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INCOME TAX OFFICER-1(3)(2), MUMBAI v. SINGHAL GENERAL TRADERS PRIVATE LIMITED, MUMBAI
Factual and Procedural Background
This is an appeal filed by the Revenue against the order of the learned Commissioner of Income Tax (Appeals) dated 22.03.2017 in respect of assessment year 2012-13. The assessing officer (AO) had treated share premium of Rs. 7,30,78,750 credited in the books by the assessee-company as unexplained income and made an addition under Section 68 of the Income-tax Act, 1961. The AO observed that the assessee issued 3,84,625 equity shares at a premium of Rs. 190 per share and allotted them to specified shareholders. The AO accepted that the source of funds was explained but doubted the reasonableness/genuineness of the share premium in view of the company's loss-making status and lack of underlying assets, and relied on certain decisions concerning shell companies and Major Metals Ltd. The assessee filed detailed documents (PANs, income-tax return acknowledgements, bank statements, balance sheets, resolutions, etc.) asserting identity, creditworthiness, and the capital nature of the receipt.
The learned CIT(A) deleted the addition, concluding that the assessee had established identity, genuineness and creditworthiness of the shareholders and relying on the Bombay High Court decision in Vodafone India Services Pvt. Ltd., CBDT Instruction No.2/2015, and ITAT precedent (Green Infra Ltd.), holding the share premium to be capital in nature and not assessable under Section 68 for the relevant year. The Revenue appealed to the ITAT (the present appeal). The ITAT heard both sides, examined the record and legal authorities, and delivered its order on 24.02.2020.
Legal Issues Presented
- Whether the assessing officer was justified in treating the amounts credited as share premium (Rs. 7,30,78,750) as unexplained income assessable under Section 68 of the Income-tax Act, 1961 for assessment year 2012-13.
- Whether receipt of share capital/share premium is a capital receipt (and therefore not taxable as income) for the assessment year in question, particularly in light of the Bombay High Court decision in Vodafone India Services Pvt. Ltd. and subsequent CBDT instruction.
- Whether the learned CIT(A) erred in directing deletion of the addition made under Section 68 by relying on case law and CBDT Instruction No.2/2015, and whether the obligation to conduct further inquiry should have shifted to the CIT(A) (as argued by Revenue with reference to CIT vs Jansampark Advertising).
- Whether post-2013 amendments (e.g., provisions under Section 56(2)(viib) or the proviso to Section 68) apply retrospectively to the assessment year 2012-13 (i.e., whether the AO could examine justification of premium for AY 2012-13).
Arguments of the Parties
Appellant (Revenue) — Principal contentions
- The AO did not examine whether the transactions (receipt of share capital/share premium) were genuine; the obligation for proper inquiry can shift to the CIT(A) based on the Delhi High Court decision in CIT vs Jansampark Advertising and Marketing (P) Ltd.
- The learned CIT(A) erred in directing deletion of the addition made by the AO under Section 68 in respect of share premium of Rs. 7,30,78,750.
- The CIT(A) wrongly held that mere submission of PAN, ITR acknowledgements, banking channel receipts and ROC-filed board resolutions suffice to establish identity, creditworthiness and genuineness of the share premium receipts.
- The CIT(A) erred in treating the receipt of share capital/premium as capital in nature and not taxable under Section 68 by relying on Vodafone and CBDT Instruction No.2/2015, which, according to Revenue, pertain to different factual or legal contexts (e.g., international transactions or not directly to taxability under Section 68).
- The AO was justified in drawing adverse inference from the fact that the assessee company was loss-making and had no underlying assets, and was correct to refer to authorities on shell companies and Major Metals Ltd. to support invoking Section 68.
Respondent (Assessee) — Principal contentions
- The assessee produced documentary evidence (PAN, ITR acknowledgements, bank statements, balance sheets, share application money account, board resolutions, etc.) to prove identity, genuineness, and creditworthiness of the subscribers and that the premium was paid through banking channels.
- The share premium was decided by the company based on its book value and expected prosperity; the company presented computations showing book value per share and enclosed balance sheets and intrinsic valuations of investments to justify the premium.
- The AO accepted the source of funds; he only questioned the reasonableness of the premium — which, the assessee argued, is a commercial/business decision and the AO cannot substitute his view for that of the business (i.e., cannot step into the shoes of a businessman to re-determine share price).
- The assessee relied upon the learned CIT(A)'s reliance on Vodafone (Bombay HC), CBDT Instruction No.2/2015, and ITAT decisions such as Green Infra Ltd. to argue that share premium is a capital receipt and not assessable as income under Section 68 for the relevant year (AY 2012-13).
