S4 CARLISLE PUBLISHING SERVICE P LTD.,CHENNAI vs. DCIT CORPORATE CIRCLE 6(1), CHENNAI

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

The AO has observed in the assessment order that unexplained amount was credited in the share premium account which was utilized for investment in a company which was not the main business of the assessee; the assessee company was utilized as a conduit for unexplained funds. After hearing the assessee , the AO determined the total income at Rs. 10,45,l7,761/- by making a major addition of Rs. 10,15,86,144/- as unexplained credits in the books u/s 68.

2.1 On appeal, the Ld. CIT(A) dismissed the appeal. On further appeal, this Honble ITAT vide its order In ITA Na. 192/Mds/2016 dated13.06.2016 set aside the order of the Ld. CIT(A) and held as under:

“The order passed by the ld. CIT(A) is very cryptic one and he has not discussed... We are unable to appreciate the order of the ld. CIT(A) and accordingly we remit the same to the Id, CIT(A) to give finding on the share purchase agreement entered into by the assessee With foreign company and also relevant allotment of share. Accordingly, we set aside the order of the ld.

CIT(A) on this issue and remit the issue back to the ld. CIT(A) for fresh consideration and to pass a detailed speaking order.”

No. of bonus share issued: 12,50.000 at Rs, 10 each

Value of bonus share issued: 1,25,00,000 2,31,580 shares of Rs. 10 each were issued out of which the shares were called up and paid up@ Rs3.3 per share and received share premium of Rs. 47

per share.

Value of share premium received : 2,31,580 x 47 = Rs, 1,08,84,260 Total share capital introduced during AY 07-08 Rs,1,32,64,214 Total Share Premium introduced during AY 07-08 Rs.L08,84,260

Rs.2,41,48,474 Subsequently, during the A. Y. 2008-09, the assessee had floated a wholly owned US subsidiary by name S4 Carlisle Publishing Services Inc. The assessee company has entered into a share transfer and purchase agreement on 06-04-2007 with M/s. Carlisle Communication Inc, US.A. Corporation incorporated under the laws of IOWA whereby the shareholders of Carlisle Communication Inc., agreed to sell the shares held by them to S4 Carlisle Publishing Services inc, a wholly owned foreign subsidiary of the assessee company, for a total purchase price of USD $3.5 million and in return to invest a sum of USD $ 2.5 million in the assessee company so as to hold 25% of the outstanding capital of the assessee company as on 31.03.2008.By this, the share capital and share premium has changed as under:

No. of shares issued @ Rs. 10 is 5,77,194 totalling Rs. 82,71,940

No.of shares issued at premium of Rs. 166 is 5,77,194 totalling Rs.9,58,14,204

Total capital credited in the books of the assessee Rs. 10,15,86,144 company during the A Y 08-09 pursuant to share transfer and purchase 3.1 Thus, in the relevant previous year, the assessee issued shares at a premium to a non-resident company at Rs. 166/- per share against the face value of Rs. 10/- per share and received a total share premium at Rs. 10.67 crore. Out of it , it has invested in a foreign company which became subsidiary company of the assessee. The foreign subsidiary company was earlier owned by four foreign shareholders and the assessee purchased their shares for Rs. 11.85 crore. After selling the assessee’s 25% of shares worth 2.5 million USD, the promoter shares in the assessee company were reduced to 75%.

3.2 The Ld CIT(A) asked the assesse to explain why a share with a face value of Ra. 10/- per share, was valued at Rs. 166/-. In spite of specific opportunity given, the assessee could not substantiate its exorbitant valuation of shares at Rs. 166/- per share as against the share value worked out at Rs.48/- per share during the relevant period by the assessee’s own Chartered Accountant based on Net Asset method ie after taking into consideration the complete assets and liabilities. The AR’s only defence was that the excess share valuation could be assessed u/s 56(2) clause (viib) only with effect from 1.4.2013. The Ld CIT(A) held that although a specific provision was introduced to assess the receipt of share premium disproportionate to the net asset value w.e.f. 1.4.2013, it cannot be said that prior to that amendment, there was no legislative intention u/s 68 to assess such receipt without any basis. Although the assessee may have received the share through banking channel with the approval of RBI, it has to satisfactorily explain with convincing reason when it comes to valuation of share premium. The AR was specifically asked to submit documentary evidence leading to such exorbitant valuation at the stage of negotiation which the assessee failed to submit. Relying on certain case- laws inwhich it was held that although theremittances have been received through banking channel, still the addition made u/s 68 was held to be validetc, the Ld. CIT(A) held that the assessee has failed to satisfactorily explain the genuineness of receipt towards share premium received. The AO has clearly brought out the facts and circumstances which prove that the assessee company has received share premium at exorbitant value , much more than the valuation done by the assessee’s C.A, for which it has no convincing explanation. The assessee has received substantial foreign remittance through a dubious transaction. Therefore, the Ld CIT(A) held that the AO’s addition of Rs. 10.15 crore made u/s. 68 is upheld and the assessee’s grounds are dismissed.

