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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 ..... ion of share applicants, affidavit and confirmation of the share applicants, IT returns, balance sheet and bank statements of share applicants and assessment orders u/s 143(3) in respect of two share applicants. We found that CIT(A) has dealt with the issue threadbare in respect of each share applicant and after applying various judicial pronouncements to the facts of the case and the documents placed on record reached to the conclusion that all the three ingredients of Section 68 i.e., identity, genuineness and credit worthiness of share applicants are duly complied with, accordingly, no addition is warranted. The findings so recorded by CIT(A) are as per material on record which do not require any interference on our part. - Decided against revenue - ITA No.732/Mum/2016 - - - Dated:- 5-10-2018 - Shri R.C. Sharma, AM And Shri Sandeep Gosain, JM For the Assessee : Shri Prakash Jhunjhunwala Shri T.P. Dangi For the Revenue : Shri N.N. Singh ORDER PER R.C.SHARMA (A.M) : This is an appeal filed by the Revenue against the order of CIT(A) 9, Mumbai dated 06/11/2015 for A.Y.2011-12 in the matter of order passed u/s.143(3) of the IT Act. 2. Rival conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith regard to share application money of ₹ 11,04,44,235 and submitted certain details to the extent of ₹ 20.29 crores. c. After a detailed discussion on the provisions of Sec.68 of the Act and various judicial pronouncements, the AO held that mere filing of PAN would not be a sufficient compliance to prove the identity of the person and therefore, the assessee failed to establish the identity of the parties in question. d. As regards creditworthiness and genuineness of the transactions, the AO noticed that no doubt the money was received through banking channels, but did not reflect actual genuine business activity. The AO noticed that the share subscribers did not have their own profit making apparatus and were not involved in business activity, but they merely rotated money, which was coming through bank accounts, and the bank accounts did not reflect the creditworthiness or even genuineness of the transactions. e. The AO further noticed that substantial investment has been made in a private limited company at a premium of ₹ 190 per share and it is not a case of the assessee that they had a proven good past track record justifying a hefty premium, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Ld. AR also relied on understated judicial decisions :- a) Pra bhakar S. Shah vs. CIT - 251ITR1 (Bombay - HC) b) Shahrukh Khan vs. DOT- 13SOT61 (Mum- ITAT) c) CIT vs, Ravindranathan Nair - 265 ITR 217 (Kerala - HC) I find that the documents relied before me are available before the AO as admitted by the AO and Addl. CIT in the Remand Report. The AO, in Remand Report, had not pointed any discrepancy in documents furnished by appellant on record. Further, the documents relied before me goes to the root of the case and are necessary to be considered while deciding the appeal and following judicial decisions cited supra, I admit the documents filed as additional evidence u/r.46A of I.T. Rule, 1962 and decide the appeal hereinafter. 4.3.2. On perusing of the documents furnished on record, it is observed that the appellant had filed the PAN card, CIN Master Data (ROC), Certificate of incorporation of the share applicants which established the identity of share applicants. The appellant had furnished the copies of share application forms, board resolution and confirmation of account and Ledger accounts to prove the genuineness of the transaction. The ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the appellant had obtained a long term lease from a share applicant named M/s. Hotel Padmini Palace Pvt. Ltd on entering into an agreement on 16/11/2010 on debiting the account of capital work in progress and correspondingly crediting the share application account. The appellant had also furnished the confirmation of account, property card and affidavit of such share applicant confirming the transaction with the appellant. There is substantial force in alternate argument of Ld. AR that the appellant had not received any money from the share applicant named M/s. Hotel Padmini Palace Pvt. Ltd, thus addition u/s.68 cannot be made and utmost the capital WIP could be reduced since there is a nexus of share application with capital WIP. The appellant also furnished the valuation report certified by M/s. Nenawati Associates, CA and valuation report of the property valuer M/s.Kamtech Associates Pvt. Ltd who had valued the Land and Building belonging to the appellant at ₹ 362.93 Crores and determining the net worth of the company at ₹ 224.11 crores and ascertaining the Net Asset Value (NAV) per share at ₹ 406.63 per share. Accordingly, argument of Ld. AR that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny Ltd [(1985) Tax L R 2948(SC) Special