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Income Tax Appellate Tribunal, INDORE SMC BENCH, INDORE
This appeal by the Assessee is directed against the order dated 15.03.2023 of Commissioner of Income Tax(Appeal), National Faceless Appeal Centre, Delhi for Assessment Year 2016-17. The assessee has raised following grounds of appeal:
“1.On the facts and in the circumstances of the case Ld. CIT(A) erred in law in confirming the addition of Rs. 6,60,650 under sec. 56 2 viib of the Act. 2. On the facts and in the circumstances of the case, Ld. CIT(A) erred in confirming disallowance 10 % of Travelling Expenses amounting to Rs.86,177 on adhoc basis. 3.On the facts and in the circumstances of the case, Ld. CIT(A) erred in confirming 30 % of Salary Expenses amounting to Rs. 7,63,646 on adhoc basis under sec. 40a ia..”
Reconnect Energy solution P. Ltd. Page 2 of 12 2. Ground no.1 is regarding the addition made u/s 56(2)(viib) of the Act. The assessee is a company engaged in the business of providing service to the Renewable Energy entities. The assessee filed its return of income on 16.10.2016 declaring loss of Rs.40,74,828/-. The Case of the assessee was selected under CASS for limited scrutiny in respect of high ratio of refund of TDS, large share premium received during the year and mismatch in sales turnover. During the year the assesse has received share premium of Rs.13,17,080/-. On query the assessee explained that during the year under consideration the assessee has converted preferential shares into equity @ Rs.470 per share having face value of Rs.10 each. The AO asked the assessee to submit a certified calculation of Fair Market Value (FMV) of shares at the time of conversion as per Rule 11UA of Income Tax Rules from an auditor and further the assessee was also asked to show cause as to why an addition should not be made u/s 56(2)(viib) of the Act for the amounts received over and above the fair market value of the shares. In response the assessee submitted the share valuation Report of Chartered Accountants wherein the fair market value of the equity shares as on 31.03.2015 was determined at Rs.108 per share. By considering the said valuation of fair market value of the share as per report submitted by the assesse the AO made an addition of Rs.6,60,650/- u/s 56(2)(viib) of the Act. The assessee challenged the action of the AO before the Ld. CIT(A) but could not succeed.
Before the Tribunal the Ld. AR of the assessee has submitted that in the preceding year i.e. assessment year 2014-15 the assessee has issued shares to one Venture Capital Fund @ Rs.520 per share and as per the agreement with the Venture Capital fund M/s infuse Capital the assesse could not issue shares in future at premium lower than 10% of the valuation of at which the shares were issued to the Venture Capital. For the year under consideration the assessee has converted into equity share of Rs.1,34,570/- redeemable preferential shares issued in the F.Y.2011-12 as the same became due for redemption during this year. Since the assessee company was bound to follow the agreement with the Reconnect Energy solution P. Ltd. Page 3 of 12 Infuse Capital and accordingly converted the preferential shares @470 per shares. He has further submitted that the AO ought to have taken into consideration this fact while satisfying himself for the premium charged and also would have appraised the fact that this is not a case of bogus premium but a genuine premium charged in the facts and circumstances. Ld. AR has submitted that the AO has not taken into consideration the tangible assets, goowill, know-how, copy right and other such things for determining the fairness of valuation. The AO has accepted the premium received by the assessee for the shares issued during the assessment year 2015-16 @ 520 per share and therefore, there is no reason to disregard that rate in subsequent year. Thus, he has pleaded that the addition made by the AO and sustained by the CIT(A) may be deleted.
On the other hand, ld. DR has submitted that the AO has not taken up the fair market value on its own but the AO has considered fair market value of the shares as on the date of conversion as per valuation report submitted by the assessee. Thus the AO has followed the process and provisions of section 56(2)(viib) of the Act and the excess of the premium over and above the fair market value of the shares is required to be added u/s 56(2)(viib) of the Act. In support of his contention he has relied upon the judgment of Hon’ble Kerala High Court in case of Sunrise Academy of Medical Specialties (India) (P.) Ltd. vs. ITO 409 ITR 109. He has also relied upon the orders of the authorities below.
