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V. R. Global Energy (P.) Ltd. v. Income-tax Officer, Corporate Ward 3(4), Chennai
Factual and Procedural Background
The present appeal challenges the Income Tax Appellate Tribunal ("C" Bench, Chennai) order dated 01.09.2016 in I.T.A. No. 871/Mds/2016, which dismissed the appeal filed by the assessee, M/s V.R. Global Energy Private Limited, against the Commissioner of Income Tax (Appeals)-11, Chennai's order dated 25.02.2016. The assessee is a company engaged in manufacture of wind electric generators and parts.
For the assessment year 2012-13 the assessee filed its return declaring income of Rs.40,46,570/-. In the balance sheet for that year, the assessee recorded a share premium balance of Rs.90,18,00,000/- (whereas it was Nil in the previous year) and introduced share capital of Rs.16,70,000/-. In the assessment year the assessee allotted 1,19,000 shares of face value Rs.10 each at a premium of Rs.5,400 per share, resulting in total issued share capital/ premium of around Rs.90.34 crores, with a small paid up capital portion and the larger balance shown as share premium recorded by book adjustment.
The background transactions involved receivables originally shown in the books of M/s Shriram Auto Finance (a firm in which one Smt. Vathasala Ranganathan held 50% partnership) amounting to Rs.60.67 crores from several companies. These liabilities were assigned to the assessee by agreements dated 01.03.2012, and subsequently on retirement of Smt. Vathasala Ranganathan from the firm, Shriram Auto Finance assigned amounts payable to the assessee in favour of Smt. Vathasala Ranganathan. Ultimately, the assessee allotted shares to Smt. Vathasala Ranganathan in purported settlement of amounts said to be due to her (aggregate sums in the range described in the record).
The return was selected for scrutiny under Section 143(2) of the Income-tax Act, 1961. The Assessing Officer completed assessment under Section 143(3) on 31.03.2015 and, treating the fresh allotment of shares and the share premium as unexplained cash credits, made additions under Section 68, determining total income at Rs.91,06,12,134/-. The Commissioner (Appeals) upheld the additions by observing that the assessee had not satisfactorily explained the valuation (premium of Rs.5,400 per share) and had not produced particulars of net worth. The Tribunal confirmed the additions and dismissed the assessee's appeal, finding the entries to be attempts to reduce tax liability and characterizing the transactions as book adjustments lacking substance.
Legal Issues Presented
- Whether the learned Tribunal erred in confirming the valuation of shares allotted in settlement of the pre-existing liability taxable as unexplained cash credit?
- Whether the learned Tribunal erred in holding that value of shares allotted to individuals would amount to unexplained cash credit?
Arguments of the Parties
Appellant's Arguments
- The shares were allotted to Smt. Vathasala Ranganathan and others in settlement of a pre-existing liability and therefore such allotment does not amount to unexplained cash credit under Section 68.
- There was no cash involved in the allotment transaction; hence provisions of Section 68 (which concern unexplained cash credits) are not attracted.
- The source of the credit (assignment/transfer of receivables and preference shares to the assessee) was explainable; the identities of the shareholders and the company's liabilities to them were established; consequently, the allotment cannot be treated as unexplained cash credit.
- Relied on precedents (Commissioner of Income-Tax v. Electro Polychem Ltd. and CIT v. Steller Investment Ltd.) to support the proposition that share application money or share capital cannot necessarily be regarded as undisclosed income of the company even if the subscribers are not genuine.
Revenue's / Respondent's Arguments
- The Assessing Officer treated the share premium and fresh share capital as unexplained cash credits under Section 68, holding the valuation methodology unacceptable and the premium of Rs.5,400 per share unreasonable.
- The assignment agreement was characterized as a purported agreement without substance and the transaction as a mere book adjustment rather than a genuine settlement.
- The Commissioner (Appeals) recorded that the assessee failed to offer convincing reasons to justify the high valuation per share and did not submit particulars of net worth, thus not proving the genuineness and creditworthiness of the credit entries.
