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TMI Blog2018 (12) TMI 1316X X X X Extracts X X X X X X X X Extracts X X X X ..... acvance/dr balance of creditors of capital nature, and addition of capital expenditures pending for capitalization of Rs. 4,83,44,824/- 4. By the impugned order CIT(A) deleted the addition made u/s.68 after observing as under:- "4.3.1. I have considered the stand of the AO as well as the facts of the case, documents produced before me and arguments advanced by Ld. AR. The appellant, during impugned year, had received the share application money from understated parties :- a) M/s. Hilton Finance Ltd Rs.3,09,36,000/- b) M/s, Kunja Finlease Pvt Ltd Rs.13,03,67,800/- c) M/s. Shinning Merchants Pvt Ltd Rs.4,61,94,200/- d) -- M/s. Hotel Padmini Palace Pvt Ltd Rs.10,60,00,000/- - Rs.31,34,98,000/- During the appellant proceedings, the AO was provided with the details and documents filed by the AR and were required to give comments. The AO, in Remand Report/ had summarized the finding of his predecessor and justified the addition on account of share application money at para 6.1 of the Remand Report reproduced as under :- "(1) Addition on account of Share Application Money: a. The assessee company received Rs. 3,34,98,035 from following parties M/s.Hilton ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the genuineness of share application money received during the year. However, it is observed that AO, in Remand Report, had accepted that the documents relied during appellate proceeding are available on assessment record. The AO in Remand Report dated 24/09/2015 accepted the fact that majority details had already been considered in the assessment proceedings and relevant finding of AO stated in para 5 of Remand Report is as under :- "however, it is noticed that the assesses has submitted majority of the details, which have now been filed as additional evidences before your goodself and the same have already been considered in the assessment proceedings." Further Addl. CIT vide letter dated 12/10/2015 forwarding the AO's Remand Report ' had also accepted that the details filed before this office are been filed before the AO which were considered by him during assessment proceeding and such are not required to be treated as additional evidence. The relevant portion of Addl. CITs letter dated 12/10/2015 is as under "Further, the details filed before your goodself as additional evidences have already been filed before the AO, which were considered by him during Assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt had discharged its onus to prove the transaction. The AO had not brought any contrary documentary evidence on record to disprove the transaction and involvement of unaccounted money belonging to the appellant. It is observed that AO did not issue the notice u/s.133(6) to share applicants or to the banker of the share applicants to verify the source of funds, In any case, the appellant is not required to prove the source of source of funds. On perusal of the bank statements of share applicants, it is observed that there are no cash deposits -corresponding to cheques issued towards share application money. Even in remand report, the AO had not brought any contrary material to disprove the transaction and had not found any fault in the documents furnished by the appellant. The AO, in remand report, had merely .summarised the finding of his predecessor as stated in assessment order. The appellant had reasonably discharged its onus to prove the identity and credit worthiness of the share applicants and genuineness of the transactions on furnishing the PAN details, registration certificate, share application forms, board resolution of share applicants, affidavit and confirmation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xmann 253 Mum-ITAT) wherein it is held that it is the prerogative of the board of directors of the company to decide the share premium and it is the wisdom of the share holders whether they want to subscribe to such heavy share premium. 4.3.3. Before proceeding further, it will be worthwhile to examine whether amount of share premium can be treated as capital receipt or revenue receipt, In this regard, it may be stated that various Courts have held such receipt as capital receipt. I. Issue as to whether share premium be treated as capital receipt or revenue receipt: A.I. Submissions as regards treatment of share premium based on the commercial accounting principles: A question arises as to whether 'share premium' be treated as capital receipt or revenue receipt. The expression "share premium" is not defined anywhere under the Income-tax Act, 1961. In the following decisions courts have held that words which are not specifically defined must be taken in their legal sense, or their dictionary meaning or their popular or commercial sense as distinct from their scientific or technical meaning: * CIT versus Taj Mahal Hotel (82 ITR 44) (SC); * Nawn versus CIT (106 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance sheet and Profit & Loss account. Sub-sec (1) of section 211" of the 1956 Act provides that every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall be prepared in accordance with the form set out in part I of Schedule VI of the 1956 Act. As per part I of Schedule VI, subscription received issue of equity share is to be shown