I have considered the rival submission as well as relevant material on record. There is no dispute so far as the relevant facts are concerned that the assessee converted redeemable preferential shares into equity share at conversion price of Rs.470 which includes premium of Rs.460 per share. The details of these conversions are given by the AO in para 5 of the assessment year as under:
Name, Addres No. of Conversio No.of Pric Amount and PAN of Pref. n ratio equity e of of subscriber Share share conv premium
Reconnect Energy solution P. Ltd. Page 4 of 12 held allotted ersi on Roshan Gaonkar 45,800 47:1 974 470 4,48,040 (PAN: BDRPG 1663C) Karwar, Karnataka SA Khaparde 40,000 50:1 851 470 3,91,460 (PAN:ABNPK 8368D) IIT Powai Maharashtra Bruce Usher (non- 48,770 47:1 1034 470 4,77,020 resident thus no PAN) new York USA 5.1 The AO asked the assesse to submit the citified valuation report determining fair market value of shares as on the date of conversion. The assessee submitted the value report wherein Chartered Accountant has determined fair market value of the shares at Rs.108/- per share consequently the AO has made addition u/s 56(2)(viib) to the extent of the excess premium received by the assessee over and above the fair market value of the shares. The assessee has not disputed these facts regarding fair market value as determined by the Chartered Accountant and submitted by the assesse before the AO. The Ld. AR of the assessee has opposed the addition only on the ground that in the immediate preceeding year the assessee has issued shares at a premium of Rs.520 per share which was accepted by the AO. It is pertinent to note that the AO has duly considered this contention of the assessee in para 9 as under:
“9. The assessee also questions why when a premium of Rs. 520/- per share charged during FY 2014-15 from Infuse was "considered reasonable" by the AO [an order u/s 143(3) was passed in the case of the assessee for AY 2015-16 also] then, that a premium of Rs. 460 /- is being considered "unreasonable" now. This is again a facile argument. It is not a question of "reasonableness" of share premium; instead it is a question of whether the premium paid was over and above the FMV of the shares, in which case Section 56(2)(viib) needs Page 4 of 12
Reconnect Energy solution P. Ltd. Page 5 of 12 to be applied. It must be borne in mind that even during AY 2015-16, the premium paid by Infuse was questioned and analyzed by the AO. However, no addition was made u/s 56(2)(viib) then in view of first proviso which says that the clause, i.e. 56(2)(viib) shall not apply where the consideration for issue of shares is received from a venture capital company or a venture capital fund. As Infuse is a venture capital company/fund, the clause was inapplicable. However, in the present case, the consideration over and above FMV of shares is received not from a venture capital fund, but from individuals, in which case the clause is very much applicable.” 5.2 Thus in the preceding year the assesse’s share were issued to the Venture Capital fund and therefore, the same falls in the first proviso to section 56(2)(viib) of the Act and consequently no addition was required to be made in respect of the shares issued to the venture capital fund. The second contention of the Ld. AR is that there is a binding agreement between the assessee and capital venture fund that the assesse could not issue the shares in future at premium lower than 10% of the value at which the shares were issued to the Venture capital. Though it may be agreement between the parties to protect the interest of the venture capital fund but the said condition in the agreement between the parties will not over-ride the provisions of section 56(2)(viib) of the Act. The Hon’ble Kerala High Court in case of Sunrise Academy of Medical Specialties (India) (P.) Ltd. vs. ITO (supra) has considered this issue in para 8 to 11 as under:
“8. We have to notice the contention of the learned Standing Counsel for Government of India (Taxes) that if Section 68 is taken as governing Section 56; the charge created with respect to income from other sources: then the provisions would have to be re-written. Section 56 comes under the Chapter: "Computation of Income". Section 68 under: "Aggregation of Income and Set Off or Carry Forward of Loss". The provision for computation was also amended to bring within the ambit of taxable income, any premium paid for purchase of shares; of companies in which the public are not substantially interested.
Any premium received by a Company on sale of shares, in excess of its face value, if the Company is not one in which the public has substantial interest, would be treated as income from other sources, as seen from Section 56(2) (viib) of the Act, which we do not think can be controlled by the provisions of section 68 of the Act. Section 68 on Page 5 of 12 Reconnect Energy solution P. Ltd. Page 6 of 12 the other hand, as substituted with the provisos, treats any credit in the books of accounts. even by way of allotment of shares; for which no satisfactory explanation is offered, to be liable to income- tax. Clause (viib) of Section 56(2) is triggered at the stage of computation of income itself when the share application money received, from a resident, by a Company, in which the public are not substantially interested: is above the face value. Then the aggregate consideration received for the shares as exceeds the fair market value will be included as income from other sources. However, when the resident investor is not able to explain the nature and source for the credit seen in the books of accounts of the Company or the explanation offered is not satisfactory then the entire credit would be charged to income tax for that previous year. That is the entire amounts credited in the books of accounts, styled as, for allotment of shares or application money, including the fair market value determined will be charged to tax. However if an explanation is offered and if it is satisfactory in the case of a Company in which the public are not substantially interested, then the charge to tax will only be to that portion exceeding the fair market value determined; which anyway has to occur under Section 56(2)(viib).
