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Facts
The assessee company, engaged in travel agency and allied services, filed its return for A.Y. 2011-12 declaring 'Nil' income. The AO made an addition of Rs. 10,50,00,000/- under section 68 for sums introduced as share capital and share premium, assuming it was cash credit. The AO also made an ad-hoc disallowance of 20% on guest house expenses, which the CIT(A) later restricted to 10%.
Held
The Tribunal upheld the CIT(A)'s deletion of the Rs. 10,50,00,000/- addition, noting that the equity shares were a conversion of FCDs from previous years, not a fresh cash credit, rendering Section 68 inapplicable. It also held that Section 56(2)(viib) was not applicable for A.Y. 2011-12 as it applies prospectively from A.Y. 2013-14. Regarding guest house expenses, the Tribunal dismissed the Revenue's ground, upholding the 10% ad-hoc disallowance restricted by CIT(A) as the assessee did not challenge it and rent expenses were verifiable.
Key Issues
Applicability of Section 68 for conversion of FCDs into equity shares and share premium, and the prospective application of Section 56(2)(viib). Ad-hoc disallowance of guest house expenses.
Sections Cited
143(3), 144C, 68, 56(2)(viib)
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Income Tax Appellate Tribunal, ‘F’ BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the department against order dated 29/12/2023 passed by NFAC, Delhi for the quantum of assessment passed u/s.143(3) r.w.s. 144C for the A.Y.2011-12. 2. In the grounds of appeal, the Revenue has raised following grounds:-
1. M/s. Futura Travels Ltd., 1. “Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is erred in directing the AO to delete the addition of Rs.10,50,00,000/- without properly appreciating the facts of the case and the issues discussed in details by the Ld. AO in the assessment order? 2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in restricting the disallowance at 10% as against the disallowance made at 20% on account of guest house expenses made on ad-hoc basis on the fact that the assessee has not furnished any supporting documentary evidences to substantiate its claim and genuineness Incurred? 3. Assessee Company is in the business of travel agency and other allied services and got engaged in booking of air tickets, train tickets, hotel, guest house, car hire, air craft handling and other related services. The return of income was filed on 30/11/2011 declaring ‘Nil’ income. The ld. AO noted that assessee company had introduced a sum of Rs.3,00,00,000/- and Rs.7,50,00,000/- and on account of share capital and share premium respectively. Without examining the nature of credit, AO proceeded with the assumption as if it is cash credit in the books of assessee during the year and accordingly he has made the addition of Rs.10,50,00,000/- u/s.68 on the ground that assessee was not able to discharge the onus.
Before the ld. CIT (A), it was clarified that assessee had issued FCDs in F.Y.2008-09 and 2009-10 of M/s. Essar Investments Pvt. Ltd., in the following manner:- Series Issued in Name Number of Amount of FCD’s Allottee Series 1 FY 2008-09 EIL 14,21,260 14,21,26,000 Series II FY 2009-10 EIL 8,76,483 8,76,48,300
Assessee has also referred to disclosures given in Note No.9 of audited financial statements for F.Ys. 2008-09 and 2009-10 for the abovementioned FCDs issued to EIL. The details of which have been incorporated in the appellate order in the following manner:- “3.1.2 EIL subsequently sold 5,40,750 FCDs of Rs.100 each to Essar House Private Limited (EHPL) and 43,050 FCDs of Rs. 100 each to Imperial Consultant & Securities Private Limited (ICSPL) during FY 2010-11 3.1.3 The Terms and Conditions of the above mentioned FCDs as disclosed in the audited financials of the Appellant Company for FY 2010-11 (For copy of audited financials, kindly, refer, Annexure A to submission dated 11 November 2016) is reproduced as under i.The debenture shall not carry any interest, shall be unsecured and shall not be listed on any stock exchange ii. Each debenture, at the option of the holder, in full satisfaction of the debenture, shall be converted into equity shares of Rs/10 each at such premium as may be mutually agreed on 31.12.2015 in the case and on of Series I and on 31.12.2016 in case of Series II. iii. Such option shall be exercised on or after 31.12.2010 in case of Series II. 3.1.4 Vide resolution dated 28/02/2011, 10,50,000 FCDs of Rs 100/- each fully paid up were converted into 30,00,000 Equity shares of Rs 10 each at a premium of Rs.25 as per mutual agreement between the Appellant Company and FCDs holders during FY 2010-11 relevant to AY 2011-12 3.1.5 Extract of Schedule 4 Unsecured Loans of Balance Sheet before conversion of FCDs as on 31.03.2010 is as under: (kindly, refer schedule 4 of Annexure-A enclosed above)
