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TMI Blog2019 (10) TMI 1226X X X X Extracts X X X X X X X X Extracts X X X X ..... the registrar of company that in the facts of the present case there is no violation of provisions of section 78 of the companies act. We further find that in the order of the authorities below it has been mentioned that the provisions of section 78 has not been complied in as much as the share premium received has been used for investment in Future Generali India Insurance Company Ltd., a party which is a 40A(2)(b) company. However the assessee in this regard disputes that there is any violation. In our considered opinion on the facts and circumstances of this case this aspect needs to be remitted to the file of assessing officer. The assessing officer is directed to examine in detail this aspect as to whether there is violation of the companies act with regard to the utilisation of share premium account. Thereafter he shall decide as per law Needless to add the assessee should be granted adequate opportunity of being heard. - Appeals filed by the revenue are allowed for statistical purposes. - I.T.A. No. 4329/Mum/2016, 4330/Mum/2016 (Assessment Year 2012-13, 2011-12) - - - Dated:- 17-9-2019 - Shri Shamim Yahya (AM) And Shri Ravish Sood (JM) Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision of Section 68 of the Act, there is no application of Section 78 of the Companies Act, 1956 on the said transaction. 5. In light of the above your honour will appreciate that the conclusion reached by the AO/CIT(A) is based on surmises, suspicion, conjecture and taking into account irrelevant and extraneous considerations. 6. In view of the above, the Appellant prays that the addition of ₹ 47,88,27,000 under Section 68 of the Act on account of share premium is erroneous, unwarranted and be deleted Relief Your appellant, therefore, respectfully prays to direct the learned AO to: a) Modify the assessment order to the above extent and b) Grant other relief deemed necessary For A.Y. 2012-13 the grounds are same with amount involved being ₹ 57,69,33,000/-. 4. Brief facts of the case are as under :- The brief facts of the case are that perusal of details annexed to the balance sheet as on 31.03.2011 31.03.2012 of the assessee company by the A.O. revealed the party wise break up of amounts received on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e registrar of the assessee company k. Proof of stamp duty or share issue expenses incurred I. Please state whether any of the directors or their relatives are in any way related to the directors of the company to whom shares were allotted. If so please specify such relationship. m. Furnish copy of Transaction Overview, Proposed Business Plan, Financial overview prepared or submitted for Fund Raising through Equity route and presented to potential investors in your company. Also furnish actual achievements in those areas as at 31.03.2010, 31.03.2011 31.03.2012 along with your Balance Sheet, Profit and Loss Account, etc., if any. The A.O. also observed that Section 78 and other related provisions of the Companies Act, 1956 provided that the amount in the share premium account could only be utilized towards: a) Issue of fully paid bonus shares. b) Writing off of preliminary expenses of the Company. c) Writing off of the expenses, commission or discount on issue of shares or debentures. d) Providing for premium payable on redemption of prefe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e premium was charged on allotment of fresh share capital to resident JV promoters. Further, the investment details of balance sheet as on 31.03.2011 and 31.03.2012 revealed that the assessee company was making long term investment in equity shares of Future Generali India Insurance Co. Ltd., a party covered u/s.40A(2)(b) of the Act. Examination of the P L a/c for A.Y.2011-12 and 2012-13 showed that the assessee company had shown a fixed income of ₹ 90,000/- in both the years being income from consultancy services. Against this income the assessee company had worked out total loss of ₹ 59,87,173/- and ₹ 76,63,915/- for A.Y.2011-12 2012-13 respectively. The loss arising in both the years was basically due to the fact that the assessee company was paying huge legal and professional charges of ₹ 60,57,678/- and ₹ 77,11,500/- for A.Y.2011-12 2012-13 respectively. From the entire gamut of facts, it could be seen that the assessee company was not involved in any business activity apart from a fixed receipt of ₹ 90,000/- being income from consultancy services in both the years. 8. The Assessing Officer observed that looking at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay ₹ 2.500/- for one share of the assessee company which again was invested in Future General! India Insurance Co. Ltd. The end result was that M/s. Participatie Maatschappiji Graafsschap Holland Nv was investing directly in the shares of Future General! India Insurance Co. Ltd @ ₹ 10/-per share and @ ₹ 2,500/- per share by investing through the assessee company. 11. In view of all the above, the A.O. held that the assessee company had not substantiated/justified its act of charging of share premium either through any submissions or through any supporting evidences such as share valuation report which may justify the act of charging of share premium by the assessee company. The A.O. accordingly treated the entire share premium of ₹ 47,88,27,000/- and ₹ 57,69,33,000/- received from M/s. Participate Maatschappiji Graafsschap Holland Nv on allotment of fresh shares as unexplained cash credit u/s. 68 of the Act and added back the same to the total income of the assessee as revenue receipt in the A.Y. 2011-12 and 2012- 13 respectively. 