital investment.
(d) As per section 56(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. This income is not chargeable under the heads specified u/s. 14, items A to E and hence is taxable under the head "Income from other sources".
(e) In view of the above stated facts, the amount of Rs.96,00,000 /- appearing in the assessee’s balance sheet as share premium is taxed as assessee's income for the year under the head income from other sources within the meaning of section 56(1) of the I.T. Act, 1961.”
Aggrieved by the assessment order, the assessee preferred appeal before the CIT(A).
4. Before the CIT(A) the assessee reiterated the submissions made before the Assessing Officer and also filed relevant details to prove the identity, genuineness of transactions and also justification for issue of shares at premium of ` 1100/- per share. The assessee also took support from the decisions of various High Courts and Supreme Court to argue that the receipt of money is not an income which can be considered as income assessable under the head “Income from other sources”. The submissions of the assessee has been reproduced by the learned CIT(A) in his
Kem Liquors & Beverages Pvt. Ltd. order at pages 3 & 4. The learned CIT(A) after considering the relevant submissions of the assessee and relying on certain judicial precedents observed that the Assessing Officer has not assigned any reasons for making additions towards share capital including share premium of ` 96 lacs u/s. 56(1) of the Income tax Act, 1961. It is not understood as to how the Assessing Officer has presumed such share application money and premium as unexplained income u/s. 56(1) of the Income tax Act, 1961. The relevant portion of the order of the CIT(A) is extracted below:-
“3.3 I have considered the issue under appeal, finding of the Assessing Officer and rival submission of the appellant, carefully. I find that Ld. Assessing Officer has wrongly taxed an amount of ` 96,00,000 as unexplained income u/s. 56(1) of the I.T.Act. The facts of the case is that appellant is a private limited company engaged in the business of manufacturing of country liquor on conducting basis. In this year, appellant has issued 8000 equity shares of ` 100/- each at a premium of ` 1100/- per share to M/s. Amber Distilleries’ Ltd. The said shares are issued by crediting equity shares/share premium account and debiting the account of M/s. Amber Distilleries Ltd. Thus, it is very evident that money have not come to appellant nor has it flown from M/s. Amber Distilleries Ltd. Assessing Officer has taxed the share and premium of ` 96,00,000/- as unexplained income without any valid ground. It is wrong on the part of the Assessing Officer to presume that there is no justification for charging of premium as according to him there is over valuation of assets of the company. The presumption of the Assessing Officer is not substantiated one because market value of building and land where plant is erected may go higher than WDV. WDV is not the market price of plant and machinery, land and building. Assessing Officer has not established as to how such assets should not have fetched out value of ` 2,73,00,000/- against WDV of ` 43,40,333/- Assessing Officer has merely disbelieved the valuation which cannot be approved. None of the reasoning given by the Assessing Officer in Para 4.7 of the assessment order is tenable. There may not be positive results and surplus, nevertheless he value of the plot, building and plant and machinery may be on higher side as compared to WDV hence it is wrong on the part of the Assessing Officer to presume that there is no justification for ascertaining premium for allotment of shares. Share has been allotted with premium considering the market value of the assets, hence there is no propriety to tax it as income of the appellant. Section 56(1) cannot be invoked for such genuine transactions. 3.4 It is not understood as to how Assessing Officer has presumed such share application money and premium as unexplained income u/s. Kem Liquors & Beverages Pvt. Ltd.
56(1) of the I.T.Act. It can be seen from the balance sheet that appellant has increased share capital to 2 lacs to 10 lacs under reserves and surplus shar premium of ` 88,00,000 has been shown. Corresponding to which, there is receivable shown in the name of M/s. Amber Distilleries Ltd., hence it is only way of making arrangement of introducing a new shareholders but that does not mean that there is a “revenue receipt” in the hands of the appellant to be taxed u/s. 56 of the I.T.Act. Assessing Officer has not made out this case on any legal ground, hence, such presumption cannot be sustained. Appellant further gets support from various decisions of the case of – a) Padmaraje R Kadambande vs CIT 195 ITR 877 (1992)(SC) b) CIT vs Lovely Exports (P) Ltd. 216 CTR 195 (2008) (SC) c) CIT vs. Jagatjit Industries Ltd. 337 ITR 21 (Delhi) (2010) (SC) d) Niyati B Yodh vs. ACIT, 4 SOT 941 (Mumbai) (2004)”
The learned DR submitted that on the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the additions made by the Assessing Officer towards share capital including share premium as unexplained income u/s. 56(1) of the Income tax Act, 1961, without appreciating the fact that the addition was made towards capital introduced in the books through book entry without any banking transactions or actual receipts. The DR further submitted that the assessee failed to file any explanation for charging exorbitant premium on shares even though the company is not having any business activity and also its asset value is considerably less. Therefore, the Assessing Officer was right in bringing to tax share capital of ` 96 lacs as unexplained income of the assessee u/s. 56(1) of the Income tax Act, 1961.
