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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 ..... e is no question of any transfer or any assets or any income therefrom on which the transferor has the right to reassume power over the income or assets. In any case, the provisions of Sec. 61 to 63 of the Act is not applicable in the hands of the transferor and the assessee herein is the recipient of the funds from the foreign investor and accordingly it is only transferee. Hence, the provisions of Sec. 61 to 63 of the Act does not come into operation at all. The amounts received on issue of share capital including the premium is undoubtedly on capital account. 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. We find considerable substanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These appeals in ITA No.780/Mum/2016, 519/Mum/2017, 339/Mum/2017 729/Mum/2016 for A.Y.2010-11, 2011-12 2012-13 arises out of the order by the ld. Commissioner of Income Tax(Appeals)-2 in appeal No.CIT(A)-2/IT/53A/2013-14, CIT(A)-2/IT/95/2015-16, CIT(A)-2/IT-62/2014-15 CIT(A)-2/IT/135/2015-16 dated 30/11/2015, 20/09/2016, 15/10/2016 20/11/2015 respectively (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Income Tax Act, 1961) dated 22/03/2013, 26/03/2015, 25/03/2015 29/03/2014 respectively by the ld. Dy. Commissioner of Income Tax 1(1), Mumbai (hereinafter referred to as ld. AO). 2. With the consent of both the parties, the appeal filed by the revenue in ITA No.780/Mum/2016 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t received Retail India Ltd 6,07,768 10 60,77,680 9 54,69,912 1,15,47,592 Matrix Partners India LLP 9,89,974 10 98,99,740 9 89,09,766 1,88,09,506 Total 15,97,742 1,59,77,420 1,43,76,678 3,03,57,098 0% Compulsory Convertible Participative preference shares of ₹ 220/- each 30,99,415 10 3,09,94,150 210 65,08,81,142 Total 66,52,60,820 4.3 The assessee submitted before the Ld. A.O that during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, 1961 . 4.4 The assessee vide reply dated 19.03.2013 submitted that the shares are always issued at a premium and it would never be listed at the face value. The assessee also submitted that the shares are issued at a premium if the prospects of the company are better and intending buyer appreciates that there would be appreciation in value. The assessee stated that the money received towards share premium has been duly credited to share premium account in the balance sheet and in the books of the investor, the same is reflected as investment in shares in the assets side of its balance sheet. The assessee submitted that there is no question of treating the said receipt of amount as income u/s 56(1) of the Act. The Ld. AO on verification of submission of the assessee together with relevant documentary evidences placed on record observed as under: A. The premium charged on allotment of shares taxed U/s 56(1) of the Act i. The assessee issued 15,97,742 shares of ₹ 10 each at a premium of ₹ 9/- per share to subscribers. Thus a share capital representing face value of ₹ 1,59,77,420/- and the premium of ₹ 1,43,79,678/- total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss of ₹ 8,44,7,402/-, Since its inception (The date of issue of PAN of the assessee company is 07.04.2006), the assessee company has been incurring losses year after year and the prospects of appreciation in value of shares are quite bleak. The losses incurred by the assessee company since its inception are as follows: Thus, the total unabsorbed carry-forward loss till AY 2010-11 is ₹ 40,49,64,189/.. In the light of the fact that the assessee company has been suffering losses year on year, and the fact that the CAs valuation report submitted by the assessee itself arrives at the fair value of the shares at Rs.N1L, the charging of premium amounting to ₹ 210/- and ₹ 9/- is not justified. Any prudent investor will not invest in shares of a company suffering continuous losses by paying heavy amounts of share premium. iv. Section 78 and other related provisions of the Companies Act, 1956, provides that the amount in the share premium account can 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in Mauritius. No details have been filed regarding the sources of funds of the investor companies. The onus is on the assessee to prove the genuineness of the funds credited to its books of accounts. The assessee has failed to discharge its onus by failing to furnish the financials of the aforementioned parties establishing the genuineness and creditworthiness of the same. In the case of McDowell reported in (1985) 3 SCC 230 the Honb'le SC concluded that where the transaction is not genuine but a colorable device there could be no question of tax planning. The SC held that a sham and non-genuine transaction cannot be considered to be a part of tax planning or legitimate avoidance of tax liability. Clearly, the assessee has neither proved the creditworthiness of the investors nor has the charging of huge amounts of share premium been justified. In the light of the fact that the huge amount of share premium was charged