- The assessee also relied on other judicial pronouncements (including orders from Bombay High Court and Supreme Court decisions referenced by counsel) to support that Section 56(2)(viib) and the proviso to Section 68 introduced with effect from 1.4.2013 are prospective and not applicable to the assessment year under consideration.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT vs Jansampark Advertising and Marketing (P) Ltd (ITA No. 525/2014) | The Revenue referred to this decision to contend that the obligation to conduct proper inquiry on facts may shift to the CIT(A). | The opinion records Revenue's reliance on this case as a ground but does not elaborate further on its content beyond the Revenue's assertion. |
| Vodafone India Services Pvt. Ltd. vs. Union of India & Others (2014) 368 ITR 1 (Bombay HC) | Held that premium on share issue was on capital account and does not give rise to income (in that case concerning issue of shares to non-resident holding company and transfer pricing adjustment). | The ITAT and the learned CIT(A) relied on this decision (and CBDT Instruction accepting it) to hold that share premium is capital in nature and deletion of addition under Section 68 is justified for AY 2012-13. |
| Green Infra Ltd., ITA No. 7762/Mum/2012 (dated 23.08.2013) | Held that share premium should not be treated as income under Section 56(1) and that Section 68 need not be applied to treat share premium as income (per the opinion). | The CIT(A) and ITAT cited this ITAT decision as supportive authority for deletion of additions treating share premium as capital receipt. |
| Major Metals Ltd. vs. Union of India (359 ITR 450) | The opinion records that this decision related to the Settlement Commission's findings where subscribers to shares were held not creditworthy; that factual context supported invocation of Section 68 in that case. | The ITAT distinguished Major Metals on facts because in the present case the AO had accepted the source of funds and there was no finding of non-existence or lack of creditworthiness of subscribers. |
| Pr. CIT vs. Apeak Infoteck (397 ITR 148) | The opinion summarises the High Court's exposition that amendments and provisos to Section 68 effected from 1.4.2013 were not applicable to AY 2012-13 and that pre-amendment Section 68 could not be invoked where evidence of identity, capacity and genuineness was led. | The ITAT relied on this authority to support the view that the proviso/amendment to Section 68 is prospective and not applicable to the assessment year before it. |
| M/s. Gangadeep Infrastructure (P) Ltd. (Income Tax Appeal No.1613 of 2014; decided 20 March 2017) | Held that the proviso to Section 68 introduced with effect from 1st April 2013 will not have retrospective effect and applies prospectively (i.e., from AY 2013-14 onwards). | The ITAT cited this decision to conclude that examination of justification of share premium was not empowered for AY 2012-13 under the post-2013 provisions. |
| M/s. G.S. Homes and Hotels Pvt. Ltd. (Apex Court decision referenced) | Referenced by the High Court in prior decisions as supporting the proposition that share capital/premium are capital receipts and not income (as noted in the opinion). | The opinion references the Apex Court decision as one of the authorities supporting the proposition that share premium is not income for the relevant period; the ITAT relied on this body of jurisprudence. |
| Pr. CIT vs. NRA Iron & Steel Pvt. Ltd. (Civil Appeal No. 29855 of 2018) (SC) | The opinion lists this case as relied upon by the Departmental Representative; the specific principle from the case is not detailed in the provided opinion. | The opinion records the Revenue's reliance but does not specify how this authority was applied in the present case. |
| Pr. CIT vs. NDR Prompters Pvt. Ltd. (ITA No. 49 of 2018) (Delhi HC) | The opinion lists this decision among authorities relied upon by Revenue; the specific rule or principle cited is not detailed in the provided opinion. | The opinion records reliance; the ITAT's application of this specific authority is not described further in the text. |
| CIT vs. Navodaya Castle Pvt. Ltd. (367 ITR 306) (Delhi HC) | The opinion lists this decision among the authorities relied upon by Revenue; specifics are not detailed in the provided opinion. | The opinion notes the Revenue's reliance; no specific application by the ITAT to facts here is detailed in the text. |
| Navodaya Castle Pvt. Ltd. vs. CIT (2015-TIOL-314-SC-IT) (SC) | The opinion lists this Supreme Court entry among Revenue's authorities; the specific principle cited is not described in the provided opinion. | The opinion records the Revenue's citation; the ITAT does not spell out how this case bears on the present facts in the provided text. |
