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TMI Blog2022 (1) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... thorities should apply the provisions selectively rather than on general terms without analyzing the real impact on management of funds and taxability. As discussed assessment was selected under CASS, main object of verification of issue of debentures on premium and low income in comparison to high investment in unlisted equities. In relation to above selection of the case, the Assessing Officer has issued several notices and the assessee has submitted relevant information as called for. The Ld. Pr. CIT considered the above verification and the information submitted by the assessee as improper and non-verification of share premium by the Assessing Officer to assume jurisdiction under section 263 of the Act. The Explanation 2 to section 263 of the Act was invoked by the Ld. Pr. CIT to come to the conclusion that the assessment order is passed without making enquiries or verification. After considering the above facts, in our considered view, the Assessing Officer has made enquiries and carried on with the verification even though passed non-speaking order. The Explanation 2 to section 263 of the Act can be invoked only when no enquiries or verification is carried on otherwise it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 263 of the Act and the Explanation 2 thereto can be exercised only where no enquiry as required under the law is done and that it is not open to invoke the said provisions in cases of inadequate enquiry; 5. The Pr. CIT erred in holding that the receipt of securities premium of ₹ 605.70 crores is taxable under the provisions of section 56(2)(viib) for reasons which are wrong, contrary to facts and provisions in law. The conclusion drawn is based on incorrect appreciation of facts and circumstances in law. 3. The brief facts of the case are, the assessee filed its return of income for assessment year 2014 15 on 25.09.2014, declaring total loss of ₹ 3,84,344/ . The case was selected for scrutiny and notice under section 143(2) and 142(1) of the Income Tax Act, 1961 (in short the Act ) were issued and served on the assessee. Based on the information collected during the assessment proceedings, the assessment under section 143(3) of the Act was completed on 15.12.2016, assessing the returned loss at ₹ 3,84,344/ . On a perusal of the records, the learned Principal Commissioner of Income Tax 6, Mumbai, observed that the company is incorpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um is debt, he observed that should be reported and classified as loan and advances in the Balance Sheet, which was not done in this case. Even there is no explanation from the company as to why the security premium money was taken to its reserves and surplus if it was somebody else money further observed that as per the debenture certificate dated 22.07.2013, the total number of debentures being 6,73,00,000 having face value of ₹ 10/ each were issued without mentioning therein any amount of premium charged. The total value of debenture is ₹ 67.3 crore whereas premium charged and received is ₹ 605.70 crore. The above CCDs are automatically converted to redeemable preference shares in the ratio of 1:1 at the end of the 7th year from the date of allotment of CCD. He observed that it is known as preference share, more commonly referred to as preferred stock, are shares of a company s stock with dividends that are paid to shareholders before common stock dividends are issued. Thus, preference shares are also like equity shares or on the shares with certain benefits of receiving the dividend on profit before equity shareholders. Section 56 (2)(viib) of the Act stipula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income at ₹ 3,84,3441-) as per normal provisions of the Act and Rs. (4,40,6871-) as book profit u/s 115J of the Act on 25.09.2014. 2. During the year, the assessee issued and allotted 6,73,00,000 0% CCDs of fact value ₹ 10/- each at a premium of ₹ 90 per CD to Edisons Utility Works Private Limited vide its board resolution passed at the meeting of board of directors on 22.07.2013, The said amount received on issue of CCDs is utilized for purchase of equity shares of Essel Publishers Private Limited of even amount (i.e. 67.30 croi-e shares at ₹ 10 per share). 