- The Tribunal reasoned that the introduction of cash credit in the names of share premium and share capital was an attempt to reduce tax liability and, absent satisfactory explanation, the book entries must be treated as the assessee's income.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax v. Electro Polychem Ltd., [2007] 294 ITR 661 (Mad.) | Held that in case of cash credit of share application money, even if subscribers to increased share capital were not genuine, the amount of share capital would in no circumstances be regarded as undisclosed income of the company. | The Division Bench judgment was relied upon to answer the second question in favour of the assessee, supporting the view that allotment of shares (without actual cash receipt) should not automatically be treated as unexplained cash credit under Section 68. |
| CIT v. Steller Investment Ltd., [2001] 251 ITR 263 / 115 Taxman 99 (SC) | The Supreme Court held that even if subscribers to increased share capital were not genuine, the amount could not be regarded as undisclosed income of the company. | The Supreme Court authority was cited and applied alongside Electro Polychem Ltd. to support the proposition that increased share capital should not be treated as the company's undisclosed income merely because subscribers are found non-genuine. |
| CIT v. Lovely Export (P.) Ltd., [2008] 216 CTR 195 (SC) | Referenced as a contrasting authority (details of the rule in the case as cited in the opinion). | The court found the present case distinguishable from Lovely Export because, in the present matter, transactions were said to be only book transactions with no actual cash receipt; Lovely Export was therefore not treated as controlling for the present facts. |
| Cases cited on behalf of respondent (distinguished): CIT v. Focus Exports (P.) Ltd.; CIT v. Globus Securities & Finance Pvt. Ltd.; Onassis Axles (P.) Ltd. v. CIT; Olwin Tiles (India) (P.) Ltd. v. Deputy Commissioner Of Income-Tax; B.R. Petrochem (P.) Ltd. v. ITO; Rajmandir Estates (P.) Ltd. v. Pr. CIT | These authorities were cited by the respondent to support treating share-related book entries as unexplained cash credits where entries were not substantiated as actual receipts. | The court distinguished those cases on the ground that, in the present matter, the cash credits towards share capital were admittedly by way of book adjustment (i.e., not actual cash receipts), and thus the respondent's cited authorities were not directly applicable to defeat the assessee's contention here. |
Court's Reasoning and Analysis
The court first outlined the factual matrix: large share premium and nominal paid up capital arose after allotment of shares to settle amounts said to be payable to Smt. Vathasala Ranganathan following assignment/transfer of receivables and related liabilities. The Assessing Officer and the lower appellate authorities treated the allotment and the share premium as unexplained cash credits under Section 68, on the basis that valuation/premium was unreasonable, the assignment agreement lacked substance and the entries were mere book adjustments.
The court examined the legal issue whether allotment of shares in settlement of a pre‑existing liability, without any cash movement, could be treated as unexplained cash credit under Section 68. It noted the appellant's contention that Section 68 concerns unexplained cash credits and that, where no cash is involved and the source of credit is explained (assignment of receivables and issuance of shares in settlement), Section 68 is not attracted.
The court relied on two authorities (Electro Polychem Ltd. and Steller Investment Ltd.) which hold that share application money or increased share capital cannot in all circumstances be treated as the company's undisclosed income merely because subscribers may not be genuine. Taking those authorities together, the court concluded that the second question (whether value of shares allotted to individuals would amount to unexplained cash credit) must be answered in favour of the assessee.
The court distinguished the respondent's cited decisions (including Lovely Export (SC) and several others) on the factual basis that in those cases the credits were not merely book adjustments or involved circumstances different from the present facts; in the present case the record showed that credits towards share capital were by way of book adjustment and no actual cash receipt was proven. The court therefore found those authorities inapplicable to sustain the additions under Section 68.
Regarding the first question (valuation of shares and whether confirmation of valuation as taxable unexplained credit involves a question of law), the court held that the question of valuation did not raise any substantial question of law. The court's primary legal conclusion was that, on the authorities relied upon and on the facts as placed before it, the allotment in settlement of pre-existing liability without cash receipt cannot be treated as unexplained cash credit under Section 68.
Holding and Implications
Holding: The appeal is allowed; the judgment and order of the learned Tribunal dated 01.09.2016 is set aside and the additions made under Section 68 of the Income-tax Act, 1961 are also set aside. The questions of law are answered against the Revenue. No costs. CMP No. 9496 of 2017 is closed.
Implications:
- The direct effect is that the additions treating the share capital and share premium as unexplained cash credits under Section 68 are vacated in favour of the assessee for the assessment year in question.
- The court applied existing precedents to reach its conclusion and distinguished contrary authorities on the factual matrix; the opinion does not purport to lay down a new principle of law beyond the application and distinction of cited authorities.
JUDGMENT
Ms. Indira Banerjee, CJ. - This appeal is against an order dated 01.9.2016 passed by the Income Tax Appellate Tribunal "C" Bench, Chennai, dismissing the appeal being I.T.A.No.871/Mds/2016 filed by the appellant assessee, M/s.V.R.Global Energy Private Limited, against an order dated 25.02.2016 passed by the Commissioner of Income Tax (Appeals) - 11, Chennai.
