M/S JR FIBER GLASS INDUSTRIES PVT LTD,MUMBAI vs. NATIONAL FACELESS APPEAL CENTRE, MUMBAI

Brief facts on the issue are that the assessee company had filed its return of income for AY. 2009-10 declaring total income of Rs.70,85,858/-. Later on, the case of the assessee was reopened u/s 147 of the Act on 29.03.2014 after recording the reason that the assessee had issued 2,15,000/- shares on premium (share of face value of Rs.10 allotted at a premium of Rs. 90). According to the AO, the shares of assessee company were issued on high premium, which needs verification and therefore according to him Rs.1.93 crores had escaped assessment. Therefore, he reopened the assessment and noted that the assessee had received share application money of Rs.21,50,000/- and premium on it of Rs.1,93,50,000/- [Total Rs.2,15,00,000/-]. According to him, the investments on shares were made by seven (7) parties as under: - Sr. No. Name of Allottees No. of Shares Allotted 1 Mona Digital Equipment Ltd 50,000 2 Prarambh Multitrade Pvt. Ltd. 15,000 3 Kapindra Multitrade Pvt. Ltd 30,000 4 Dura Allowy Cutters Pvt. Ltd. 35,000 5 Radhe Krishna Chemicals Pvt. Ltd. 10,000 6 Ambuj Mercantile Pvt. Ltd. 45,000 7 Raw Gold Securities Pvt. Ltd. 30,000 Total 2,15,000

According to the AO, shares were issued at premium of Rs. 90 per share and in order to verify the identity and creditworthiness of the aforesaid parties, he issued notice u/s 133(6) of the Act on 11.02.2015 which were returned back by the Postal Authorities stating "parties unknown or left". Therefore, the AO asked the assessee to produce the parties for verification; and since assessee failed to produce the parties and submitted only the financials of three (3) parties i.e. (i) M/s. Prarambh Multitrade, (ii) M/s. Kapindra Multitrate and (iii) M/s. Ambuj Mercantile; and that parties returned low income, according to him, the creditworthiness of these parties are not proven. Therefore, he was of the opinion that assessee failed to prove the genuineness of the deposit in share-capital of Rs.2.15 cr and therefore, he added total amount of Rs.2.15 crores as un-explained deposit received as share- capital. Aggrieved by the action of the AO, the assessee preferred an appeal before the Ld. CIT(A) who confirmed the aforesaid addition by holding as under:- "6.2 The appellant in its Ground of Appeal No. 2 assailed the AO in making addition of Rs.21500,000/- u/s 68 of the Act on account of share application and share premium. The AO in the assessment order noted that the assessee received share application money of Rs.2150,000/- and Rs.1,93,50,000/- as share premium making a total investment of Rs.2,15,00,000/-. Sr. No. Name of Allottees No. of Shares Allotted 1 Mona Digital Equipment Ltd 50,000 2 Prarambh Multitrade Pvt. Ltd. 15,000 3 Kapindra Multitrade Pvt. Ltd 30,000 4 Dura Allowy Cutters Pvt. Ltd. 35,000 5 Radhe Krishna Chemicals Pvt. Ltd. 10,000 6 Ambuj Mercantile Pvt. Ltd. 45,000 7 Raw Gold Securities Pvt. Ltd. 30,000 Total 2,15,000 The assessee was asked to produce the above parties for verification. The AO noted that the assessee filed the financials of three parties namely Prarambh Multitrade, Kapindra Multitrade, and Ambuj Mercantile. The AO noted that their financials could not derive confidence in accepting these entities as genuine and their creditworthiness. The AO stated that the creditworthiness of these parties is not proved further the letters sent to these parties returned back and proceeded to add the share capital of Rs. 21500000/- as unexplained deposits, 6.2.1 The appellant in its submission stated that the AO had not made any comment in the remand report as the appellant has not submitted nay additional evidence and it relies on the submission earlier filed before the AO. The appellant further submitted that the transaction receiving the share premium is in the nature of the 'capital receipt' and that the capital receipt cannot be taxed as income of the assessee as this receipt is outside the scope of income taxable under the Act. he appellant further submitted the Board resolution, bank statement, ITR and other relevant details to stress the genuinity of the claim. The appellant at length stressed on the establishment of identity, creditworthiness and genuinity of the share premium. In order to support its contention, the appellant relied on a number of the case laws and judicial pronouncements. 6.2. 