If Section 68 is applicable, and the proviso is not satisfied, then the entire amounts credited to the books would be treated as income. If satisfactory explanation is offered as to the source, then the premium paid as revealed from the books will be brought to tax as income from other sources. The contentions raised are to be negatived.
The learned Counsel then would submit that the assessee would definitely approach the Appellate Authority, but the adjudication be untrammeled by the observations made by the learned Single Judge. We are not inclined to so efface the declaration made by the learned Single Judge; when this Court has also laboured on the contentions raised and found the findings to be above board and without fault and perfectly in accordance with the provisions. The judicial time spent by the learned Single Judge and this Bench cannot be lightly ignored, to merely set aside the observations while relegating the matter to the Appellate Authority: thus permitting the Appellate Authority to enter into a finding contrary to that of this Court. This would in fact egregiously meddle, impede and obtrude upon the well recognised hierarchy of Courts and adjudicatory authorities and would not be a proper exercise to be carried out by a Division Bench in appeal. The appellate powers, according to us, is not a weapon to obliterate a perfectly legal and reasonable construction given to the provisions in a statute by a learned Single Judge. The assessee sought to by-pass the statutory remedies, to approach this Court under Article 226; the jurisdiction under which is circumscribed as held in State of H.P. v. Gujarat Ambuja Cement Ltd. [2005] 6 SCC 499. Having opted to challenge the order on the ground raised of a Page 6 of 12
Reconnect Energy solution P. Ltd. Page 7 of 12 proceeding totally without jurisdiction; when it is answered against the assessee, then they cannot seek the luxury of a fresh consideration on the very same aspect by the subordinate authority. That would be waste of judicial time and an abuse of process; especially in the present times of escalating litigation and undue backlog of cases. The appeal is dismissed, leaving the parties to suffer their respective costs. The assessee could approach the appellate authority only on the quantum.” 5.3 The Hon’ble High Court has held that the premium received by a company on sale of shares in excess of its face value/fair market value would be treated as income from other sources as provided u/s 56(2)(viib) of the Act and the said provision cannot be controlled by the provision of section 68 of the Act that if the assessee has explained the identity and capacity of the investor as well as the genuineness of the transactions then the addition cannot be made. Accordingly when the assessee itself has given the fair market value which was considered by the AO while making addition of the excess amount of premium over and above the fair market value u/s 56(2)(viib) of the Act then we do not find any error or illegality in the impugned order of the CIT(A) the same is upheld.
Ground no.2 is regarding ad hoc disallowance of traveling expenses. During the assessment proceedings the AO noted that the assessee has debited Rs. 8,61,675/-as travel expenses. The AO asked the assesse to submit ledger copies and all details with evidences relating to the expenses. The AO further noted that the assessee has neither produced the ledger account nor any evidences/vouchers in support of the traveling expenses and consequently the assesse failed to establish that the expenses are incurred wholly and exclusively for the purpose of business. Accordingly the AO has made an adhoc disallowance of 10% of the total expenses amounting to Rs.86,177/-. The assesse challenged the action of the AO before the Ld. CIT(A) but could not succeed.
6.1 Before the Tribunal Ld. AR of the assessee has submitted that the AO has made disallowance by comparing travel expenses with the preceding year without considering the fact that there is overall increase Page 7 of 12
Reconnect Energy solution P. Ltd. Page 8 of 12 in the turnover of the company. The assesse company is maintaining regular books of account which are duly audited and auditor has not pointed out any defect in the books or vouchers. Thus, ld. AR has submitted that ad hoc disallowance made the by the AO is not justified and same may be deleted. He has relied upon the following decisions:
Munnalal Agrawal Vs. ACIT 26 ITC 146(1998) ITAT, Indore, 2. D & H Secheron Electrodes decided by ITAT Indore 3. DCIT Vs. Agrawal Transport Corp., 27 ITJ 21 (Ind Trib) (2016) 7. Thus, Ld. AR has submitted that when the books of account of the assesse are not rejected by the AO then adhoc disallowance made by the AO is not sustainable and liable to be deleted.
On the other hand, Ld. DR has submitted that the AO has given the reason for disallowance as the assessee failed to produce supporting bills and vouchers of the traveling expenses and therefore, the onus is on the assessee to establish the expenditure was increased wholly and exclusively for the purpose of business but the assesse has failed to discharge the same with supporting evidence. Further an increase in the turnover of the assesse cannot be considered to justify increase in the traveling expenses. He has relied upon the orders of the authorities below.