for issue of shares, valued at Rs. NIL as per assessee's own valuation report furnished during the assessment proceedings, and the creditworthiness of the investors including their source of funds have not been proved by the assessee despite specifically be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the meaning of section 61 to 63, the same is well within the scope of income defined u/s. 5 and the charging provisions of section 4 of the Income Tax Act. Therefore the income arising by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the assessee and shall be included in its total income. (c) Further the assessee has no liability to repay this amount to the alleged investors as the return on investment for the investor is a subject matter of high volatility. (d) As per section 56(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head Income from other sources , if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. This income is not chargeable under the heads specified u/s.14, items A to E and hence is taxable under the head Income from other sources . (e) In view of the above stated facts, the amount of ₹ 66,52,60,820/- which is credited to the Share Premium Ale in the AY under consideration and utilized in violation of section 78(2) of the Companies Act is taxed as asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) converted from preference FV ₹ 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 ₹ 10 to equity FV ₹ 10 23,39,181 2,33,91,810 23,39,181 2,33,91,180 Iii Fresh issue of equity FV ₹ 10 and premium 9 15,97,742 1,59,77,420 1,43,79,678 Premium sub-total 66,52,60,820 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at a premium of ₹ 9 per share it is submitted as under: - Strong emphasis is laid on the decision of the Hon'ble Bombay High Court in writ petition of 871 of 2014 in the case of Vodafone India Services Private Limited in writ petition 871 of 2014, copy of which is enclosed in the case law paper book placed on record. The appellant has drawn attention to the observations of the Hon'ble High Court in paras 38, 40 and 41 which are strongly relied upon. My attention is also drawn to the fact that Hon'ble Bombay High Court 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticipating preference shares (CCPPS) of face value of ₹ 220/-each into equity shares of face value of ₹ 10 each at premium of ₹ 210 each. The details of the same are as under: Name of shareholder Date of investment Number of equity shares Face value Equity share capital Share premium per share Share premium account Total amount received Retail India Ltd 18/01/2010 and 19/01/2010 607768 10 6,077,680 9 5,469,912 11,547,592 Matrix Partners Ind 22/03/2010 989974 10 9,899,740 9 8,909,7666 18,809,506 Investment Holding LLC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad only received a sum of ₹ 3,03,57,098/- towards share capital and share premium during the year from Retail India Ltd., and Matrix Partners India Investment Holding LLC. With regard to conversion of preference shares into equity, the monies were received from the aforesaid four investors as tabulated supra, were received in A.Ys 2008-09 and 2009-10 and during the year under consideration, only those preference shares were converted into equity shares at a premium. In other words, the preference share capital which was originally received by the assessee company at face value of ₹ 220/- each per preference share, where converted into equity shares during the year under consideration into equity comprising of face value of ₹ 10 and premium of ₹ 210/- per equity shares. It would also be relevant to understand the background of the assessee. 4.10 The assessee company was established on 23rd March, 2006 by Murjani Group. Murjani Group is a 75 year old group with over 40 years of unparalleled international brand management experience. The assessee company was incorporated as a holding company and to carry on cash and carry wholesale trading activity. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the price of ₹ 220/- per share. As per the terms of the issue of the preference shares and in order to maintain their respective shareholding ratio, it was agreed between the assessee and the investors that the CCPPS would be converted into equal number of the equity shares of face value ₹ 10/- each at a price of ₹ 220 per share, since the face value of equity shares was ₹ 10/-, the balance amount of ₹ 210/per share was transferred to share premium. The assessee submitted that the investment made by the aforesaid parties are from the long term point of view considering the immense potential of the business with backing of the exclusive license of these premium brands. The assessee submitted that the investees i.e. Matrix and Baugur were independent investors and it does not have direct or indirect interest in the assessee as well as in its subsidiaries. All the investment was made by the investors in 2007 and 2008 after considering the future prospects of the business in India. The Assessing Officer has held that as per the assessee's own valuation report, the value