2. The AO in the remand report stated that the assessee did not submit any new detail, however the notices u/s 133(6) were issued and the assessee was asked to produce the share applicant for verification, however the assessee did not produce them and that the assessee's claim of the share premium as share premium as capital receipt is an alternate ground and is not acceptable and section 68 of the Act speaks of any sum credited in the books of assessee whether it is capital or revenue receipt is immaterial. The -AO further stated that the plea of the appellant may be dismissed. 6.2. 3. The submission of the appellant is perused and is found to be not satisfactory as the claim that the share premium is a capital receipt and cannot be taxed as income of the appellant is untenable. An amount which ‘is received by the appellant and is credited in its books of account even for academic exercise is- accepted Is of capital nature, the appellant is still required to prove the source of the same to the satisfaction of the AO about its identity, genuinity and creditworthiness, a mere claim that the receipt is of capital nature cannot provide the appellant protection from the operation of the provision of section 68 of the Act. Therefore, in view of the foregoing discussion the addition made by the AO on account of receipt of share premium is sustained. The Ground of Appeal No. 2 is dismissed."

Aggrieved by the aforesaid action of the Ld. CIT(A), the assessee is before us.

We have heard both the parties and perused the records. We note that the assessee in its return of income have declared total income of Rs.70,85,858/- and is in the business of manufacture and sale of Pollution Control Equipment's and Trading of Flex. And has shown in the relevant year purchase of Rs.22,44,35,165/- and sale of Rs.29,79,92,075/-. And after claiming administrative expense of Rs.5,40,97,327/- had shown the net profit of Rs.71,04,167/- i.e. profit ratio of 2.3% and returned income of Rs.70,85,858/-. Even though, the AO estimated assessee's income from business of Rs.6,73,93,851/- (@ 25% of the turnover), the Ld. CIT(A) has deleted the addition. And the Department has not preferred any appeal against the action of the Ld. CIT(A)/NFAC. Before us, the Ld AR Shri Satya Prakash Singh appearing for assessee has challenged the action of the Ld. CIT(A) confirming the action of the AO making an addition of Rs.2.15 crores in respect of share capital/premium received by the assessee from seven (7) parties (supra) on the ground that the assessee was not able to discharge the creditworthiness of these parties. Before the AO the assessee in order to prove the "nature and source" of the share capital/premium of Rs.2.15 cr the assessee has produced the following documents. (i) Copy of Board Resolution which is found placed at page no. 1 to 3 of PB, (ii) List of details (name and address of the parties) (iii) Copy of PAN details of seven (7) share subscribers and gave details about their respective juri ictional ITO/AO which details are found placed at page no. 3 to 11 of PB, (iv) Valuation Report which is found placed at page no. 12 to 29 of PB, (v) and ITR Acknowledgment of 4 parties, and Balance-sheet of the 3 parties which are found placed at page no. 34 to 95 of PB and (vi) Bank statement highlighting the transaction which are found placed at page no. 96 to 109 of PB. According to the Ld. AR, the assessee by producing the aforesaid relevant documents has discharged the burden to prove the nature and source of the credit entry of Rs.2.15 cr as share capital/premium. Further, according to the Ld. AR, in the relevant year AY. 2009-10, the assessee has received the share capital, on a premium of Rs.90 from the share subscribers, which premium received by it could not have been brought to tax in the year under consideration. According to him, the assessee has received share capital of Rs.21.50 Lakh on premium of Rs.1,93,50,000/-. And according to the Ld. AR, the assessee when called upon by AO to prove the nature and source of Rs.2.15 cr had filed the share- subscribers PAN details along with the details of their respective juri ictional AO's ITO and since all the seven (7) share subscribers were legal entities and were being regularly assessed to tax by the department, the identity of share-subscribers were proved before the AO, and also pointed out that in this digital world, the AO could have easily verified from the department data-base on the click of mouse the PAN of any person, and he would come to know the entire details of that person. According to Ld AR, when assessee has produced the relevant documents (supra), it can be presumed that AO would have conducted such an exercise and didn't find