| CIT vs. MAF Academy (P) Ltd. (361 ITR 258) | Listed by the Revenue; the opinion does not detail the rule/principle from this case in the provided text. | No specific application by the ITAT is described in the opinion for this authority. |
| Rick Lunsford Trade & Investment Ltd. vs. CIT (385 ITR 399; also reported 2016-TIOL-207-SC-IT) | Listed by Revenue; the opinion does not provide the rule or principle cited from this case. | The opinion records reliance; no detailed application by the ITAT is recorded in the provided text. |
| CIT vs. Nipun Builders & Developers (P) Ltd. (350 ITR 407) | Listed among Revenue's authorities; the opinion does not describe the principle cited. | The opinion records the citation; the ITAT's use of this authority is not elaborated in the provided opinion. |
| CIT vs. Nova Promoters & Finlease (P) Ltd. (342 ITR 169) | Listed by Revenue; the opinion does not give details of the rule/principle from this case. | No specific application by the ITAT is described in the provided text. |
| CIT vs. Ultra Modern Exports (P) Ltd. (220 Taxmann 165) | Listed by Revenue; the opinion does not state the rule/principle cited in the provided text. | No explicit application by the ITAT is set out in the provided opinion. |
| CIT vs. Frostair (P) Ltd. (210 Taxman 221) | Listed by Revenue; the opinion does not elaborate the principle cited. | The opinion notes the citation; the ITAT's application is not specified in the provided text. |
| CIT vs. NR Portfolio Pvt. Ltd. (263 CTR 456) | Listed by Revenue; the principle cited is not detailed in the provided opinion. | The opinion records the citation without specifying its application to the present proceedings. |
| CIT vs. Empire Builtech (P) Ltd. (366 ITR 110) | Listed among authorities relied upon by Revenue; the opinion does not set out the legal principle from it. | No specific application by the ITAT is detailed in the provided opinion. |
| CIT vs. Focus Exports (P) Ltd. (228 Taxman 88) | Listed by Revenue; the opinion does not provide the principle cited from the case. | The opinion records the citation but does not spell out any application to the facts in the provided text. |
| N.K. Proteins Ltd. vs. CIT (2017-TIOL-23-SC-IT; and 2016-TIOL-3165-AHM-IT) | Listed by Revenue; the specific rule or principle cited in the opinion is not detailed. | The opinion notes the citations; the ITAT's application (if any) is not described in the provided text. |
| Udit Kalra vs. ITO (ITA No. 220/2019 & CM No. 10774/2019 dt. 08.03.2019) | Listed by Revenue; the opinion does not state the specific legal principle relied upon. | The opinion lists the authority among those relied upon by the Departmental Representative; no further application is described. |
| Principal Commissioner of Income Tax vs. Rohtak Chain Company (110 Taxmann.com 59) | Referred to by assessee's counsel (decision passed after NRA Steel); the opinion does not detail the legal principle in the provided text. | The opinion records the assessee's reliance on it; no specific application by the ITAT is described in the provided text. |
| Principal CIT vs. Chain House International (P) Ltd. (98 Taxmann.com 47) (MP) — SLP dismissed by SC | Referred to by assessee's counsel; the opinion does not set out the principle in the provided text. | The opinion notes the reliance; it does not further describe application to the facts in the provided text. |
| CIT vs. Gagandeepdeep Infrastructure Pvt. Ltd. (80 Taxmann.com 272) | Referred to by assessee's counsel; the opinion does not specify the rule/principle relied upon in the provided text. | The opinion records the citation as supporting assessee's case; specific application by the ITAT is not detailed beyond noting it supports the assessee. |
Court's Reasoning and Analysis
The ITAT's analysis proceeded by examining facts, evidence and relevant law as recorded in the file and the orders of the AO and CIT(A). The step-by-step reasoning in the opinion is summarized below, strictly as set out in the text:
-
Fact-finding and AO position:
- The AO observed issue of equity shares at Rs. 190 premium and accepted that the source of funds was explained (i.e., identity, bank transfers, documents submitted) but doubted the reasonableness of charging such high premium given the assessee-company's loss-making status and lack of underlying assets.
- On these bases (including reliance on decisions about shell companies and Major Metals Ltd.), the AO added Rs. 7,30,78,750 as unexplained income under Section 68.
-
CIT(A)'s conclusions:
- The CIT(A) found that the only dispute was the justification of the share premium and that the AO had accepted the source of funds.
- The CIT(A) concluded the assessee had complied with requirements to prove genuineness, identity and creditworthiness by filing PAN, ITR acknowledgements, computation of income, bank statements, balance sheets, share allotment letters and resolutions.