12. Upon assessee s appeal learned CIT(A) confirmed the addition made by the assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the shares and accordingly invested in the shares of the appellant company. In this regard, I find that M7s. Participatie Maatschsappiji Graafsschap Holland Nv had directly invested in the shares of Future General India Insurance Co. Ltd. @ ₹ 10/- per share. It defies all logic as to how M/s. Participatie Maatschsappiji Graafsschap Holland Nv by applying its commercial acumen would decide to pay a premium of ₹ 2,490/- to get one share of Future Generali India Insurance Co. Ltd. by investing in the appellant company when it was able to get it directly @ ₹ 10/- per share only. This clearly indicates that the receipt of ₹ 2,4907- per share from M/s. Participate Maatschsappiji Graafsschap Holland Nv was not on account of share premium. 6.16 Perusal of the appellant's financials as on 31.03.2010, 31.03.2011 31.03.2012 shows that except for earning fixed income of ₹ 90,000/- in all these three years being income from consultancy services, there were no major business activities. The appellant had posted losses of ₹ 4,95,426/-, ₹ 59,87,173/- ₹ 76,63,915/- for A.Y.s 2010-11, 2011-12 2012-13 respectively. Peru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was no mention about the subsequent utilization of the amounts so received. While section 68 of the Act may not mention about the subsequent utilization of the amounts received, the same is relevant for treatment of the nature of such receipt, 'me appellant is a company and is bound to abide by the provisions of the Company Act. During the course of assessment proceedings, the appellant had simply submitted that there was no violation u/s. 78 of the Companies Act in its case. However, it is seen from the facts on record that the alleged share premium received was invested in the shares of Future Generali India Insurance Co. Ltd. which is clearly in violation of the provisions of section 78 of the Companies Act. As the share premium amount has not been utilised for the purpose for which it has been received, these receipts lose their character as capital receipts. 6.19 The appellant had placed reliance on the decision of the Hon'ble Allahabad High Court in the case of Commissioner of Income-tax (Central) vs. Vacmet Packaging (India) (P.) Ltd. [2014] 45 taxmann.com 204 (Allahabad) which is not applicable to the facts and circumstances of the instant case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an promoters. That assessee has used the sum involved in making long-term investment in equity shares of future Generali India insurance Co Ltd. section 40A(2b) company. That assessee company does not have any business activity. 15. Learned counsel submitted that assessing officer has simply questioned justification of charging high premium. Learned counsel submitted that ultimately the sole reason given for addition is alleged violation of section 78 of the companies Act regarding utilisation of share premium account which is an event post receipt of money. Learned counsel submitted that full and proper compliance of section 78 of the company s act is there. He submitted that registrar of companies has not raised any objection. He submitted that once the issue of shares at premium is accepted as valid and proper under the companies act the assessing officer cannot sit in the arm chair of registrar of companies when the issue was valid or proper. The ld Counsel submitted that approach of assessing officer/learned CIT(A) to tax share premium on the basis of alleged contravention of section 78 of the companies act is fundamentally wrong. In this regard learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olved was liable to be taxed as revenue receipt. Learned Departmental Representative pleaded that action of the authorities below is in concurrence with the above proposition. Hence, he submitted that learned CIT(A) s order should be upheld. 17. Upon careful consideration we find that the learned CIT(A) in his order has referred to the fact that assessee s operations do not command such share premium. He has also observed that assessee s plea that issuing shares premium is a prerogative of board of directors is not applicable in this case as same shares have been issued with differential treatment for issuance of shares to different set of investors. While premium charged from one party is ₹ 2,490/- on face value of share of ₹ 10/-. No such premium is charged from other party as share issued in the same period. Hence he held that the amount received over and above the face value from M/s. Participatie Maatschsappiji Graafsschap Holland Nv has to be treated as not being on account of share premium. Learned CIT(A) has further concluded that the assessee is a company and is bound to abide by the provisions of companies act. That during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. From this it implies that it is incumbent upon subordinate courts to follow the law laid down by the honourable Supreme Court. We find that by referring to the non-compliance of section 78 of the Companies Act the learned commission of income tax has in substance referred to this aspect. The assessee has been evasive in its reply to the question of compliance of provisions of section 78 of the companies act. The assessee has submitted that this is an aspect which arises post receipt of the money. In other words assessee contends that it is not relevant. However this is contrary to the exposition of the honourable Supreme Court as above. Furthermore assessee submits that the registrar of company has not passed any order against the assessee in this regard. We find that it is not the case of the assessee that he has submitted a confirmation from the registrar of company that in the facts of the present case there is no violation of provisions of section 78 of the companies act. 20. We further find that in the order of the authorities below it has been mentioned that the provisions of section 78 has not been complied in as much as the share premium received h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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