has been determined as Nil. The assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expenses of the company; (c) in writing off the expenses of or the commission paid or discount allowed on, any issue of shares or debentures of the company; or (d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company. On perusal of the aforesaid section it is clear that the aforesaid section states that the share premium account may be applied only for the aforesaid purposes. However, there is no bar on the manner of utilization of the cash received by issue of shares at a premium. The appellant submits that the Assessing Officer has failed to appreciate the distinction between the utilization of the cash generated pursuant to the issue of shares at a premium and the restriction contained in section 78(2) of the Companies Act, 1956 vis-a-vis the application of the share premium account. The appellant, therefore, submits tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, 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 received from the investors and shares were issued. (c) The assessee had entered into shareholder agreement with the investors. (d) Prior approval of the FIPB, Government of India was taken for the investment. (e) The ld AO had himself held that par value of the shares to be genuine and has held the share premium amount as sham which is in complete contradiction of his findings. A transaction can be said to be sham in entirety and not in parts. 4.14 As regard the reliance placed by the Ld. AO on the decision of Hon'ble Apex Court in the case of McDowell v. CTO reported in [1985] 3 SCC 230 is concerned, we find that in McDowell's case, the assessee was liquor manufacturer and on sale of the liquor the assessee had not included the excise duty which was paid by the buyers (under certain arrangement) in their turnover. The Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer 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, convenient, agreement or arrangement . 4.18 From the bare reading of the aforesaid provisions, we find that the provisions of Sec. 61 to 63 are intended to circumvent attempts made by a transfer or to reduce tax liability by arranging the transfer of its assets such that the income does not accrue to him but reserves the power or interest in the assets transferred or in the income therefrom. We find that u/s 61 of the Act, income arising to any person by virtue of revocable transfer is deemed to be income of the transferor. In the present case, we find that the assessee has converted/issued shares to the foreign investors at a premium. There is no question of any transfer or any assets or any income therefrom on which the transferor has the right to reassume power over the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are 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) were converted at a share premium of ₹ 210 each which was agreed in accordance with share holders agreement entered into with foreign investors and at the fair market price which was determined at the time of issue of shares. It is not in dispute that the conversion of CCPPS was made to independent third parties which does not have any direct or indirect relation with the promoters of the assessee. Hence, we hold that the issue of share and the conversion of CCPPS cannot be regard as sham or non genuine having regard to the aforesaid facts and observations and more especially the entire details of the investors were duly provided and the same were also subjected to due approval received from Foreign Inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 this reason that under section 2(24)(vi) that the Legislature has expressly stated, inter alia, that income shall include any capital gains chargeable under section 45. Under Section 2(24)(vi), the Legislature has not included all capital gains as income. It is only capital gains chargeable under Section 45 which has been treated as income under Section 2(24). If the argument of the Department is accepted then all capital gains whether chargeable under section 45 of not, would come within the definition of the word income under section2(24). Further, under section 2(24)(vi) the Legislature has not stated that any capital gains will be covered under the word income. On th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old 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 grounds raised by the revenue are dismissed. ITA No. 339/Mum/2017, A.Y 2012-13 6. The first ground raised by the revenue for A.Y 2012-13 is exactly identical to ground No. 2 raised by the Revenue for A.Y 2010-11 and the decision rendered by us thereon would apply with equal force for this assessment year also except with variance in figures. Accordingly, the ground No. 1 raised by the revenue is dismissed. 7. Ground No. 2 raised by the revenue is with regard to the action of the Ld. CIT(A) restricting the disallowance of interest u/s 36(1)(iii) of the Act to ₹ 34,24,711/-as against ₹ 1,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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