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TMI Blog2020 (1) TMI 455X X X X Extracts X X X X X X X X Extracts X X X X ..... 16 for A.Y 2010-11 is taken as the lead case and the decision rendered thereon would apply with equal force for other appeals also except with variance in figures. 3. The first issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in deleting the disallowance made u/s 14A of the Act in the facts and circumstances of the case. 3.1 We have heard rival submissions. It is not in dispute that the assessee had not derived any exempt income during the year. Hence, in our considered opinion, the provisions of Sec. 14A of the Act cannot be made applicable. This issue is now very well settled by the decision of Hon'ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640 (SC). Accordingly the ground No.1 raised by the revenue is dismissed. 4. Ground No. 2 raised by the revenue is with regard to the action of Ld. CIT(A) in deleting the addition of share premium and share capital added by the Ld. A.O u/s 56(1) of the Act. 4.1 Brief facts of this issue are that the assessee is engaged in the business of import and wholesale trading in branded readymade garments. The assessee had created following six subsidiaries and each of the subsidiary w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee also submitted the copy of the Board resolution for issue of shares. The assessee submitted that since the shares were allotted directly to the investors, no Registrar was appointed for issue of shares. The assessee also submitted that franking stamp for payment of stamp duty have been affixed on copy of share certificates. It was specifically submitted that the directors of the assessee company or their relatives were not related to the directors of the investor company to whom shares were allotted during the year. The Ld. A.O issued show cause notice vide dated 30.03.2013 as under: "From the Share Valuation as per the CI guidelines, the fair value of the equity shares of Brand Marketing (India) P Ltd has been determined at Rs. 10. However, the shares have been issued at a premium of Rs. 9/-. Vide notice u/s 142(1) dated 25.02.2013 you were specifically asked in point No. 7(f) to justify the premium charged on the issue of shares with reference to the basis of valuation with supporting documentary evidences. However, you have merely submitted the valuation certificate as per which the fair value of the share has been arrived at Rs. 10/- per share. Thus, you are again reques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Value Rs. 10/- and share premium of Rs. 210/- per share. Clearly, as on the date of conversion, the value of the fair market value of the shares as per the Net Asset Value Method was Rs. NIL. However, considering the scope and limitations of the method of valuation, the CA certificate furnished by the assessee indicates that the fair market value of the shares has to be taken at Rs. 10/- per share. Thus, the shares of Fair Market Value of Rs. 10/- per share have been allotted at a premium of Rs. 2 10/- per share while converting the 0% Compulsory Convertible Participative Preference Shares. iii. Vale notice U/s 142(1) dated 13.03.2013 the assessee was specifically asked to justify the charging of share premium. In its reply dated 19.012013 the assessed has merely stated that shares are never issued at book value by any listed company nor are the shares listed on stock exchange on the basis of hooL value prices. The assessee contends that the shares are always issued at a premium where the prospects of the company are better and the intending buyer appreciates that there would be appreciation in value. This contention of the assessee is clearly not acceptable in the light of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um charged on the shares. Looking at the accumulated losses of the assessee company the payment of huge share premium cannot be justified by any means. Considering the fact that the shares have been issued to Promoter companies, the entire transaction can be seen to be a sham transaction by which money has been brought into the books of the assessee company in the guise of 'Share Premium'. Any transaction which is a genuine business transaction has to be justified by the principles of commercial expediency. Foreign investor companies based in Mauritius have invested in the shares of the assessee company year on year despite the assessee company making huge losses and showing no prospects of any good return on investment in future. Vide show-cause notice U/s 142(1) dated 25.02.2013 the assessee was specifically asked to furnish the names and addresses of the persons to whom shares have been issued, the complete transaction ledger and explanation of sources of the funds of the investor companies. However, in response the assessee has merely stated that the investor companies M/s Retail India Ltd, Mauritius and M/s Matrix Partners India Investments Holding LLP, Mauritius are r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. Hence the introduction of the fresh capital at a premium of Rs. 210/- and Rs. 9/- amounting to R. 66,52,60,820/-partakes the character of income uls.56(1) of the Act. B. Treating share premium received as income U/s 56(1) of the Act. Having established above facts and in law that the transaction in question is not genuine and the form in which it is brought in to the books of assessee (i.e the introduction of alleged share premium) the taxability of the same in the hands of assessee under section 56(l) under the head income from other sources is analyzed as under: (a) In response to a specific question as to why the amount involved should not be taxed as assessee's income as income from other sources uls.56(1) of the Act., the assessee has only stated that the question of-treating