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2024 (12) TMI 242

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..... 14-15 were originally concluded u/s. 143(3) on 31.3.2017 and 21.12.2016 respectively. The date of the search is 23.11.2015. The dates of the TP orders for Assessment Years 2013-14 and 2014-15 are 01.02.2017 and 20.12.2018 respectively, well after the search. Therefore, any assessments under Sections 153A/153C in respect of unabated assessments must be based on incriminating materials obtained during search proceeding and not based on post-search materials, in this case TP orders passed subsequent to search materials. Further, in respect of assessments under Section 153C the same principle was reiterated in DCIT v U.K. Paints Ltd. [ 2023 (5) TMI 373 - SC ORDER ] Even earlier held in PCIT v Vikas Telecom Ltd. [ 2021 (12) TMI 1386 - DELHI HIGH COURT ] had held that post-search enquiries cannot be the basis of assessments under Section 153A/153C. Therefore, the reliance placed by the AO on the TP orders passed after the search cannot be countenanced. We also accept the assesse s submissions that an Assessing Officer should not step into the shoes of a businessman to decide what should be the right price for issue of shares. This principle has been stated in several cases by the Hon ble .....

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..... ears 2013-14 and 2014-15. - Shri Mahavir Singh, Hon ble Vice President And Shri S. R. Raghunatha, Hon ble Accountant Member For the Appellant : Shri. A. Sasikumar, CIT For the Respondent : Shri. V. Ravichandran, CA ORDER PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER: These appeals filed by the revenue are directed against the common order passed by the learned Commissioner of Income Tax (Appeals)-18, Chennai, dated 20.03.2023 and pertains to assessment year 2013-14 2014-15. 2. At the outset, we find that there is a delay of 19 days in both the appeals filed by the revenue, for which petition for condonation of delay along with reasons for delay has been filed. After considering the petition filed by the revenue and also hearing both the parties, we find that there is a reasonable cause for the revenue in not filing appeal on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeal and admit appeal filed by the revenue for adjudication. 3. The revenue has raised the following grounds of appeal for the A.Y. 2013-14: 2. The learned CIT(A) erred in deleting the addition made u/s. 56(1) of the IT Act, amounting to Rs. 615.34 .....

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..... the A.Y. 2014-15,to the tune of Rs. 832.06 crores, which was confirmed by the CIT(A). 2.2 The learned CIT(A) erred in deleting the addition made u/s. 56(1) of the IT Act without appreciating the fact that the assessee had taken out of its own unaccounted money in the form of purchase cost, by inflating the purchases from Non-residents and the same excess money was brought back to the assessee's own account in the form of share premium, which is nothing but round tripping of the assessee s own unaccounted funds in the guise of share premium. 2.3 The Ld. CIT(A) erred in considering the transaction between the assessee and the non-residents as genuine investments s in shares with a premium, covered by the Bombay High Court decision in the case of M/s. Vodafone India Services Private limited (2014) 50 taxmann.com 300 (Bombay), and the Board's circular No. 2 of 2015 dated 29.6.2015, without appreciating the fact that the said share premium transactions are not genuine transactions and was only a colourable devise in order to accommodate the assessee s own un accounted funds, through non-residents, and the receipts are taxable as Income from other sources. 3. For these grounds an .....

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..... the below table: Name of Party FY AY No.of shares issued Share capital (Rs. In crores) Share premium (Rs.in crores) MJC 2009-10 2010-11 78,86,163 7.88 189.27 MJC 2010-11 2011-12 1,19,32,223 11.93 286.37 MJC 2011-12 2012-23 96,02,715 9.60 230.46 MJC 2012-13 2013-14 2,28,08,394 22.80 547.40 Enerk 28,30,976 2.83 67.94 MJC 2013-14 2014-15 6,39,837 0.64 15.35 Enerk 2,12,60,091 21.26 510.24 4.1 The share application money was received through banking channels with Foreign Inward Remittance Certificates. The receipt of the share application money and the allotment of shares were communicated to RBI in Form FCGPR. MJC being an associated enterprise as defined in Section 92CA(l) of the Act, the issue of shares was reported in the Form 3CEB issued by a Chartered Accountant certifying that the shares were issued at arms' length price for AY 2012-13, A Y 2013-14 and A Y 2014-15. MIPP International Limited, Mauritius ('MIPP') is said to be a subsidiary SPV of the MJC Group, engaged in supplying equipment and related activities for power projects. Enerk is also a shareholder in MIPP. The relationship between the appellant and MIPP was disclosed to the Project lenders and in all corpo .....

