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TMI Blog2020 (3) TMI 465X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions cannot be termed as unrealistic and cannot be termed as not genuine. There is absolutely no dispute in the instant case that the amount and share premium account were utilized by assessee for its business purposes. Respectfully following observations and respectfully following the judicial precedent hereinabove we direct the Ld. AO to delete the addition made in sum of ₹ 10,66,23,000/- u/s 56(1) of the Act. Accordingly, the ground nos. 2 3 raised by assessee are allowed. - I.T.A. No.3861/M/2016, I.T.A. No.5360/M/2016 - - - Dated:- 29-1-2020 - Shri M. Balaganesh, AM And Shri Amarjit Singh, JM For the Assessee : Shri Vipul Joshi Ms. Dinkle Haria (AR) For the Revenue : Shri B. Srinivas (DR) ORDER PER AMARJIT SINGH, JM: The revenue as well as assessee has filed the above mentioned appeals against the order passed by the Commissioner of Income Tax Revenue by: Shri B. Srinivas (DR) Assessee by: Shri Vipul Joshi Ms. Dinkle Haria (AR) (Appeals)-21, Mumbai [hereinafter referred to as the CIT(A) ] relevant to the assessment year 2010-11. ITA. NO. 3861/M/2016 5360/M/2016 2. The revenue as well as assessee has filed the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncorporated on 04.02.2000. The assessee company nowhere generated business income as per the main object of the company as notified in the Memorandum and Articles of Association of the company in the year under consideration. The receipt shown in the profit and loss account includes commission received in sum of ₹ 9,39,741/- and profit on sale of investments of ₹ 7,36,978/-. Against these receipts, the assessee claimed various expenses under the heads administrative and other expenses and depreciation amounting to ₹ 11,21,530/- and ₹ 1,914/- respectively. After claiming the expenses, the net profit was disclosed in sum of ₹ 4,00,190/-. On verification, it was found that the assessee introduced the share capital and share premium. The assessee company was incorporated on 04.02.2000 and collected the huge premium in sum of ₹ 10,66,23,000/- on allotment of shares face value of ₹ 10 each at a premium of ₹ 990/- per share. The share capital and share premium was received by assessee company from various parties as under described at page 2 of the assessment order. The table marked portion is as under.:- Name of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 100000 Swati P. Dave 100 10 1000 990 99000 100000 Gopal Dave 150 10 1500 990 148500 150000 107700 1077000 106623000 10770000 6. The Ld. CIT(A) on perusal of the balance-sheet of the assessee observed that the share premium amount has been utilized for making investments and loan and advances thereby violating the provisions of Section 78 of the Companies Act 1956 which specified the manner in which the share premium amount could be utilized. The assessee gave the justification for premium charged as under.:- Business Relationship: New Era Advisors Pvt. Ltd is a promoter company of Maharashtra Polybutenes Ltd (MPL) and holds 2,50,00,000 equity shares which is 16.04% of total issued equity of MPL. The equity shares of MPL are listed at the BSE Ltd. The preferential shares were allotted to MPL on 24-03- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a in near future and the replacement cost of such plant is exorbitantly prohibitive. If this EPDM plant and technology is acquired by MPL, it would tremendously help MPL to sky rocket its top line as well as bottom line. The management of MPL was convinced with the New Era proposal as for MPL it was a good opportunity to invest in New Era and acquire the EPDM Plant along with the technology, technical support system, stores and spares etc of UIL. Looking to the valuation of the EPDM plant and machinery and the technology the opportunity cost of the investment made by MPL in New Era is in favour of MPL, and hence MPL agreed to pay the premium on preference shares with a specific object to acquire the EPDM Rubber Plant through New Era. Sunciti Financial 5ervices Pvt Ltd, one of the preference share holders is also an associate company of New Era. Redemption and benefits to share holders : As per the terms of the allotment of preference shares the shares will be redeemed at the issue price of ₹ 1000 plus an additional minimum premium of ₹ 500/-. The premium amount may be increased with mutual agreement. In addition to this all the preference shareholders will be entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussed with the potential investors as mentioned in para 2(a) above and they were willing to invest in New Era. No project report was required for this purpose. New Era has already acquired the debts of UIL from IFCI Ltd on 01-10- 2010 and all the rights in the debts have been assigned to New Era. The recoverable amount from UIL is ₹ 86.55 crore as on 30-06-2008. New Era i5 in the process of taking next step in this matter. The UIL debts were assigned to New Era and a copy of Deed of Assignment signed by and between IFCI Ltd and New Era dated 01-102009 is attached as Annexure -7. Annual Audited financials as at 31-032010,31-03-2011 and 31-03- 2013 are attached as Annexure 8, 9 and 10 respectively. 