2022 (11) TMI 223 - AT - Income Tax

Addition u/s 68 - unexplained cash credit - Share premium received from foreign investor - HELD THAT - The share capital premium to the extent of Rs.63,32,28,987/- pertained to earlier years; and the nature source of the same had already been examined and verified in the income tax assessments for the earlier years, and therefore the same is directed to be deleted, since no addition u/s 68 of the Act was legally permissible in the relevant AY 2018-19. Share premium received from the founder promoter, Mr. Anuj Rakyan it is noted that the assessee has discharged its burden of proving his identity, genuineness and creditworthiness, and both the lower authorities could not find any defects or fault therein and therefore the aforesaid addition is also directed to be deleted. Share premium received from three (3) foreign investor, we once again deprecate the inaction and non-application of mind to the facts of the case by the lower authorities, particularly when the revenue has accepted the identity and genuineness of these investors in the past years. Having held so, we also cannot lose sight of the fact that the assessee by their own admission was unable to provide all the primary evidences Viz, income tax returns, bank statement, etc of the foreign investors concerning the relevant year for verification. Understandably, these foreign investors are of repute and given the fact that the assessee was only as start-up, it may not be in a position to obtain from them all relevant documents, as desired by the AO/NFAC. However, this cannot absolve the foreign investors from verification of their creditworthiness by the income tax authorities. In our humble opinion, the right course of action for the revenue was to make independent enquiries from these investors through appropriate channel such as FT TR etc, particularly when such manner and line of enquiry had already been laid down by the CBDT in their SOP dated 19.11.2020 or from the AO s of the respective foreign investors. I Revenue ought not to have simply pushed the entire burden on to the assessee to provide the details and documents of foreign share holders, particularly when the CBDT empowered them to make independent enquiries from them. With these observations, we set aside the addition to the extent being the share premium received from foreign investors back to the file of the AO/NFAC for de-novo assessment in respect of the credit in assessee s book, in a fair and reasonable manner and in accordance to law. Needless to say, the assessee shall be provided with reasonable opportunity of being heard. As the share premium relating to Ms. Jaqualine Fernandez is concerned, in the light of the facts discussed (supra) in respect of Ms. Jaqualine Fernandez, AO/NFAC is directed to confine their inquiries only to the genuineness of the arrangement by enquiring as to whether the agreed consideration had indeed been subjected to Goods Service Tax GST and TDS, as claimed by the assessee; and also the manner in which the consideration has been accounted by the assessee and the share-holder in their respective books. If the arrangement is found to be in accordance to law, then no addition shall be made on this count. The AO/NFAC may make enquiries directly from the share-holder as well, but at the same time, AO/NFAC shall allow sufficient opportunity of being heard to the assessee. Appeal of the assessee is partly allowed for statistical purposes

Issues Involved:

1. Addition under Section 68 of the Income Tax Act, 1961.
2. Identity, creditworthiness, and genuineness of transactions with investors.
3. Applicability of Section 68 to opening balances of share premium.
4. Valuation of share premium and compliance with RBI/FEMA regulations.
5. Verification of investment details from foreign investors.
6. Treatment of shares issued to Ms. Jacqueline Fernandez.

Issue-Wise Detailed Analysis:

1. Addition under Section 68 of the Income Tax Act, 1961:

The main grievance of the assessee was the confirmation of an addition of Rs.115,56,95,385/- under Section 68 of the Income Tax Act, 1961. The assessee had filed its return declaring a total loss of Rs.41,85,61,758/-, and the case was selected for scrutiny. The AO proposed to add back the amount under Section 68, arguing that the share premium charged was unreasonable given the company's increasing losses. The assessee contended that the entire closing amount was not received in the relevant year and provided detailed information about the investors and the share premium received.

2. Identity, Creditworthiness, and Genuineness of Transactions with Investors:

The assessee provided extensive documentation to establish the identity, creditworthiness, and genuineness of the transactions with investors, including financial statements, PAN cards, and Foreign Inward Remittance Certificates (FIRCs). The assessee argued that the investors were reputable foreign entities and that the initial onus under Section 68 was discharged. The AO/NFAC, however, did not find the valuation reports reliable and labeled the transactions as 'hawala,' suggesting the applicability of the Black Money Act.

3. Applicability of Section 68 to Opening Balances of Share Premium:

The Tribunal noted that the impugned addition comprised an opening balance of Rs.63,32,28,987/- from earlier years, which could not be assessed under Section 68 in the relevant year. The Tribunal referenced the Bombay High Court's decision in Ivan Singh vs ACIT, which held that Section 68 applies only to sums credited in the books during the relevant year, not to those from earlier years. Consequently, the Tribunal directed the deletion of the addition related to the opening balance.

4. Valuation of Share Premium and Compliance with RBI/FEMA Regulations:

The assessee supported the share premium valuation with a certificate from a Chartered Accountant using the Discounted Cash Flow (DCF) method, as prescribed by RBI guidelines. The Tribunal noted that the share premium received from foreign investors complied with FEMA/RBI regulations and that the RBI had not disputed the fair value of the shares. The Tribunal also clarified that Section 56(2)(viib) of the Act, which pertains to the valuation of shares issued to residents, was not applicable to shares issued to non-residents.

5. Verification of Investment Details from Foreign Investors:

The Tribunal criticized the lower authorities for not making independent inquiries from the foreign investors through appropriate channels, such as the FT & TR, as outlined in the CBDT's SOP dated 19.11.2020. The Tribunal emphasized that the lower authorities should have used their statutory powers to verify the creditworthiness of the foreign investors instead of shifting the entire burden onto the assessee. The Tribunal set aside the addition related to the share premium received from foreign investors and directed the AO/NFAC to conduct a de-novo assessment.

6. Treatment of Shares Issued to Ms. Jacqueline Fernandez:

The Tribunal found that the shares issued to Ms. Jacqueline Fernandez were in lieu of her services as a celebrity endorser, and no actual cash inflow was involved. The Tribunal noted that the AO/NFAC failed to verify whether the consideration had been subjected to GST and TDS. The Tribunal directed the AO/NFAC to confine their inquiries to the genuineness of the arrangement and to make direct inquiries from Ms. Fernandez if necessary, while providing the assessee with a reasonable opportunity of being heard.

Conclusion:

The Tribunal set aside the impugned order of the Ld. CIT(A) and directed the deletion of the addition related to the opening balance of share premium and the share premium received from Mr. Anuj Rakyan. The Tribunal also directed the AO/NFAC to conduct a de-novo assessment for the share premium received from foreign investors and to verify the genuineness of the arrangement with Ms. Jacqueline Fernandez. The appeal of the assessee was partly allowed for statistical purposes.

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