Commissioner versus Pernsel (3 TC 53, 94) (HL); John Hudson versus Kirkness (36 TC 28) (HL); Eduard versus Clinch (50 63C367, 409-10) (HL); CIT versus Gaekwar Foam (35 ITR 662); Ramachandra versus CIT (27 ITR 667); CIT versus Patel (106 ITR 424, 432); Surajratan versus CIT (106 ITR 576, 583); and CIT versus Karthikeyan (124 ITR 85, 91). Based on the settled legal position referred to above, the meaning of the word share premium is to be interpreted accordingly. The expression 'share premium' is defined vide paragraph 15.09 of the Guidance Note on the terms used in the financial statements issued by The Institute of Chartered Accountants of India ( ICA1 ), the highest accounting body of the country, which reads as under: 15.09 Share Premium The excess of the issue price of shares over their face value. At page no. 1207 of the Guide to the Companies Act by A. Ramaiya, 17th Edition 2010 published by LexisNexis Buttenvorths Wadhwa, Nagpur, the Author has defined the share premium as under: The expression 'premium' is not defined. It may be that if, over and above th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes . In the following decisions, courts, including the Apex Court, have held that commercial accounting principles be considered to determine the nature of deduction/taxability: CIT vs. U.P. State Industrial Development Corporation Ltd. (225 ITR 703) (SC); British Paints India Ltd. vs. CIT (188 ITR 167) (SC); Challapalli Sugar Ltd. vs. CIT (98 ITR 167) (SC); Kedarnath Jute Manufacturing Co. Ltd. vs. CIT (82 ITR 363) (SC); and Miss Dhun Dadabhoy Kapadia vs. CIT (63 ITR 651) (SC). II. Issue as regards treatment of share premium as capital receipt: A, In this regard, reference may be made to the decision of Hyderabad Tribunal in M/s. PVF Ventures Limited ; The Hon'ble Hyderabad Tribunal in the case of M/s. PVP Ventures Ltd. vs. DCIT (ITA No. 647/Hyd/2011), has held that while examining the question as to whether share premium be subject to tax under the head Income from Other Sources , the Tribunal held that such premium be treated as capital in nature. The facts of this case were as under: T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any allegation of fraud or quid pro quo for any illegal transaction or any type of unjust enrichment or without any justification for receiving so much premium, in the absence of legal provision the capital receipt on premium account cannot be considered as income as made out by the Assessing Officer and the CITY A). In this case assessee justifies the premium on proposed merger of the assessee company with another public listed company by name M/s. SSI Ltd, whose shares are being traded at a higher price than issue price, which became reality after wards. 26. In the case of Addl. OT V/s. Om Oils and Oil Seeds Company (152 ITR 552), the Hon'ble Delhi High Court held that the share premium received was not taxable, observing that the amount was not a revenue receipt includible in the total income of the assessee company. S.78 of the Companies Act, 1956 treats the premium as a special class of capital: the distribution of the share premium by way of dividend was not permitted and it is taken out of category of divisible profits. S. 78 also provided for application of premium received on issue of shares and the premium had to be transferred to a capital account called 'Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that while dealing with the question as to whether premium on issue of shares be treated as revenue receipt includible in total income of assessee, held that premium on issue of shares is to be regarded as money paid on capital account and not on revenue account. The facts of this case were as under: The assessee company owns a building in the heart of Delhi. Its main business was to organise forward trade in oil and oil seeds. This trading was suspended by Forward Markets Commission for short time and thereafter it was resumed and then it was subsequently banned. Thereafter, the assessee could not do its business for long time.. It was having unissued equity share capital which was issued by the assessee company at a premium of ₹ 1000/- per share. The shares were allotted and the allottees were also given office accommodation in the building owned by the assessee. The assessing officer held that the assessee devised the novel method of charging revenue receipts from tenants under the guise of share, premium and that the share premium was neither an advance nor deposit to be adjusted against future rent and, therefore, assessed this premium amount as subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all money on the - day appointed for payment thereof, the Board of Directors may serve a notice on the shareholders regarding payment of the call money together with interest, if any. The provisions of the Companies Act, as contained in the Table A of Schedule I, indicate that forfeiture of shares is not a business or trading activity of the Company. The forfeiture of shares