DCIT 1(2)(2), MUMBAI vs. OM SAGAR ENGINEERING P. LTD, MUMBAI

held that the AO had not gone through the submissions of the assessee and the valuation report of the Chartered Accountant, that as per the valuation report the value of each equity share was worked out to Rs.74,136/-,that on 05/05/2015 during the course of assessment, the assessee had submitted valuation report. After going through the audited account of assessee for the year ended 31/03/2010 and 31/03/2011 respectively, stated that no loss was incurred by companies as alleged by AO, that the AO had not doubted the receipt of money and its sources thereof, that he had objected to charging premium money, that the assessee had filed the Chartered Accountant’s valuation report for its equity shares, that as per the report, value of each equity share worked out to Rs.74,136/- as on 31/03/2010 .He referred to the order of the Tribunal delivered in the case of Green Infra ltd. ITA/7762/Mum/2012 dated 23/8/13 and held that addition made by AO were not sustainable. 4.The Departmental Representative(DR)supported the order of the AO and stated that genuineness of the transaction was not proved,that provisions of section 68 of the Act talked about nature of the transaction, that the premiums charged by the assessee was abnormal, that the AO had rightly made the addition to the total income of the assessee. The Authorised Representative(AR)stated that the assessee had obtained valution report from an authorised person,that the shares were purchased by the existing directors’ meeting,that the profit earned by the assessee after-tax for the year under consideration was Rs.4,24, 69,844/-,that EPS of the assessee was Rs. 44,234/-,that it had charged premium of Rs. 10, 000/-per share. He referred to page number 18 of the paper book and relied upon the cases of Greeen Infra Ltd.(145 ITD 240) and Greeen Infra Ltd.(392 ITR 7). 5.We have heard the rival submissions and perused the material before us.We find that the assessee had received share premium money at the rate of 10,000/-per share,that the AO made an addition of Rs.2.97 crores to the income of the assessee invoking the provisions of section 68 of the Act,that it had obtained a valuation report from a CA about the market value of the shares,that the earning per share of the assessee was more than Rs. 40,000/-that it had charged premium of Rs.10,000/-only per share, that the existing director said purchase the shares. In our opinion, once a valuation report this opted by an assessee from a professional it has to be given due weightage,until and unless it is proved that same was factually incorrect or was obtained by fraud.It had charged 1/4th premium,as compared to the earning per share. Here,we would like to refer to the matter of Green Infra Ltd.(supra)delivered by the Tribunal. Relevant portion of the order reads as under:

We have considered the rival submissions and carefully perused the orders of the lower authorities and the material evidences brought on record in the form of Paper book. The entire dispute revolves around the charging of share premium of Rs. 490/- per share on a book value of Rs. 10/- each. This dispute is more so because of the fact that the assessee company was incorporated during the year under consideration. Therefore, according to the revenue authorities, it is beyond any logical reasoning that a company with zero balance sheet could garner Rs. 490/-per share premium from its subscribers. Such transaction may raise eyebrows but considering the subscribers to the assessee company, the test for the genuineness of the transaction goes into oblivion. It is an undisputed fact admitted by the Revenue authorities that 10,19,000 equity shares has been subscribed and allotted to IDFC PE Fund-II which company is a Front Manager of IDFC Ltd., in which company Government of India is holding 18% of shares. The contributors to the IDFC PE Fund-II who is a subscriber to the assessee's share capital, are LIC, Union of India, Oriental Bank of Commerce, Indian Overseas Bank and Canara Bank which are all public sector undertakings. Therefore, to raise eyebrows to a transaction where there is so much of involvement of the Government directly or indirectly does not make any sense. 10.1 No doubt a non-est company or a zero balance company asking for a share premium of Rs. 490/- per share defies all commercial prudence but at the same time we cannot ignore the fact that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the share holders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land. Details of subscribers were before the Revenue authorities. The AO has also confirmed the transaction from the subscribers by issuing notice u/s. 133(6) of the Act. The Board of Directors contains persons who are associated with IDFC group of companies, therefore their integrity and credibility cannot be doubted.