3. The terms of the CCDs are as under: CCD s shall carry a zero coupon rate CCDs shall automatically be converted to Redeemable Preference Shares in the ratio of 1:1 at the end of 7th year from the date of allotment of CDs. Converted Redeemable Preference Shares shall be redeemed at the end of 81h year from the date of conversion of C6Ds at a premium of Re. 150 per share. The CCD's are filly transferrable. 4. The case of the assessee was selected for scrutiny assessment under ASS for reason of Large receipt of share premium, and 'Low in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is no longer payable by the assessee, the money changes its character when such amount becomes the assessee s own money as the assessee itself has treated and accounted it as its own money and credited to Reserves and Surplus of Balance Sheet as at 31.03.2014. It is like taxing the liability which is no longer payable resulting in a definite business surplus and thereby the assessee company has become richer by the amount of premium. He observed that if the CCDs are to be converted to redeemable preference shares after the end of 7th year from the date of allotment of CCD and the converted redeemable preference shares to be redeemed after eight years from the date of conversion of CCDs at a premium of ₹ 150 per share. The Assessing Officer not verified the receipt of share premium during the said financial year made the assessment order erroneous and prejudicial to the interests of the Revenue. Further, he observed that the assessment was made without application of mind in all perspective and there is consequential loss of revenue, it is clear from the above discussions that proper enquiry was not made by the Assessing Officer and non-enquiry by the Assessing Officer is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income, financials and relevant extract of bank statements were provided to establish the genuineness of source of source. (g) Submitted justification of premium on CCD5 whereby the assessee, inter alia, specifically mentioned that the amount received by it on issue of CCD5 with premium is actually loan, which is to be repaid with interest in the form of a premium. Hence, the assessee is paying more than the amount received on issue of CCD5. 2.1.3. After perusing and considering the aforesaid explanations of the assessee, the AO completed the assessment vide order dated 15.12.2016 under section 143(3) of the Act without making any addition / disallowance. 2.1.4. In view of the above, the Appellant submits that the AO has made full enquiry into the issue of CCD5 including receipt of premium and after applying his mind, passed the assessment order under section 143(3) of the Act. Therefore, the Appellant submits that the assumption of jurisdiction under section 263 by the Pr. CIT is bad in law. Reliance is placed on the various decisions. 2.2. On the merits of the issue, the appellant submits that the impugned order passed by the PUT is not sustainable and, on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are. Hence, the valuation is justified as one has to see the redemption value to determine as to whether the receipt of the premium was justified in the first place. 2.2.4. Once, it is found that the provisions of section 56(2)(viib) cannot be applied, the receipt of share premium being a capital receipt cannot be taxed. [Refer: The decision of the Hon'ble Bombay High Court in the case of Vodafone India Services P. Ltd. Vs. UOI (368 ITR 1) and Pr. CIT Vs. Apeak Infotech (397 ITR 148) cited at the time of hearing wherein it has been held that receipt of share premium is a capital receipt and not chargeable to tax. 2.2.5. Further, the Appellant further submits that Department cannot re-characterize the transaction relating to issue of debentures to issue of equity shares in the absence of any enabling provisions in the Act. [Refer: DIT Vs. Besix Kier Dabhol SA (26 taxmann.com 169)(Bom.)].. W.e.f. AY 2018-19, under the Chapter X-A (GAAR), the department can re- characterize a transaction under specified circumstances. Since, in the present case, we are concerned with AY 2014-15, the provisions of this section are not applicable. 2.2.6. Therefore, the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remium would be utilized in repaying premium on redemption of preference shares. Hence, it cannot be said that the premium is not repayable. 3.3. In para 4 of the Show Cause Notice under section 263 of the Act (Pg 81 of the Paper Book), the Pr.CIT has questioned as to how 0% CCD5 can be issued at a premium rather than a discount. Reply: The Pr. CIT failed to appreciate that the CCDs issued at ₹ 100 are convertible into equivalent preference shares which are to be redeemed at ₹ 160. The interest is embedded in the premium on redemption of preference shares. Therefore, it is not strictly a case where no interest is payable on the CCD5. 