2018 (5) TMI 502 - AT - Income Tax

Addition made on share premium u/s.68 - satisfactory explaination - nature of share premium - Justification of the excess premium received compared to its intrinsic value - Held that - Revenue has already accepted the share capital to the tune of face value of equity shares amounting to ₹ 4.19 crores raised by the assessee from these two non-resident holding companies during the year as no additions were made, wherein by implication ingredients of Section 68 were deem to have been fulfilled and even ECB to the tune of ₹ 7.50 crore raised by the assessee from Asia Compound Limited, Hongkong during the impugned assessment year was accepted by Revenue and ingredients of Section 68 was accepted to be fulfilled by the assessee as no addition has been made by Revenue. The incriminating information used by the AO to discredit the valuation of ₹ 20 per equity shares arrived at by assessee using DCF method is based on perverse finding of facts recorded by the AO, which findings of the AO are already rejected by us. We have no hesitation in confirming/sustaining well reasoned appellate order of CIT(A) keeping in view factual matrix of the case and hence no addition is warranted towards share premium of ₹ 4,18,65,830/- received by the assessee from its holding companies namely Asian Compounds Limited, Hongkong and Finproject Asia Limited, Hongkong, who are non resident entities as the said share premium is on account capital transaction and is not an income within charging Sections of the 1961 Act. So far as deeming fiction of Section 68 is concerned, there is no reliable incriminating finding of fact available on record justifying our interference to the well reasoned order of learned CIT(A) which we sustain. Thus, the appellate order of learned CIT(A) stood confirmed. Revenue fails in this appeal which stood dismissed. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made on share premium under Section 68 of the Income-tax Act, 1961.
2. Justification of excess premium received compared to intrinsic value.
3. Application of Section 56(1) and Section 78 of the Companies Act, 1956.
4. Compliance with FEMA and RBI regulations.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made on Share Premium Under Section 68:
The Revenue appealed against the CIT(A)'s decision to delete the addition made on share premium under Section 68. The AO had added ?4,18,65,830/- to the assessee's income, arguing that the share premium was not satisfactorily explained. The CIT(A) found that the share premium was received from non-resident companies and relied on judicial precedents, including the Supreme Court's decision in CIT vs. Allahabad Bank Ltd., which held that share premium is a capital receipt and not taxable as income.

2. Justification of Excess Premium Received Compared to Intrinsic Value:
The AO questioned the justification for the share premium, arguing that the assessee's financial condition did not support the premium charged. The assessee countered by stating that the shares were valued using the Discounted Cash Flow (DCF) method, as required by FEMA and RBI regulations. The CIT(A) accepted this explanation, noting that the valuation was certified by a Chartered Accountant and complied with legal requirements.

3. Application of Section 56(1) and Section 78 of the Companies Act, 1956:
The AO argued that the share premium should be taxed under Section 56(1) as income from other sources and claimed that the assessee violated Section 78 of the Companies Act by not utilizing the share premium for specified purposes. The CIT(A) disagreed, stating that the share premium was used for business purposes, such as setting up a manufacturing unit, and not for the purposes specified in Section 78. The CIT(A) held that the AO misunderstood the application of Section 78, which pertains to the adjustment of liabilities or intangible assets with the Share Premium Account, not the utilization of cash received.

4. Compliance with FEMA and RBI Regulations:
The assessee argued that the share premium was in compliance with FEMA and RBI regulations, which require shares to be valued using the DCF method. The CIT(A) agreed, noting that the RBI had accepted the valuation and the transaction was recorded in compliance with FEMA guidelines. The CIT(A) also referenced CBDT Instruction No. 2/2015, which accepted the Bombay High Court's decision in Vodafone India Services Pvt. Ltd. v. Union of India, holding that share premium received from non-residents is a capital transaction and not income.

Conclusion:
The ITAT upheld the CIT(A)'s decision to delete the addition made under Section 68, agreeing that the share premium was a capital receipt and not taxable as income. The ITAT found that the AO's findings were based on incorrect facts and that the assessee had complied with all legal requirements, including FEMA and RBI regulations. The appeal of the Revenue was dismissed.