The Ld. Departmental Representative has raised an altogether plea by stating that the nature of the transaction should also be judged within the parameters of the Sec. 68 of the Act. The counsel for the assessee strongly objected to this but in the interest of justice and fair play, we allowed the DR to raise this issue. For this, we draw support from the decision of the Hon'ble Supreme Court in the case of Kapurchand Shrimal v. CIT [1981] 131 ITR 451/7 Taxman 6, wherein the Hon'ble Supreme Court has laid down the ratio that "It is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statute." 11.1 Considering the submissions of the Ld. DR in the light of the above ratio, let us test the transaction in the light of the provisions of Sec. 68 of the Act. As per Section 68 the initial onus is upon the assessee to establish identity, genuineness of the transaction and the capacity of the lender or the depositor. The subscribers to the share capital are all companies. The confirmations of the transactions have been received by the AO by issuing notice u/s. 133(6) of the Act, therefore, identity has been established beyond all reasonable doubts nor the Revenue authorities have questioned the identity of the share holders. The genuineness of the transaction can also be safely concluded since the entire transaction has been done through the banking channels duly recorded in the books of accounts of the assessee duly reflected in the financial statement of the assessee. The bank statement is exhibited at pages 101 and 102 of the Paper book in which the transaction relating to the allotment of shares are duly reflected . In the instant case, the capacity of the share holders cannot be doubted as has been pointed out elsewhere in our order that 98% of the share is held by IDFC Private Equity Fund-II which is a front manager of IDFC Ltd., and the contributors in IDFC Private Equity Fund-II are LIC, Union of India, Oriental Bank of Commerce, Indian Overseas Bank and Canara Bank which are public sector undertakings.

We have considered the grievance of the Revenue from all possible angles and by applying the provisions of Sec. 56 of the Act and at our stage we have gone to the extent of testing the transaction within the parameters of Section 68 of the Act. We could not find a single evidence which could lead to the entire transaction as sham. Our view is also fortified by the share holding pattern as explained to us and as substantiated by the material evidence on record. We find that the share holders in all the related transaction under issue are directly or indirectly related to the Government of India. Therefore, considering the entire issue in the light of the material evidence brought on record, in our considerate view, the Revenue authorities have erred in treating the share premium as income of the assessee u/s. 56(1) of the Act. In our considerate view, for the reasons discussed hereinabove, we do not find it necessary to apply the provisions of Sec. 68 of the Act. We, therefore, direct the AO to delete the addition of Rs. 47,97,10,000/-. Ground No. 2 & 3 are accordingly allowed.” The Hon’ble Bombay High court,confirming the order of the Tribunal,held as under: “For the assessment year 2011-12, the Department raised an issue before the Appellate Tribunal that the share premium of the assessee had to be charged to tax under section 68 of the Income-tax Act, 1961. The Appellate Tribunal examined the applicability of section 68 on the parameters of the identity of the subscribers to the share capital, genuineness of the transaction and the capacity of the subscribers to the share capital. It found that the identity of the subscribers were confirmed by the issuance of notices to them under section 133(6) by the Assessing Officer . It also held that the Department made no grievance of the identity of the subscribers. So far as the genuineness of the transactions of the share subscribers was concerned, it held that the entire transactions were recorded in the books of account and shown in the financial statements of the assessee since the subscriptions were done through banks as evidenced by bank statements which were examined by it. In respect of the capacity of the subscribers, a finding was recorded by it that 98 per cent. of the shares were held by the assessee’s fund manager company whose contributions were all by public sector undertakings. In respect of the sums of interest earned by the assessee on its fixed deposits, the Assessing Officer was of the view that since the assessee had neither commenced its business nor was it in the business of money lending the interest was taxable under the head “income from other sources” and not as business income and reclassified the assessee’s income. The Commissioner (Appeals) upheld the order of the Assessing Officer. The Appellate Tribunal recorded the fact that the three fixed deposits were for a period of 1 day, 28 days and 90 days and held that considering the nature of the business of the assessee, the interest earned was taxable under the head “business income”….. …. That the provisions of section 68 of the Income-tax Act, 1961could not be invoked. The Appellate Tribunal had examined the case of the Department on the parameters of section 68 and had found on facts that it was not applicable. The Department had not been able to show that the factual finding recorded by the Appellate Tribunal was perverse in any manner.”