- The CIT(A) considered the premium to be a capital receipt and relied on Vodafone (Bombay HC), the CBDT Instruction No.2/2015 accepting Vodafone's ratio, and ITAT's Green Infra decision to hold that premium on issue of shares does not give rise to income and deleted the addition under Section 68.
-
ITAT's examination of departmental contentions:
- The ITAT heard the departmental representative who relied on a long list of cases (recorded in the order) arguing in favour of the AO's view.
- The ITAT examined whether the AO's adverse inferences (regarding company performance and lack of assets) were consistent with his contemporaneous acceptance of the source of funds. The Tribunal observed that an adverse inference about source typically accompanies findings of shell/company bogusness, which was not the case here because the AO had accepted the identity and source of funds.
- The Tribunal distinguished Major Metals (and similar decisions) on facts, noting those cases concerned findings by the Settlement Commission and circumstances where subscribers were found not creditworthy or non-existent; by contrast, in the present case the assessee had produced documentary evidence and the AO had not recorded that shareholders were unidentifiable or bogus.
-
Legal-prospective applicability of statutory amendments:
- The ITAT considered the impact of statutory amendments (e.g., Section 56(2)(viib) and proviso to Section 68) which came into force from AY 2013-14 and noted decisions of the jurisdictional High Court (e.g., Gangadeep Infrastructure) and High Court expositions (e.g., Pr. CIT vs Apeak Infoteck) holding that those amendments are prospective and do not apply to AY 2012-13.
- On that basis the Tribunal held that the AO was not empowered to examine justification of share premium under those post-amendment provisions for AY 2012-13.
-
Assessment of precedents and final conclusion:
- The ITAT reviewed the precedents relied upon by both sides and concluded that many of the decisions cited by the AO/Revenue were distinguishable on facts (e.g., because they involved doubts as to source, non-availability of subscribers or unserved notices), whereas authorities relied on by the assessee and CIT(A) (Vodafone, Green Infra, Apeak Infoteck, Gangadeep Infrastructure, G.S. Homes & Hotels) supported treating share premium as capital receipt for the relevant year.
- Given the AO had not disputed identity, creditworthiness or genuineness, the Tribunal found no infirmity in the CIT(A)'s order deleting the addition under Section 68 and concluded that the Revenue's appeal was without merit.
Holding and Implications
Holding: APPEAL DISMISSED. The ITAT upheld the order of the learned CIT(A) deleting the addition of Rs. 7,30,78,750 made by the AO under Section 68 for assessment year 2012-13.
Implications:
- Direct effect: The addition made by the AO under Section 68 in respect of share premium credited in the books (Rs. 7,30,78,750) was deleted; the CIT(A)'s order in favour of the assessee was affirmed.
- Statutory/precedential implications: The Tribunal applied and followed the jurisdictional High Court and ITAT precedents (including Vodafone/Bombay HC, Green Infra ITAT, Pr. CIT vs Apeak Infoteck and Gangadeep Infrastructure) to hold that the amendments/proviso to Sections (as introduced w.e.f. 1.4.2013) are prospective and do not apply to AY 2012-13, and that where identity, genuineness and source are established, share premium could not be taxed as income under Section 68 for the year under consideration.
- No new precedent was proclaimed by the Tribunal beyond applying and distinguishing existing authorities; the decision upholds the CIT(A)'s reasoning and confines the result to the facts and legal position applicable to AY 2012-13 as discussed in the opinion.
Order pronounced in Court on 24.02.2020. Members signing the order were Ramlal Negi (Judicial Member) and Shamim Yahya (Accountant Member). The order records copies forwarded to the Appellant, Respondent, CIT(A), CIT and DR, ITAT Mumbai.
Per Shamim Yahya (AM) :- This appeal by the Revenue is directed against order of learned CIT(A) dated 22.3.2017 and pertains to assessment year 2012-13.
2. The grounds of appeal raised by the Revenue read as under :-
1. On the facts and in the circumstances of the case and in law, whilst it is true that it is the obligation of the AO to conduct proper scrutiny of the material given the fact that the AO did not examine whether the transactions of receipt of share capital/ share premium are genuine, the obligation to conduct proper inquiry on facts would shift to Learned CIT(A) in view of the Hon'ble Delhi High Court decision in the case of CIT Vs Jansampark Advertising and Marketing (P) Ltd (ITA No. 525/2014).