3 Section 78 of the Companies Act, 1956 states that the premium received on issue of shares should be credited to separate account called security premium account and company has credited all the sum received towards premium in such account and in the balance sheet as on 31-032010 it is shown in Schedule-2 under the head RESERVE SURPLUS the amount is ₹ 13,43,43,000 which also includes ₹ 10,66,23,000/- of security premium received during the year. The comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igned for non consideration of past or future performance of the company for the valuation purposes or its promoters or directors. As already discussed the company does not possesses any patent, copy right, intellectual property rights etc, which could be considered as hidden assets which could have enhanced the value of the shares of the company and therefore justified to some extent the charging of very high premium for allotment of shares. All the assets held as on date by assessee are volatile with no certainty of realization or realizable values as contended by assessee. Determination of virtual certainty that sufficient future taxable income will be available is a matter of judgment based on convincing evidence and will have to be evaluated on a case to case basis. Virtual certainty refers to the extent of certainty, which, for all practical purposes, can be considered certain. Virtual certainty cannot be based merely on forecasts of performance such as business plans. Virtual certainty is not a matter of perception and is to be supported by convincing evidence. Evidence is a matter of fact. To be convincing, the evidence should be available at the reporting da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itute dividend within the meaning of provisions of Section 2(22)(a) of the Act which attracts dividend distribution tax u/s 115O of the Act. Since the assessee failed to pay the dividend distribution tax as required u/s 115O of the Act, the same was also levied by Ld. AO together with the interest u/s 115P of the Act while completing the assessment. The notice was given and after the reply of the assessee, the AO was of the view that the share premium amounting to ₹ 10,66,23,000/- as on 31.03.2010 was utilized for non-specified purposes in violation of provisions of Section 78(2) of the Companies Act, 1956 and held as dividend distribution within the meaning of provisions of Section 2(22)(a) of the Act. The assessee failed to pay the dividend distribution tax u/s 115O of the Act. Accordingly, dividend distribution tax u/s 115O of the Act was imposed on an amount of ₹ 10,66,23,000/-. The interest was also charged u/s 115P of the Act. 10. Before the Ld. CIT(A), the assessee reiterated the assertion made before the Ld. AO with regard to taxability of proceed of share premium u/s 56(1) of the Act. As regards as the applicability of the provisions of Section 56(1) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation had proceeded to agree with the addition made by Ld. AO u/s 56(1) of the Act on the only ground that the assessee had violated the provisions of Section 78(2) of the Companies Act 1956 which specifies the manner of utilization of share premium account. In this regard, what is relevant for the purpose of assessment is whether the receipt of share premium by the assessee could be termed as income policy within the meaning of provisions of income tax act. We find that the provisions of Section 78(2) of the Companies Act, 1956 specifies the manner of utilization of share premium account for specified purposes which are relevant only for compliance with the provisions of the Companies Act, 1956 and have agreed absolutely no relevance for the purpose of Income Tax Act, 1961. In the instant case, there is absolutely no dispute with regard to receipt of share premium by assessee at ₹ 990/- per share was duly justified. There is no dispute that all the necessary documents were duly filed before the AO and all the share subscribers have directly replied to the notice issued u/s 133(6) of the Act by Ld. AO. It is not in dispute that the money was received from 10 corporate share h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 31,07,4280 10 31,07,4280 6,21,48,560 Finproject Asia Ltd. , Hongkong 10,358 10 1,03,580 10 1,03,580 2,07,160 Finproject Asia Ltd., Hongkong 31,482 10 3,14,820 10 3,14,820 6,29,640 Total 41,86,583 4,18,65,830 4,18,65,830 8,37,31,660 The Revenue had invoked provisions of Section 56(1) wherein additions were made in the hands of the assessee by the AO towards share premium charged by the assessee to the tune of ₹ 4,18,65,830/- . The learned CIT-A deleted the said additions towards share premium as were made u/s. 56(1) of the Act. The Revenue is not aggrieved by the said relief granted by learned CIT-A with respe ct to the deletion of additions made u/s. 56(1). However , without prejudice in alternate the AO also confirmed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the regime of taxability as income within the deeming fiction of Section 68 of the 1961 Act. The assessee has placed its audited financial statements on record which are placed in paper book/page 101-141. The assessee has also filed its certificate of incorporation issued by MCA which shows the date of incorporation of the assessee as 06-01-2010, which is placed in the file. The Directors Report (page 104/pb) states that this is 2nd Annual Report of the company. The company has set up a manufacturing unit for manufacturing soles for footwear at Jaipur, Rajasthan. The assessee company is promoted by two non-resident entities who have subscribed to the shares of the assessee company. The majority shareholding of the assessee company to the tune of 98.99% is held by Asian Compound Limited, Hongkong who is its parent company directly and shares are also held by Finproject Asia Limited, Hongkong who is assessee‟s holding company indirectly (page 138/pb). The assessee has issued equity shares to its holding company namely Asian Compound Limited , Hongkong as well to said Finproject Asia Limited, Hongkong Limited of ₹ 10 each at premium of ₹ 10 each during the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the assessee has issued preference shares as well the assessee had made investment in volatile companies to prejudice assessee by discarding valuation of shares arrived at by the assessee , which finding of fact are again perverse finding of facts which need to be discarded . Thus, errors had been made