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TMI Blog2021 (4) TMI 1024X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire addition deserves to be deleted which has rightly been done by the ld. CIT(A) which does not require any interference. Accordingly, grounds raised by the revenue are dismissed X X X X Extracts X X X X X X X X Extracts X X X X ..... tal and goodwill. Mr. Surinder Kumar Kaushik has expired. There is no change in shareholding in the hooks of the company till now." 5. The AO, thereafter asked the assessee to furnish the details of the services and efforts made by Shri Surinder Kumar Kaushik for procuring the aviation licence. He asked the assessee to furnish the details regarding intimation of death to the Indian Authorities, i.e., ROC and other government departments. So far as the death of Shri Kaushik is concerned, it was submitted that the same was intimated to the ROC and the reason for appearance of the name in the list of directors at the ROC website is due to technical errors. So far as the services rendered by Mr. Surinder Kumar Kaushik is concerned, it was submitted that he was instrumental in obtaining the aviation licence as he and Mr. R.K. Sharma were the only persons on the Board of Directors of the company. The copy of approval from Ministry of Civil Aviation was submitted before the AO. The obtaining of licence in itself was shown as the evidence of his efforts. It was submitted that Shri Kaushik was a renowned advisor in aviation industry and was instrumental in obtaining the above licence. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cence who have a issued capital of ₹ 2O crore. Face value of shares (₹ 20 crores) were booked as goodwill in the books the company, which is a common practice where shares are issued at a discount, where the difference in issue price and face value is capitalized in form of goodwill In this case,the shares were issued without any monetary consideration and therefore entire amount of face value has been booked as goodwill." The assessee is not permitted under law to use of this coloured device to reduce incidence of tax and also can't be part of the tax planning as held in the celebrated case of McDowell and Co. Ltd. Vs. CTO 154 ITR 148 (SC). It was observed by the the Hon'ble Supreme Court: "Colourable devices cannot be part of tax planning and it is wrong to encourage avoidance of tax by dubious methods. It is for the court to take stock and determine the nature of legal devices to avoid taxes, and to expose these devices for what they really are " iii. Even the assessee could not provide the supportive evidence of work/services rendered for which the goodwill was created. iv. Even the other agencies have also informed to this office that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness which had utilized for starting the business of assessee company. The Director - Shri Surinder Kumar Kaushik who was the moving force behind the company, when the company was incorporated and its activities were in a nascent stage he labored and later on secured an aviation licence for it. In consideration of his yeomen services the company issued shares, under the category 'shares issued other than for cash' to him. This was done by debiting goodwill account in the company and crediting the share capital account. The creation of goodwill in the books of account is at the discretion of the company. It represents merely a book entry. There is no law regulating the creation of this provision. The Company is empowered to evaluate goodwill at its sole discretion. Therefore, the AO could not seek any explanation or justification from the Company for the creation of goodwill. Like-wise the company has the discretion to issue share capital as well. That again cannot be questioned. The AO is in the wrong footing in asking for a justification for the creation of goodwill. He did not perhaps realize that doing so was the assumed prerogative. There is no onus which is cast on the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue at hand to be decided is whether Sh. Surender Kumar Kaushik was really having expertise and the appellant has acquired the same from the said director by way of any legal/valid documents and whether in the circumstances provision of section 68 of the Act is applicable in this case. 5.5 To appreciate the issue at hand, it is worth referring to the provision of section 68 of the Act. Bare reading of Section - 68, Income-tax Act, 1961 is as under- Cash credits. S.68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year: Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless- ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of enquiry, AO is satisfied that the entries are not genuine, then he will have every right to add the said sum represented by such credit entry as income from other sources. The satisfaction of the assessing officer is the basis of invocation of his powers under section 68. However, such satisfaction must not be illusory or imaginative but must have been derived from relevant facts and factors, and is on the basis of proper enquiry of all material before him but also to which he has command. 