M/S AUTHORGEN TECHNOLOGIES PVT.LTD,MOHALI vs. PR.CIT-1, CHANDIGARH

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ITA 171/CHANDI/2021Status: DisposedITAT Chandigarh02 September 2024AY 2015-16Bench: SHRI. AAKASH DEEP JAIN (Vice President), SHRI. VIKRAM SINGH YADAV (Accountant Member)33 pages
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What did the Tribunal hold?

The Tribunal upheld the Pr. CIT's order invoking revisionary powers under Section 263, finding the AO's order to be erroneous and prejudicial to the revenue. The Tribunal noted a clear lack of material on record and non-application of mind by the AO regarding the applicability of Section 56(2)(viib) to the consideration received for the issuance of Compulsorily Convertible Preference Shares (CCPS). Regarding the set-aside proceedings where Rs. 2,59,25,331/- was brought to tax under Section 56(2)(viib) from Kaizen Domestic Scheme-1, the Tribunal did not agree that the assessee took a fresh ground before the Tribunal. The assessee's consistent stand was that Section 56(2)(viib) is not applicable when investments are received from Venture Capitalists. However, the Tribunal found that the relevant documentation to qualify as a Venture Capital Undertaking and for the investor company to qualify as a Venture Capital Fund was submitted for the first time before the CIT(A), not the AO. Since there were no findings from either the AO or the CIT(A) on this specific point, and the AO sought time for verification, the Tribunal set aside the matter to the AO for verification of the assessee's claim under the proviso to Section 56(2)(viib), allowing the assessee a reasonable opportunity. The appeal in ITA No. 171/Chd/2021 was dismissed, and the appeal in ITA No. 212/Chd/2023 was allowed for statistical purposes.

What were the facts?

The assessee, Authorgen Technologies Pvt. Ltd., filed appeals against two orders concerning Assessment Year 2015-16. The first appeal (ITA No. 171/Chd/2021) challenges the order of the Pr. CIT, Chandigarh-1, dated 23/03/2021, passed under Section 263 of the Income Tax Act, 1961, which revised the assessment order. The second appeal (ITA No. 212/Chd/2023) challenges the order of the CIT(A), NFAC Delhi, dated 14/02/2023, which dismissed the assessee's appeal against the set-aside proceedings and the subsequent assessment order passed under Section 143(3) r.w.s. 263 of the Act. The original assessment order determined the assessed income as a loss of Rs. 20,99,12,982/- after adjustments. The Pr. CIT initiated revision proceedings under Section 263, citing that the Assessing Officer (AO) had not properly examined the large share premium received by the assessee.

What were the issues?

1. Whether the revisionary powers under Section 263 were validly invoked by the Commissioner of Income Tax, given that the AO's order was neither erroneous nor prejudicial to the revenue, particularly concerning the share premium received from foreign investors, which was explained to the AO's satisfaction. 2. Whether Section 56(2)(vii) of the Income Tax Act, 1961, is applicable to foreign entities, and if shares of the same class were issued to both foreign and domestic entities at different prices, whether the price paid by foreign entities should be considered the fair market price for shares issued to the Indian entity. 3. Whether the share premium received by the assessee was taxable under Section 56(2)(viib) of the Income Tax Act, 1961, and if the AO erred in rejecting the Discounted Cash Flow (DCF) method of valuation in favor of the Net Asset Value (NAV) model, leading to an addition of Rs. 2,59,25,331/-. 4. Whether the AO erred in invoking Section 68 of the Income Tax Act, 1961, when the assessee, being a resident, provided complete explanations regarding the nature and source of the credited sum. Assessee's arguments: The order passed by the AO was not erroneous or prejudicial to the revenue. The share premium was issued above fair value as required by foreign exchange laws, and the AO was satisfied. Section 56(2)(vii) is not applicable to foreign entities, and the price paid by them should determine the fair market value for domestic entities. The DCF method should have been accepted as per Rule 11UA(2)(b). Section 68 is not applicable due to complete explanations provided. Revenue's arguments: The Pr. CIT's revisionary powers were validly invoked. The AO's assessment was erroneous and prejudicial to the revenue as the identity, genuineness, and creditworthiness of the investors and the valuation of shares were not established. The matter requires verification, and the case should be set aside to the AO.

