2019 (8) TMI 1404 - AT - Income Tax

Addition u/s 68 - conversion of preference share into equity share - alleged that assessee did not submit proper explanation about the nature and source of sums credited in its books - HELD THAT - Assessee has credited the amount of preference shares in the earlier year which has now converted into equity-shares capital. The AO nowhere doubt over the identity and creditworthiness of the investor and genuineness of the transaction. The only doubt is that the value of share premium charged is not truly reflecting the intrinsic value of the equity shares of the company. Valuation of charging of shares premium could not be basis for making addition u/s 68. The assessee nowhere credited the cash/sum in the books of accounts which is the essential condition to apply the provisions of u/s 68 - assessee submits the certificate obtained from the CA in which the valuation of the share has been duly assessed. The assessee also produced the letter dated 14.06.2010 produced before the RBI and also submitted the certified copy of resolution of Extra Ordinary Meeting of Member s for obtaining consent for conversion which has been marked as annexure-C. The assessee has also produced the concerned letter of preference shareholder for conversion marked as annexure-D CIT(A) has decided the matter of judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, this issue is being decided in favour of the assessee against the revenue.

Issues Involved:
1. Deletion of addition under Section 68 of the Income Tax Act, 1961.
2. Genuineness of the transaction involving conversion of preference shares into equity shares.
3. Valuation of share premium and its reflection of intrinsic value.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 68 of the Income Tax Act, 1961:
The revenue challenged the CIT(A)'s decision to delete the addition made by the AO under Section 68. The AO had concluded that the assessee failed to provide a proper explanation about the nature and source of sums credited in its books, leading to an addition of ?10,80,94,797/- as unexplained cash credit. The CIT(A), however, found that the amount of preference shares was already credited in earlier years and was now converted into equity share capital. The CIT(A) noted that the AO did not doubt the identity and creditworthiness of the investor or the genuineness of the transaction, but only the valuation of the share premium. The CIT(A) held that valuation issues could not be the basis for making an addition under Section 68, as the essential condition of crediting cash/sum in the books was not met. The assessee provided necessary documentation, including a CA certificate for share valuation and relevant correspondence with RBI, substantiating the transaction's genuineness.

2. Genuineness of the Transaction Involving Conversion of Preference Shares into Equity Shares:
The AO questioned the genuineness of the conversion of preference shares into equity shares, suspecting that the share premium did not reflect the intrinsic value of the equity shares. The CIT(A) and the Tribunal found that the transaction was genuine, supported by sufficient evidence, including statutory forms filed with ROC, confirmatory letters, and bank details. The Tribunal emphasized that the identity, creditworthiness, and genuineness of the transaction were established, and the AO's concerns about the share premium valuation did not undermine the transaction's authenticity.

3. Valuation of Share Premium and its Reflection of Intrinsic Value:
The AO's primary contention was that the share premium did not reflect the intrinsic value of the equity shares, suggesting that the issue price was not justified. The Tribunal referenced the case of DCIT Vs. Piramal Realty Pvt. Ltd., highlighting that the valuation of share premium is not relevant for determining the genuineness of the transaction under Section 68. The Tribunal noted that the AO did not dispute the face value of shares but only the premium. It reiterated that the onus to prove that the apparent is not real lies with the revenue, which failed to demonstrate that the share premium was not genuine. The Tribunal concluded that the CIT(A) rightly deleted the addition, as the assessee had sufficiently discharged its onus by providing detailed documentation and evidence of the transaction.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal. It affirmed that the assessee had adequately demonstrated the genuineness of the transaction, the identity and creditworthiness of the investor, and complied with all statutory requirements. The Tribunal emphasized that valuation issues alone could not justify an addition under Section 68, and the revenue failed to prove that the share premium was not genuine. The appeal was dismissed, and the CIT(A)'s order was confirmed.

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