anything adverse to note, but merely because three parties reflected low income in their ITR, cannot be the basis for branding them un-worthy of credit, which AO could not have done unless AO enquires from the share subscribers ITO's and finds from them any adverse reports of these entities, the AO of assessee cannot brand them unworthy of credit and for such a proposition relied on the decision of Hon'ble High Court of Calcutta in the case of CIT vs M/s Dataware Private Ltd [ITAT No 263 of 2011]. According to Ld AR, the AO did not conduct any enquiry worth its name and merely because the notices once issued by him couldn't be served, he drew adverse inference against them. In this regard, the Ld AR submitted that the share capital/premium in question has been collected in the FY. 2008-09 and the re-opened assessment was carried out in the year 2015 and with the passage of time (six years), there may be change in address and that might be the reason for return of notices, which cannot be the sole ground to doubt the share subscribers and their investment made (share-capital/premium) as unexplained. The Ld. AR pointed out that all seven share subscribers are assessed to tax and that assessee had filed PAN details of all 7 share subscribers, ITR acknowledgement of 4, thus the identity of share subscribers stands proved. And by filing the balance-sheet as well as bank statement was able to show the creditworthiness; and since the assessee has filed the bank statement which shows that share capital/premium has passed through proper banking channel and a perusal of the bank statement would reveal that there is no cash deposit before the bank transfer to assessee, genuiness of the transaction cannot be doubted. Thus, according to him, the assessee has discharged the burden to prove the identity, creditworthiness and genuiiness of the share transaction. So Ld. CIT(A) erred in confirming the addition.

Per contra, the Ld. DR submitted that three (3) parties who subscribed namely Prarambh Multitrade Pvt. Ltd, (ii) Kapindra Multitrade Pvt. Ltd. and (iii) M/s. Dura Allow Cutters Pvt. Ltd. (supra) had meagre income. And therefore, the AO has rightly observed that they did not had the creditworthiness. And since the notices couldn't be served and assessee failed to produce the share subscriber, the Ld. CIT(A) has rightly the confirmed the action of the AO. Therefore, according to him, there should not be any interference from our part.

Having heard both the parties and after perusal of the records, we note that assessee is a private limited company and has infused share capital of Rs.21,50,000/- (Rs.21.50 Lakhs) which was allotted to seven (7) entities on shares of face value of Rs.10/- each, at a premium of Rs.90/- per share i.e. share premium of Rs.1.93 cr. To support the premium charged on shares, the assessee had filed the Valuation Report found placed at page no. 12- 29 of PB. The AO/Ld. CIT(A) has not disputed the share premium of Rs.90/- per share which assessee received to the tune of Rs.1.93 cr (even though this was the reason for re-opening). According to Ld. AR, in the relevant assessment year ie. AY 2009-10, the AO/Ld. CIT(A) could not have added the share premium of Rs.1.93 cr in any case and the addition of Rs.1.93 cr was per-se legally unsustainable. In order to appreciate this contention of Ld. AR of assessee, we note that AO has made the addition of Rs.2.15 cr as unexplained deposit in share capital by alleging that assessee did not produce the parties/subscribers and failed to prove the creditworthiness of the parties. Even though, AO has not specifically mentioned section 68 of the Act, the Ld. CIT(A) while deciding the appeal of assessee has examined the addition as if made u/s 68 of the Act. Therefore, before we advert to the merit of the addition, let us re- visit section 68 of the Act which we need to examine the law as it stood in AY 2009-10. However, we note that AO framed the assessment in the year 2015 [i.e, on 26.03.2015] and it is presumed that he has taken the provision of section 68 of the Act, which was in the statute as on that date, when section 68 of the Act reads as under:- Section 68: Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year: Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee company shall be deemed to be not satisfactory, unless- (a) The person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) Such explanation in the opinion of the Assessing officer aforesaid has been found to be satisfactory: Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10].