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..... 8,34,576 2012-13 143(3) r.w.s. 92CA/10.03.2016 14A r.w.r. 8D(2) 21,90,94,574 3,09,15,322 FD Interest as IOS 3,09,15,322 2013-14 143(3) r.w.s. 92CA /31.03.2017 TP Adjustment 4,07,25,95,597 25,93,58,803 14A r.w.r. 8D(2) 1,70,83,176 FD Interest as IOD 25,93,58,803 2014-15 143(3)/20.12.2016 14A r.w.r. 8D(2) 66,48,047 FD Interest as IOS 51,56,40,547 51,56,40,547 For AY 2010-11, reassessment proceedings were initiated under Section 148 of the Act and order u/s. 143(3) r.w.s.147 was passed on 24.03.2016 without any disallowance/addition. 4.3 Search and seizure operations under Section 132 of the Act were carried out in the premises of the assessee in Tamilnadu and Chhattisgarh on 23.11.2015, on 09.12.2015 and concluded on 13.01.2016. During the search, certain documents were seized from the premises of the appellant. The reassessment for AY 2010-11 and the assessment for AY 2012- 13 to AY 2014-15 were concluded after the search and the details of receipt of share capital from MJC and Enerk was accepted without any adjustment. The Transfer Pricing order u/s. 92CA(3) of the Act for the AY 2013-14 was completed after the conclusion of the search, wherein the TPO proposed TP downward adjustme .....

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..... ails and documents. The Assessing Officer without considering the explanation and detailed reply submitted, relying on the order of the TPO for AY 2013-14 AY 2014-15, assessed the share premium as other income on the basis that profits made by MIPP on supply of equipment to the assessee were invested as share capital by framing the assessment u/s. 143(3) r.w.s 153B r.w.s 153C r.w.s 153A of the Act vide order dated 19.02.2019 for A Y 2010-11 to AY 2013-14 and draft assessment order for AY 2014-15 as under: AY Treatment of shares premium as Income TP Adjustment Assessed total income Demand raised 2010-11 189,26,79,120 189,26,79,120 134,00,32,126 2011-12 286,37,33,520 288,55,68,096 186,64,95,391 2012-13 230,46,51,600 233,55,66,922 137,83,70,108 2013-14 615,34,48,800 641,28,07,603 352,92,52,393 2014-15 525,59,82,720 832,05,84,608 577,16,23,267 8. The contentions and submissions of the assessee company have been considered carefully and found that the same are not tenable for the following reasons: 8.1.Original assessments: The assessee's contention that the issues mentioned in the show Cause notice were already considered in the original assessment made for the A.Y. 2013-14 dated 3 .....

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..... face value of Rs. 10 only, whereas the foreign shareholder invested at a premium ofRs.240/- in the said shares of M/s.R.K.M.Powergen Pvt. Limited. Also, it is noticed from page nos.248 to 250 of the seized annexure - ANN/ST/RKMLS/S-1 that M/s.R.K.M.Powergen Pvt. Ltd. had passed on huge amounts running into crores of US Dollarsto M/s.MIPP International Ltd. towards supply of Plant and Equipments during the period from July, 2007 to March, 2010. Also, it is noticed from page nos. 68 to 74 of the seized annexure - ANNIST/RKM/LS/S-1 that M/s. R.K.M.Powergen Pvt. Ltd. had passed on huge amounts running into crores of US Dollars/INR to M/s MIPP International Ltd. Towards supply of Plant and Equipments during the F.Y. 2010-11 to 2014-15 totalling to INR4071,64,01,520. Further, it is noticed from the financials of M/s.Enerk International Holdings Limited and M/s.Mudajaya Corporation Berhad that M/s.MIPP International is an associate company of M/s.Enerk lnternational Holdings Ltd. and M/s.Mudajaya Corporation RK from these seized material, it is categorically clear that funds flown out from M/s. Berhad. From these seized material, it Is categorically clear that funds flown out from M/s. RK .....