9. On the other hand, the Ld. DR argued in detail and submitted written submission of synopsis which is reproduced below: Debentures Issued to Edison Utility Works Pvt. Ltd. [PB 16] 6,73, 00,000 in no. Face Value ₹ 10 Premium ₹ 90 On 22. 07. 2013 Money Borrowed from i. Jayneer Capital Pvt.Ltd. ii. Esssel Corporate Resources Pvt. Ltd. (Group Companies) Total Amount Rs. [PB41] 673,00,00,000 [PB 12/16/23] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or premium charged [APB Page 41] and to the contrary claims that premium is actually loan, which is to be repaid by the assessee with interest in the form of premium. [It validates the observation of the CIT(A) that If the securities premium is debt, then it should be reported and classified as Laon and Advances in the Balance Sheet | Para 4 ] ii. AO has not called for valuation report share debenture deed A. Assessee company was incorporated on 11.06.2013 [APB Page 6|, i.e. it is first year of its business B. Assessee company has not carried out any business activity during the year [APB Page 6], Even the funds raised by the assessee by issue of Debenture were not applied for purpose of business. C. Net worth of the company was at best ₹ 5 lac and it has issued Debenture worth ₹ 67.30 Cr. on 22.07.2013 [PB 12 / 16 /23] with no corresponding assets, and with no corresponding assets further received premium of ₹ 605.70 Cr. which according to assesse is actually Uun, which is to be repaid by the assessee with interest [APB Page 42] Thus, the assessee has failed to justify the share premium received with supporting evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial manoeuvring tor the benefit of its clients, or, with that predominant underlying objective, to give the colour of genuineness to these entities. Pavankumar M. Sanghvi v, ITO [2017] 165 1TD 260 (Ahmedabad - Trib.) confirmed in [20181 404 ITR 601 (Gujarat) affirmed in [2018] 97 taxmann.com 398 (SC) (SLP Dismissed) E. There is no presumption that merely because the payment is made by cheque, it is a genuine transaction: C1T vs. P. Mohanakaia Ors. (2007) 2911TR 278 (Supreme Court) The transactions though apparent were held to be not real one. May be the money came by way of bank cheques and paid through the process of banking transaction but that itself is of no consequence. Naresh K. Pahuja vs. ITAT: (2015) 375 ITR 526 (Bombay) mere routing of a gift through a banking channel would not by itself establish that the gift is genuine and the genuineness or non-genuineness of the gift would have to be established by other evidence. CIT Ors. vs. Saravana Constructions (P.) Ltd. [2012] 72 DTR 258 (Karnataka) there is no presumption that merely because .the payment is made by cheque, it is a genuine transaction, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his plea is also rejected in Rajmandir Estates (P.) Ltd. v. Principal Commissioner of income-tax, Kolkata-IIl [2016] 386 ITR 162 (Calcutta)/ [2016] 70 taxmann.com 124 (Calcutta) affirmed in [2017] 77 taxmann.com 285 (SC). Further also, similar additions have been confirmed in by the Hon'ble Apex Court in the case of Pr C1T (Central)-l v. NRA Iron Steel (P.) Ltd. [2019] 103 taxmann.com 48 (SC/[2019] 412 ITR 161 (SC). 6. Similar actions u/s 263 have been affirmed in : Rajmandir Estates (P.) Ltd. v. Principal Commissioner of Income-tax, Kolkata-IIl [2016] 386 ITR 162 (Calcutta)/ [2016] 70 taxmann.com 124 (Calcutta) affirmed in [2017] 77 taxmann.com 285 (SC) rejecting the plea that any further investigation is futile because the money was received on capital account [Para 29] Subhlakshmi Vanijya (P.) Ltd. v. Commissioner of Incometax- t, Kolkata 12015] 155 ITD 171 (Kolkata - Trib.) S. Manickavasagam v. Income-tax Officer, Ward-1, Salem |2010] 123 ITD 235 (Chennai) - Agro Portfolio (P.) Ltd. v. Income Tax Officer, Ward 1 (4), New Delhi ; [2018] 171 ITD 74 (Delhi-Trib.) 10. In rebuttal, the Ld AR submitted as below: 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich are fact specific and distinguishable as rebutted at the time of hearing. We crave leave to rebut the same in written submission when called upon. 11. Considered the rival submissions and material on record. We noticed that the assessee issued and allotted 6,73,00,000, zero percent Compulsory Convertible Debentures at a face value of ₹ 10, each with a premium of ₹ 90, per CCD to Edison Utility Works Pvt. Ltd. The above