2021 (8) TMI 332 - AT - Income Tax

Addition u/s 68 - Difference in share premium received and the fair value of equity shares as per the report of the registered valuer - assessee failed to forward any cogent reasons as to why the shares were allocated at such a huge premium vis- -vis the valuation report as obtained by the assessee itself from the registered valuer - HELD THAT - CIT(A) has erred inasmuch as, he has not examined the information obtained about the various offshore companies of Mauritius and France from whom the information was obtained and from where the source is layered. Secondly, there is no cogent explanation of difference between the values as given to the RBI and that given to Income tax Authorities on the touchstone of the legal maxim of approbate and reprobate as referred by Hon'ble Supreme Court in the case of Suzuki Parasrampuria Suitings Pvt. Ltd. 2018 (10) TMI 484 - SUPREME COURT . Further the issue in substance here is not addition under section 56 but addition under section 68. In this view of the matter also the case laws referred by learned Counsel of the assessee are not applicable. Furthermore the decision of Green Infra of Hon'ble Bombay High Court was not dealing with layered remittance from source abroad. Moreover the issue here clearly is assessee applying opaque device which comes under the ken of exposition of Hon'ble Supreme Court decision in Mc Dowell Co. Ltd. 1985 (4) TMI 64 - SUPREME COURT With the above observation, we remit the issue to the file of learned CIT(A) for fresh adjudication. Needless to add, assessee should be granted adequate opportunity of being heard. Addition u/s 56(2) - towards the difference in the fair market value of shares of Rochem separation systems (India) Private Limited - CIT-A deleted the addition - HELD THAT - There is nothing mentioned in the Act, which proscribes the application of section 69B is cases such as the present one. In this view of the matter in our considered opinion here as noted above since there is use of opaque colourable device the reference to ITAT decision in Rupee Finance and Management 2007 (2) TMI 240 - ITAT BOMBAY-J does not fructify the assessee's case. Thus, Ld. CIT(A) has erred in allowing the assessee's appeal despite the fact that the assessee's investment falls under provisions of section 69B.there is some lack of clarity regarding the valuation aspect of the shares as the AO has started with a figure of ₹ 6,875/- and finally considered the value at ₹ 7,067/-. Moreover, valuation aspect was never examined by learned CIT(A). Hence, the valuation aspect needs to be examined by the first appellate authority. Since we have remitted the first issue to the file of Ld. CIT(A), we deem it appropriate to remit this issue also to the file of Ld. CIT(A). Ld. CIT(A) is directed to consider this issue also afresh.Appeal filed by the revenue is allowed for statistical purpose.

Summary

Issues Involved:
1. Addition under Section 68 of the Income Tax Act.
2. Addition under Section 56(2) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition under Section 68 of the Income Tax Act:

The Revenue appealed against the deletion of additions made under Section 68 of ?40,20,04,997/- due to the difference in share premium received and the fair value of equity shares. The assessee-company received funds from a private equity firm based in Mauritius and issued shares at a premium significantly higher than the valuation report obtained for statutory compliance. The Assessing Officer (AO) found the transactions suspicious and questioned the genuineness, citing that the subscription prices were excessively higher than the fair values. The AO added the difference as unexplained cash credit under Section 68, citing various judicial precedents.

Upon appeal, the learned CIT(A) noted the AO's observations and concluded that the source of funds was verified through the Exchange of Information Article of Indo-Mauritius DTAA, which confirmed the genuineness of the transaction. The CIT(A) held that the difference in share pricing could not lead to rejection of the nature of funds received, emphasizing that the value at which shares are issued is the prerogative of the assessee. The CIT(A) also referred to the Bombay High Court decision in Vodafone India Services (P.) Ltd. vs. Union of India, which indicated that no income could be charged in respect of raising share capital from a non-resident.

The Tribunal found that the AO did not reference the enquiry conducted about the source of funds from overseas concerns. The CIT(A) relied on the AO's office notes rather than examining the documents obtained under the exchange of information mechanism. The Tribunal emphasized that the powers of CIT(A) are coterminous with the AO and that it was the CIT(A)'s duty to correct errors in the AO's order. The Tribunal remitted the issue back to the CIT(A) for fresh adjudication, noting that the CIT(A) did not properly examine the information obtained about the various offshore companies and the difference in share values given to RBI and Income Tax Authorities.

2. Addition under Section 56(2) of the Income Tax Act:

The AO noted that the assessee purchased shares of Rochem Separation Systems (India) Pvt. Ltd. at a price significantly lower than their book value. The AO considered the transaction as sham and applied Section 56(1) to add the difference between the fair market value and the purchase consideration to the assessee's income. The AO also referred to the Supreme Court decision in McDowell and Co. Ltd. vs. CTO to support his view.

Upon appeal, the CIT(A) held that the provisions of Section 56(2) were not applicable for the assessment year under consideration and that the transaction was capital in nature, hence outside the scope of addition. The CIT(A) referred to the Bombay High Court decision in Vodafone India Services (P) Ltd. vs. UOI, which dealt with the taxability of the difference between the price at which shares were issued and their fair market value.

The Tribunal noted that the assessee accepted that the value given for the shares was much lower than their actual value. The Tribunal emphasized that putting a wrong section is not fatal to the assessment and referred to Section 69B, which deals with investments where the amount expended exceeds the amount recorded in the books. The Tribunal found that the assessee used an opaque device and subterfuge, and the reference to Section 56 was irrelevant. The Tribunal remitted the issue back to the CIT(A) for fresh adjudication, noting the lack of clarity regarding the valuation aspect of the shares.

Conclusion:

The appeal filed by the Revenue was allowed for statistical purposes, with both issues remitted back to the CIT(A) for fresh adjudication, ensuring the assessee is granted adequate opportunity of being heard.