is an act of the company in respect of its capital structure. Any profit which arises on the forfeiture of the shares cannot therefore, be treated as the company's normal trading transaction giving rise to any income liable to tax under the Income-tax Act. The Schedule VI - Part I of the Companies Act which contains the form in which the balance-sheet is to be prepared by the company indicates that all capital reserves of the company should be disclosed under the heading 'Reserves and surplus' in the liability side of the balance sheet. The assessee had credited the amount in respect of the forfeited shares under the head 'Capital reserve'. Thus the Companies Act itself treat the profit on forfeiture of shares as a capital reserve not: available for distribution as dividends. It was, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l receipt. The Tribunal in his case held that the amount forfeited for default in payment of call money as also share premium on reissue of forfeited share be treated as receipt on capital account. Similarly, in the following decisions courts have held that amount forefeited by the assessee for default by shareholder in payment of call money and credited to 'capital reserve account' be treated as revenue receipt: Travencore Ruber and Tea Co. Ltd. vs. CIT (243 ITR 158) (SQ; Multan Electric Supply Co. Ltd., In.re (13 ITR 457) (Lah.); Prism Cement Ltd. vs. JCIT (Mum. Tribunal) (101ITD103); DOT vs. Brijlaxmi Leasing and Fin. Ltd. (118 ITD 546) (And.); and M/s. Primeslots Properties (P) vs. DCIT (226/Pnj/2013) The Calcutta Tribunal in Asiatic Oxygen Ltd. (supra) held that share premium received by the assessee stands on the same footing as that of amount forfeited for non-payment of call money. In other words, the Calcutta Tribunal held that receipt of money on account of issue of securities is on capital account. Since, the share premium stands on the same footing as that of share capital/ receipt of share premium may also be treated as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shareholders .whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land. Details of subscribers were before the Revenue authorities. The AO has also confirmed .the transaction from the subscribers by issuing notice under section 133(6). The Board of Directors contain persons, who are associated with IDFC group of companies, therefore, (heir integrity and credibility cannot be doubted. The entire grievance of the Revenue revolves around, the charging of such huge premium so much so that the Revenue authorities did not even blink their eyes in invoking provisions of section 56(1). A simple reading of section 56(1) shows that income of every kind which is not to be excluded front the total income shall be chargeable to incometax. The emphasis is on that 'income of every kind', therefore, to tax any amount under this section, it must have some character of income . It is a settled proposition of law that capital receipts, unless specifically taxed under any provisions of the Act, are excluded from income. The receipts directly relating to the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts for Income-tax.lt may be said that these amounts are of the nature of capital, but I prefer for the present purpose to say that beyond all doubt they are not profits and gains arising or accruing from a trade, for that does directly to the question which arises under Schedule D. What I have said is equally true whether the shares are allotted at par or at a premium. The sum of ₹ 11,625 which in this case the company might hypothetically have received for premiums was not an item in its profits and gains. In the ordinary course such a sum would be carried to a reserve account in the balance sheet: but carrying it to some account in the profit and loss account would not have affected the matter. It would not be an item of profit of the trade. Indeed the issue of shares by a limited company is not a trading transaction at all. The corporate entity becomes protanto larger, but the receipts of the trade on the one hand and the amount of the costs and expenditure necessary for earning these receipts on the other remain unaltered; and it is the difference between these two sums which is taxable under Schedule D. It is well settled that profits and gains must be ascertained on or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not necessarily decide the nature of the transaction. In such a situation, the question always is what is the real character of the receipt, not what the parties call it. The Hon'ble Supreme Court in the case of Ke tie well Bullen Co. Ltd. v. CIT (53 fTR 261) held that what is received for loss of capital is capital receipt and when there is profit in trading transaction, is a taxable income. Again the Hon'ble Supreme Court in CIT v, Prabhu Dayal (82 ITR 804) has hed that, the question whether a particular receipt is capital or of income ultimately depends on the facts of a particular case. The Court of Appeal in