Which sections of the Income-tax Act were involved?

Section 263,Section 143(3),Section 144C(1),Section 56(2)(viib),Section 68,Section 142(1),Section 10(23)FB

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Heard together (2 matters)

ITANO.171/Chd/2021
ITA NO.212/Chd/2023

Read from the judgment's own cause title. This page is filed under one of them.

आयकर अपील सं./ िनधा"रण वष" / Assessment Year : 2015-16 Authorgen Technologies Pvt. Ltd. The ITO बनाम C-203, 8th Floor, World Tech Tower Ward 6(1), Chandigarh Industrial Area, Phase VIII, Mohali 160070, Punjab "ायी लेखा सं./PAN NO: AADCA0494Q अपीलाथ"/Appellant ""थ"/Respondent िनधा"रती की ओर से/Assessee by : Shri K.M. Gupta, Advocate राज" की ओर से/ Revenue by : Shri J.S. Kahlon, CIT, DR & Smt. Amanpreet Kaur, Sr. DR सुनवाई की तारीख/Date of Hearing : 05/06/2024 उदघोषणा की तारीख/Date of Pronouncement : 02/09/2024 आदेश/Order PER VIKRAM SINGH YADAV, A.M. :

These are two appeals filed by the assessee against the order of the Ld. Pr. CIT, Chandigarh -1 dt. 23/03/2021 passed under section 263 of the Income Tax Act, 1961 pertaining to Assessment Year 2015-16 and the order passed by the Ld. CIT(A), NFAC Delhi dismissing the appeal of the assessee in respect of set aside proceedings and the order passed under section 143(3) r.w.s 263 of the Act dt. 14/02/2023 for Assessment Year 2015-16. Both these appeals were heard together and are being disposed off by this consolidated order.

2.

In the assessee has raised the following grounds of appeal:

“1. On the facts and under the circumstances of the case and in law, the Commissioner of Income Tax, erred in invoking revisionary powers u/s 263 without appreciating the fact that order passed by AO is neither erroneous nor prejudicial to the revenue, hence revision u/s 263 is bad in law.

2. On the facts and circumstances of the case and in law, the learned CIT erred in setting aside the order of the AO and directing assessment de-novo, on the grounds that Large share premium received during the year, without appreciating the fact that two out of three investors are foreign investors and such shares are issued above the fair value as required under foreign exchange laws of the country. The Ld. AO has asked at the time of assessment and was explained to him to his satisfaction.

3. On the facts and circumstances of the case and in law, the learned CIT erred in not appreciating the fact that same class of shares were issued to foreign entities and domestic entity. Section 56(2)(viib) is not applicable to foreign entities and therefore the price paid per share for the same class of shares by foreign entities should be treated as fair market price for share issued to Indian entity. There cannot be different pricing for same class of shares issued to different persons. Hence, the action of CIT of invoking revisionary powers is bad in law.”

3.

In the assessee has raised the following grounds of appeal:

“1. On the facts and under the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the AO by treating the share premium as taxable u/s 56(2)(viib) which is bad in law.

2. On the facts and under the circumstances of the case and in law, the learned AO erred in rejecting the DCF method of valuation adopted by the appellant for valuing the shares and calculating the FMV on the basis of NAV model thereby making an addition of share premium of Rs. 2,59,25,331/- u/s 56(2)(viib) of the Income Tax Act, 1961 even when DCF method was allowable as per Rule 11UA(2)(b) and hence such an action is bad in law.

3. On the facts and under the circumstances of the case and in law, the learned AO erred in invoking Section 68 of the Income Tax Act, 1961 even though the appellant being resident, has provided complete explanation about the nature and source of sum so credited.”

4.