under the sub-heading "share capital" and premium on issue of such shares is to be shown under the heading "reserves and surplus" on the liabilities side of the balance sheet. Thus, as per the commercial accounting principle, the issue of equity shares and share premium is required to be treated as "shareholders funds". The Supreme Court in CIT vs. U.P. State Industrial Development Co-operation (225 ITR 703) while dealing with the question as to -whether of cost of shares can be determined based on the commercial accounting principles held that the commercial accounting principle can be considered in determining the question of taxability of the subject. The specific finding of the Apex Court reads as under: "In order to determine the question of taxability, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pheld the action of the assessing officer. On further appeal, the Tribunal treated the share premium as capital receipt. The specific findings of the Tribunal reads as under: "2., We have considered the issue and examined the record. There is no dispute with reference to the fact that assessee allotting the shares v.-ith a premium and the amounts being received by way of share premium being shown in the Balance Sheet as such. There is also no dispute with reference to the fact that the assessee has not commenced the business in the impugned assessment year. It is also a fact that the assessee company got merged with M/s. SSI Limited, which was a public limited company; whose shares were quoted at relevant point of time at more than Rs. 55. Therefore, issuing shares at a premium by the company cannot be faulted because it was a decision taken by the investors to their interest. There is also no dispute with reference to the fact that the shares were issued at a premium to a local group, M/s. Karvy and also to NRIs at premium rates which was stated to be after negotiations. The share premium cannot be brought to tax as it is a capital receipt and not on revenue account. Provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer is directed to delete the addition made in that behalf." In the above decision the assessing officer has invoked section 56(1) of the Act for treating the share premium as income subject to tax under the head "Income from Other Sources", this fact car. be evident from paragraph 22 of the Tribunal's order in PVP's case (supra) wherein the Tribunal has produced the finding of the Commissioner of Income Tax (Appeals) which reads as under: "7.4 I have considered carefully the facts and evidence. Firstly, the appellant has argued that as per section 56(2), the excess share premium is to be treated as income from other sources. However, the assessing officer is wrong in applying that section to the currernt year because the amendment in the above section is applicable for the assessment year 2013-14 onwards. In this regard, I find that the Assessing Officer has not taken recourse to this section. Once the AO has not applied the section, any arguments of that section's applicability are not valid." In the decision before the Hyderabad Tribunal, the market value of share of the successor company was considered. B. Issue as discussed in the case of Om O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premium issued on shares and premium had to be transferred to a separate account called the share premium account." C. Issue as discussed in the case of Asiatic Oxygen Ltd., The Calcutta Tribunal in the case of Asiatic Oxygen Ltd. Vs. DCIT(49 ITD 355), has held that while dealing with the question as to whether amount received on reissue of forfeited shares credited to share premium account was capital receipt, held that such credit to share premium account be treated as on account of capital account. The facts of this case were as under: During the assessment year 1984-85, the assessee in this case has claimed that the. amount forfeited by it for default in payment of call money as capital receipt and exempt from tax. Similarly, exemption was claimed in respect of reissue of the forfeited shares. The amount forfeited was credited by the assessee to 'capital reserve' account and premium received was credited to 'share premium' account. The assessing officer held that the aforesaid amounts were revenue receipts assessable in the hands of the assessee. On appeal, the Commissioner of Income Tax (Appeals) upheld the order of the assessing officer. On further appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re capital of the company. Schedule VI to the Companies Act which contains the form of balance sheet in Part I thereof also indicates that the share premium account has to be shown as reserve under the head 'Reserves and surplus1 in the liability side of the balance sheet. Having regard to the aforesaid legal position, it could be said that the share premium amount could not be treated as income of the assessee. It did not arise out of any trading transaction of the assessee. It related to the capital structure of the assessee and had to be treated as a capital receipt not liable to tax." D. Issue as discussed by the Hon'ble Supreme Court in the case of Durga Das Khanna's : *The Supreme Court in its early decision in the case of Durga Das Khannav. CIT(72 ITR 796} held that prima facie premium is not income and it is for the income tax authority to show that existence of facts