the said amount as income does not arise as Sec 56(1) pertains to income which would not be chargeable under any other head of income. (b) Having established the fact that the amount received by assessee in the guise of share premium is in fact is not a share premium but transfer of funds in the nature of revocable transfer of asset within the meaning of section 61 to 63, the same is wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 2009 30,99,415 68,18,71,300 43,07,992 4,30,79,920 94,73,683 9,47,36,830 66,40,04,053 Adjustments (i) converted from preference FV Rs. 220 to preference FV at 10 30,99,715 68,18,71,300 30,99,415 3,09,94,150 65,08,81,142 (ii) converted from Preference FV Rs. 10 to equity FV Rs. 10 23,39,181 2,33,91,810 23,39,181 2,33,91,180 Iii Fresh issue of equity FV Rs. 10 and premium 9 15,97,742 1,59,77,420 1,43,79,678 Premium sub-total 66,52,60,820 Closing as at 31st March 2010 NIL NIL 50,68,226 5,06,82,260 1,34,10,606 13,41,06,060 1,32,92,64,874 30,99,415 preference shares of IV, Rs. 220 converted into 30,99,415 preference shares of F.V. Rs. 10 Stage 1 and premium of Rs. 210 per share, to bring parit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in Vodafone case was dealing with a Transfer Pricing issue but the findings in paras 38, 40 and 41 apply to the facts of this case fully. Reliance is also placed on the decision of Hon'ble Bombay High Court Rockstar Real Estate Pvt. Ltd. (Writ Petition no. 2885 of 2014), copy whereof placed on pages 160 to 161 of the case law paper book where also share premium has been held to be on capital account. Appellant has also drawn my special attention to the case of the Hon'ble Mumbai Income Tax Appellate Tribunal in the case of Green Infra Ltd. v. ITO (145 ITD 240), copy placed at case law paper book pages 162 to 184. In this case, it is emphasized, that against a face value of Rs. 10. only, premium of R. 490 i.e. 49 times the face value was received by the company and the shares of this company were subscribed by government companies and in the eyes of law such companies are in no way different from the public at large. 10.5 Besides, in the case before me, monies have been received through normal banking channels from abroad and necessary formalities of Reserve Bank of India also stand fully complied with. 10.6 I have gone through the assessment order as well as the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 14,379,678 30,357,098 Details of issue and conversion of preference shares Name of shareholder Date of investment Number of preference shares Face value Preference share capital Conv. into no of equity shares Conv. into equity shares Amount transferred to share premium account Matrix Partners India 12.10.2007 526,316 220 115,789,520 526,316 5,263,160 110,526,360 Baugar Mauritius Ltd 12.10.2007 2,105,263 220 463,157,860 2,105,263 21,052,630 442,105,230 Baugar Mauritius Ltd 28.05.2008 233,918 220 51,461,960 2333,918 2,339,180 49,122,780 Matrix Partners India Investment Holding LLC 28.05.2008 233,918 220 51,461,960 233,918 2,339,180 49,122,780 Total 3,099,415 681,871,300 3,099,415 30,994,150 650,877,150 4.9 The premium on issue of the aforesaid equity shares and conversion of preference shares amounting to Rs. 66,52,56,828/- has been credited to share premium account in the books of the assessee. The relevant supporting documents in this regard were submitted to the Ld. AO vide letter dated 01.03.2013. Hence, from the aforesaid table it could be safely concluded that assessee had only received a sum of Rs. 3,03,57,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e future prospects. The assessee submitted that the value of the business is generally derived from the following :- - Future prospects of the business and not only from past performance of the business; - The future business plan of the company; - The Price to Earning multiple in the retail industry; experience in the retail industry; - Future cash generating capacity of the business; - The growth of the business; - The exclusive right to access to various international brands in India; established distributional channels across India; - The number of retail outlets proposed to be rolled out; - Market sentiment for premium and luxury brands and demand drivers for such brands Considering the above factors, a detailed valuation of the entire business was undertaken and on a conservative basis a pre-money valuation for the entire business was estimated at US $ 60 million. After detailed round of negotiations with the investors it was agreed to issue shares to the aforesaid investors in the year 2007 and 2008 in the form of CCPPS at the price of Rs. 220/- per share. * As per the terms of the issue of the preference shares and in order to maintain their respective s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any as stated above, the assessee submitted that the price at which the shares were issued/conversion of the preference shares is in accordance with fair value and hence justified. The Assessing Officer erred in holding that since the valuation based on the CA certificate was NIL, the issue of shares /conversion of shares at a premium was not justifiable. 