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was erred in directing the deletion of the sum brought to tax by the AO as unexplained income under Section 68 of the Income Tax Act, 1961 in respect of moneys credited in the books as share premium of Rs. 7,30,78,750/-
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was erred in holding that the assessee proved identity, credit- worthiness and genuineness of moneys credited in the books as share M/s. Singhal General Traders Pr ivate Limited capital, including share premium, of Rs 7,30,78,750/-, just by submitting PAN, and acknowledgement of income-tax returns of the share holders, and that the share premium has been received through banking channel and duly supported by the board resolutions filed by the assessee company with Registrar of Companies(RoC).
4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was erred in holding that receipt of share capital / premium is capital in nature and thus cannot be brought to tax under section 68 of the Income - tax Act 1961 by relying on decision of Hon'ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. Vs. Union of India & Ors [368 ITR 1(Bom)] where in issue is relating to income arising out of international transaction in the form of issue of share and not taxability of capital receipt u/s 68 of the Income-tax Act, 1961.
5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was erred in holding that receipt of share capital/premium is capital in nature and thus cannot be brought to tax u/s 68 of the Income-tax Act, 1961 by relying on Instruction No.2 of 2015 vide F.No. 500/15/2014-APA-l dated 29.01.2015 wherein the issue is regarding acceptance of the decision of Hon'ble Bombay High Court in Vodafone Case (Supra) the form of issue of shares and not taxability of capital receipt u/s 68 of the Income-tax Act, 1961.
3. Brief facts of the case are that the assessing officer observed that assessee has received unjustified share premium during the course of your. He noted that on perusal of submissions filed by the assessee it is seen that assessee had issued 3,84,625 shares on premium @ of Rs.190/- per share during the year. The assessee allotted 1, 63,500 shares to M/s Monitor Vyapaar Pvt. Ltd., 2,15,000 shares to Blackberry Vyapaar Pvt. Ltd. And 6,125 shares to R N Navmrman Pvt. Ltd. The assessee was asked to justify the premium charged during the year. Thereafter the assessing officer noted following submissions of the assessee :- Company decided to issue shares at a premium of Rs. 190/- per share. The above share premium has been decided by the company in view of its financial position and expected prosperity. The above share premium is applicable to all the shareholder to whom shares allotted during the year. Share premium received from issue of shares is of capital in nature and forms part of the share capital of the company. The purchase of the share, after considering the various facts, agreed to purchase share at stipulated price and so this is as per mutual agreement. Allotted/purchase of the shares is a mutual agreement between shareholder and company. The company has received the amount of premium and this fact is confirmed by the respective shareholders. M/s. Singhal General Traders Pr ivate Limited Again there is; no provision in the Income-tax Act fixing the amount of premium. The share premium paid are well supported by share allotment letter and resolution passed by shareholder and company. The identity, creditworthiness and genuineness of the shareholders are proofed. Vide letter dated 26.03.2015 assessee further submitted that: That the company's book values of the Equity Shares as on 31.03.2011 was Rs.91/- per share for the face value of Rs.10/- per share which has been calculated as under: Share capital as on 31.03.2011 2848000.00 Reserve and Surplus 23138135.00 Total : 25986135.00 No. of shares as on 31.03.2011 284800 Book Value per share 91.24 That the fund of the company valued upto 31.03.2011 was invested in the group companies namely: Vandana Ispat Limited Vandana Vidhyut Limited Vandana Energy and Mineral Limited Vandana Ispat & Power Limited In the particular company Vandana Ispat Limited this company continuously earning good profit and therefore increase the value of book value. In the case of Vandana Vidhyut Limited currently there is an 8MV Bio Mass plant and further expansion of thermal power plant of 540 MV. In this company also the profit is to be expected in long term. Balance Sheet as on 31.03.2011 of Vandana Ispat Limited and Vandana Vidhyut Limited is enclosed herewith for ready reference. Therefore, premium command by the company is in view of book value and further growth in value of investment. Now in current year shareholders has accepted to purchase shares at a premium of Rs.190 per share. The company book values of the Equity Shares as on 31.03.2012 was increased to Rs.153/- per share for the face value of Rs.10/- per share which has been calculated as under:- Share capital as on 31.03.2012 6694250.00 Reserve and Surplus 96169516.00 Total 102863766.00 No. of shares as on 31.03.2012 669425 Book Value per share 153.66
4. However, the assessing officer was not convinced. He was of the opinion that it is unlikely that someone will invest at high share premium in a company which is loss-making. Though he noted that source of fund is fully explained the nature of share premium remains unjustified, he noted that the M/s. Singhal General Traders Pr ivate Limited company is making losses and there are no underlying asset. He referred to the ITAT decision regarding shell companies and also referred to Bombay High Court decision in the case of major metals Ltd in Writ petition No. 397 of 2011 and accordingly added the share premium Rs. 7,3078750 as addition under section 68.