5.8 If at all the provisions of Section 68 are invoked, it is apparent that the appellant has duly explained the source and the nature of the transaction. The provisions could have been applied or the addition could have been made if an undisclosed income is found from an unknown source or if the amount represents some canceled income which was not credited in the books kept by him. Section 68 applies when the source of the capital contribution made by the share holders is not disclosed or disclosed but not satisfactorily explained to the assessing officer. Introduction of share capital does not always mean that provisions of Section 68 have to come into play necessarily. Without prejudice t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount by making the following entries: Goodwill Dr. 20 crores Share Capital Cr. 20 crores 5.13 The limitation associated with such kind of self created/revalued intangible assets in the nature of goodwill is that they cannot be qualified for claiming any depreciation for the reason this intangible asset (goodwill) appearing in the books of account of the appellant is not an asset for which any purchase cost has been paid or it is also not the case where appellant has acquired the same by incurring any expenditure. The appellant though has not claimed any depreciation on this self created/revalued Goodwill of ₹ 20 crore in its P & L A/c for the current previous year, is not entitled to claim the same in the future either. 5.14 A detailed scrutiny of the documents on records including form 5 submitted to the ROC for increase in the share capital reveals the reason adduced for issuing share worth ₹ 20 crore to its one of the directors Sh. Surender Kumar Kaushik that shares were issued for "blessings and efforts" and his goodwill which helped in obtaining aviation license. Under the circumstances, it amounts to a kind of payment/ESOP to the said shareholder without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of business of civil aviation" by debiting the goodwill account in the books of account. The shares have been issued without any consideration and therefore in the nature of ESOP/salary and most importantly there has not been any transaction/receipt of cash or bank or any other realizable assets against the alleged share capital. In factum of the case, section 68 of the Act cannot be invoked. Therefore, addition of ₹ 20 crore made u/s 68 requires to be deleted. The Ld. AO is directed accordingly. Thus, the appellant succeeds in this ground of appeal." 7.3 Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal. 8. The ld. DR strongly challenged the order of the CIT(A) in deleting the addition made by the AO. She submitted that the ld.CIT(A) without any valid reasons has deleted the addition which under the facts and circumstances of the case, is not justified. She submitted that the director of the assessee company was never produced before the AO. Further, there is no basis of valuation of such goodwill. According to the ld. DR, no such valuation report was ever provided by the assessee to the AO. Referring to the copy of the assessment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting year relevant to the assessment year under consideration. Therefore, the ld. CIT(A) was fully justified in deleting the addition. The ld. Counsel for the assessee relied on the following decisions:- i) V.R. Global Energy Pvt. Ltd. vs. ITO, 407 ITR 145 (Madras); ii) Jatia Investment Company vs. CIT, 206 ITR 718; iii) ACIT vs. Shri Suren Goel, ITA No.1767/Del/2011, order dated 1st December, 2011; iv) ITO vs. Anand Enterprises Ltd., ITA No.1614/Kol/2016; v) ACIT vs. Mahendra Kumar Agarwal, 23 taxmann.com 285; vi) Abhijeet Enterprises Ltd. vs. ITO, ITA No.308/Kol/2017; vii) ITO vs. Bhagawat Marcom Pvt. Ltd., 109 taxman.com 350; viii) H.H. Sri Rama Verma vs. CIT, 57 taxmann 149 (SC); and ix) Abhishek Estate Ltd. vs. ITO, ITA No.1585/Ahm/2007. 10. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, made addition of ₹ 20 crores to the total income of the assessee u/s 68 of the IT Act being the amount of ₹ 20 crores shown as goodwill and on wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We find, the Hon'ble Madras High Court in the case of VR Global Energy Pvt. Ltd. (supra) has held that where the assessee allotted shares to a company in settlement of pre-existing liability of assessee to the said company by way of adjustment and since no cash was involved in transaction of said allotment of shares, conversion of these liabilities into share capital and share premium could not be treated as unexplained cash credit u/s 68 of the Act. It was held that since the cash credits towards share capital were only by way of book adjustment and not actual receipts, therefore, the same could not be treated as receipt towards share subscription money. Since no cash was involved in transaction of said allotment of shares, conversion of these liabilities into share capital and share premium could not be treated as unexplained cash credits u/s 68 of the IT Act. We find, the Revenue challenged this decision of the Hon'ble Madras High Court before the Hon'ble Supreme Court and the Hon'ble Supreme Court dismissed the SLP filed by the Revenue reported in 268 taxmann.com 392. 