Sr.No. Fully convertible Amount FCDs of Rs.100/- each 1. 14,21,260 FCDs- 14,21,26,000 Series I 2. 8,76,483 FCDs - 8,76,48, 300/- Series II Total (A) 22,97,74,300/- 3.1.6 Extract of Schedule 4 'Unsecured Loans' of Balance Sheet after conversion of FCDs as on 31.03.2011 is as under ; (Kindly refer schedule 4 of Annexure-1 submitted vide submission dated 11.11.2016) Sr. Wo. Fully convertible FCDs ofRs.100 Amount each 1. 12,47,743 FCDs- Series 1 12,47,74,300/- 2. 8,76,483 FCDs - Series II - (B) 12,47,74,300/- 3. 2,23,74,000/- 2,23, 740 FCDs - Series HI (Fresh issue) Total 14,71,48,300/> Difference FCDs (A-B) converted into equity shares ~ Rs. 10,50,00,000 3.1.7 The details of allotment of shares are tabulated as under- As mentioned above, in terms of resolution dated 28/02/2011, 10,50,000 FCDs of Rs 100 were converted into 30,00,000 Equity shares of Rs 10 each at a premium ofRs.25 in the following manner in FY 2010-11 (relevant to AY 2011-12): SNo Name of No. of Value Value of No. of Va Total the Allottee FCDs FCDs Shares lue Including premium 1 Essar 466,200 100 4,66,20,000 13,32,000 35 4,66,20,000 Investments Ltd. ('EIL')
2 Essar 540, 750 100 5,40,75,000 15,45,000 35 5,40,75,000 House Private Ltd. ('EHPL')
3 Imperial 43,050 100 43,05,000 123,000 35 43,05,000 Consultants & Securities Private Ltd.('ICSPLJ 3.1.8 In the course of assessment proceedings, vide its submission dated 25.03.2015 (For copy of submission, kindly, refer Annexure 'A' to our submission for even date regarding request for admitting additional supporting evidences) the Appellant Company provided the following details as required by the Assessing Officer:- A. Details of shares allotted and share premium, name, address, of shareholders with amount of share capital & premium b. Details of name of shareholders, shares allotted and share premium, Form no. 2 (Return of allotment) filed with ROC c. Details of conversion of FCDs along with Copy of Board Resolution of the Appellant Company dated 28.02.2011 for conversion of FCDs into shares along with name of the allottees and number of shares.
Thus, it was stated that there was no cash credit during the previous year and out of 10,50,000/- FCDs were converted into 30,00,000 equity shares of Rs.10 each at a premium of Rs.25 which is assessment year under appeal, therefore, amount of Rs.3,00,00,000/- were transferred to share capital Account and Rs. 7,50,00,000/- was transferred to Share Premium A/c shown under Reserves & Surplus and following journal entries were passed in the F.Y.2010-11. a) Fully Convertible Debentures A/c Dr Dr. 10,50,00,000 To Debenture Holders Account Cr 10,50,00,000 b) Debenture Holders Account Dr Dr. 10,50,00,000 To Equity Share Capital Account Cr 3,00,00,000 To Share Premium Account 7,50,00,000 The assessment order of the AO has been perused along with the submission of the Appellant and the remand report in grave detail. From the evidence produced before me, the following facts emerge: i. The appellant company had issued Foreign Convertible Debentures in Financial years 2008-09 & 2009-10. The same were converted into equity shares in the year under consideration. ii. No payment against the conversion of FCDs into equity was received during the year under consideration. iii. The appellant has produced all the details of the subscribers to such equity shares, including their financial statements and FORM-2 filed with ROC. iv. The appellant has also produced the financial statements of the preceding years in which the FCDs were issued. v. Copy of the resolutions have also been produced were the conversion was approved by the appellant. vi. The assessments of financial years 2008-09 and 2009-10 have also been conducted and no adverse inference has been drawn on the issue of FCDs during that period. From the above, it is clear that, the issue of equity shares is only a conversion of the FCDs issued previously. There is no credit in the books of the appellant during the year under consideration, it is merely a journal entry. Even otherwise, provisions of Section 68 of the Act cannot be invoked as the appellant has duly discharged it's onus by proving the identity and creditworthiness of the subscribers and the genuineness of the transactions.
