ACIT-16(1), MUMBAI v. GOLDEN LINE STUDIO PVT. LTD., MUMBAI

Per B.R. Baskaran (AM) : The appeal filed by the Revenue is directed against the order dated 19.7.2016 passed by the learned CIT(A)-4, Mumbai and it relates to A.Y. 2011-

12. The Revenue is aggrieved by the decision of the learned CIT(A) in deleting the addition of excess premium received by the assessee on issue of preference shares made by the Assessing Officer u/s. 68 of the Act.

2. Facts relating to the issue are stated in brief. The assessee is engaged in the business of film production in the field of providing visual effects and animation facilities. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has issued 6,10,825/- non- cumulative, non-convertible redeemable preference shares on 1.4.2010 having face value of ` 10/- each at a price of ` 500/-. Thus, the assessee has collected ` 490/- as share premium. The above said preference shares are redeemable at ` 750/- each after expiry of five years from the date of issue. The shares were allotted to a single person named M/s. Sahara India Commercial M/s. Golden L ine Studio Pvt. Ltd. Corporation Limited. The Assessing Officer asked the assessee to justify huge premium collected on issue of preference shares. The assessee explained that preference shares stand on different footing from equity shares and hence the tests applied to equity shares should not be applied to preference shares. The assessee made following submissions before the Assessing Officer in this regard:- " this is in reference to the query raised by your goodself for A. Y. 20] 1-12 in respect of 610825 shares allotted to Sahara India Commercial Corporation Limited at the premium of Rs,490/- resulting into total share premium ofRs.29,93,04,250/-. Facts of the assessee 's case: During the year under consideration, the assessee Geon Studio Pvt. Ltd. has issued 610825 Non-cumulative Non-Convertible Redeemable preference shares to its holding company, Sahara India Commercial Corporation Limited at an issued price of Rs.500/- (including face value of Rs. 10/-. and premium of Rs.490). The complete board resolution in respect of the said issue is enclosed herewith as Annexure 1. your goodself has sought the basis for arriving at the premium allotment for the shares. In this regards, it is to be noted that the shares allotted are preference shares. First and foremost it is contented that the rules of valuation of said shares are completely inapplicable to normal rules for valuation of the equity shares. As per the provisions of Companies Act, 1956, Preference Shares has preferential right over equity shares dividend and repayment of capital on winding up. Further, another major difference is that Preference Shares does not participate in the profits of the company. We have tabulated below salient features of Preference Shares vis-a- vis equity shares: Basis of difference Preference share Equity Share Rate of dividend The rate of dividend on preference share is fixed. The rate of dividend on equity share is changed from year to year depending upon the availability of profits. Payment of dividend They have a right to receive dividend before any divided is paid on equity shares Dividend on equity shares is paid, after any dividend is paid on preference shares. Participation in management Preference shareholders are not entitled to participate in management. Equity share holders are entitled to participate in management. M/s. Golden L ine Studio Pvt. Ltd. Winding up On the winding up, they have a right to return of capital ahead (before) of the capital returned on equity shares In this case, they have been paid only when preferences capital is paid in full. Voting rights Preference shareholders do not have any voting rights Equity shareholders enjoy voting rights. From the above, it is evident that preference shares are different from equity shares. Preference share are like quasi-debt instruments whereas equity shares are nothing but participating rights of the shareholders in the company. We further submitted that the valuation of equity shares is dependent on the intrinsic value of the company as they have rights in assets/funds of the company. One cannot judge the actual value of equity shares from its face value. For instance, an equity share of face value of Rs.

10 can even fetch Rs. 1000 on winding up of a company if sufficient funds are left for the equity share holders. However, preference shares being quasi debt instruments does not have such rights. Preference share holders can at the most receive face value of the preference shares & premium (which is decided at the time of issue of shares) on redemption/winding up. For instance, a preference share of face value of rs.100 redeemable at a premium of 10% at the time of redemption will fetch Rs. 110 on redemption irrespective of the value of the assets of the company. Accordingly, it is submitted that the valuation of such quasi debt instruments is entirely made on the basis of the returns received by the investor of such instruments. As evident from the boards resolution, each preference share would be redeemable at a price of ` 750/- per share on expiry of the 5 year period. Thus, the said investment would fetch [he investor, Sahara India Commercial Corporation Limited a return of approximately 10%p.a. over a period of 5 years on such preference shares. The said aspect clearly proves the valuation made by the assessee company. The above illustration clearly highlights the difference in the valuation rules for equity shares vis-a-vis preference shares. In the assessee's case, an investor has invested Rs.500 per share on which a reasonable return is generated over the period. The same clearly highlights the fact that the valuation of preference share was made on fair basis............. " Accordingly, learned AR submitted that valuation of preference shares should be made on the basis of returns received by the investor from such instruments. It was submitted that investor shall receive ` 750 per share after expiry of five years period, which would give a return of approximately 10 % per annum. Accordingly, it was submitted that premium of ` 490/- is justified. M/s. Golden L ine Studio Pvt. Ltd.

