2023 (8) TMI 21 - AT - Income Tax

Addition u/s 56(1) - shares received by the assessee company at the time of amalgamation - HELD THAT - As decided in Priapus Developers (P.) Ltd. 2019 (4) TMI 1283 - ITAT DELHI when amalgamation scheme has been approved by the Court, it is not open for the AO and CIT (A) to hold that amalgamation has been used by the assessee company as a tool for tax evasion. The amalgamation order passed by the High Court is a judicial order and has statutory force and in case, the department had any objection, then same should have been given before the Hon'ble High Court for which sufficient time was allowed. The department cannot clamour that such an amalgamation have been used by the assessee as a tool for tax evasion or as colourable device. Having held so, we, at the same time, agree that the Revenue is not precluded from ascertaining as to whether the scheme of amalgamation was in compliance with the provisions of the Act so as to avail the benefit of Section 47(vi) of the Act. In the present case valuation report exchange ratio, if so, could have a bearing only in the hands of the shareholders of both the transferor and transferee companies, as only these shareholders would have gained or lost having agreed to the same. We therefore do not find merit in the report of the AO challenging the correctness of the valuation report exchange ratio of shares between shareholders of the transferor and transferee companies to justify the addition u/s 56(1) of the Act. We find ourselves in agreement with the AR that, when qua these assets lower authorities did not disregard the scheme of amalgamation or hold it to a colourable device to evade tax, then it was incorrect on the Revenue s part to cherry pick only the receipt of shares of ZEEL and assess it as a taxable event, denying the benefit of exemption set out in Section 47(vi) of the Act. Thus we hold that the scheme of amalgamation of EBPL with the assessee company cannot be disregarded nor can it be held to be a colourable device . Consequent thereto, the transfer of shares of ZEEL pursuant to the scheme of amalgamation was entitled for benefit of exemption u/s 47(vi) of the Act and therefore the addition made u/s. 56(1) is not sustainable - Decided against revenue. Addition u/s 68 - share capital/premium received by the assessee as bogus - HELD THAT - CIT(A) had noted that the assessee had furnished the details of EMEL including copy of certificate of incorporation in Mauritius, certificate regarding source of funds, copy of inward remittance proof along with assessee s bank statement evidencing both receipt of funds and refund of excess balance. Documents placed on record revealed that EMEL was incorporated on 3rd June 2011 and that the source of their investment in assessee was the contribution received from its shareholders, as certified by the local Chartered Accountant. CIT(A) had further observed that, the AO had referred the matter to FT TR Division to make independent enquiries in Mauritius and the AO had noted in the impugned order that part reply was also received from FT TR. CIT(A) rightly pointed out that the AO had not cited any adverse finding or remark of the FT TR with respect of the source of investment either in the assessment order or post completion of the assessment. Even before us the Revenue was unable to furnish any adverse finding or contrary report of FT TR doubting the genuineness of the investment made by EMEL in the assessee. We thus find merit in the submissions of the Ld. AR that, the proviso to Section 68 of the Act, introduced by the Finance Act, 2012, was applicable only from AY 2013-14 and onwards, and therefore the said proviso cannot be held applicable in AY 2012-13. Meaning thereby, the assessee was under no obligation to substantiate the source of funds of its shareholder, EMEL in AY 2012-13 and to that extent, the AO s reasoning justifying the addition u/s 68 of the Act in the relevant AY for want of explanation regarding source of source of funds is held to be erroneous. Justification of share premium charged by the assessee upon the issuance of shares - It is noted that the assessee has supported the valuation with a certificate issued by a chartered accountant using DCF method, which is one of approved methods prescribed by the RBI. The tax-payer while issuing shares to the non-resident investors creates a foreign obligation for India in favour of another country. Accordingly, in terms of the RBI/FEMA requirements, the tax-payers are required to issue shares for a consideration which has to necessarily be equal to or higher than the fair value, arrived at by an approved method. Reason being, the tax-payer should not create a foreign obligation for India in favour of another country at a consideration which is below fair value of shares. Thus, to plug this loss to India, FEMA/RBI have stipulated that the issue price of shares should be equal to or more than fair value arrived at by approved method viz. DCF. Hence, even going by the AO's analogy that the price at which shares were issued to foreign investors was higher than fair value of shares, according to us, such issuance of shares at a value higher than the intrinsic fair value was in compliance with the FEMA/RBI regulations. It is noted that, the RBI has not disputed the fair value of shares, which was supported by the CA Certificate using DCF method. Even the AO, apart from making certain remarks, was unable to point out any specific defect or inaccuracy in the valuation report issued by the Chartered Accountant. No reason to interfere with the order of the Ld. CIT(A) in deleting the addition made by the AO u/s 68. Disallowance u/s 14A read with Rule 8D - both under normal computational provisions and under MAT provisions u/s 115JB - HELD THAT - CIT(A) noted that the investments only comprised of shares of ZEEL. He observed that, the erstwhile transferor company, EBPL originally received these shares by way of gift (at NIL consideration), as accordingly noted that the assessee did not pay any sum for acquisition of these shares and that, upon amalgamation, the assessee had only recorded these investments at its fair value by way of book entry. CIT(A) thus held that, as there was no utilization of borrowed funds for acquiring these shares, the disallowance made under Rule 8D(2)(ii) ought not to have been made - CIT, DR appearing before us was unable to countenance these facts. No reason to interfere with the order of Ld. CIT(A) deleting the interest disallowance made by the AO under Rule 8D(2)(ii). Disallowance which had suo moto been offered by the assessee in the return of income under Rule 8D(2)(iii) - As noted from the financial statements and computation of income that the assessee did not earn any exempt income during the relevant year, the AO is directed to delete the disallowance made under Section 14A read with Rule 8D(2)(iii). Now we come to the issue of disallowance u/s 14A r.w. Rule 8D made while computing book profit u/s 115JB of the Act. Since we have already held that no disallowance u/s 14A read with Rule 8D is warranted in the given facts of the case, consequentially no disallowance is sustainable in the MAT computation under section 115JB of the Act as well. Also, Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has held that the computation mechanism provided under Rule 8D of the Rules cannot be applied for computing addition in terms of clause (f) of Explanation 1, for arriving at the book profit u/s 115JB of the Act. Hence, the impugned disallowance made by the AO while computing book profit u/s 115JB is held to be unsustainable in law. Denial of carry forward of losses brought forward upto AY 2011-12 on account of change in shareholding pattern u/s 79 - On appeal before the CIT(A), the assessee claimed that the provisions of Section 72A override the provisions of Section 79 of the Act and therefore argued that any change in shareholding pattern due to amalgamation cannot be subjected to rigors of Section 79 - HELD THAT - As CIT(A) did not find any force in the argument put forth by the assessee and rejected the same. Before us also, the Ld. AR of the assessee was unable to counter the findings of the Ld. CIT(A). Accordingly, this ground of appeal is dismissed.