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..... pital equipments from M/s. MIPP International Limited, the TPO (JCIT, TPO-2, Chennai) vide order u/s 92CA(3) of the Act dated 01/02/2017 for the AY 2013-14 proposed a downward adjustment of Rs. 407,25,95,597I- out of the total value of imports made of Rs. 1471,30,09,946/-. It is also noticed from the TPO's orders that the business of M/s MIPP International Limited was limited to procure and supply of power plant equipments to M/s.RKM Powergen Private Limited only and that M/s.MIPP International Limited did not do any other business. It is also noticed that from the huge/undue profits earned from the supply of equipments to M/s.RKM Powergen Private Limited, the said company M/s.MIPP International Limited distributed dividends to its shareholders viz.,M/s.Mudajaya Corporation Berhad and M/s.Enerk International Holdings Limited which in turn invested in the shares of M/s.RKM Powergen Private Limited i.e., in the assessee company with a huge premium of Rs. 240 per share. 8.3.2.2.Further, the following findings were made in the order of the TPO dated 20/12/2018of the JCIT, TPO-2, Chennai made for the A.Y. 2014-15: i. M/s.R.K.M.PPL entered into a mechanical and electrical plant and m .....

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..... hat M/s MIPP was not making purchases on its own but M/s RKM decided the material to be purchased. identifies the suppliers and negotiates the price. Further, it is seen that M/s MIPP that only the job of placing formal orders with the suppliers and monitoring their supplies in time and ensuring shipment are the functions carried out by M/s MIPP. ix. All these facts indicate that M/s MIPP International Lid. is equipment supplier for the sake of record only. 8.3.2.3. It is also pertinent to mention here that he TPO (JCIT, TPO- 2, Chennai) made downward adjustment of Rs. 407,25,95,597/- for the A.Y. 2013-14 vide his order u/s 92CA(3) of the Act dated 01/02/2017 out of the total value of Imports made of Rs. 1471,30,09,946 and that the TPO made downward adjustment of Rs. 32,05,84,608/- out of the total value of imports made of Rs. 1350,64,11,226/- for the A.Y.2014-15 vide order w's 92CA(3) of the Act dated 20/12/2018. 8.3.3. Circuit of funds flow: M/s.Enerk International Holdings Ltd. is a 20% shareholder and M/s.Mudajaya Corporation Berhad is 80% shareholder (ultimate beneficiaries for the profits earned by M/s MIPP) which got funds from M/s MIPP in the form of dividends which wer .....

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..... h has been decided against it. For AY 2014-15, the assessee had filed writ against the draft assessment order passed on 19.02.2019. Consequent to the order of the Hon'ble High Court referred above, the Assessing Officer passed the final order under section 143(3) r.w.s.144C(1) r.w.s.153B r.w.s.153C r.w.s.153A on 14.10.2022 served on the assessee on17.10.2022 assessing the total income at Rs. 577,16,23,267/- and raised a demand of Rs. 375,86,97,070/-. 4.9 Aggrieved by the order of the AO u/s. 143(3) of the Act, the assessee preferred an appeal before the ld.CIT(A) in the appeal filed against the assessment under Section 143(3) for Assessment Year 2013-14, the ld.CIT(A) confirmed the downward adjustment made and further enhanced the downward adjustment. Further, the assessee preferred an appeal before the Ld.CIT(A) against the order passed u/s. 153C of the Act by the Assessing Officer for Assessment Years 2010- 11 to 2014-15. 5. The ld.CIT(A) deleted the addition of share premia under Section 56(1) for Assessment Years 2010-11 to 2014-15but confirmed and enhanced the downward adjustment made by the TPO for Assessment Year 2014-15, holding as under: 7.5 Addition u/s. 56(1): 7.5.1 .....

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..... wnward adjustment of Rs. 832.06 crores. 7.5.5 For making the addition of share premium from Mudajaya (AYs 201011 to 2014-15) and Enerk (AYs 2013-14 and 2014-15) u/s 56(1) as shown in the table above, the AO quoted the following reasons: - The share premium is in excess of the value arrived at through DCF by assessee itself. - For the AYs 2013-14 and 2014-15, the TPO has made downward adjustments on the value of import from MIPP. - Mudajaya and Enerk hold 80% and 20% shareholding in MIPP respectively. They are the ultimate beneficiaries of profits earned by MIPP. They obtained dividends from MIPP, which were used to make investments in the assessee company with huge premium of Rs. 240 per share. There is circuit fund flow. 7.5.6 The Appellant submitted that the share prices are determined by commercial negotiations with investors. The valuation of shares based on the Discounted Cash Flow (DCF) method (for AY 2010-11, it is as per CCI guidelines) was done only to comply with the requirements of RBI Guidelines pertaining to allotments made to Non- Residents. As per the FEMA Regulations dealing with Foreign Direct Investments, shares should be issued to foreign investors only at a pric .....