The learned AR for the assessee strongly supported the order of the learned CIT(A) and submitted that it is highly incorrect on the part of the Assessing Officer to make additions on the basis of suspicion and surmises, ignoring all the facts filed to prove the identity, genuineness of transactions and justification for issue of shares at premium. The AR further submitted that it is incorrect on the part of the Assessing Officer to presume that all receipts are income, which is chargeable under the head “Income from other sources” whereas, the fact remains that the assessee has received share capital which is a capital receipt that cannot be made as addition
Kem Liquors & Beverages Pvt. Ltd. u/s. 56(1) of the Income tax Act, 1961. The AR further submitted that the issue of shares at premium and subscription to such shares is a contract between two parties and which is within the knowledge of person, who issue shares and subscribe to such shares. The Assessing Officer does not have any role to play as long as the genuineness of transactions is not doubtful. In this case the assessee has issued shares at premium to its group concern that too by book adjustment without any cash transaction and further such issue has been justified with enormous evidences. Therefore, there is no reason for the Assessing Officer to make additions u/s. 56(1) of the Income tax Act, 1961.
We have heard both the parties and perused the material available on record. The fact with regard to issue of shares at premium to associate enterprise of the assessee is not disputed by the Assessing Officer. The Assessing Officer also did not dispute the fact that the assessee has filed details to prove the identity and genuineness of transactions, which is evident from the assessment order that the shares have been issued without any cash consideration. The Assessing Officer disputed share premium charged by the assessee on the ground that the assessee failed to justify charging huge premium of ` 1100/- per share. The Assessing Officer has given his own reasons for disbelieving the transactions between the assessee and subscriber to the share capital. According to the Assessing Officer the receipt is undisclosed income of the assessee, which is charged to tax u/s. 56(1) of the Income tax Act, 1961. The assessee has filed various details including Board Resolution for allotment of shares at premium, return of allotment filed with ROC, ledger extract of both the companies to prove that shares had been issued by book adjustment by crediting share capital account and debiting to loans and advances account of M/s. Amber Distilleries Limited. The assessee also filed valuer’s report from a registered valuer to prove the value of shares as per net asset value method. The valuer has determined the value per share at ` 1150/- on the basis of net asset value method. These facts have not been disputed by the Assessing Officer. The Assessing Officer has made the additions only on the basis of suspicion by holding that the assessee is not having enough business and its net assets as per audited balance sheet is not supporting to Kem Liquors & Beverages Pvt. Ltd.
determine the value of shares at ` 1150 per share. The Assessing Officer also disputed the value adopted by the valuer for immovable properties owned by the company without any valid reason. The issue of shares at premium and subscription to such shares is a contract between two parties and also which is within their knowledge. The Assessing Officer does not have any role to play as long as the transaction is genuine. In this case, the assessee has filed various details to prove genuineness of transaction. In fact, the Assessing Officer never disputed the genuineness of transactions. The assessee also filed valuer’s report to justify determination of shares at ` 1100/- per share. Therefore, we are of the considered view that the Assessing Officer completely erred in making addition towards share capital and share premium u/s. 56(1) of the Income tax Act, 1961, as unexplained income of the assessee. The Hon’ble Supreme Court in the case of Padmaraje R Kadambande vs. CIT (1992) 195 ITR 877 held that amount received as capital receipts cannot be treated as income within the meaning of section 2(24) of the Income tax Act, 1961. The Hon’ble Supreme Court reiterated its stand in the case of CIT vs. Jagatijit Industries Ltd. (2010) 337 ITR 21 by holding that money raised through issue of equity shares is a capital receipt, which cannot be taxed as income u/s. 56(1) of the Income tax Act, 1961. The ITAT Mumbai in the case of Niyati B Yodh vs. ACIT (2004) 4 SOT 941 held that unless a receipt is in the nature of income, same cannot be said to be in the nature of “Income from other sources”.
In this view of the matter and respectfully following the ratio of case laws discussed above, we are of the considered view that there is no reason for the Assessing Officer to make additions towards share capital of ` 96 lacs u/s. 56(1) of the Income tax Act, 1961, when the assessee has filed necessary evidence to prove the issue of shares at premium. The CIT(A) after considering relevant submissions has rightly deleted the additions made by the Assessing Officer. We do not find any error in the order of the CIT(A) and hence, we are inclined to uphold the findings of the CIT(A) and dismiss the appeal filed by the Revenue.
Kem Liquors & Beverages Pvt. Ltd.
In the result, the Revenue’s appeal is dismissed.
Order pronounced in the open court on this day of 15th June 2018.