by the AO in recording perverse finding of facts not supported by the material/evidence on record to discredit fair valuation of shares arrived at by the assessee by adopting approved valuation method viz. DCF method which valuation was certified by a qualified chartered accountant . It is not shown before the Bench by learned DR that these perverse finding of facts as were arrived at by the AO were indeed correct finding of facts recorded by the AO and the assessee is hiding the correct facts from the authorities . The AO also erred in holding that there is a violation of Section 78 of the 1956 Act by holding that the assessee ought to have utilised the proceeds of share premium for certain specified purposes as is stipulated in the said Section 78 of the 1956 Act viz. paying up unissued shares of the company as bonus shares, writing off preliminary expenses , buy-back of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right perspective, while AO erred in making such erroneous conclusion that the assessee did not utilised the funds raised through share premium for specified purposes u/s 78 of the 1956 Act without any basis and understanding the rational for both concepts which are altogether meant for different purposes , while the assessee did rightly utilised the proceeds of funds raised towards share premium for setting up manufacturing unit for manufacturing soles for footwear at Jaipur and business purposes as the funds were stated to be entrusted by the shareholders for the said approved purposes of setting up the said unit / business purposes as per terms and conditions of the invitation to offer , and the assessee do transfer share premium raised to Share Premium Account‟ under the head Reserves and Surplus‟ in books of accounts as is mandated u/s 78 of the 1956 Act . Section 78 of the 1956 Act allows application of Share Premium Account for certain specified purposes by way of write off/knocking against issuance of bonus shares, writing off preliminary expenses , buy-back of shares etc by book entry . Thus as is emerging from material on record, the conclusions arrived at b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s circular dated 04-05-2010(page 46/pb). The AO tried to demolish this fair value of ₹ 20 per equity share by basing its decision based on perverse finding of facts which are already discarded by us. Thus, the assessee was on the right side of the law by issuing equity shares at a value of ₹ 20 per equity shares so far as FEMA/RBI compliances are concerned. RBI has also accepted the said fair price of shares supported by CA Certificate using DCF method and FC-GPR form filed by the assessee through its banker Axis Bank was accepted by RBI and taken on record, which is placed in file(pb/44-45). The assessee has filed its bank statements as well FIRC issued by its bankers as an evidences which are placed in file. Thus based on material on record before us, no fault lies with the assessee in issuing equity shares of face value of ₹ 10 each at share premium of ₹ 10 each so far as compliances under FEMA/RBI are concerned. It is pertinent to mention that Section 56(2)(viib) r.w.s. 2(24)xvi) of the 1961 Act were placed in statute by Finance Act, 2012 w.e.f. 01-04-2013 and the said sections are relevant for issuance of shares to residents while in the instant case , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted in (2014) 369 ITR 511(Bombay) to hold that issue of shares at share premium by the taxpayer to non resident holding companies is on account of capital transactions and does not give rise to an income chargeable to tax. Section 56(2)(viib) r.w.s. 2(24)(xvi) of the 1961 Act were introduced by Finance Act, 2012 w.e.f. 01-04-2013 and had applicability to the receipt of consideration towards shares from resident entities and has no application when consideration towards shares are received from non-resident entities which are excluded in order to encourage foreign investments. The learned DR erred in making contentions that the said decision of Hon‟ble Bombay High Court is relevant for TP proceedings while in Vodafone case, Hon‟ble Bombay High Court has held that TP provisions as are contained in chapter X are machinery provisions while there has to be firstly an income chargeable to tax and then only machinery provisions can be applied. The issue of shares at share premium by tax-payer to nonresident holding entities was held to be on account of capital transaction which were not found to be having character of income chargeable to tax. CBDT has also accepted this posi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 3 raised by assessee are allowed. 8. Ground No.1 raised by assessee was stated to be not pressed at the time of hearing. Accordingly, the same is treated is hereby dismissed is not pressed. 9. The ground no. 4 raised by assessee is general in nature. ITA. NO.3861/M/2016 10. We find the revenue has challenged the action of the Ld. CIT(A) dismissing the invocation of provisions u/s 115O of the Act. We find that the main grievance of the revenue seems to be that relief has been granted by Ld. CIT(A) without there being any specific ground raised by the assessee before the Ld. CIT(A). In this regard, it is pertinent to note that Ld. AO had addressed the entire issue of receipt of share premium and taxability of share premium of ₹ 10,66,23,000/- u/s 56(1) of the Act as well as invoking the dividend distribution tax in terms of 2(22)(a) r.w. Section 115O of the Act in the assessment order. The primary reason for making such additions u/s 56(1) was due to non compliance of provisions of Section 78(2) of the Companies Act, 1956 in the opinion of Ld. AO. We find that the observation of the Ld. AO for levying the dividend distribution taxed u/s 115O of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X
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