“1) The orders of the assessing officer and that of the Commissioner of Income Tax (Appeals) CIT(A)9 are against the law, the facts and circumstances of the case and the principles of equity and natural justice. 2) The CIT(A) erred in upholding the addition of Rs.10.15 crores under section 68 of the Income Tax Act. 3) The CIT(A) failed to appreciate that provisions of section 68 does not apply in respect of capital and share premium received from non-resident investors. 4) The CIT(A) failed to appreciate that the appellant has discharged his onus of proof, i.e the identity of the persons, capacity of the persons to transfer money and genuineness of the transaction. The addition made under section 68 is therefore bad in law. 5) The case laws relied by the CIT(A) are not applicable to the facts and circumstances of the case. The CIT(A) failed to appreciate that the appellant has satisfied the conditions stated in the case laws relied by the CIT(A). It is therefore submitted that the order of the CIT(A) is bad in law. 6) The CIT(A) failed to appreciate that the rate of issue of share at Rs.176/- (including a premium of Rs.10/-) was arrived at based on agreement between the parties. The nature and source of the sum was explained to the CIT(A). 7) The addition under section 68 can only be made when the appellant failed to explain the nature and source of transaction. The appellant having explained the same, the CIT(A) erred in sustaining the addition under section 68 merely on the ground that the shares were issued at huge premium. The assessing officer and CIT (A) erred in considering that the explanation offered by the appellant as not satisfactory. 8) The CIT (A) erred in not considering the submission of the appellant that neither section 56 nor proviso to section 68 apply to the case of the appellant particularly when the those provisions were not part of the Act during the relevant assessment”.

MaribethcarlisleGolus 270.7925 John Carlisle 270.7925 Julie Carlisle Kane 270.7925 William Carlisle 536.9325 Total 1349.31 Pursuant to the share purchase agreement dated 06.04.2007, the assessee issued 5,77,194 shares of Rs. 10/- each at a premium of Rs. 166/- per share.

The assessee received the following amounts towards shares at premium and credited in its books .

Rs. Share Capital (5,77,194 shares at Rs. 10 each) 57,71940 Share Premium (Rs. 166/ share*577194) 9,58,14,204 Total 10,15,86,144 5.1 The Ld AR invited our attention to the copies of the Foreign Inward Remittance certificates and submitted that they evidence the date of payment, amount of inward remittance and the name of the remitter . The assessee had allotted shares to the new investors mentioned above and had filed the return of allotment with the Registrar of Companies in form. 2 as required under the Companies Act 1956. The assessee also reported the transaction of non-resident investment of 577194 equity shares of Rs. 10/ - each into its share capital at a premium Rs 166/- per share to the Reserve Bank of India in form FCGPR dated 29.6.2009 and the same was acknowledged by RBI, vide its letter dated 8.1.2010. For the issuance of shares at premium, the assessee had followed the guidelines for valuation as prescribed under the Foreign exchange Management Act and the valuation as

per the Chartered Accountants valuation was at Rs. 48/- per share. The copy of the RBI’s letter and form FCGPR reported by the assessee and the valuation report of the Chartered Accountant were enclosed in the paper book.Thus, the transaction of receipt towards share capital and premium was made in accordance with law, following the all the statutory requirements.

Further, the Ld AR submitted that the shares were valued at Rs. 48 as per the guidelines of erstwhile Controller of Capital Issues. The appellant had issued the shares at 176 (including the premium), based on its agreement with the prospective new shareholders. The difference between the value as

per the guidelines and the premium received by the appellant is only a capital receipt and is duly credited to the share premium account. Apart from the fact that the said receipt is only a capital receipt, it is submitted that there is no provision under which the said difference could be brought to tax. Although, it was not the case of the assessing officer that Section 56 would apply, it is submitted that the said section has been inserted by Finance Act 2012, with effect from 01.04.2013 and even then it is only applicable to cases where the said consideration for issue of shares is received from a resident. The section is not applicable to the present case since the shares are issued to non residents and also the transactions are much before 01.04.2013. In view of the same, it is submitted that no part of the consideration of Rs. 10,15,86,144/- [2.50 Mm USD] is taxable in the hands of the assessee.