3. The Assessing Officer was not convinced with the contention of the assessee. He noticed that the assessee has been incurring losses from last two years. He also took the view that the claim of redemption of preference shares at ` 750/- per share is also not acceptable for the reason that any expectation based on future cannot be reckoned for taking decision at present. Accordingly, the Assessing Officer took the view that the fair market value of unquoted shares should be determined on the basis of balance-sheet of the assessee. Accordingly, the Assessing Officer arrived at fair market value of the shares at ` 38/- per share. Accordingly, the Assessing Officer took the view that reasonable premium should have been ` 28/- per share. Accordingly, Assessing Officer took the view that excess premium of ` 462/- per share which worked out to ` 28.22 crores is not satisfactory and accordingly assessed the same as income of the assessee.

4. The Ld CIT(A) took the view that the AO has applied the provisions of Rule 11UA for valuing the Shares, which was incorporated in consequence of insertion of provisions of sec.56(2)(viib) of the Act. The Ld CIT(A) noticed that the provisions of sec.56(2)(viib) were inserted w.e.f. 1.4.2013, which is held to be prospective in nature by Delhi bench of ITAT in the case of First Blue Home Finance Ltd vs. ACIT(2015)(62 taxmann.com 80). The assessee also contended that Share premium is a Capital receipt and for this purpose, it took support of the decision rendered by Honble Bombay High Court in the case of Vodafone India Services P Ltd vs. Union of India & Ors (2014)(368 ITR 1). The above said contention was accepted by Le CIT(A), in view of the Instruction No.500/15/2014/APA-1 dated 29-01-2015 issued by CBDT, wherein the CBDT has stated that it has accepted the decision of Honble Bombay High Court referred above and also directed the DRP and CIT(A) to follow the above said decision. Further, the CIT(A) also noticed that the assessee has issued the Preference Shares only to its holding Company named M/s Sahara India Commercial Corporation Ltd, which fact has not been disputed at all by the AO. He also noticed that the assessee has issued the Preference Shares by following due procedures prescribed under the Companies Act. Accordingly, M/s. Golden L ine Studio Pvt. Ltd. the Ld CIT(A) took the view that there is no justification in determining the Share Premium at Rs.28/- per share. He also expressed the view that the share premium amount has been determined on a reasonable basis, since the preference shares are redeemable at Rs.750/- per share after five years. Accordingly he deleted the addition made by the AO. The revenue is aggrieved by the decision of Ld CIT(A).

5. The Ld D.R submitted that the Ld CIT(A) has proceeded on the basis that the AO has invoked the provisions of sec.56(2)(viib) of the Act for making this addition. He submitted that the AO, nowhere invoked the provisions of sec.56(2)(viib) of the Act. He submitted that the AO has, impliedly, invoked the provisions of sec.68 of the Act, as he did not agree with the nature of receipts. The high amount of premium charged on the issue of preference shares is beyond human probabilities. He submitted that the assessee has not given any basis for charging high premium. The Ld D.R submitted that in an identical case, the Mumbai bench of Tribunal has confirmed assessment of excess premium in the case of Varsity Education Management P Ltd (ITA No.486/Mum/2015 dated 11.01.2017). He submitted that the Tribunal, in the abovesaid case, took note of the fact that the book value of shares was NIL and hence there was no basis for receiving share premium of Rs.1030/- per share. The Ld D.R submitted that the Tribunal has also referred to the decision rendered by Honble Bombay High Court in the case of Major Metals Ltd (207 taxman 185) and also the decision rendered by the Tribunal in the case of Angel Pipes and Tubes (P) Ltd (2014)(50 taxmann.com 128). Accordingly, the Ld DR submitted that the decision rendered by Ld CIT(A) should be reversed.

6. The Ld A.R submitted that the assessee has received the funds towards preference shares in the earlier years and during the year under consideration, the assessee has only allotted the shares. He submitted that the provisions of sec.68 shall apply only in the year in which the funds were received. During the year under consideration, the assessee has passed a journal entry by transferring funds received in the earlier years to Preference Share capital M/s. Golden L ine Studio Pvt. Ltd. account. Accordingly the Ld A.R submitted that the AO was not right in law in invoking provisions of sec.68 during this year, since funds were not received during this year. In support of this proposition, the Ld A.R placed his reliance on the decision rendered by Honble Supreme Court in the case of P Mohanakala (291 ITR 278)(SC).