CCDs were issued by passing its board resolution dated 22.07.2013. The fund so raised were utilised for the purpose of investment in equity shares of subsidiary company Essel Publishers Pvt. Ltd. of even amount. We also noticed that the debenture certificate as filed before us at Page 23 to 26 of the paper book and the board resolution, the terms of the CCDs are (a) it shall carry a zero coupon rate; (b) it shall automatically be converted to redeemable preference shares in the ratio of 1:1 at the end of 7th year from the date of allotment of CCDs; and (c) the converted redeemable preference shares shall be redeemed at the end of 8th year from the date of conversion of CCDs at a premium of ₹ 150 per share. The above terms of issue and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certificates and board resolution. He submitted that in another reply, the assessee offered no justification for premium charged and makes contrary claim that premium is actually loan which is to be repaid by the assessee with interest in the form of premium. He supported the findings of the Ld. Pr. CIT that if the securities premium is debt, then it should be reported and classified as loans and advances in the Balance Sheet. He also submitted that Assessing Officer has not called for valuation report as well as share debenture deeds which are necessary documents to verify the genuineness of the transaction which the Assessing Officer has failed and he supported the findings of the Ld. Pr. CIT by relying on case law which are in line with the presumptions that the CCDs are in the form of equity. However, the case law relied by Ld DR is distinguishable on facts. 14. After considering the submissions, we noticed that the Ld. Pr. CIT treated the transactions entered by the assessee as subscription of shares instead of subscription of debentures. We observed that the corporate arranges funds for its requirement through various instruments like equity shares, preference shares wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rument has to be redeemed at the premium of ₹ 150 per CCD. That means the subscribers of the debt instrument will redeem ₹ 150 per CCD against the payment of premium ₹ 90 per CCD at the time of investment. Further, we noticed that the Ld. Pr. CIT invoked the provisions of section 56(2)(viib) of the Act in second notice issued under section 263 of the Act and directed the Assessing Officer to complete assessment as per the above section. He considered the hybrid instrument as issue of shares i.e., issue of equity rather than debt. The basic presumption made by the Ld. Pr. CIT is flaw that he treated the hybrid instrument as issue of equity shares in order to invoke the provisions of section 56(2) of the Act. The tax authorities, in order to invoke the provisions of section 56(2) of the Act, they have to bring on record that consideration was received for issue of shares exceeds the face value of such shares and the aggregate consideration received for such shares exceeds the fair market value. In the given case, in our view, is not an issue of equity shares rather it is issue of debt instrument with the condition of conversion to redeemable preference shares. We no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is hybrid instrument to arrange corporate funding thru group concerns, it does not mean that it has indulged in generation of unaccounted money. In this case, there is no finding by any authorities that the assessee has indulged in such activities except that they received premium in issue of CCDs and recorded the same under the head Reserves and Surplus. As discussed above, the assessee cannot utilize the premium other than the manner specified in section 52 of Companies Act, 2013. There is proper safety and binding specified in the Companies Act to monitor the funds generated by the companies. The tax authorities should apply the provisions selectively rather than on general terms without analyzing the real impact on management of funds and taxability. 16. As discussed above, in our view, the assessment was selected under CASS, main object of verification of issue of debentures on premium and low income in comparison to high investment in unlisted equities. In relation to above selection of the case, the Assessing Officer has issued several notices and the assessee has submitted relevant information as called for. The Ld. Pr. CIT considered the above verification and th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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