2. The appellant assessee is a Company carrying on business of manufacture of Wind Electric Generators and parts of Wind Electric Generators.
3. The appellant assessee filed its return of income for the assessment year 2012-13 on 30.9.2012 declaring income of Rs.40,46,570/-.
4. In the balance sheet, the assessee showed Rs.90,18,00,000/- as share premium as against "Nil" in the immediately previous year ending on 31.3.2011. The assessee had also introduced share capital of Rs.16,70,000/-.
5. It appears that during the aforesaid assessment year, the appellant assessee had issued share capital of total value of Rs.90.34 Crores, out of which, the paid up value of shares allotted was Rs.16.7 lakhs. The balance of Rs.90.18 Crores was shown in the share premium account. The entire share premium and the paid up value was apparently by book adjustment.
6. According to the appellant assessee, one Smt. Vathasala Ranganathan was a partner holding 50% share in the firm M/s.Shriram Auto Finance, which had paid various advance amounts to banks and other institutions on behalf of the companies as per the particulars given below:
| Name of the Company | Amount |
| Century Wood Limited | 8.52 |
| TTG Industries Limited | 34.15 |
| Other | 18.00 |
7. In the books of account of M/s.Shriram Auto Finance, a total amount of Rs.60.67 crores was shown as receivable from the companies named above. This was reflected in the balance sheet of M/s.Shriram Auto Finance as on 1.3.2012.
8. The above said companies assigned their liability payable to M/s.Shriram Auto Finance to the appellant assessee by an agreement dated 1.3.2012. Therefore, in the book of accounts, the appellant assessee had shown the amounts as due from the various companies and corresponding amount as payable to M/s.Shriram Auto Finance.
9. Smt. Vathsala Ranganathan retired from the partnership of M/s.Shriram Auto Finance. On retirement of Smt. Vathsala Ranganathan, M/s.Shriram Auto Finance assigned the said amount of Rs.60.67 Crores payable by the appellant assessee to M/s.Shriram Auto Finance to Smt. Vathsala Ranganathan. Consequently, in the books of account of the appellant assessee, the said amount was shown as due to Smt. Vathsala Ranganathan.
10. On retirement of Smt. Vathsala Ranganathan from M/s. Shriram Auto Finance, in all, a sum of Rs.65.95 Crores became payable by the appellant assessee to Smt. Vathsala Ranganathan. The appellant, therefore, decided to allot its shares to Smt. Vathsala Ranganathan in settlement of the amount due to her. The appellant assessee allotted 1,19,000 shares with face value of Rs.10/- at a premium of Rs.5400/- and, therefore, the allotment of shares by the appellant to Smt.Vathsala Ranganathan was in settlement of the pre-existing liability of the appellant to Smt.Vathsala Ranganathan.
11. It is stated that the shares were allotted against the liability that had accrued to the appellant assessee from transfer to it of the assets being receivables and preference shares of equal value and correspondingly there was a liability created in favour of the transferors, viz., M/s.Shriram Auto Finance. It is further stated that the apportionment between the paid up capital and the share premium was on the basis of the agreement between the shareholders and the company and hence there is no scope for addition under Section 68 of the said Act.
12. It is stated that when liability has been created equal to amount of assets transferred and shares allotted in settlement of this liability, there can be no addition under Section 68 of the said Act as unexplained cash credit.
13. It is stated that the transactions have been confirmed by those companies and, therefore, the liability of the appellant assessee to the said companies was genuine and had accrued on transfer by the three persons of the assests by way of receivables/shares of equal value and, therefore, the conversion of these liabilities into share capital account cannot be assessed as unexplained credit.
14. The return filed by the appellant assessee was selected for scrutiny and notice was issued under Section 143(2) of the Income-tax Act, 1961, hereinafter referred to as "the said Act". The scrutiny assessment was duly completed under Section 143(3) of the said Act on 31.3.2015 determining the total income of the appellant assessee for the assessment year 2012-13 at Rs.91,06,12,134/-.
15. The Assessing Officer, vide the assessment order dated 31.3.2015, added the share premium and the share capital for the fresh allotment of 167000 shares and treated the same as unexplained cash credits under Section 68 of the said Act, while holding that the method of valuation was not acceptable and that the share premium of Rs.5400/- was unreasonable. The Assessing officer held that the assignment agreement furnished by the appellant assessee was only a purported agreement without any substance and the transaction was a mere book adjustment.