7. The Ld A.R submitted that the assessee has received share premium on Preference Shares, which is non-convertible and also redeemable. Hence the AO was not right in applying the tests applicable to equity shares to preference shares. He submitted that Share premium is a capital receipt and hence the same cannot be subjected to tax, since the AO accepted the identity & creditworthiness of the Investor and also genuineness of transactions. He submitted that the preference shares, in the instant case, is redeemable after five years. He submitted that, in substance, the assessee has borrowed funds of Rs.500/- by way of preference shares and repaid Rs.750/- after five years. He submitted that the assessee had also received Unsecured loans from M/s Sahara India Commercial Corporation Ltd during the year under consideration and the AO has accepted the same as genuine. He submitted that the decision rendered in the case of Major Metals (supra) cannot be taken support of, as the said decision has been rendered against the orders passed by Settlement Commission. He submitted that the Power of Honble High Court against the orders passed by Settlement Commission is not appellate power, but restricted

(i) grave procedural defects such as violation of mandatory procedural requirement of provisions in Chapter XIX-A and or violation of rules of natural justice;

(ii) absence of nexus between reasons given and decision taken by Settlement Commission. He submitted that it was so held by Honble Karnanata High Court in the case of N.Krishnan vs. Settlement Commission (1989)(180 ITR 585)(Kar). The Honble Karnataka High Court further held that ban error of fact or of law alleged to have been committed by Settlement Commission cannot be looked M/s. Golden L ine Studio Pvt. Ltd. into by High Court. The Ld A.R also placed his reliance on the decision rendered by Honble Supreme Court in the case of R.B.Shreeram Durga Prasad & Fatehchand Nursing Das (1989)(176 ITR 169)(SC). Accordingly the Ld A.R submitted that the decision rendered by Honble Bombay High Court in the case of Major Metals (supra) cannot be taken support of. Accordingly, the Ld A.R submitted that there is no reason to interfere with the decision rendered by Ld CIT(A).

8. We have heard rival contentions and perused the record. We notice that the assessee has issued Non-convertible Redeemable Preference Shares to its holding company named M/s Sahara India Commercial Corporation Ltd @ Rs.500/- per preference share against the face value of Rs.10/- per share. The share premium on the preference shares so issued worked out to Rs.490/- per share. The AO took the view that the share premium amount is on the higher side. Based on the net asset value of the assessee, the AO worked out the value of shares at Rs.38/- per share. Accordingly the AO has taken the view that the share premium should have been charged at Rs.28/- and accordingly assessed the excess premium as income of the assessee.

9. We notice that the AO has failed to appreciate the fact that the Preference Shares and Equity shares stand on different footing, which has been explained by the assessee before the AO. We have extracted the submissions made by the assessee before the AO in the preceding paragraph explaining the difference between Equity shares and Preference shares. We notice that the AO has failed to appreciate the same. We agree with the submissions of the assessee that the Equity shares and Preference shares stand on different footing. While the equity share holders are the real owners of the company, the preference share holders are not in fact, the owners of the company. They get preference over the equity share holders on payment of dividend and repayment of equity. Hence the Net asset value of the company really represents the value of Equity shares and not Preference shares. Hence, in M/s. Golden L ine Studio Pvt. Ltd. our view, the AO has misdirected himself in comparing the Net Asset value of the company with the Preference Shares.

10. The Ld A.R submitted that the assessee has also received unsecured loans from named M/s Sahara India Commercial Corporation Ltd and the AO has accepted the same as genuine, i.e., he did not make any addition. In respect of money received against issue of Preference shares also, the AO has accepted the face value and also the premium upto Rs.28/- per share. Hence the basis for making the impugned addition was that the AO was of the view that the share premium should not have exceeded Rs.28/- per share. In this regard, it is pertinent to note that the AO has not taken support of any of the provisions of the Income tax Act to assess the alleged excess premium. There should not be any dispute that all receipts do not constitute income assessable under the Act, meaning thereby, no receipt can be assessed to income tax unless there is authority under the law to assess the same. The Honble jurisdictional High Court has held in the case of Vodafone India Services P Ltd (supra) that the receipt by way of share capital is Capital receipt. In the instant case, the AO has accepted that the assessee has received money by issuing Preference Shares. The grievance of the AO is that the Share Premium is excessive in nature. As stated earlier, the AO has not drawn support from any of the provisions of the Act to assess the alleged excess premium.