Morely (Inspector of Taxes) v. Tattersall (7 ITR 316) held that if a particular amount is not received as a trading receipt at die first instance it would not be subsequently recorded as a trading receipt due to change of circumstances. The proposition to be derived is that since the share capital money received as a capital receipt at initial stage, the same cannot be subsequently recorded as a trading receipt due to change of circumstances. Use it in Reliance only - when debentures are issued. V. Issue as regards treatment of premium or discount on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he first Appellate Authority in relation to non-applicability of section 56(2) of the Act to its case, which could not find favour of with the Commissioner of Income Tax (Appeals) and he upheld the action of the AO with the following finding in relation to applicability of the above sections: 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 current 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 arc not valid. On further appeal when the matter reached before the Tribunal, the Tribunal has considered the provisions of section 56(2) and held that share premium be treated as capital not subject to tax. The relevant finding of the Tribunal reads as under: The share premium cannot be brought to_tax_as it is a capjtal receipt and not o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stantially interested, receives in any previous year, from any resident person any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares be treated as income in the hands of the recipient assessee company, which would issue the shares. The said section has been inserted by Finance Act, 2012 w.e.f assessment year 2013-14 and will not be applicable retrospectively i.e. to earlier assessment years. In this regard kind attention is invited to the decision of the Supreme Court in National Agricultural Co-operative Marketing Federation of India Ltd, and Another vs. Union of India (260 ITR 548), wherein the Apex Court while dealing with the question of applicability of the provisions whether prospectively or retrospectively, held as under: The legislative power either to introduce enactments having retrospective effect for the first time or to amend an enacted law with retrospective effect, is not only subject to the question of competence but is also subject to several judicially recognized limitations. The first is the requirement that the words used must exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .f. assessment year 2013-14, hence, based on the ratio laid down by the Apex Court in National Agriculture's case (supra), the said provisions would apply prospectively. The Supreme Court in Sedco Forex International Drill Inc. and Others vs. CIT(279 ITR 310) while dealing with the question as to whether Explanation to section 9(l)(ii) is applicable prospectively or retrospectively held that such Explanation would be applicable prospectively as it has been implemented prospectively and it has impact of changing the law. The specific finding of Apex Court reads as under: Held also, that the new Explanation substituted by the Finance Bill, 1999, was deliberately introduced with effect from April I, 2000, and was, therefore, intended to apply only prospectively. It was also understood as such by the Central Board of Direct Taxes which issued Circular No. 779 dated September 14, 1999, which, though not binding on the assessee, afforded a reasonable construction of the amendment. - An Explanation to statutory provisions may fulfill the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section. If it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th effect from April 1; 2003. It is well settled that a liability cannot be created retrospectively. In the present case/ compensation received under the noncompetition agreement became taxable as a capital receipt and not as a revenue receipt: by_specific___legislative___mandate vide Section 28(va) and that too with effect from April 1, 2003. Hence, the said section 28(va) is amendatory and not clarificatory The provisions of section 56(2)(viib) of the Act have been specifically inserted by the Finance Act 2012 w.e.f assessment year 2013-14. As a consequence, any consideration .received by a company for issue of shares that exceeds the face value of such shares/ the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be subject to tax with effect from assessment year 2013-14 and any such amount received during the earlier assessment years shall not be subject to tax under the Act. Therefore, section 56(2)(viib), based on the ratio laid down by the Apex Court in Guffic Chem (P) Ltd's case (supra) is amendatory and not clarificatory. The Hyderabad Tribunal in PVF Ventures Ltd. vs. DCIT (ITA 6471 hyd/2011) held that the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Board has accepted the decision of the High Court of Bombay in the above mentioned Writ Petition. In view of the acceptance of the