M/s. Futura Travels Ltd., Another issue raised by the AO is the justification of premium charged on the issue of such shares during the year under consideration. In this regard, it is seen that for the year under consideration, the AO could not have questioned the excessive premium paid by the subscribers as long as the onus under Section 68 is discharged by the appellant. Further even the burden to prove the source of source has been introduced with effect from assessment year 2013-14 prospectively by way of proviso to section 68. Hence for the year under consideration, the appellant has duly discharged it's onus. The law makers have also section 56(2) (viib) vide Finance Act 2012 where the taxability of excess premium is specifically dealt. This amendment is applicable on cases involving assessment 2013-14 onwards. Since, the said amendment is not applicable on the year under consideration, the excessive premium, if any, cannot be subjected to tax. The prospective application of the said section has also been clarified by the CBDT vide Circular No. 3, dated 12.06.2012. In view of the above, the addition of Rs 10,50,00,000/- on account of issue of share capital and share premium is, hereby deleted. Hence, Ground No. 3 is allowed.
After hearing both the parties and on perusal of the facts and material placed on record, it is seen that the ld. AO has made the addition without even examining the details and facts brought on record before him and held that the amount of Rs.10,50,00,000/- is to be added because assessee has not provided the details of shareholders and assessee was not able to justify the basis of valuation of premium on issue of shares. What has been brought on record and also noted by the ld. CIT (A) is that, assessee had issued FCDs in F.Ys. 2008-09 and 2009-10 which was converted into equity shares in the year under consideration and no payment against conversion of FCDs into equity shares was received during the year under M/s. Futura Travels Ltd., consideration and merely a journal entry was made as noted above. Thus, there is no question of any cash credit in the form of share capital and share premium being received during the year. If fully convertible debentures issued earlier have been converted into equity shares in this year, then there cannot be a case of any amount received during the year. Accordingly, the aforesaid finding of the ld. CIT (A) is confirmed and the grounds raised
by the Revenue are dismissed.
9. Coming to the second issue relating to the adhoc disallowance of Rs.42,96,261/- of guest house expenses.
10. The brief facts are that assessee company was in the business of operating guest house and it has taken seven premises on rent where he provided guest house services. It has earned revenue of Rs.3,21,77,575/- from guest house services and has incurred expenditure of Rs. 2,14,81,307/-. The ld. AO without any basis has made adhoc disallowance of 20% of expenses incurred. Before the ld. CIT (A) it was stated that assessee had specifically given the details of the guest house expenses with the location and address and business activity of the assessee. It was submitted that AO never asked the assessee to substantiate the claim with any documentary evidences. Before the ld. CIT (A), all the details of expenses with the bifurcation was given which was as under:-
Guest House Expenses Amount Guest House Rent 12,500,000 M/s. Futura Travels Ltd., Guest House Care taking Expenses 3,240,592 Guest House Electricity Expenses 1,225,405 Guest House Laundry Expenses 353,915 Guest House Telephone Expenses 231,890 Guest House Cable Expenses 173,903 Guest House Security Expenses 597,335 Guest House F&B Expenses 1,484,602 Guest House Other Expenses 276,021 Guest House Consumable 200,646 Guest House Maintenance Expenses 980,854 Guest House Gardening Expenses 24,019 Guest Cleaning Material 178,796 Guest House Conveyance 13,329
21,481,307
Further, it was brought on record that immediately preceding year similar expenses were incurred which were not disputed. Accordingly, the ld. CIT (A) restricted the adhoc disallowance to 10% after excluding the rent expenses of Rs.1,25,00,000.
M/s. Futura Travels Ltd., 12. Since assessee has not challenged the said adhoc disallowance, therefore, we uphold the order of the ld. CIT (A) because in so far as guest house rent is concerned same is fully verified from the bank statement and other documentary evidences, and therefore, it cannot be taken for the purpose of adhoc disallowance. For other expenses ld. CIT (A) has reasonably applied 10% of adhoc disallowance, which cannt be interfered with. Accordingly, ground No.2 raised by the Revenue is dismissed.
In the result, appeal of the Revenue is dismissed. Order pronounced on 16th October, 2024.