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2024 (12) TMI 242 - AT - Income TaxAssessment u/s 153C - Transfer Pricing Adjustments - Whether payment towards equipment purchase was not at arms length price? - HELD THAT - We note that the entire basis of the present appeals is the transfer pricing orders wherein downward adjustments were made to the price paid for the equipment imported by the AE. The Assessee had filed an appeal to this Tribunal against the appellate order for Assessment Year 2013-14 (arising from the assessment under Section 143(3) and the TPO order). This appeal was disposed in RKM POWERGEN PRIVATE LIMITED 2024 (3) TMI 878 - ITAT CHENNAI wherein the downward adjustment was deleted in its entirety. This Tribunal, had after careful appraisal of the evidence, concluded that the price paid by the Assessee was at arm s length. Thus, addition u/s. 56(1) made by the AO based on the TP order alone cannot stand in the eyes of law. As observed that the assessment for Assessment Years 2013-14 and 2014-15 were originally concluded u/s. 143(3) on 31.3.2017 and 21.12.2016 respectively. The date of the search is 23.11.2015. The dates of the TP orders for Assessment Years 2013-14 and 2014-15 are 01.02.2017 and 20.12.2018 respectively, well after the search. Therefore, any assessments under Sections 153A/153C in respect of unabated assessments must be based on incriminating materials obtained during search proceeding and not based on post-search materials, in this case TP orders passed subsequent to search materials. Further, in respect of assessments under Section 153C the same principle was reiterated in DCIT v U.K. Paints Ltd. 2023 (5) TMI 373 - SC ORDER Even earlier held in PCIT v Vikas Telecom Ltd. 2021 (12) TMI 1386 - DELHI HIGH COURT had held that post-search enquiries cannot be the basis of assessments under Section 153A/153C. Therefore, the reliance placed by the AO on the TP orders passed after the search cannot be countenanced. We also accept the assesse s submissions that an Assessing Officer should not step into the shoes of a businessman to decide what should be the right price for issue of shares. This principle has been stated in several cases by the Hon ble Supreme Court of India, and cited by the AR. It has been repeatedly held by the Supreme Court in a number of cases that it was not open to the Assessing Officer to substitute his judgement over that of the businessmen. Moreover, in this case, the share premium was an international transaction with an associated enterprise that was duly reported in Form 3CEB and was referred to the TPO, who had not found any fault with the share premia. Therefore, it was not open to the Assessing Officer to hold that share premia was unduly inflated. Addition made u/s 56(1) being income from other sources of the assessee - Applicability of Section 56(1), which is a residual section to tax incomes that are not chargeable under other heads (Salaries, House Property, Business) and not a deeming provision to assess to tax receipts that are not income. Hence, Section 56(1) cannot be resorted to assess a receipt that does not constitute income. This proposition has been upheld by the hon ble Supreme Court of India in CIT v D P Sandu Bros. 2005 (1) TMI 13 - SUPREME COURT , where the Assessing Officer attempted to tax under Section 56 what could not be assessed under Section 45. Section 56(1) cannot be invoked since for it to apply a receipt should be income whereas share premia is capital in nature as held in Vodafone India Services Private Limited 2014 (10) TMI 278 - BOMBAY HIGH COURT The matter is now beyond any dispute because after the decision of Vodafone India case, the CBDT issued an instruction No 2 of 2015 noting that the Court had held that share premium was a capital account transaction that does not give rise to income and that the Board had accepted the said decision and directed that all field officers should adhere to the ratio decidendi of this judgement. This Instruction is binding on the Assessing Officer under Section 119 of the Act, as per the decision of the Hon ble Apex court in the case UCO Bank 1999 (5) TMI 3 - SUPREME COURT Therefore the action of the learned CIT Appeals in applying the CBDT Instruction to delete the addition cannot be faulted. Thus, the action of the ld.CIT(A) in deleting the additions made by the AO u/s. 56(1) on account of share premium at Rs. 240/- per share collected by the assessee through allotment of shares to the non-resident companies is upheld by dismissing the grounds of appeal of the revenue for both the assessment years 2013-14 and 2014-15.
Issues Involved:
1. Condonation of Delay in Filing Appeals 2. Addition under Section 56(1) of the Income Tax Act for Share Premium 3. Transfer Pricing Adjustments 4. Jurisdiction under Section 153C of the Income Tax Act 5. Treatment of Share Premium as Income Issue-wise Detailed Analysis: 1. Condonation of Delay in Filing Appeals: The Tribunal acknowledged a delay of 19 days in the filing of appeals by the revenue. The revenue provided a petition for condonation of this delay, citing reasonable cause. After considering the petition and hearing both parties, the Tribunal condoned the delay in the interests of justice, allowing the appeals to proceed for adjudication. 2. Addition under Section 56(1) of the Income Tax Act for Share Premium: The core issue was the addition of share premium received by the assessee from foreign investors as income under Section 56(1). The Assessing Officer (AO) argued that the share premium was in excess of the fair market value (FMV) determined by the Discounted Cash Flow (DCF) method and constituted unexplained income. The Commissioner of Income Tax (Appeals) [CIT(A)], however, deleted the addition, stating that share premium is a capital receipt and not income. The CIT(A) relied on the precedent set by the Bombay High Court in the case of Vodafone India Services Private Limited, which held that share premium is a capital account transaction and does not give rise to income. The Income Tax Appellate Tribunal (ITAT) upheld this view, noting that Section 56(1) is a residuary section meant for revenue receipts and cannot be used to tax capital receipts like share premium. 3. Transfer Pricing Adjustments: The Transfer Pricing Officer (TPO) had proposed downward adjustments to the cost of equipment imported by the assessee from MIPP International Limited, a related party. The AO used these adjustments to argue that the share premium was funded by inflated equipment costs, constituting a round-tripping of funds. However, the ITAT noted that the TPO's findings were limited to equipment transactions and did not pertain to share premium transactions. The Tribunal also observed that the TPO had not proposed any adjustments to the share premium in the relevant years, which implied that the share premium was at arm's length. 4. Jurisdiction under Section 153C of the Income Tax Act: The AO issued notices under Section 153C, which pertains to assessments based on incriminating material found during a search. The Tribunal highlighted that for unabated assessments, as in this case, any additions must be based on incriminating material found during the search. The Tribunal found that the AO's reliance on post-search materials, such as transfer pricing reports, was inappropriate. The ITAT cited the Supreme Court's ruling in PCIT v Abhisar Buildwell P Ltd, which stated that no additions could be made in the absence of incriminating material found during the search. 5. Treatment of Share Premium as Income: The AO treated the share premium as income, arguing that the premium was excessive and constituted unexplained income. The CIT(A) and ITAT disagreed, emphasizing that share premium is a capital receipt, not a revenue receipt, and thus cannot be taxed as income under Section 56(1). The Tribunal noted that the share premium transactions were reported in compliance with the Foreign Exchange Management Act (FEMA) and were accepted by the Reserve Bank of India (RBI). The ITAT also referred to several judicial precedents, including the Supreme Court's ruling in CIT v D P Sandu Bros, which held that Section 56(1) cannot be used to tax non-income receipts. Conclusion: The ITAT dismissed the revenue's appeals for the assessment years 2013-14 and 2014-15, upholding the CIT(A)'s decision to delete the additions made under Section 56(1) for share premium. The Tribunal concluded that share premium is a capital receipt not subject to tax under the Income Tax Act, and the AO's reliance on transfer pricing adjustments and post-search materials was misplaced.
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