16. Aggrieved by the order of assessment, the appellant assessee appealed to the Commissioner of Income Tax (Appeals)-11, who, by order dated 25.2.2016, held that the appellant assessee had not shown any convincing reason as to how the share with a face value of Rs.10/- could be valued at Rs.5,400/- per share, despite several opportunities granted to it, and that the appellant assessee had not submitted the particulars of its net worth. In effect, the Commissioner of Income Tax (Appeals)-11 held that the appellant assessee had not proved the genuineness and credit worthiness of the credit entries in its books of accounts. Thus, Appellate Commissioner upheld the addition of share premium and share capital as unexplained cash credit under Section 68 of the said Act and dismissed the appeal of the appellant assessee.
17. On further appeal, the learned Appellate Tribunal, by order dated 1.9.2016 made in I.T.A.No.871/Mds/2016, held that by way of introducing cash credit in the name of share premium and share capital, the appellant assessee is making attempts to reduce the tax liability. The learned Tribunal further held that when the Assessing Officer found credit in the books of account and the appellant assessee could not offer any satisfactory explanation, then the entires found in the books have to be treated as income of the appellant assessee and, thus, dismissed the appeal by confirming the orders passed by the authorities below.
18. Assailing the said order, the appellant assessee has filed the present appeal raising, inter alia, the following questions of law:
19. The learned counsel for the appellant assessee contended that shares were allotted to Smt. Vathasala Ranganathan and others in settlement of pre-existing liability and, therefore, it will not amount to unexplained cash credit.
20. Counsel argued, and rightly, that when there was no cash involved in the transaction of allotment of shares, provisions of Section 68 of the said Act treating it as unexplained cash credit are not attracted.
21. Learned counsel for the appellant assessee emphatically argued that inasmuch as the source of credit in which shares were allotted was clearly explainable, the same cannot be treated as unexplained cash credit. Moreover, the identity of the shareholders and the liability of the company to shareholders has been established and, therefore, the allotment of shares cannot be treated as unexplained cash credit.
22. In Commissioner Of Income-Tax v. Electro Polychem Ltd., [2007] 294 ITR 661 (Mad.) cited on behalf of the appellant, a Division Bench of this Court held that in case of cash credit of share application money, even if it were to be assumed that the subscribers to the increased share capital were not genuine, the amount of share capital would in no circumstances be regard as undisclosed income of the company.
23. In CIT v. Steller Investment Ltd. [2001] 251 ITR 263/115 Taxman 99 (SC) also cited on behalf of the appellant, the Supreme Court held that even if the subscribers to the increased share capital of assessee-company were not genuine, the amount could not be regarded as undisclosed income of the company.
24. The question of whether the learned Tribunal erred in confirming the valuation of shares allotted in settlement of the pre-existing liability taxable as unexplained cash credit, does not involve any question of law, far less any substantial question of law.
25. However, the second question is answered in favour of the assessee and against the Revenue by the judgment of the Division Bench of this Court in Electro Polychem Ltd., (supra) and Steller Investment Ltd., (supra).
26. This case is distinguishable from the case of CIT v. Lovely Export (P.) Ltd. [2008] 216 CTR 195 (SC) in that the transactions were only book transactions, and there was no cash receipt. The decisions in (i) CIT v. Focus Exports (P.) Ltd. [2014] 51 taxmann.com 46/228 Taxman 88 (Delhi) (Mag.) ; (ii) CIT v. Globus Securities & Finance Pvt. Ltd. [2014] 41 taxmann.com 465/224 Taxman 237 (Delhi) ; (iii) Onassis Axles (P.) Ltd. v. CIT [2014] 364 ITR 53/224 Taxman 80 (Mag.)/44 taxmann.com 408 (Delhi) ; (iv) Olwin Tiles (India) (P.) Ltd. v. Deputy Commissioner Of Income-Tax [2016] 382 ITR 291/237 Taxman 342/66 taxmann.com 8 (Guj.) ; (v) B.R. Petrochem (P.) Ltd. v. ITO [2017] 81 taxmann.com 424 (Mad.) ; and (vi) Rajmandir Estates (P.) Ltd. v. Pr. CIT [2016] 386 ITR 162/240 Taxman 306/70 taxmann.com 124 (Cal.) , cited on behalf of the respondent are distinguishable, in that the cash credits towards share capital were admittedly only by way of book adjustment and not actual receipts which could not be substantiated as receipts towards share subscription money.
27. The appeal is, thus, allowed and the judgment and order of the learned Tribunal dated 1.9.2016 is set aside, for the reasons discussed above. Additions under Section 68 of the 1961 Act are also set aside. The questions of law are answered against the Revenue. No costs. Consequently, CMP No.9496 of 2017 is closed.
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