2024 (4) TMI 350 - AT - Income Tax

Addition u/s 68 - share premium receipts - no basis for valuation of the shares of loss making company at such a high premium of Rs. 40/- per shares (face value is Rs. 10/-) - during the course of assessment the assessee has failed to submit or explain the basis of arriving at the said premium, without which is was not possible to ascertain the genuineness of claim of transaction - CIT(A) deleted addition - HELD THAT - The expression the assessee offers no explanation means assessee offers no proper, reasonable and acceptable explanation as regards sums found credited in the books maintained by the assessee. The opinion of the AO is required to be formed objectively with reference to the material on record. Application of mind is a sine qua non for forming the opinion. The burden is on the assessee to take the plea that, even if the explanation is not acceptable, the material and the attending circumstances available on record do not justify the sum found credited in the books being treated as a receipt of income nature. The identities of the creditors are clearly established in case of the appellant because the sum credited in the books of the assessee as share capital and share premium have been subscribed by the Future group and Godrej group, which are the holding company and other major shareholder of the appellant company. The creditworthiness has also not been questioned by the AO. The only reason why the AO made addition u/s 68 of the Act is that there is no basis for valuation of the shares of loss making company at such a high premium of Rs. 40/- per shares (face value is Rs. 10/-). The company has been consistently incurring losses and the assessee failed to furnish any valuation report before the AO for the subject assessment year. Moreover, if AO does not doubt the transaction and creditworthiness or the genuineness, then how can addition be made on valuation of premium paid on shares on the ground that valuation is higher according to him. AO can examine the nature and source of credit and once the nature and source has been proved which is not doubted by him and then how addition can be made under section 68 for treating the premium amount as unexplained on the reason that premium amount is not justified. To tax such such premium amount on account of valuation more that the fair market value statute has brought section 56(2)(viia)/(viib) from A.Y.2013-14. Thus such an addition cannot be made u/s 68 of the Act. The valuation report for issue of share was prepared prior to notification of Rule 11UA of the Income-tax Rules, 1942. We find that the valuation report was prepared for A.Y. 2010-11. Though, no fresh valuation report has been prepared, there are no substantial changes in the projections made in the said report. The Valuer has adopted DCF method which takes into account the future business prospect of the company. It uses the concept of the time value of money. All cash flows expected at a particular point of time are estimated and discounted by using cost of capital to determine its present value. The appellant has argued that the IT Act itself gives option to the assessee to determine the value of its share u/s 56(2)(viib) and the same cannot be rejected merely on the ground that actual result or profit does not tally with the projected result. We agree that valuation of shares is a commercial decision between the investors and investees and once both the parties agree on a price of the subject shares, then questioning the same by the AO would be beyond the scope of section 68 of the Act. Even the decision in the case of SLS Energy (P) Ltd. 2023 (7) TMI 88 - BOMBAY HIGH COURT is directly on the issue and is in favour of the assessee. In the said case, security premium of ₹6,79,32,00,000/- was stated to be unjustified on the ground of intrinsic valuation of shares‟. However, the Hon ble High Court held that the very basis for reopening was misconceived as receipt of premium on issuance of shares was not receipt of income , but it was a capital receipt . The Hon ble High Court held that the receipt of share capital including share premium was on capital account and gave rise to no income. The facts of the present case are similar to the facts of the decision cited supra and therefore, on this ground also, the appellant is liable to succeed. In the result, the grounds of appeal of the revenue are dismissed. Disallowance of interest paid on ICDS - CIT(A) allowed the ground Perusal of the Tax Audit Report reveals that interest paid on ICDS to Future Venture India Ltd. - HELD THAT - Once the assessee has taken ICD‟s and that ICD‟s has been taken in the earlier year then payment of interest cannot be disallowed on the ground that assessee has incurred loss during the year. Thus, we do not find any infirmity in the order of the CIT (A) when the interest has been paid on the ICD‟s to Future Venture India Ltd. Accordingly, the ground is dismissed. In the result, the appeal filed by the revenue is dismissed. Reopening of assessment u/s 147 - share capital and share premium questioned - HELD THAT - As AR contended that the AO had asked for all details regarding receipt of share process during the year in the original assessment proceedings. The same were supplied to the AO and the assessment order was passed after considering the explanation and details furnished before the AO. We find that no addition has been made by the AO in the assessment order u/s 143(3) except a small disallowance u/s 36(1) of the Act.. Therefore, it cannot be said that the AO has not applied his mind to impugned issue regarding share capital and share premium. CIT(DR) has not placed any evidence or material before us to counter the argument of the Ld. AR that the details regarding impugned issue were not provided to the AO and the same was not considered by the AO. Therefore, reopening is based on mere change of opinion on the same set of facts and the same issue already considered by the AO in the original proceedings u/s 143(3) of the Act. The reopening is based on mere change of opinion, which is not permissible, as held in the case of Kelivintor of India Ltd. 2010 (1) TMI 11 - SUPREME COURT We also filed that the decision of Godrej Projects Development Pvt. Ltd. 2024 (2) TMI 166 - BOMBAY HIGH COURT supports the case of the appellant. Under similar facts and circumstances of the case, the Hon ble Court held that the reopening is based on mere change of opinion and would amount to review of the assessment order, which is not permissible. It also held that receipt of share premium does not competitive income charged to tax under the Act. The case of the appellant is covered by the above decision. In view of the facts and the precedents discussed above. Therefore, the ground of the appellant is allowed. Addition u/s 56(2)(viib) - share premium receipt - HELD THAT - As clear from reading of section 56(2)(viib) of the Act that mischief of the said section is not attracted to a company in which public are substantially interested. The provisions of section 2(8)(b)(B) of the Act defines a company in which public are substantially interested . After careful consideration of the facts of the case in the light of the above statutory provisions, it is clear that the case of the appellant is not covered under the provisions of section 56(2)(viib) of the Act. We also find that the assessee covered by the clause (b) (B)(c) of the subsection (18) of section 2 of the Act because the share holding in the appellant s company is as follows (1) Future Venture India Ltd. (now known as Future Consumer Ltd.) 70%, (2) Godrej Agrovet Ltd. 19% and (3) Others 11%. Thus, appellant is a subsidiary of Future Venture India Ltd. Shares held by the Future group are not entitled to a fixed dividend whether with or without a further right to participate in profits. Clause (b) of section 2(18) applies to the said company since it satisfies the condition in clause (b)(A). The shares of Future Consumers Ltd. are listed on BSE and NSE since 10th May 2011. In view of the facts it is a company in which public are substantially interested and the appellant is deemed to be a company in which the public are substantially interested within the meaning of section 2(18) of the Act. It is thus evidently clear that provisions of section 56(2)(viib) are not applicable to the appellant company. Regarding valuation of shares, we are of the considered view that it was a commercial decision by the promoters of two companies who had agreed to rely on the valuation report which was relied upon while subscribing to the shares of the assessee company in FY 2009-10. In this regard, the appellant has relied upon the decision of the ITAT, Mumbai in the case of Green Infra Ltd 2013 (12) TMI 949 - ITAT MUMBAI where a newly created company had issued shares of ₹ 10 each at premium of ₹ 490 per share. During the assessment proceedings, the AO had observed that own funds were introduced by the assessee through shareholders under guise of revenue. The AO also questioned the authenticity of the valuation report. In the first appeal, the Ld. CIT(A) confirmed the addition. However, the ITAT decided the issue in favour of the assessee.