above judgement, it is directed that the ratio decided of the judgement must be adhered to by the field officers in all cases where this issue is involved. This may also be brought to the notice of the ITAT, DRPs and CsIT (Appeals). (iii) In the case of ACIT vs. Gagandeep Infrastructure Pvt. Ltd bearing ITA No. 5784/Mum/20H dated 23/4/2014, Hon'ble Mumbai ITAT decided that; We have carefully perused the orders of the lower authorities. In our considered view, the issue of shares at premium is always a commercial decision which does not require any justification. Further the premium is a capital receipt which has to be dealt with in accordance with Sec.78 of the Companies Act/1956, Further, the company is not required to prove the genuineness, purpose or justification for charging premium of shares, share premium by its very nature in a capital receipts and is not income for its ordinary sense....... The entire dispute revolves around the fact that the assessee has charged a premium of ₹ 190/- per share. No doubt a non-est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tax - Assessing Officer had taxed share premium under section 56(1) as assessee's income from other sources - Whether since expenditure and receipts directly relating to share capital of a company are of capital in nature, share premium collected by assessee could not be taxed under section 56(1) as income from other sources - Held, yes - Whether since entire transaction relating to allotment of shares had been done through banking channel and assessee had invested share premium in its three subsidiary companies, provisions of section 68 as suggested by revenue had also not applicable to instant case - Held, yes.... No doubt a non est company or a zero balance company asking for a share premium of ₹ 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 the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a very premium. The revenue authorities cannot question t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law, but it cannot be regarded as undisclosed income of assessee company. (viii) In the case of CIT vs. Steller Investment Ltd reported in 251 ITR 263, Hon'ble. Apex court decided that: , - . That the increase in subscribed capital of the respondent-company could not be a device of converting black money into white with the help of formation of an investment company, on the round that, even if it be assumed that the subscribers to the increased capital were not genuine, under no circumstances could the amount of share capital be regarded as undisclosed income, an appeal was taken by the Department to the Supreme Court. The Supreme Court dismissed the appeal holding that the Tribunal had come to conclusion on facts and no interference was called for. (ix) In the case of CIT vs. Expo Globe India Ltd reported in 361 ITR 147, Hon ble Delhi High Court decided that: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh 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 public or private - Held, no. 4.3.5. After considering the entire Facts and circumstances of the case as well as the Judicial Pronouncements referred and relied above, I hold that AO is not justified in making the addition u/s 68 of the share application money received by the appellant. The judicial decisions relied by AO are distinguishable on facts. The share application money received by appellant is of capital nature and does not constitute a revenue receipt. The provision of Sec.56(2)(viib) had been inserted w.e.f. 1/4/2013, accordingly would not apply for the impugned year. The appellant had filed relevant documents to establish the identity of share applicants, genuineness of transaction and capacity of share applicants. Further, the assessment order of two share applicants M/s Shining Merchants Pvt. Ltd and M/s. Hotel Padmini Palace Pvt. Ltd had been completed u/s.!43(3) of I.T. Act, thus transactions made by such companies with the appellant cannot be treated as non-genuine. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dentity 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 Merchants Pvt. Ltd and M/s. Hotel Padmini Palace Pvt., then correspondingly the transaction cannot be held as non-genuine in case of the assessee. 9. After discussing various documentary evidence filed before the AO and in the remand proceedings, the CIT(A) recorded a finding to the effect that assessee had discharged its onus to prove the transaction and that AO has not brought any contrary documentary evidence on record to dispute the transaction and involvement of unaccounted money belonging to the assessee, CIT(A) also recorded a finding to the effect that on perusal of bank statement of share applicants, it is observed that there are no cash deposit 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 assessee, accordingly it was held by CIT(A) that assessee had reasonably discharged its ..... X X X X Extracts X X X X X X X X Extracts X X X X
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