5. Upon assessee's appeal in this regard Id CITA noted that only dispute is with regard to the justification of share premium. He Noted that the AO has accepted that source of fund is duly explained. Ld CITA distinguished the decisions relied upon by the assessing officer. He referred to submission of assessee as under :- The Appellant has submitted enough evidence to prove the identity and creditworthiness of the companies who have subscribed to share capital and premium and transaction of amount through banking channel. The Appellant has complied with all the requirement to prove:-
1. The genuineness of amount received towards share application and premium.
2. Identity of the creditor
3. Genuineness of the transaction and
4. Creditworthiness of the creditor by tiling following details :
a) Copy of Ack. of the IT Return filed for A.Y. 2012-13.
b) Computation of Total Income.
c) Share application money account
d) Bank statement and
e) Balance Sheet as on 31.03.2012
f) Copy of resolutions passed by the assessee company for allotment for Equity Shares of Rs. 10/- each at a premium of Rs. 190/-per share and copy of resolutions passed by share applicant companies to subscribe the equity shares of Rs. 190/each at a premium of Rs. 190/-per share.
6. Thereafter Ld CIT(A) noted that share price is a business consideration and the assessing officer cannot step into the shoes of businessman. In this regard Ld CIT(A) relied upon several case law. He further noted the following submissions of the assessee to buttress the point :- The appellant has further submitted that the Company is presently having investment activity. The Company is reporting loss because it is valuing investments at book value. Whereas, the intrinsic or fair market value is much more. While issuing shares, fair market value of the assets has to be M/s. Singhal General Traders Pr ivate Limited taken into account and the person paying the premium has factually benefited from the purchase of shares at premium. The Appellant had, during the course of assessment, given the fair market value of the investment held which proves the reasonableness of the premium. The loss is only a loss as per accounts as maintained as per Companies Act and as required by the Income Tax Department .This is by precedent and accounting standards, the valuation of closing stock has been at cost or market price, whichever is lower as accepted for Assessment purpose. The securities, when sold, will result in huge profit by reason of value of investment at cost price. Thus, the revenue is never at loss so far as taxes are concerned because the profit will accrue and arise only when sale is made. The Appellant encloses the intrinsic value of the investment held, which was filed with Assessing Officer to prove that the premium charged and paid for by the buyers is not unreasonable or artificial, but in consonance with the correct value. The slight variation, if any, is by reason of prudent investment knowledge of the management of the Company, in which the subscriber has faith. The Assessing Officer has accepted the factum of fair market value shown by the Appellant of the shares in paragraph 2.3 and 2.4 of the Assessment Order. However, he has rejected the explanation by giving 7 observations which were irrelevant, immaterial and given only for the sake of rejecting the claim, without any substantial finding against the Appellant. The vital finding of the Assessing Officer is that the source of fund is fully explained and therefore, in view of this, categorically upholding of the Appellant's genuineness. The other reasoning are baseless. The Appellant has also explained in the written submission on page 3 onwards the fallacy of reason given by the Assessing Officer. The Appellant emphasises that the addition made by the Assessing Officer under section 68 of the Act, which has absolutely no application to the facts of the case, hence incorrect.