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..... es Ltd, the promoters were issued shares at par whereas the investors were issued shares at Rs 250. It was in this commercial and financial context that the Appellant was therefore able to obtain the investment from the foreign investors at the price of Rs. 250 per share. 7.5.9 Appellant stated that the share premium from foreign investors has been received based on the Shareholders Agreement. A Shareholders Agreement dated 8th February 2007 and a Supplemental Shareholders Agreement dated 20 February 2009, incorporating this share price for foreign investors was executed by the Appellant, RK and Mudajaya, copies of which have been furnished to the AO. This was approved by the shareholders at the EGM of Mudajaya Group Berhad, 100% Holding Company of MCB on 15th June 2007 and 28thApril 2009, copy of which has been furnished to the AO. Their Investment Banker, OSK Investment Bank, Berhad, had given an independent opinion dated 17@ May 2007 and 8th April 2009 on the fairness of the subscription price of the equity shares. It is undisputed that Mudajaya is a listed company in existence for decades before RK or RKM were incorporated. It carries on independent business. It agreed to pay a .....

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..... raised in relation thereto. As per Section 78 of the Companies Act, 1956 when shares are issued at premium, the aggregate amount of premium is to be transferred to an account called the share premium account. This share premium account is not distributable as income just like as any other capital assets. On winding up, the surplus monies in the share premium account are to be returned to the shareholders as capital. So long as the company is a going concern, the monies in share premium account can never be returned to the shareholders except through the medium of a reduction petition, or, in other words, except under exactly the same conditions as those under which any other capital asset can reach the shareholders hands. Distribution of share premium amount is not permitted through dividend. It is taken out of the category of divisible profits. The provisions in respect of issue of shares at premium are the same in the old company Act as well as in the new company Act. Hence Companies Act clearly mentions that amount received as premium is a capital receipt and not a revenue receipt. The share premium is also verifiable from returns of allotment submitted in ROC. As per departmen .....

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..... d 17thMay 2007 and 8thApril 2009 on the fairness of the subscription price of the equity shares. Mudajaya has been a listed company. The appellant stated that all these particulars were given to the AO. In the show-cause notice, the AO proposed to assess the share premia as undisclosed income. It was stated that once, it was pointed out by the appellant that this was impermissible, he chose to assess the share premia under section 56(1). Appellant stated that it cannot be assessed as unexplained income in view of the latest decision of the Hon ble Supreme Court in PCIT v Bharat Securities [2020] 113 taxmann.com 32 (SC) and PCIT v Rohtak Chain Co P Ltd [2019] 110 taxmann.com 59 (SC) in which it was held that once the identity of the shareholders is proven share capital cannot be assessed under Section 68 that shares were issued at excess premium. The assessee also cited Bombay High Court in CIT v Gagandeep Infrastructure P Ltd [2017] 80 taxmann.com 272 (Bombay) and CIT v Green Infra Ltd [2017] 78 taxmann.com 340 to the same proposition that once the identity of the shareholders is proven and the amounts are received through banking channels, share capital cannot be assessed under Se .....

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..... have been made only in the AYs 2013-14 and 2014-15. This downward adjustment cannot be the ground for another addition in the form of unexplained income. In fact, it is unclear from the impugned orders as to how this would be unexplained income in the hands of the Appellant. The downward adjustment made by the TPO cannot be ground for another addition in the form of unexplained income. Even if the statements made in the show cause notice that the profits made on the supply of equipment were the source of the share capital were assumed correct, it would still not constitute unexplained income of the assessee. The downward adjustment by the TPO can only result in the downward adjustment in the actual cost of the equipment for depreciation and cannot constitute income in the hands of the appellant. Even according to the TP order the profit margin of MIPP was 26.67%. Rs. 245 Crores remains unpaid to MIPP. Downward adjustment made for two years only (AYs 2013-14 and 2014-15) and that does not match the share premium of Rs. 1973.77 crores (Rs.1847.05 crores in RKM + Rs. 126.72 crores in RK). According to transfer pricing orders, approx. 27% of value of imports was considered for downward .....