Here it is to be noted that the first proviso and second proviso was inserted by Finance Act, 2012 with effect from 01.04.2013, so it is applicable only for/from AY 2013-14 and not for this AY 2009-10. 10. Next let us refer to the definition of income stated in Section 2(24) of the Act. Section 2(24) of the Act includes:- i) profits and gains xvi) any consideration received for issue of shares as exceeds the Fair Market Value of the shares referred to in clause (viib) of sub-section (2) of section 56. 11. It is noted that this amendment was made by an insertion of clause (xvi) in section 2(24) of the Act was by Finance Act 2012 with effect from 01.04.2013. 12. Correspondingly, the Parliament inserted sub-clause (viib) in sub-section 2 of section 56 of the Act by Finance Act 2012, w.e.f. 01.04.2013, that is for AY 2013-14 (not this AY 2012-13) in respect of computing and taxing the premium of shares in the hands of assessee (i.e.to tax the difference in consideration of value of shares if it exceeded the fair market value), which for the purpose of complete understanding of the law though not applicable is reproduced as under:- Section 56(2)(viib): "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, or (ii) By a company from a class or classes of persons as may be notified by the Central Government in this behalf. Explanation- For the purposes of this clause, (a) The fair market value of the shares shall be the value- (i) As may be determined in accordance with such method as may be prescribed, or (ii) As may be substantiated by the company to the satisfaction of the Assessing Officer based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. Whichever is higher: (b) Venture capital company, venture capital fund, and venture capital undertaking shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10]."

So, we note that in this assessment year before us i.e. AY 2009- 10, the law in force was that if any sum is found credited in the books of an assessee in a financial year and, if the AO asks for the explanation of assessee in respect of the nature and source thereof, then the assessee is duty bound to explain the nature and source of the credit entry in the books and if the assessee fails to explain or if the AO is not satisfied, he may charge to income tax the sum so credited. So, the assessee is bound to explain before the AO the nature and source of share capital, i.e. the identity, creditworthiness and genuineness of the share capital. In this AY, the assessee is bound to know about the share applicants who wish to invest their identity, whether they have the financial capacity (creditworthiness) and they are genuine investors in their company (assessee). In this AY, the assessee is not bound by law at the time of collection of share capital to ask the share-applicants from where it is getting the money to invest in the assessee's company. And we also note that share premium can be taxed if it exceeds the fair market value only from AY 2013-14 and not in this A.Y. 2009-10. For coming to such a conclusion let us discuss few case laws: (A) Coming to the share premium, it is noted that this Tribunal in ITA-2411/KOL/2017 in the case of Kanchan Plywood Products Pvt. Ltd. -vs.- ITO vide order dated 01.05.2019 has taken note that - Per contra, the Learned DR vehemently supported the order of the authorities below and wondered us to how the assessee-company issued share to three Private Limited Companies when its face value of Rs. 10/- at a premium of Rs. 990/-. According to the Learned DR, the assessee-company had a meager return of income in the year under consideration and therefore, question of any person subscribing such high premium to the shares of the assessee-company cannot be believed. According to the Learned DR, when the income of the assessee is meager, the action of the share subscribing companies in giving astronomical prices for the shares is against preponderance of probabilities and cited the decision of the Hon'ble Supreme Court as ITAT has been upheld by the Hon'ble Bombay High Court order dated 20th March 2017. Further the Hon'ble High Court observed as under- "(i) We find that the proviso to Section 68 of the Act has been introduced by the Finance Act 2012 with effect from 1stApril, 2013. Thus it would be effective only from the Assessment Year 2013-14 onwards and not for the subject Assessment Year. Infact, before the Tribunal, it was not even