12.1 We find, the Delhi Bench of the Tribunal in the case of ACIT vs. Shri Suren Goyal (supra), has held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO, the assessee had actually introduced unaccounted money in its company through issue of bogus shares to various shareholders. According to him, the entire set of transactions entered into by the assessee shareholder, the assessee or company in which the assessee has invested has a pre-designed set of transactions executed to introduce unaccounted money in garb of share capital and share premium. Applying the provisions of section 68 of the IT Act, the AO made addition of ₹ 20,07,60,000/- to the total income of the assessee. In appeal, the ld.CIT(A) deleted the addition. On further appeal by the Revenue, the Tribunal upheld the order of the CIT(A) and dismissed the appeal filed by the Revenue by observing as under:- "4. We have heard the rival submissions. At the outset, we find that the assessee had not raised any share capital by receipt of cash consideration in the instant case. The shares were issued for consideration other than cash in lieu of assessee company making investment in shares in some other company. Effectively, the assessee purchased certain shares from the aforesaid six shareholders and instead of paying cash to them, the assessee company issued shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expression 'any sum paid' used in the said section denotes ' sum of money paid' . Hence if certain shares were donated by a person, then the same would not fall eligible for deduction u/s 80G of the Act. We also find that the Hon'ble Jurisdictional High Court in the case of Jatia Investment Company vs. CIT reported in 206 ITR 718 (Cal) also supports the case of the assessee herein, wherein it was held as under: "It is finally emphasised by learned counsel for the assessee that the ultimate result is that the firm becomes a debtor to GB and Co. and the three nonfinancial companies of the group got discharged. Learned counsel also emphasised that, at the worst, it can be said that the assessee-firm has received valuable assets being the said shares of the equivalent value of the debt taken over by it from the companies, i.e., ₹ 11.20 lakhs. Therefore, the question of cash credit does not come in, there being no actual passing or receipt of cash. In other words, the transactions are mere book entries. It was contended that the fact that the entries passed through the cash book could not detract from or efface the essential nature of the entries. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the Income- tax Officer himself. We have already extracted the observation of the Income- tax Officer in paragraph 14 of his assessment order. The Income- tax Officer has clearly opined that all the respective parties did not receive cash nor did pay cash as none had any cash for the purpose. The only point in the assessment order is that the entries not involving the passing of cash should not have found a place in the cash book, but in the ledger account through journal entries. There is another self- contradiction in the Income-tax Officer's finding that, if there was no real cash entry on the credit side of the cash book, but merely a notional or fictitious cash entry, as admitted by him, there is no real credit of cash to its cash book ; the question of inclusion of the amount of the entry as unexplained cash credit cannot arise. One of the grounds of the Tribunal for disbelieving the assessee's case is that the adjustment entries were made by notional cash entries with a view to bringing down the debt-and-capital ratio, i.e., that while being discharged of the debt the said companies also jettisoned their assets, i.e., the shares held by them of equivalent su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital, it is very clearly mentioned by way of note that the fresh share capital was raised during the year for consideration other than cash. Hence we hold that provision of section 68 of the Act are not applicable in the instant case and accordingly the entire addition deserves to be deleted which has rightly been done by the ld. CIT(A) which does not require any interference. Accordingly, grounds raised by the revenue are dismissed." 15. In view of the above discussion and in view of the detailed reasoning given by learned CIT(A) on this issue, we do not find any infirmity in his order deleting the addition made by the AO invoking the provisions of section 68 of the Income Tax Act, 1961. Accordingly, the order of learned CIT(A) is upheld. 16. However, in our opinion, the addition, if any, in the instant case has to be made in the hands of Shri Surinder Kumar Kaushik to whom the shares were allotted for his services rendered by debiting the goodwill account in the books of account. Therefore, the AO may take necessary steps for bringing this amount to tax in the hands of Shri Surinder Kumar Kaushik or his legal heirs in accordance with law. We hold and direct accordingly. 16.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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