which would make it revenue receipt. The above decision was rendered by Supreme Court in relation to premium or salami of long lease transaction. However, the Calcutta Tribunal in Asiatic Oxygen Ltd. (supra) has followed for above decision while dealing with the issue as to whether amount r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the face value of Rs. 10 each at a premium of Rs. 490 per share. The said business plan alongwith the justification for issue of shares at a premium was prepared and presented to subscribers on April 14, 2008. The assessee did not have any investments on the date of proposal to issue shares at a premium, hi other words, the book value of shares of a company was of Rs. 10 per share. The assessee has treated the share premium as receipt of capital in nature. The receipt on account of share premium has been invested by the assessee in units of IDFC, being a group company, investment in shares of subsidiary companies, bank FDR's, advances to subsidiary, etc. The AO treated the share premium as income under section 56(1) and taxed the same under the head "Income from other sources". On appeal, the Commissioner of Income Tax (Appeals) upheld the action of the AO. On further appeal, the Hon'ble Tribunal held as under: "No doubt a non-est company or a zero balance company asking for a share, premium of Rs. 490 per share defies all commercial prudence, but at the same time one cannot ignore the fact that it is a prerogative of the Board of Directors of a company to decide th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of taxability of receipt on account of shares issued at par and at premium. In this case the shares were issued at par by the assessee to its employees. However/ the market value of the shares was higher than the par value at which the shares were issued to the employees. The assessee company claimed that the shares were issued at par to further the business interest and to secure benefit of the assessee company and that the sum representing the difference between the par value and the market value was the sum foregone by the assessee for the purpose of its business and was consequently deductible. While dealing with this contention, it was held by Viscount Caldecote (Lord Chancellor) at page 96 as under: "In my opinion this appeal largely turns on the nature of the right of a company to issue it shares at any price and on any conditions it thinks fit, provided that it does so in good faith for the benefit of the company and does not issue them at a discount: See Helder v. Dexter.Vpon an issue of shares the assets of the company are increased by the amounts obtained from the subscribers. These amounts are obviously not profits or gains of the trade, and they are not liable to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treatment of amount forefited on non-receipt of call money held that issue of non-convertible debentures is not business of assessee. Hence, the forfeited amount for non-payment of call money cannot be treated as income of the assessee in this case. IV. Issue with regard to the nature of receipt - Capital vs. Revenue The Rajasthan High Court in the case of Eklingji Trust vs. CIT (158 ITR 810} held that while dealing with the question as to whether receipt of annuity in perpetuity by way of compensation was in the nature of capital receipt laid down the following principles for determining whether receipt is capital or revenue in nature: "The principles applicable in determining whether a particular amount received by the assessee is capital or revenue are- (1) the fact that certain payment is measured by the estimated annual yield or profits does not make the payment an income receipt; (2) the fact that the receipt is a periodic receipt or a single receipt is immaterial for the purpose of determining its nature; an income receipt is not necessarily recurring, nor a capital receipt necessarily single; (3) the name given to the transaction by the parties concerned does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The interest on the debentures would always be taxable, but the amount by which the redemption price of debentures exceeds the issue price cannot be brought to tax. It is not income but a capital sum which a company bears in consideration of the risk attaching to the investment which is borne by the investor. From the above, it can be seen that when the debentures are issued at a certain coupon rate and are subject to redemption at a premium then, in that case, such premium may be treated as capital in nature. Drawing an analogy from the ratio laid down by the courts in above decision, even the premium issued on shares be treated as receipt of capital in nature. VI. Issue as regards applicability of clauses fviia) and fviib) of sections 56(2} of the I.T. Act: The Hyderabad Tribunal in the case of M/s. PVP Ventures Limited V/s. DCIT (ITA No.647/Hy4/'2011) held that while dealing with a question as to whether share premium be treated as revenue receipt or capital receipt held that it be treated as capital receipt. In this case the AO has invoked section 56(1) of the Act and not section 56(2) of the Act. The Appellant has made submissions before the first Appellate Authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or at a consideration lower than the fair market value then, the differential amount between the