Summary

Issues Involved:
1. Deletion of addition made under Section 56(1) of the Income-tax Act, 1961.
2. Deletion of addition made under Section 68 of the Income-tax Act, 1961.
3. Disallowance under Section 14A read with Rule 8D.
4. Legal validity of the assessment order.
5. Denial of carry forward/set-off of losses under Section 79 of the Income-tax Act, 1961.

Issue-wise
Detailed Analysis:

1. Deletion of Addition under Section 56(1) of the Act:
The Revenue challenged the deletion of the addition of Rs. 1466.60 crores made under Section 56(1) on account of shares of Zee Entertainment Enterprises Ltd. received by the assessee from Essel Business Process Ltd. during amalgamation. The AO viewed the transfer of shares as a 'colourable device' to avoid tax. However, the Tribunal held that once the scheme of amalgamation is sanctioned by the High Court, the AO cannot disregard it as a 'colourable device'. The Tribunal noted that the Revenue did not object to the scheme before the High Court. The Tribunal also observed that the scheme was in compliance with Section 2(1B) and Section 47(vi) of the Act, granting exemption from tax. Therefore, the addition made under Section 56(1) was deleted.

2. Deletion of Addition under Section 68 of the Act:
The Revenue contested the deletion of Rs. 29.30 crores added under Section 68 as unexplained cash credit. The AO doubted the creditworthiness of the investor, Essel Media & Entertainment Ltd. (EMEL), and the genuineness of the transaction. The Tribunal noted that the assessee provided sufficient evidence, including incorporation details, financial statements, and remittance proofs. The Tribunal emphasized that the proviso to Section 68, which requires substantiation of the 'source of source', was applicable only from AY 2013-14 and not AY 2012-13. The Tribunal upheld the deletion of the addition, finding no fault with the valuation report and the premium charged.

3. Disallowance under Section 14A read with Rule 8D:
The AO disallowed Rs. 12,47,28,867 under Rule 8D(2)(ii) and Rs. 4,08,52,175 under Rule 8D(2)(iii). The Tribunal upheld the deletion of the interest disallowance under Rule 8D(2)(ii), noting that the shares were acquired without utilizing borrowed funds. Regarding the disallowance under Rule 8D(2)(iii), the Tribunal held that no disallowance under Section 14A is warranted in the absence of exempt income, following the jurisdictional High Court's decisions. Consequently, the disallowance under MAT provisions was also deleted.

4. Legal Validity of the Assessment Order:
The assessee challenged the assessment order as time-barred. However, the Tribunal dismissed this ground as not pressed by the assessee during the hearing.

5. Denial of Carry Forward/Set-Off of Losses under Section 79:
The AO disallowed the carry forward of losses due to a change in shareholding pattern. The assessee argued that Section 72A overrides Section 79, but the Tribunal upheld the AO's decision, agreeing with the findings of the CIT(A).

Conclusion:
The appeal of the Revenue was dismissed, and the cross-objections and appeal of the assessee were partly allowed. The Tribunal's decision emphasized compliance with statutory provisions and judicial precedents, particularly regarding the validity of amalgamation schemes and the applicability of tax provisions.