5.2 The assessing officer added the entire sum of Rs 10,15,86,144/- as unexplained credits under section 68. Section 68 of the Income Tax can be invoked only when the assessee failed to explain about the nature and source of the sums credited in it books of accounts or when the explanation offered by the assessee is not satisfactory. In this case, the assessee provided all the material before the assessing officer (which are part of the paper book) to prove the identity of the new shareholder. The genuineness of the transaction is also established based, since the same arose out of contract between parties through banking channels with KYC norms duly followed. Further, then on residents who have for the share capital and share premium, had adequate source for the sums credited. The new share holders to whom shares have been issued at premium resulting in the credit to the share capital and share premium account had sold their shareholding in M/s Carlisle had The source for the credits in the books of accounts of the appellant is on account of transfer of shares to the erstwhile shareholders of the subsidiary.

All the transactions have been routed through banking channels and the full details of the names and address of the parties in the agreements and the Remittance certificates are available. The assessee had provided complete identity of the new shareholders arid also established the genuineness of the transaction beyond all doubts before the assessing officer, The assessee has also complied with all the relevant statutory provisions like filing of the ROC returns and reporting of the transaction with the Reserve Bank of India.

5.3 With regard to the credit worthiness of the investor, the assessee drew our attention to the share transfer agreement between the assessee and the subsidiary dated 06.04.2007 and its subsequent compliances through banking channel etc .Upon purchase of the shares from the non residents, the said Carlisle Communications Ltd became a 100% subsidiary of the assessee. The said company changed its name as S4 Carlisle Publishing Service, Inc and issued share certificate to the assessee far the 1349.31 shares which were purchased by the assessee. The assessee also duly reported its outbound investment to Reserve Bank of India through its authorized dealer M/s Citi Bank, Chennai. It is thus evident that the new shareholders investors collectively had 3.5 million USD as source to invest into the shares of the appellant. The transaction between the assessee and the investors happened in multiple tranches. Inviting our attention to para 8.11 of the assessment order, wherein the assessing officer had mentioned that the investors had shown only 1 million USD as sale consideration in their return of income filed, the Ld AR submitted that in the opinion of GPAs, based on whose advice the investors had offered only 1 million USD as consideration. It is submitted that as per the taxation law in the nation of the investors (USA) only 1 million USD is to be offered to taxation, being the net sum received by the investors. The remaining amount will only be taxable on sale of the shares by the investors.

It is submitted that at any rate, the assessing officer did not reject the non residents received 3.50 Mn USD or that they have invested 2.50 Mn USD.

Mere fact that they were liable for tax only for 1 Mn USD in their country does not mean that they had source only for 1 Mn USD The Assessing Officer did riot even give credit for the sources the non resident had even according to his own judgment . Thus, the AO without appreciating full facts erred grossly in holding that the non- residents who have invested into the capital of the assessee did not have source. Without prejudice to the submission that the new shareholders had adequate source, the assessee cannot be called upon to establish the source of the shareholders as per the decision of the Hon’ble Supreme Court in the case of Lovey Exports P Ltd. [2008] 216 CTR 195 (SC).

The First proviso to section 68 inserted by Finance Act 2013 with effect from 1.4.2013 is only prospective. Further, the said proviso does not apply where the credit for the shares stand in the name of anon resident. Admittedly ,in the case of the assessee, the new shareholders are non residents. Therefore the proviso is not applicable. At any rate, the non-residents have also admitted that the credit to share capital in the assessee’s accounts is on account of investment made by them at a premium. This is established by the share purchase agreement. In view of the above, it is submitted that the assessing officer/ the Ld CIT (A) grossly erred in holding that the explanation of the assessee regarding the credit to the share capital and share premium account is not satisfactory. It is submitted that the conclusion of the Lower authorities are against the facts and circumstances of the case and against the law. In view of these submissions, the Ld AR pleaded to allow the appeal and render justice.

Order pronounced on Thursday, the 28th day of June, 2018 at Chennai.