4.12 With regard to comments made by the Ld. AO in his assessment order that the assessee had violated the provisions of the Sec. 78 of Companies Act, 1956 in respect of utilization of share premium account, the Ld. AR submitted before us as under:- (1) The appellant submits that the Assessing Officer erred in holding that the funds received on account of share premium have been utilized for purposes other than those specified under section 78(2) of the Companies Act, 1956. The appellant submits that section 78(2) of the Companies Act, 1956 provides as under:- (2) The securities premium account may, notwithstanding anything in sub-section (1), be applied by the company- (a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares; (b) in writing off the preliminary ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersion of the preference shares. The assesssee's detailed submission in this regard have already been stated in the preceding paragraphs. The ld AR submitted that the terms of the conversion of the CCPPS were already determined at the time of the issue of the CCPPS to the investors and the fact that the assessee had losses for the past 5 years would have no bearing on the conversion of the CCPPS to equity shares at a premium. The entire investment by the investors has been approved by the Foreign Investment Promotion Board of India (FIPB). The ld AR submitted that Matrix is a SEBI registered Foreign Venture Capital Investor (FVCI), in support of which a registration certificate was also furnished before the lower authorities. 4.13.1 The ld AR submitted that the ld AO had held that the investment transaction is a Sham. In this regard, he argued that "Sham'' means non existent, or bogus or imaginary. The ld AR submitted that the findings of the ld AO are completely devoid of merits for the following reasons:- (a) The ld AO had clearly failed to appreciate the documents that were furnished which proves the genuineness of the transaction. (b) The funds were infact rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.16 With regard to yet another observation made by the Ld. AO that the amount received by the assessee is not share premium, but transfer of funds in the nature of revocable transfer of asset within the meaning of the Sections 61 to 63 of the Act and thereby the same is well within the scope of income defined u/s 5 r.w.s 4 of the Act, it would be relevant to address the provisions of Sec. 61 of the Act as under:- "All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income." 4.17 It would also be relevant to address the provisions of Sec. 63 of the Act which defines revocable transfer as under; "For the purpose of sections 60,61 and 62 and of this section- (a) A transfer shall be deemed to be revocable if - (i) it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor, or (ii) it, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets; (iii) transfer includes any settlement, trust, convenien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shares referred to in Clause (viib) of Sub Sec. (2) of Sec. 56". 4.21 So it could be seen from aforesaid definition that the legislature wanted to bring within the ambit of income u/s 2(24) and consideration received from issue of shares which is over and above the fair market value of the shares as referred to in Sec. 56(2)(viib) of the Act. We find that the said provision was introduced only w.e.f A.Y 2013-14 onwards and cannot be made applicable to the year under consideration. Moreover, the aforesaid definition refers to consideration received in excess of fair market value of the shares as referred to in Sec. 56(2)(viib) of the Act. Whereas, the Ld. A.O in the instant case, had resorted to tax the receipt of share premium u/s 56(1) of the Act. Hence, the amended definition of Sec. 2 Sub Sec. 24 cannot be made applicable in the instant case. We also find that the amended definition of Sec. (2) sub Sec. 24 (xvi) even w.e.f A.Y 2013-14 would not be applicable in the instant case because the provisions of Sec. 2(56)(viib) of the Act are not applicable for issue of share to non-residents. 4.22 Hence, we hold that compulsorily convertible participating preference shares (CCPPS) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount. Share premium have been made taxable by a legal fiction under Section 56(2)(viib) of the Act and the same is enumerated as Income in Section 2(24)(xvi) of the Act. However, what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received on application of ALP. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. This is settled by the decision of this Court in Cadell Weaving Mill Co. v. CIT [2011] 249 ITR 265/116 Taxman 77 was upheld by the Apex Court in CIT v. D.P Sandu Bros. Chember (P.) Ltd. [2005] 273 ITR 1/142 Taxman 713. This Court has in Cadell Weaving Mills Co. (supra) inter alia, observed as under:- 'It is well settled that all receipts are not taxable under the Income tax Act. Section 2(24) defines "income". It is no doubt an inclusive definition. However, a capital receipt is not income under section2(24) unless it is chargeable to tax as capital gains under Section 45. It is for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire issue in the light of the material evidence brought on record in our considerate view, the Revenue authorities have erred in treating the share premium as income of the assessee u/s 56(1) of the Act. In our considerate view, for the reasons discussed hereinabove, we do not find it necessary to apply the provisions of Sec. 68 of the Act. We therefore direct the A.O to delete the addition of Rs. 47,97,10,000/-. Ground No. 2 & 3 are accordingly allowed. 4.25 In view of the aforesaid elaborate observations in the facts and circumstances of the case and respectfully following the various judicial precedents relied upon herein above, we hold that there is absolutely no case for making any addition u/s 56(1) of the Act. Hence we find no infirmity in the order of CIT(A) deleting the said addition. Accordingly, the Ground No.2 raised by the revenue is dismissed. ITA No. 519/Mum/2017 -A.Y: 2011-12 . 5. The grounds No. 1 & 2 raised by the Revenue in this appeal are exactly similar to that raised by them in ITA No. 780/2016 for A.Y 2010-11. The decision rendered by us for A.Y 2010-11 would apply with equal force for A.Y 2011-12 also except with variance in figures. Accordingly, the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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