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..... to all the AYs and when specifically, the TPO held the equipment import transaction with MIPP for AYs 2011-12 and 2012-13 were at arm's length and cannot also be extrapolated to another assessee RK Powergen Pvt. Ltd for the AYs involved, where there was no such import transaction with MIPP. 7.5.14 Appellant relied on the Supreme Court decision in G. S. Homes Hotels (P.) Ltd. [2016] 73 taxmann.com 120 (SC) to submit that the amount of share capital received from the various shareholders cannot be as assessed as business income. 7.5.15 Reliance has been placed by the assessee on the decisions of the Bombay High Court in PCIT v ApeakInfotech[2017] 88 taxrnann.com 695 (Bombay) for the proposition that share premium receipt is on capital account and cannot be assessed as income. 7.5.16 For the proposition that Section 56(1) cannot be used to assess as income what does not fall under the definition of income under Section 2(24), assessee relied on the decisions of the Hon'ble Supreme Court of India in CIT v DP Sandu Bros [2005] 142 Taxman 713 (SC) and the Bombay High Court in Cadell Weaving Mill Co. v CIT [2011] 249 ITR 265/116 Taxman 77. 7.5.17 Assessee relied on the following .....

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..... nd Enerk, which are non-residents. Therefore, this is clearly a capital receipt. The AO has also not questioned genuineness of the transactions though he has taken the circuit of funds as one of the arguments for making the addition. Moreover, the AO has not given any reason to treat the receipts as unexplained income. It is settled law that share premium could never be considered as income under Section 56(1) of the Act and to that effect the assessee has quoted catena of decisions. In the case of Vodafone India Services Private Limited v Additional CIT [2014] 50 taxmann.com 300 (Bombay), it has been clearly held that share premium is a capital account transaction and it does not give rise to income. This decision has been accepted by the department and no further appeal filed before Hon'ble Supreme Court. CBDT has also given an Instruction No. 2 of 2015 dated 29 January 2015, refraining the officers of the department from treating the share premium as income. In view of the above, addition u/s 56(1) is not possible on the impugned share premium capital transactions. 7.5.19 In view of various details and documentary evidences filed by the assessee on identity and other element .....

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..... ly from Assessment Year 2024-25 that share premia received from a non-resident in excess of the fair market value can be taxed. Thus, there is no case u/s 56(2)(viib) also for the impugned AYs. This shows Parliament in its wisdom allowed more FDI flowing into India above DCF value (FMV) also till the AY 2023-24 which is not taxable u/s 56(2)(viib) till then. 7.5.22 With reference to differential rate of allotment of shares to the domestic investor (RK Powergen Pvt. Ltd) and the foreign investors, the issue is dealt u/ s 56(2)(viia) in terms of provisions of Rule 11 UA(l)(c)(b) separately and it would be discussed in the order in the case of RK Powergen Pvt. Ltd under relevant AYs. 7.5.23 As mentioned in para 7.5.13 above, the Appellant has stated that it had not commenced business or commercial operations and the payments to MIPP were made through banking channels; these remittances were funded by secured loans obtained from banks and financial institutions. The purchase of equipment from MIPP appears on the Assets side of the balance sheet and source for which appears on the liability side of the balance sheet as secured loans as admitted by the assessee itself. For the AY 2013-14 .....

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..... at arms length price. Further, ld.DR argued that the Ld.CIT(A) action of deleting the addition u/s. 56(1) of the Act, is erroneous for the fact that the investments made by the non-resident in assessee company represent remittance out of excess billed sums arising out of the supplies made by the non-residents, which is evidenced by the downward TP adjustment carried out by the TPO for the A.Y.2013-14 for Rs. 407.26 crores, which was later enhanced by the Ld.CIT(A) to Rs. 744.03 Crores. The Ld.DR stated that the Ld.CIT(A) has not appreciated the fact that the assessee had taken out of its own unaccounted money in the form of purchase cost, by inflating the purchases from Non-residents and the same excess money was brought back to the assessee s account in the form of Share premium, which is nothing but round tripping of the assessee s own unaccounted funds in the guise of share premium. 6.1 Further, Ld.DR submitted that the Ld. CIT(A) erred in considering the transaction between the assessee and the non-residents as genuine investments in shares with a premium, covered by the Bombay High Court decision in the case of M/s. Vodafone India Services Private limited (2014) 50 taxmann.co .....