the case of the Revenue that Section 68 of the Act as in force during the subject years has to be read/understood as though the proviso added subsequently effective only from 1st April, 2013 was its normal meaning. The Parliament did not introduce to Section 68 of the Act with retrospective effect nor does the proviso so introduced that it was introduced "for removal of doubts" or that it is "declaratory". Therefore it is not open to give it retrospective effect, by proceeding on the basis that the addition of the proviso to Section 68 of the Act is immaterial and does not change the interpretation of section 68 of the Act both before and after the adding of the proviso. In any view of the matter the three essential tests while confirming the pre proviso Section 68 of the Act laid down by the Courts namely the genuineness of the transaction, identity and the capacity of the investor have all been examined by the impugned order of the Tribunal and on facts it has found satisfied. (ii) Further it was a submission on behalf of the Revenue that such large amount of share premium gives rise to suspicion on the genuiiness (identity) of the shareholders i.e. they are bogus. The Apex Court in CIT vis. Lovely Exports (P) Ltd. 317 ITR 218 in the context to the pre-amended Section 68 of the Act has held that where the Revenue urges that the amount of share application money has been received from bogus shareholders then it is for the Income Tax Officer to proceed by reopening the assessment of such shareholders and assessing them to tax in accordance with law. It does not entitle the Revenue to add the same to the assessee's income as unexplained cash credit. " (B) The Tribunal Mumbai Bench in the case of DCIT vs. M/s. Alcon Biosciences (P) Ltd., ITA No. 1946/M/2016, Order dated 28.02.2018 held as under "As regards the AOs observation with regard to the issue of shares at a face value of Rs.10/- issued at a premium of Rs.990 per share, we find that there is no merit in the findings of the AO for the reason that the issue of shares at a premium and subscription to such shares is within the knowledge of the company and the subscribers to the share application money and the AO does not have any role to play as long as the assessee has proved genuineness of transactions. We further notice that the AO cannot question issue of shares at a premium and also cannot bring to tax such share premium within the provisions of section 68 of the Act, before (supra) held that Proviso inserted to section 68 is prospective in nature. Hon'ble M.P. High Court in the case of CIT vs. Chain House International (P) Ltd., order dated 07.08.2018, decision reported in 98 taxmann.com47 has held at para 52 as under- "Issuing the share at a premium was a commercial decision. It is the prerogative of the Board of Directors of a company to decide the premium amount and it is the wi om of shareholder whether they want to subscribe the shares at such a premium or not. This was a mutual decision between both the companies. In day to day market, unless and until, the rates if fixed by any Govt. Authority or unless there is any restriction on the amount of share premium under any law, the price of the shares is decided on the mutual understanding of the parties concerned ..". (C) The Mumbai Tribunal in the case of ACIT-l(1) vs. M/s. Gagandeep Infrastructure Pvt. Ltd. the ITAT has held as under: "We have carefully perused the orders of the lower authorities. In our considered view, the issue of shares at premium is always a commercial decision which does not require any justification. Further the premium is a capital receipt which has to be dealt with in accordance with Sec. 78 of the Companies Act, 1956. Further, the company is not required to prove the genuineness, purpose or justification for charging premium of shares, share premium by its very nature in a capital receipt and is not income for its ordinary sense. It is not in dispute that the assessee had filed all the requisite details/documents which are required to explain in the books of accounts by the provisions of Sec. 68 of the Act. The assessee has successfully established the identity of the companies who have purchased shares at a premium. The assessee has also filed bank details to explain the source of the share holders and the genuineness of the transaction was also established by filing copies of share application forms and Form No. 2 filed with the