7. Thereafter learned CIT(A) noted that section 56(2)(viib) was applicable from assessment year 2013 -14. Ld CIT(A) deleted the addition by concluding as under :- I have carefully considered the rival submission, facts of the case and the judicial decisions relied upon by the appellant. In the case, the AO has not doubted the nature of transactions relating to issue of share and charging of premium. In my opinion, the appellant has complied with all the requirements to prove the genuineness of the amount received towards the share application money and the premium, identity of the creditors, genuineness of the transactions and the creditworthiness of the creditor by filing relevant documents. Further the AO has not brought on record any evidence to show that the explanation of the appellant is not correct. The AO has only raised the issue of unreasonableness of the amount of premium so M/s. Singhal General Traders Pr ivate Limited received by the appellant @ Rs. 190/- per share. Therefore, the AO is not justified in making the addition u/s 68 of the IT Act. As regards, the premium charged by the appellant is concerned; the AR submitted that the company is presently having investment activity. The Company is reporting loss because it is valuing investments at book value, whereas, the intrinsic or fair market value is much more. While issuing shares, fair market value of the assets has to be taken into account and the person paying the premium has factually benefited from the purchase of shares at premium. The Appellant had, during the course of assessment, given the fair market value of the investment held which proves the reasonableness of the premium. As observed above, the AO has not doubted the genuineness of the receipt of the share premium but he formed the opinion that the exorbitant rate of share premium fixed by the appellant company and treated the same as taxable income. In this regard, CBDT Instruction No. 2/2015 dated 29.01.2015 is clear on the issue in which it has been held that premium on share issued was on account of capital account transaction and does not give rise to income. The Board's Instruction is reproduced as under:- "In reference to the above cited subject, lam directed to draw your attention to the decision of the High Court of Bombay in the case of Vodafone India Services Pvt. Ltd. for AY2009-10 (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. 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 decidenal 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 TTAT, DRP's and CsIT (Appeals). This issues with the approval of Chairperson, CBDT." I have gone through Vodafone India Services Pvt. Ltd. vs. Union of India & Others (2014) 368 ITR 01 (Bom HC), wherein it is held as under:- "For all the above reasons, we find that in the present facts issue of shares at a premium by the Petitioner to its non-resident holding company does not give rise to any income from an admitted International Transaction. Thus, no occasion to apply Chapter X of the Act can arise in such a case" In the case of Green Infra Ltd. ITA No. 7762/Mum/2Oi2 dated 23.08.2013, wherein it has been held that:- M/s. Singhal General Traders Pr ivate Limited "Considering the entire issue in the light of the material evidence brought on record in our considerate view, the Revenue authorities have erred in treating the share premium as income of the assessee u/s 56(1) of the Act. In our considerate view, for the reasons discussed hereinabove, we do not find it necessary to apply the provisions of sec.
68 of the Act. We, therefore, direct the AO to delete the addition of Rs. 47,97,10,000/-. Considering the Board's Instruction No. 2/2015 vide F No. 500/15/2014- APA-I dated 29.01.2015 and respectfully following the jurisdictional High Court Bombay's decision in the case of Vodafone India Services Pvt. Ltd. vs Union of India & Others (2014) 368 ITR 01 (Bombay HC) and jurisdictional ITAT "G" Bench decision in the case of Green Infra Ltd. ITA No. 7762/Mum/2012 dated 23.8.2013. In view of the above facts and circumstances of the case, I am of the considered opinion that share premium amount received by the appellant is in the nature of capital and same cannot be assessed u/s 68 of the IT Act and therefore addition made by the AO is deleted. Grounds 1 to 11 are, therefore, allowed.
8. Against the above order revenues in appeal before us.
9. We have heard both the Council and perused the records .learned departmental representative relied upon the grounds of appeal and the order of the assessing officer. The learned DR further placed reliance upon following case laws :- Pr.CIT Vs. NRA Iron & Steel Pvt. Ltd.(Civil Appeal No. 29855 of 2018)(SC) Pr. CIT Vs. NDR Prompters Pvt. Ltd. (ITA No. 49 of 2018)(Delhi High Court) CIT Vs. Navodaya Castle Pvt. Ltd. (367 ITR 306)(Delhi) Novodaya Castle Pvt. Ltd. Vs. CIT (2015-TIOL-314-SC-IT) (SC) CIT Vs. MAF Academy(P) Ltd. (361 ITR 258) Rick Lunsford Trade & Investment Ltd. Vs. CIT (385 ITR 399) Rick Lunsford Trade & Investment Ltd. Vs. CIT (2016-TIOL-207-SC-IT) CIT Vs. Nipun Builders & Developers(P) Ltd. (350 ITR 407) CIT Vs. Nova Promoters & Finlease(P) Ltd. (342 ITR 169) CIT Vs. Ultra Modern Exports(P)Ltd. (220 Taxman 165) CIT Vs. Frostair(P) Ltd.(210 Taxman 221) CIT Vs. NR Portfolio Pvt. Ltd. (263 CTR 456 CIT Vs. Empire Builtech(P) Ltd. (366 ITR 110) CIT Vs. Focus Exports(P) Ltd. (228 Taxman 88) N.K. Proteins Ltd. Vs. CIT (2017-TIOL-23-SC-IT) N.K. Proteins Ltd. Vs. CIT (2016-TIOL-3165-AHM-IT) UDIT Kalra Vs. ITO (ITA no. 220/2019 & CM No. 10774/2019 dt. 8.3.2019)
10. Per contra Id counsel of assessee Shri GC Srivastava relied upon orders of the Ld CITA. He submitted that the companies who have applied for the M/s. Singhal General Traders Pr ivate Limited share at a premium are in active status at the site of Department of company affairs. He referred to decision of honourable Supreme Court in the case of principle Commissioner of income tax versus Rohtak chain company 110 Taxmann.com 59 passed after NRA Steel. He submitted that Hon'ble Supreme Court has also not interfered with the order of the honourable madhyapradesh HC High Court which is on identical subject. Learned counsel further submitted that the source of fund is fully explained and no doubt has been expressed by the assessing officer. Learned counsel further submitted that various case laws from honourable Bombay High Court including the following duly covered the issue in favour of assessee :- CIT versus Gagandeepdeep infrastructure private limited (80 Taxmann.com 272) Principal CIT Vs. Chain House International (P) Ltd. (98 taxmann.com 47)(MP) SLP dismissed by Supreme Court
11. We have carefully considered the submissions and perused the records. We note that the issue in dispute is the addition as undisclosed income u/s.