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..... ed in its entirety. This hon ble Tribunal, which is the ultimate fact-finding authority, had after careful appraisal of the evidence, concluded that the price paid by the Assessee was at arm s length. Thus, the entire basis of the appeal filed by the department stands vitiated and for this reason alone the appeals deserve to be dismissed. 3. The assessment made under Section 153C must be based on incriminating material found during the search and not subsequent material such as the transfer pricing report. Two crucial facts must be noted: 1. The assessment for Assessment Years 2013-14 and 2014-15 were originally concluded under Section 143(3) on 31.3.2017 and 21.12.2016 respectively. As such the assessments under Section 153C are unabated assessments. 2. The date of the search is 23.11.2015. The dates of the Transfer Pricing Orders for Assessment Years 2013-14 and 2014-15 are 01.02.2017 and 20.12.2018 respectively, well after the search. 8.1 In such cases, it is now settled law by authoritative pronouncements of the hon ble Supreme Court that any assessments under Sections 153A/153C in respect of unabated assessments must be based on incriminating materials obtained during search p .....

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..... were distributed to Mudajaya Corporation and Enerk international who have in turn contributed to the share capital of the company. Even if the profits made on the supply of equipment were the source of the share capital, it would still not constitute unexplained income of the company. The Assessee had not commenced business or commercial operations and the payments to MIPP were made through banking channels. These remittances were funded by secured loans obtained from banks and financial institutions. As such these would not be said to constitute undisclosed income. The only legal consequence of the TP Order would be a downward adjustment in the cost of the equipment for purposes of depreciation. The application of these profits, if any, cannot be assessed again in the hands of the Assessee. To illustrate, let is assume that an assessee-company makes a revenue payment to a related person such as a director s relative or interested concern and the Assessing Officer believes that the payment is excessive. Such excessive amount can be disallowed under Section 40A(2)(b) in a manner analogous to a TP downward adjustment. This disallowance would be appropriate and legal. Let us further .....

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..... s 10 Rs 370 GMR Infrastructure Ltd 21.08.2006 Rs 10 Rs 210 KSK Energy Ventures Ltd 14.07.2008 Rs 10 Rs 240 GVK Power Infrastructure Ltd 27.02.2006 Rs 10 Rs 310 It can be seen from the prospectus of Reliance Power that the promoters were issued shares at par whereas in the IPO shares were issued at a premium. Likewise, in the case of KSK Power Ventures Ltd, the promoters were issued shares at par whereas the investors were issued shares at Rs 250. It was in this commercial and financial context that the Assessee was therefore able to obtain the investment from the foreign investors at the price of Rs 250 per share. Mudajaya is a listed company in existence for decades before RK Power or RKM were incorporated. A Shareholders Agreement dated 8th February 2007 and a Supplemental Shareholders Agreement dated 20th February 2009, incorporating this share price was executed by the Assessee and Mudajaya. This was approved by the shareholders at the EGM of Mudajaya Group Berhad, 100% holding Company of Mudajaya Corporation Berhad CB on 15th June 2007 and 28th April 2009. Their Investment Banker, OSK Investment Bank, Berhad, had given an independent opinion dated 17th May 2007 and 8th April 2 .....

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..... The Income-tax Authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. Thus, it has been repeatedly held by the Supreme Court in a number of cases that it was not open to the Assessing Officer to substitute his judgement over that of the businessmen. 8.6 To sum up: the share premia was agreed based on prevailing market conditions and it is not open to the Assessing Officer to step into the shoes of the Assessee or the foreign investor and decide the price at which shares are to be issued. Since the issue of shares to Mudajaya was a transaction with an associated enterprise as defined in Section 92A (1) of the Act, the Assessee had obtained and furnished a report of a Chartered Accountant that the price at which the shares were issued was at arm s length. The issue of shares has been reported in Form 3CEB as part of compliance with Transfer Pricing regulations. For Asst Year 2012-13, a reference was made to the Transfer Pricing Officer. The TP Order dated 08.09.2015 passed by the Joint Commissioner of Income Tax, refers to the tran .....

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..... stry of Corporate Affairs have taken on record these returns and no questions have been raised in relation thereto. Section 78 of the Companies Act, 1956 provides as follows: 78. Application of premiums received on issue of shares. (1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account, to be called the share premium account ; and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the share premium account were paid- up share capital of the company. (2) The share premium account 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 o .....

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..... C from the remitting banks; (d) Receipt of the share application money was informed to RBI; (e) Allotment of shares was communicated to RBI in forms FC GPR; and (f) RBI has acknowledged all the allotments. Thus, the Assessee had complied in full with the FDI Regulations. When FDI Regulations require the issue of shares at a price higher than the value determined by the DCF method, the statement of the Assessing Officer that the premium received is inflated is misconceived. The Mumbai Bench of the Income Tax Appellate Tribunal held in the case of DCIT v Finproject India P Ltd. (2018) 93 Taxmann.com 461 as follows: The assessee while issuing shares to non-resident investors create an foreign obligation for India in favour of third country and as per RBI/FEMA requirements, the assessee are required to issue shares using valuation methods which are approved method (DCF is approved method of valuation) and the consideration for issuance of shares has to be necessarily equal to or above fair value arrived at by such approved method because otherwise the assessee will create foreign obligations for India in favour of third country at a consideration price received which is below fair valu .....