11. The Ld CIT(A) has made it clear that the provisions of sec. 56(2)(viib), which deals with collection of excess premium on shares shall apply only from AY 2013-14. The Ld D.R contended that the AO has not invoked the provisions of sec.56(2)(viib) of the Act. Since the assessing officer did not specify any section of the Act under which he assessed the alleged excess premium, the Ld D.R contended that the AO has presumably invoked the provisions of sec.68 of the Act. Accordingly, the Ld D.R submitted that the assessee is required to prove the nature and source of the receipts. The Ld D.R submitted that in the instant case, the nature was not proved. M/s. Golden L ine Studio Pvt. Ltd.

12. Thus, it is the case of the revenue that the nature of receipt was not proved by the assessee. There is no dispute that the Source has been proved. There is no dispute with regard to the fact that the assessee has received the impugned funds by way of Share Premium on issue of preference shares. In the books of accounts also, the assessee has credited share premium account only with the amount received. Hence, according to the assessee, the nature of receipt is Share premium received on issue of preference shares. We have noticed earlier, the assessee has received the money on issue of Non- convertible and Redeemable preference shares, meaning thereby, the assessee has to return the money received by way of preference shares. The issue price was Rs.500/- per share including the premium and the same shall be redeemed at Rs.750/- per share after a period of five years. If we consider the issue price and the price at which the shares are proposed to be redeemed, it can be noticed that there is commercial consideration involved in these transactions. Hence the Ld A.R argued that the substance of the transactions should be seen over the form. The revenue has suspected the nature of receipt only for the reason that the book value of share stand at Rs.38/- only. As observed earlier, the above said book value relates to Equity Shares and hence it cannot be adopted for Preference Shares. Hence we are of the view that, on the basis that the share premium is in far excess of book value, the nature of receipt of share premium cannot be doubted with, as equity shares and preference shares stand on different footing. Hence we are unable to agree with the contentions of Ld D.R that the assessee did not prove the nature of receipt.

13. With regard to the decision rendered by Honble Bombay High Court in the case of Major Metals (supra), the Ld A.R has pointed out that the said decision has been rendered by Honble Bombay High Court against the orders passed by Settlement Commission, wherein the jurisdiction of Honble High Court is restricted. The Ld D.R could not contradict this contention of the Ld A.R. The decision rendered by Mumbai bench of Tribunal in the case of M/s Angel pipes and Tubes (P) Ltd (supra) only discusses about the scope of M/s. Golden L ine Studio Pvt. Ltd. provisions of sec.68. In the case of Varsity Education Management P Ltd (supra), the Tribunal has taken support of the decision rendered by Honble Bombay High Court in the case of Major Metals and the decision rendered by Mumbai Tribunal in the case of Angel Pipes and Tubes P Ltd (supra) and held that the excess share premium was not explained to the satisfaction of the AO.

15. However, in the instant case, we are of the view that the nature of the transaction has been explained by the assessee as Share Premium, which could not be contradicted by the revenue with any other material. There is no dispute with regard to the Source. Hence, in effect, the conditions prescribed in sec. 68 of the Act has been fulfilled by the assessee. With regard to the basis for excess premium, we have noticed that the AO has considered the share premium amount as excess in nature, only for the reason that it is in excess of Book value of shares. We have noticed that the book value of shares would value only Equity shares and not Preference shares. Hence, the very basis on which the AO determined the excess premium should, in our view, is not sustainable. In any case, the assessee has shown that the transaction is a commercial transaction involving receipt of money @ Rs.500/- per share and repayment of the same @ Rs.750/- per share after a period of five years. Yet another point, which supports the case of the assessee is that the assessee had received funds in the earlier years and not during the year under consideration. During the year under consideration, the assessee has transferred the funds to preference shares account and shares premium account by passing journal entries. There should not be any doubt that the provisions of sec.68 shall apply only in the year in which the cash credit was found.

16. In view of the foregoing discussions, we are of the view that there is no justification in assessing the alleged excess premium as income of the assessee. Accordingly we are of the view that the Ld CIT(A) was justified in deleting the impugned addition and accordingly we uphold his decision. M/s. Golden L ine Studio Pvt. Ltd.

17. In the result, the appeal filed by the revenue is dismissed. Order has been pronounced in the Court on 31.8.2018. Sd/- Sd/- (RAMLAL NEGI) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 31/8/2018 Copy of the Order forwarded to :

1. The Appellant

2. The Respondent

3. The CIT(A)

4. CIT

5. DR, ITAT, Mumbai

6. Guard File. BY ORDER, //True Copy// (Senior Private Secretary) PS ITAT, Mumbai