fair market value and the amount of consideration paid/ payable by such recipient company shall be deemed to be income of such recipient company. It can be seen that above clause provides for the following conditions: (a) There should be transfer of shares; v (b) Such shares shall be of a company in which public is not subs tain ti ally interested; (c) Transferor can be any person as defined u/s. 2(31) of the Act; (d) Transferee shall be firm or a company, not being a company in which public is substantially interested; (e) Transfer should be either without consideration or at a consideration lower than the fair market value of such shares; and (f) The transfer should take place on or after June 1, 2010. If all the above conditions are satisfied then the provisions of clause (viia) shall apply and not otherwise. B. issue as regards applicability of section 56(2)(viib) of the Act: The aforesaid section provides that where an assessee, being a company, not being the company in which public are substantially interested, receives in any previous year, from any resid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeds the face value of such shares, then the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income tax. An exemption was provided in a case where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund. (i) It has now been further provided that such excess share premium is included in the definition of "income" under sub-clause (xvi) of clause (24) of section 2. (ii) Considering that the proposed amendment may cause avoidable difficulty to investors who invest in start-ups where the fair market value may not be determined accurately, it is proposed to provide an exeihptibri1 to any other class of investors as may be notified by the Central Government. These amendments, will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years." [Clauses 21,3] From the above, it can be seen that the provisions of section 56(2)(viib) have been inserted expressly w.e.f. assessment year 2013-14, hence, based on the ratio laid down by the Apex Court in Nation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icable to earlier assessment years. The Apex Court further held that non-compete fee received during assessment year 1997-98 would be treated as capital receipt and not revenue receipt. The facts of the case were as under: During the assessment year 1997-98 the assessee received non-compete fee under an agreement dated March 31,1997 whereby assessee aggrieved that it shall not cam' out directly or indirectly the business hitherto carried on by it on the terms and conditions appearing in the agreement. The assessee claimed the said receipt as capital in nature. However/ the assessing officer treated the receipt as revenue in nature. The first and the second Appellate authorities have held that receipt is capital in nature. However, the High Court reversed the decision of the Tribunal. On further appeal, the Supreme Court held as under: "The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non-competition agreement u-as a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from " April 1; 2003. It is well settled that a liability cannot be created retrospectively. In the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner's case that neither the capital receipts received by the Petitioner on issue of equity shares to its holding company, a non-resident entity, nor the alleged short-fall between the so called fair market price of its equity shares and the issue price of the equity shares can be considered as income within the meaning of the expression as defined under the Act" , (ii) The CBDT vide instructions No - 02/2015 dated 29/1/2015 directed the revenue not to file the SLP before Hon'ble to Supreme Court and directed Ld AOs to accept the High Court order. The relevant instructions is as under :- "In reference to the above cited subject, I am directed to draw your attention to the decision of the High Court of Bombay in the case of Vodafone India Services Pvt. Ltd for A.Y.2009-10 (WP No.871/2014) = 2014-TIM9-HC-MUM-TP, wherein in the Court has held, inter-alia, that the premium on share issue was on account of a capital account transaction and does not give rise to income and, hence, not liable to transfer pricing adjustment. .. It is hereby informed that the Board has accepted the decision of the High Court of Bombay in the above mentioned Writ Petition. In view of the acceptanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these undisputed facts, it can be safely concluded that the initial burden of proof as rested upon the assessee has been successfully discharged by the assessee. Even if it is held that excess premium has been charged, it does not become income as it is a capital receipt. The receipt is not in the revenue field. What is to be probed by the AO is whether the identity of the assessee is proved or not. In the case of share capital, if the identity is proved; no addition can be made u/s.68 of the Act We draw support from the decision of the Hon'ble Supreme Court in the case of Lovely Exports Pvt Ltd. 317 ITR 218. We, therefore do not find any error or infirmity in the findings of the Ld. C1T(A). Ground No.l is accordingly dismissed. (iv) In the case of Green Infra Ltd vs. ITO reported in 38 taxmann.com 253 (Mum-ITAT) dated 23/8/2013, Hon'ble Mumbai ITAT decided that "During previous year ending on 31-3-2009, it had collected share premium on allotment of shares of face value of Rs. 10 each at a premium of Rs. 490 per share - It had credited said amount in balance-sheet under head share premium account - It claimed that share premium was a capital receipt not exigible to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare application money is received by the assessee-company from alleged bogus shareholders, whose names are given to the AO, then" the Department ""Can always" proceed against them and "if necessary reopen their individual assessments. In the case in hand, it is not disputed that the assessee had given the details of name and address of the shareholder, their PAN/GIR number and had also given the cheque number, name of the bank. It was expected on the part of the AO to make proper investigation and reach the shareholders. The AO did nothing except issuing summons which were ultimately returned back with an endorsement "not traceable". In our considered view, the AO ought to have found out their details through PAN cards, bank account details or from their bankers so as to reach the shareholders since all the relevant material details and particulars were given by the assessee to the AO. In the above circumstances, the view taken by the Tribunal cannot be faulted." (vii) In the case of CIT vs. Lovely Exports (P) Ltd reported in 216 CTR 195, Hon'ble Apex court decided that; "If the share application money is received by the assessee company from alleged bogus shareholders, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee had filed documentary evidence to prove genuineness of share application money consisting of (i) share application forms; (ii). copies of bank accounts of share applicants; (iii) copies of income tax returns of share allottees; (iv)balance sheets; and (v) copies of share allotment certificates and of Board's resolution of the share applicants -Identity of applicants was established by production of copies of PAN cards and registration certificate with the Registrar of Companies - Financial capacity was also proved by filing of copies of the bank accounts from where the share application money was transferred through banking channels to the assessee- Assessee had discharged onus placed upon him by 68- Concurrent finding of facts also rendered by CIT(A) and tribunal in this regard - No substantial question of law arises- Revenue's appeal Dismissed" (xi) In the case of Jaya Securities Ltd vs. CIT reported in 166 Taxman 7 (SLP filed by department dismissed), Hon'ble Allahabad High Court decided that : "Whether any addition under section 68 can be made in respect of investment made by different persons in share capital of assessee company, limited by shares/ whether pub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a (ROC), Certificate of incorporation of the share applicants which established the identity of share applicants. The CIT(A) also observed that assessee had furnished the copies of share application forms, board resolution and confirmation of account and Ledger accounts to prove the genuineness of the transaction. A finding has also been recorded by the CIT(A) to the effect that assessee had filed IT acknowledgement receipts, balance sheets as on 31/03/2011, bank statements and assessment order u/s.143(3) for the A.Y.2012-13 of M/s. Shining Merchants Pvt. Ltd., and for A.Y.2011-12 of M/s. Hotel Padmini Palace Pvt. Ltd., to prove the creditworthiness of the share applicants. The CIT(A) also observed that assessee had filed affidavit for the share applicants confirming the transactions entered with the assessee. It was further observed that the AO in the remand report had not disputed the correctness of the above said documents which reasonably establishes the identity and genuineness of the transaction and which also proves creditworthiness of the share applicants. As per CIT(A), once assessment order u/s.143(3) had been passed in the case of share applicants named M/s. Shinning Me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociates Pvt. Ltd who had valued the Land and Building belonging to the assessee at Rs. 362.93 Crores and determining the net worth of the company at Rs. 224.11 Crores and ascertaining the Net Asset Value (NAV) per share at Rs. 406.63 per share. Accordingly, it was found that share application money received by the assessee @Rs.200/- per share is fair price after referring to the various documents filed before the lower authorities. The CIT(A) concluded that assessee has furnished adequate documents to prove the identity, genuineness and creditworthiness of the share applicants. After justifying the share premium charged by the assessee, the CIT(A) observed that addition u/s.68 cannot be made of share premium money since such is a receipt on capital account and is not of revenue nature. The detailed finding so recorded by CIT(A) are as per material on record. We further found that provisions of Section 56(2)(viib) inserted by Finance Act, 2012 had been made applicable from A.Y.2013-14 and does not apply to the year under consideration i.e., for the A.Y.2012-13. Our this view is supported by the decision of ITAT in the case of M/s Gagandeep Infrastructure Pvt. Ltd and M/s Green Infr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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