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..... of the appellant that even if the income cannot be chargeable under section 45, because of the inapplicability of the computation provided under section 48, it could still impose tax under the residuary head is thus unacceptable. If the income cannot be taxed under section 45, it cannot be taxed at all . 8.9.2 Similarly, the Bombay High Court in Cadell Weaving Mill Co. v CIT [2011] 249 ITR 265/116 Taxman 77 held that: It is well-settled that all receipts are not taxable under the Act. Section 2(24) defines income. It is no doubt an inclusive definition. However, a capital receipt is not income under section 2(24) unless it is chargeable to tax as capital gains under section 45. It is for this reason that under section 2(24)(vi) the Legislature has expressly stated, inter alia, that income shall include any capital gains chargeable under section 45 . The Assessing Officer was conscious that the identity and the solvency of Mudajaya and Enerk had been well established. Mudajaya was a listed company in business for decades and listed on the Malaysian stock exchange even before the Assessee was incorporated. Mudajaya had a substantial net worth and the investment in the Assessee had b .....

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..... ai Bench of the hon ble Income Tax Appellate Tribunal in ACIT vs Covestro India P Ltd [2021] 129 taxmann.com 50 (Mumbai - Trib.)held that share premia cannot be assessed under Section 56(1) as can be seen from the following extract: The receipt of share premium per se cannot be treated as income or the revenue receipt. In order to bring a particular receipt to be taxable within the ambit of section 56(1), the receipt should be in the nature of income as defined in section 2(24). The share premium received by the company admittedly forms part of share capital and shareholders' funds of the assessee - company. When receipt of share capital partakes the character of a capital receipt, the receipt of share premium also partakes the character of capital receipt only. Hence, at the threshold itself, the receipt in the form of share premium cannot be brought to tax as the revenue receipt and consequently treat the same as income under section 56(1). [Para 4.6] 8.9.6 The Bombay High Court in Vodafone India Services Private Limited v Additional CIT [2014] 50 taxmann.com 300 (Bombay)held: But we have examined the issue afresh. The word income for the purpose of the Act has a well underst .....

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..... Ltd (2020) 113 taxmann.com 15: Whereas, the Ld. A.O in the instant case, had resorted to tax the receipt of share premium u/s 56(1) of the Act. Hence, the amended definition of section 2 Sub section 24 cannot be made applicable in the instant case. We also find that the amended definition of section (2) sub section 24 (xvi) even w.e.f A.Y. 2013- 14 would not be applicable in the instant case because the provisions of section 2(56)(viib) of the Act are not applicable for issue of share to non-residents. 8.9.9 The Hyderabad bench of the ITAT in Apollo Sugar Clinics Ltd v DCIT [2019] 105 taxmann.com 254 (Hyderabad - Trib.) held: 11.1 The Assessing Officer instead of invoking Section 56(2)(viib), he went ahead by disallowing the excess of the premium received by assessee by invoking the provisions of Section 56(1) of the Act. In order to invoke Section 56(1), the income earned by the assessee should be classified as revenue income as per Section 14 but should not fall within any of the head of income A, C, D or E. Since section 56(1) is residuary head of income, it falls in the head of income 'F' i.e., income from other sources . This head of income consists of two parts i.e., .....

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..... OF BOMBAY IN CASE OFVODAFONE INDIA SERVICES PVT. LTD. [2014] 50 TAXMANN.COM 300 (BOMBAY) INSTRUCTION NO.2/2015 [F.NO.500/15/2014-APA-I], DATED 29- 1-2015 In reference to the above cited subject, I am directed to draw your attention to the decision of the HighCourt of Bombay in the case of Vodafone India Services Pvt. Ltd. for A.Y. 2009-10 (WP No. 871/2014),wherein the Court has held, inter-alia, that the premium on share issue was on account of a capital account transaction and does not give rise to income and, hence, not liable to transfer pricing adjustment. 2. It is hereby informed that the Board has accepted the decision of the High Court of Bombay in the above mentioned Writ Petition. In view of the acceptance of the above judgment, it is directed that the ratio decidendi of the judgment must be adhered to by the field officers in all cases where this issue is involved. This may also be brought to the notice of the ITAT, DRPs and CsIT (Appeals). 3. This issues with the approval of Chairperson, CBDT. (emphasis supplied) A press note dated 28th January 2015 was also issued accepting the order of this Court in Vodafone India Services (P.) Ltd. (supra), which reads as under : Acc .....