Summary

Issues Involved:
1. Addition u/s 68 on account of share premium.
2. Addition u/s 56(2)(viib) on account of share premium.
3. Interest paid on loan taken from Holding Company.
4. Validity of reopening u/s 147 of the Act.

Summary:

1. Addition u/s 68 on account of share premium (A.Y. 2011-12 & 2012-13):
The revenue challenged the deletion of the addition of Rs. 10,00,00,000/- made by the AO u/s 68 of the Income Tax Act, claiming the assessee failed to justify the share premium. The CIT(A) deleted the addition, noting that the identity and creditworthiness of the investors were established, and the transaction was genuine. The tribunal upheld the CIT(A)'s decision, stating that the valuation report prepared prior to Rule 11UA was valid and that questioning the share premium was beyond the scope of section 68.

2. Addition u/s 56(2)(viib) on account of share premium (A.Y. 2013-14, 2014-15, 2017-18):
The AO added Rs. 9,60,00,000/- u/s 56(2)(viib) for A.Y. 2013-14, Rs. 8,00,00,000/- for A.Y. 2014-15, and Rs. 12,00,00,000/- for A.Y. 2017-18, questioning the share premium. The CIT(A) deleted these additions, holding that the provisions of section 56(2)(viib) did not apply as the assessee was a subsidiary of a public company. The tribunal upheld the CIT(A)'s decision, emphasizing that the valuation was a commercial decision and the provisions of section 56(2)(viib) were not applicable.

3. Interest paid on loan taken from Holding Company (A.Y. 2011-12):
The AO disallowed Rs. 45,67,728/- paid as interest on loans from the holding company, arguing it was unjustified due to the assessee's losses. The CIT(A) allowed the deduction, and the tribunal upheld this decision, noting that the interest on ICDs was legitimate and could not be disallowed merely because the assessee incurred losses.

4. Validity of reopening u/s 147 of the Act (A.Y. 2011-12):
The assessee challenged the reopening u/s 147, arguing it was a change of opinion. The CIT(A) upheld the reopening, citing sufficient reasons to believe income had escaped assessment. The tribunal, however, found the reopening to be based on a mere change of opinion and not permissible, thus allowing the assessee's cross-objection.

Conclusion:
The tribunal dismissed the revenue's appeals and upheld the CIT(A)'s decisions, allowing the assessee's cross-objection regarding the reopening u/s 147. The tribunal emphasized the validity of commercial decisions and the inapplicability of section 56(2)(viib) to the assessee, a subsidiary of a public company.