9. I have considered the rival submission as well as relevant material on record. The assessee is in the business of providing services to renewable energy companies by forecasting of weather conditions as well as other information for setting up of the renewal energy generation plants. Thus, the assessee has claimed that the travel expenses are inseparable part of the business of the assessee. The personal of the assessee have to visit at the site where the client is going to set up a renewal energy generation plant like solar/wind. Thus, Ld. AR has contended that these expenses are incurred wholly and exclusively for the purpose of business of the assessee. He has referred to the ledger account of the traveling expenses and submitted that these expenses are on Reconnect Energy solution P. Ltd. Page 9 of 12 account of traveling, boarding and lodging expenses. Though the assessee has produced the ledger account giving the details of the travel expenses however, the assessee has not produced the supporting evidence in the shape of bills and vouchers of these travelling expenses. Thus, in the facts and circumstances of the case when the actual expenditure incurred by the assesse are not in dispute then the disallowance made by the AO @ 10% is on the higher side. Accordingly having considered facts and circumstances of the case and in the interest of justice the disallowance of traveling expenses for want of the supporting vouchers and bills is restricted to 5% as against the 10%.
10. Ground No.3 is regarding disallowance made u/s 40(a)(ia) for want of TDS in respect of the salary paid to the employees. The AO has made disallowance by considering the fact that the assesse has not deducted tax at source in respect of the salary paid to the employees above taxable limit of Rs.2,50,000/- and consequently the AO has made disallowance of 30% of the total payment of Rs.25,45,488/- amounting to Rs.7,63,646/- u/s 40(a)(ia) of the Act. The assesse challenged the action of the AO before the ld. CIT(A) but could not succeed.
11. Before the Tribunal Ld. AR of the assessee has submitted that the TDS on salary is required to be deducted u/s 192 of the Act after considering the details submitted by the employees in Form No.12BB as prescribed in Rule 26C(3) for the claimed of HRA, LTA, Interest on house loan and deduction under chapter VIA which are to be given in form 12BB. Therefore, while calculating the required TDS the assessee was to take into consideration of those details. The AO has made the disallowance in respect of the salary paid to five (5) employees ignoring details showing the respective break up of salary and TDS liabilities. It the details in form 12BB is considered there was no further tax liability in those cases wherein the AO has made disallowance. Accordingly the Ld. AR has summited that wherever the TDS was required to be deducted the assessee deducted TDS from the salary payment of Rs.200,05,897/- but no TDS was required to be deducted in respect of the salary payment of Page 9 of 12
Reconnect Energy solution P. Ltd. Page 10 of 12 Rs.1,30,05,523/-. Therefore, there is no default on the part of the assesse in deducting TDS. He has thus submitted that the disallowance made by the AO is not justified and the same may be deleted.
On the other hand, Ld. DR has submitted that the assessee has not produced the relevant details to show that the salary paid to those employees were not subjected to the tax by considering threshold minimum limit of taxable income. He has relied upon the orders of the authorities below.
I have considered the rival submission as well as relevant material on record. The AO has made the disallowance of salary payment u/s 40(a)(ia) for want of TDS. The AO has considered gross salary payment which is more than Rs.2,50,000/- in respect of five (5) employees. The assessee has contended that after adjusting various deductions as provided under Chapter VIA as well as required details furnished in form 12BB and as per Rule 26C the salary paid to the employees was less than below the threshold taxable limit. The assessee has given details of the salary paid to these employees as under:
Naresh IT 188381 6320 18400 92058 136710 15000 32490 366320 18-Jul April TDS After SV 0 -15 investment net income 14 2,11,996 Parimal HR 217982 4417 18400 103163 17858 15000 67590 484164 20- April 3090 After aC 1 Jul-12 -15 investmen t net income 2,58,956 Praveen IT 186434 5961 18400 89480 8219 15000 32472 355966 22- April After sep-14 -15 investmen t net Mahant income esh 1,96,935 Rajkam IT 199030 4636 18400 97223 16205 15000 34137 384631 20-Oct 187 After al investmen t net 14 income 2,71,816/ -
Reconnect Energy solution P. Ltd. Page 11 of 12
April- 15 REshm Acc 250512 1486 14039 125252 20874 10968 90181 513312 8-Jul After a Mehta ou investmen nts t Tran to 15 Ret(share the from 16 part B)
April- 15 S. Op 227810 1148 13265 113901 18985 10363 55623 441095 23- After Shristo era july-15 investmen pher tio t than Muthia ns 2.40 lac h – he has po passed wer away in Sar FY
Since these details were not discussed and considered by authorities below therefore, in the interest of justice this issue is set aside to the record of the AO for fresh adjudication after considering these details submitted by the assessee. In case the salary paid after various deductions including on account of investment is less than the minimum taxable slab then there should be no default on the part of the assesse for deducting TDS.
In the result, the appeal of assesse is partly allowed for statistical purposes. .
Order pronounced in the open court on 06.12.2023