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..... re premium received by issuance of shares is on capital account and gives rise to no income. Therefore, Section 56(1) is a residual section to assess incomes and cannot be used to assess share premia which is a capital receipt. 8.10 In light of the above submissions, the ld.AR prayed for dismissing the appeal of the revenue and confirm the orders of the ld.CIT(A). 9. We have heard the rival contentions, perused the materials available on record, gone through the orders of the authorities along with the plethora of judicial pronouncements of various hon ble courts. The facts with regard to impugned order are not in dispute and hence for the sake of brevity the facts are not repeated. Search and seizure operations under Section 132 of the Act were carried out in the premises of the assessee in Tamilnadu and Chhattisgarh on 23.11.2015, 09.12.2015 and concluded on 13.01.2016. During the search, certain documents were seized from the premises of the assessee. The reassessment for AY 2010-11 and the assessment for AY 2012-13 to AY 2014-15 were concluded after the search and the details of receipt of share capital from MJC and Enerk was accepted without any adjustment. 9.1 The Transfer Pr .....

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..... rovisions of the Act. b) The findings of the TPO are in different context of benchmarking the import transaction of equipment and the same cannot be applied simply here. The AO has not given any specific reasons as to how he treated the share premium as unexplained income to come under purview of Section 56(1) of the Act. The AO has not disputed the fact that share premium has been received by the assessee from Mudajaya and Enerk, which are non-residents. Therefore, this is clearly a capital receipt c) In the case of Vodafone India Services Private Limited v Additional CIT [2014] 50 taxmann.com 300 (Bombay), it has been clearly held that share premium is a capital account transaction and it does not give rise to income. This decision has been accepted by the department and no further appeal filed before Hon'ble Supreme Court. CBDT has also given an Instruction No. 2 of 2015 dated 29 January 2015, refraining the officers of the department from treating the share premium as income. In view of the above, addition u/s. 56(1) is not possible on the impugned share premium capital transactions. 9.4 We note that the entire basis of the present appeals is the transfer pricing orders whe .....

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..... absence of any incriminating material found during the course of search under section 132 or requisition under section 132A of the Act, 1961 . 9.6 Further, in respect of assessments under Section 153C the same principle was reiterated by the hon ble Supreme Court in DCIT v U.K. Paints Ltd [2023] 150 taxmann.com 108 (SC). Even earlier the hon ble Delhi High Court had held in PCIT v Vikas Telecom Ltd [2022] 135 taxmann.com 362 (Delhi) had held that post-search enquiries cannot be the basis of assessments under Section 153A/153C. Therefore, the reliance placed by the AO on the TP orders passed after the search cannot be countenanced. 9.7 We also accept the assesse s submissions that an Assessing Officer should not step into the shoes of a businessman to decide what should be the right price for issue of shares. This principle has been stated in several cases by the Hon ble Supreme Court of India, and cited by the AR. It has been repeatedly held by the Supreme Court in a number of cases that it was not open to the Assessing Officer to substitute his judgement over that of the businessmen. Moreover, in this case, the share premium was an international transaction with an associated ent .....

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..... ncome whereas share premia is capital in nature as held by the Bombay High Court in Vodafone India Services Private Limited v Additional CIT (supra). The matter is now beyond any dispute because after the decision of the Bombay High Court in the Vodafone India case, the CBDT issued an instruction No 2 of 2015 noting that the Court had held that share premium was a capital account transaction that does not give rise to income and that the Board had accepted the said decision and directed that all field officers should adhere to the ratio decidendi of this judgement. This Instruction is binding on the Assessing Officer under Section 119 of the Act, as per the decision of the Hon ble Apex court in the case UCO bank Vs.CIT (1999) 237 ITR 889 (SC). Therefore the action of the learned CIT Appeals in applying the CBDT Instruction to delete the addition cannot be faulted. 10. In light of the above discussions and in the present facts and circumstances of the case and by relying on the various decisions of the hon ble courts, the action of the ld.CIT(A) in deleting the additions made by the AO u/s. 56(1) on account of share premium at Rs. 240/- per share collected by the assessee through al .....

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