At the outset, it is noted that there is delay in filing the appeal by the Assessee against the order passed by the Ld. Pr. CIT under section 263 dt. 23/03/2021. The appeal has been filed by the assessee on 05/07/2021 after a delay of 44 days as pointed out by the Registry. In this regard, the assessee in its application has submitted that the reasons for not filing the appeal within stipulated time period was due to the second wave of COVID-19 pandemic in the country at the relevant point in time whereby nationwide lockdown was imposed which has resulted in delay in filing the present appeal. Further, reliance was also placed on the decision of Hon’ble Supreme Court wherein the period of limitation has been extended. It was accordingly submitted that the delay in filing the present appeal is beyond the control of the assessee and hence there was a reasonable cause for the delay and the same may be condoned and the appeal be admitted to be heard on merits of the case.

5.

The Ld. DR is heard, who has not raised any specific objection. 6. After hearing both the parties and considering the material available on the record, we find that there was a reasonable cause for the delay in filing the present appeal due to COVID-19 pandemic, hence, the delay is hereby condoned and the appeal of the assessee is admitted for adjudication. 7. Briefly the facts of the case are that the assessee filed its return of income on 28/11/2015 declaring a loss of Rs. 29,47,80,832/-. Subsequently, the case of the assessee was selected for complete scrutiny under CASS and one of the reasons for complete scrutiny was to examine matter relating to large share premium amount received by the assessee company during the financial year relevant to impugned assessment year. Subsequently, after issuance of notice and calling for the information and submissions from the assessee, the assessment proceedings were completed and assessed income was determined by the AO at a loss of Rs. 20,99,12,982/- by making an adjustment on account of transfer pricing amounting to Rs. 8,21,51,007/-, addition on account of ESI/EPF amounting to Rs. 18,81,760/- and disallowance under section 14A amounting to Rs. 8,35,083/-. 7.1 The assessee company thereafter carried the matter in appeal before the Ld. CIT(A) by filing an appeal on 23/01/2019. In the meantime, before the appeal could be taken up for adjudication by the ld CIT(A), the assessee opted for Vivad Se Vishwas (VSV) Scheme 2020 and filed Form No. 1 on 29/01/2021 before the Competent authority. Thereafter after issuance of Form No. 3 dt. 09/02/2021 by the Competent authority, the assessee informed the same to the Ld. CIT(A) and the Ld. CIT(A) granted leave to the assessee to withdraw its appeal against the adjustment and other matters relating to disallowances so made by the AO while passing the assessment order passed under section 143(3) and accordingly, the appeal so filed by the assessee was treated as withdrawn and dismissed by the ld CIT(A) vide order dated 05/03/2021. 7.2 The assessment records were, subsequently, called for and examined by the Ld. Pr. CIT and a show cause u/s 263 dt. 10/03/2021 was issued to the assessee company. In the show cause, the Ld. Pr. CIT has stated that basis perusal of the assessment records and in particular, reasons for selection of case for scrutiny, the notice issued by the AO under section 142(1) dt. 14/06/2017 and questionnaire of even date wherein the AO requisitioned the detail of share capital issued during the year and in response to which, the assessee furnished the information, it is noted that the company has received share premium amounting to Rs. 8,99,63,752/- on issuance of 24,28,827/- Compulsorily Convertible Preference Shares (CCPS) at an premium of Rs. 37.04 per share from non-resident companies based out of Netherlands and Mauritius, during the Financial Year 2014-15 relevant to Assessment Year 2015-16. The Ld. Pr. CIT further stated that on examination of records, it is observed that the method adopted to arrive at the face value of more than Rs. 10/- per share or the valuation report to substantiate the Fair Market Value (FMV) adopted by the company or such other document to confirm the claim were not furnished during the assessment proceedings. Therefore, the identity, genuineness and credit worthiness of the person / companies from whom the assessee received share capital and premium had not been established. It was accordingly held that the order so passed by the AO under section 143(3) r.w.s. 144C(1) is prima facie erroneous and prejudicial to the interest of the Revenue and the assessee was asked to show cause as to why the order may not be revised under the provisions of Section 263 of the Act. In response, there was no reply/ submissions from the assessee company, thereafter, another notice dt. 17/03/2021 was issued to the assessee company and in response, the assessee company submitted that amount towards share capital is received from foreign parties / non residents i.e; companies registered in Netherlands & Mauritius and these transactions are duly governed and monitored by RBI and all necessary FEMA compliances have been done by the assessee company along with compliances made before the

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