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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 ..... interest of the revenue. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law; 2. The Pr. CIT failed to appreciate that the Assessing Officer after due application of mind as regards the nature & source and justification for valuation relating to receipt of monies amounting to Rs. 673 crores against issuance of Compulsorily Convertible Debentures (hereinafter referred to as "CC1amed the assessment order without making any addition on the said count; 3. The Pr, CIT failed to appreciate that, where two views are possible and the Assessing Officer, after conduct of due enquiry, has taken one view with which the Pr. CIT does not agree, the assessment order cannot be treated as erroneous and prejudicial to the interest of the revenue; 4. Assuming without admitting that the present case was a case of inadequate enquiry, the Pr. CIT failed to appreciate that the power of revision envisaged 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. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benture deed. Based on the above observation he issued notice under section 263 of the Act on 28.02.2019 with the observation that the Assessing Officer has failed to carry out proper investigation of the premium money as well as the debentures/shares. In response, the assessee filed submission dated 11.03.2019 that during the course of assessment proceedings the Assessing Officer sought various details, information and explanation through various notices issued under section 142(1) of the Act and to which assessee has filed detailed explanation, replies and information. 4. The Ld. Pr. CIT in his order observed that the assessee is a Private Limited Company and issued compulsory convertible debenture which is equal to issue of equity shares to Edisons Utility Works Pvt. Ltd., Group Company by charging premium amount which is credited to general reserve account. If the securities premium 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 obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... represents income which is to be taxed in the year of receipt itself. In response, the assessee submitted its submission vide letter dated 26.03.2019 stating that in the earlier notice under section 263 of the Act, the Ld. Pr. CIT had proposed to revise the assessment order alleging to be erroneous and prejudicial to the interests of Revenue for non-enquiry into the premium received on issue of compulsory convertible debentures. Further it submitted as below:- "1. The assessee is incorporated on 11.062013 i.e. FY 2013-14 relevant to AY 2014-15. It is engaged in the business to construct, maintain develop or control any buildings, factories, highways, railways, bridges etc. and other building for housing work and otherwise assists to any infrastructure related projects. The assessee had c-filed its return of income for the assessment year 2014-15, declaring total income at Rs. 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 Rs. 10/- each at a premium of Rs. 90 per CD to Edisons Utility Works Private Limited vide its board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re valuation report nor the Assessing Officer has called for. He observed that the total number of CCD issued was 6,73,00,000 instead of share, issued on 22.07.2013 to Edisons Utility Works Pvt. Ltd. at a face value of Rs. 10/- each. The premium was charged at Rs. 90/- per debenture/share and thereby the assessee company has received total premium money of Rs. 605.70 crore. As per the financial statement ended with 31.03.2014, the valuation of per share is in negative (-Rs. 8.81/-). Thus, the fair market value of shares is Rs. (-)8.81/- whereas premium is charged at Rs. 90/- per debenture/share. Hence, the premium in excess of the fair market value is to be treated as income as per section 56(2)(viib) of the Act. Further, he observed that CCD includes premium amount which 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued 0% CCDs of Rs. 10 at premium of Rs. 90 and purchased 67.30 crore equity shares of Essel Publishers Private Limited at Note 13 and 14 respectively (b) Details of issue of CCD along with copy of debenture certificate (c) Return of Income, financials, relevant extract of bank statement of Edison evidencing the nature and source of monies received by the assessee towards CCD5. (d) Extract of bank statement of the assessee highlighting relevant transactions showing receipt of money towards CCDs from Edison to prove the genuineness of the transaction. (e) Board Resolution for issuance of CCDs. (f) The source of sources of monies received towards CCDs was from Essel Corporate Resources Pvt. Ltd. and Jayneer Capital Pvt. Ltd. Their return of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares" are covered within the provisions of section 56(2)(viib) and other securities such as "debentures" are outside the ambit and scope of section 56(2)(viib) of the Act. 2.2.3. Notwithstanding the fact that provision of section 56(2)(viib) is inapplicable to the assessee, the assessee has justified the premium vide letter dated 29.11.2016 (Pg 41-56 of the Paper Book) in the course of assessment proceedings. The assessee has issued CCDs at Rs. 100/- each, and allotted 6.73 crore CCDs of Rs. 10/- at a premium of Rs. 90 each on 22.07.2013 to the Edison. Further, the CCD5 are convertible into redeemable preference shares which are to be redeemed at a premium of Rs. 150 per share. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany and that the AO has not verified the receipt of share premium. Reply: The assessee has issued CCD5 at Rs. 100/- each, and allotted 6.73 crore CCDs of Rs. 10/- at a premium of Rs. 90 each on 22.07.2013 to the Edison. The CCD5 are convertible into redeemable preference shares at the end of 7 years which are to be redeemed at a premium of Rs. 150 per share after another 8 years. The premium on issue of debentures has been classified under the head "securities premium" in the financial statements in line the section 78 of the Companies Act, 1956 (Pg 132 of the Paper Book-11). In terms of section, the securities premium 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 Rs. 100 are convertible into equivalent preference shares which are to be redeemed at Rs. 160. The interest is embedded in the premium on redemption of preference shares. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Debenture Certificate [APB Page 23] and Resolution passed by the Board of Directors of the Assessee Company [APB Page 39]. Assessee submits another reply vide letter dated 29.11.2016, offers no justification for 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 Rs. 5 lac and it has issued Debenture worth Rs. 67.30 Cr. on 22.07.2013 [PB 12 / 16 /23] with no corresponding assets, and with no corresponding assets further received premium of Rs. 605.70 Cr. which according to assesse is "a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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," * CIT vs. Maithan International (2015] 56taxmann.com 283 (Calcutta): "mere examination the pass book or the bank statement or the letter of confirmation or the balance sheet of the lender was not enough." 3. Reason [CIT Page 4]: The assessee has credited the premium to General Reserve, the Debenture Holder cannot claim the money. Sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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. Rebuttal to Contentions of the Id. Departmental Representative 4.1. The impugned order has questioned the genuineness of the transaction as well as applicability of section 68 of the Act Reply: At outset, we submit that the Pr.CIT has not raised any question of the genuineness of the transaction and has only alleged that the AO has not enquired into the issue of share premium [Refer Para 6 at Pg 11 of his order]. Therefore, it is not open the Department to go beyond the order of the Pr.CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 Rs. 150 per share. The above terms of issue and redemption is not the bone of contention before us since it is also confirmed by the Ld. Pr. CIT in his order. 12. The issue before us is, the assessment under section 143(3) was completed vide dated 15.12.2016 after considering various submissions in connection with the issue of CCDs by the Assessing Officer. The Ld. Pr. CIT after verification of the above assessment order invoked the provisions of section 263 and assumed the jurisdiction. We also noticed that the assessment was selected for scrutiny under CASS for the reason "Large share premiu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents 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 with various combinations of conversion and percentage of dividend, debentures with various combinations of conversion as well as percentage of interest and other similar bonds for its financial requirements. In the present case, the funds were arranged from internal sources within the group concerns. The assessee company through its Board passed a resolution to arrange funds by issue of compulsory convertible debentures with zero percent interest payout with premium. It is also important to notice that these debentures were issued at private placement and subscribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 noticed that the Ld. Pr. CIT equated the preference shares with equity shares with reference in distribution of dividends. We do not agree with the observation that preference shares are nothing but equity shares. The preference shares do not carry any right to equity participation / business. It is only a type of capital without participation and having a preferential right over distribution of prescribed dividend and distribution of capital. Therefore, the preference shares can never be considered as equity shares unless it is converted and issued with promise to convert as equit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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