68 of the sums received as share premium. The assessing officer has categorically mentioned that there is no doubt about the genuineness of the source of fund. In other words he has accepted the identity, creditworthiness and genuineness of the sources of funds of the share applicants. The assessing officer has drawn adverse inference on the ground that the assessee companys performance does not command the justification for share premium. In this regard by referring to the observations about shell companies the assessing officer has contradicted himself by observing that the source of fund is duly explained. It is quite settled that in shell companies there is doubt about the source of funds. As regards the reliance of the assessing officer on the decision of Major Metals (supra) is concerned the same was with respect to the order of the settlement commission wherein the veracity of the funds were in doubt and in those circumstances honourable jurisdictional High Court has upheld the order of the settlement commission with regard to the absence of genuineness of the source of share premium. In the present case we note that assessee has M/s. Singhal General Traders Pr ivate Limited duly submitted all the necessary documents for the verification of the identity creditworthiness and genuineness of the share applicants as evident in the order of learned CIT(A) noted in paragraph 5 above.
12. As regards the examination of justification of share premium is concerned it is noted that the concerned provision in income tax law was brought into statute books in the form of section 56 (2)(vii)(b) . This was with effect from 2013-14. Honourable jurisdictional High Court in the case of M/s. Gangadeep Infrastructure (P) Ltd. (Income Tax Appeal No.1613 of 2014 decided in 20 March 2017) has duly held that the said provision is prospective. Hence the examination of this justification for the concerned assessment year is not in accordance with the jurisdictional High Court decision as mentioned above.
13. Furthermore identical issue was examined in detail by honourable jurisdictional High Court in the case of Pr CIT vs Apeak Infoteck (397 ITR 148) the exposition from honourable High Court are summarised as under :- Amendment to Section 68 of the Act by the addition of proviso thereto took place with effect from 1st April, 2013. Therefore, it was not applicable for the subject Assessment year 2012-13. So for as the pre-amended Section 68 of the Act was concerned, the same cannot be invoked in this case, as evidence was led by the Respondents- Assessee before the Assessing Officer with regard to identity, capacity of the investor as well as- the genuineness of the investment. Therefore, admittedly, the Assessing Officer did not invoke Section 68 of the Act to bring the share premium w tax. Similarly, the CIT(A) an consideration of facts, found that Section 68 of the Act cannot be invoked. In view of the above, it was likely that the Revenue may have taken an informed decision not urge the issue of Section 68 of the Act before the Tribunal. High Court may a/so point out that decision of High Court in Major Metals Ltd. vs. Union of India, 359 ITR 450 proceeded on its own facts to uphold the invocation of Section 68 of the Act by the Settlement Commission. In the above case, the Settlement Commission arrived at a finding of fact that the subscribers to shares of the Assessee - Company were not creditworthy in as much, as they did not have financial standing which would enable them to make an investment of Rs. 6,00,00,000/- at premium - at Rs. 990 per share. It was this finding of the fact arrived at by the Settlement Commission which was not disturbed by High Court in its writ- jurisdiction. In the present: case the person who have subscribed to the share and paid share premium have admittedly made statement on oath before the Assessing Officer as recorded by the Tribunal. No finding in this M/s. Singhal General Traders Pr ivate Limited case has been given by the Authorities that shareholder/share applicants were unidentifiable or bogus. High Court found that the impugned order of the Tribunal upheld the view of the CIT(A) to hold that share premium is capital receipt and therefore, cannot be taxed as Income, This conclusion was reached by the impugned order following the decision of this Court in Vodafone India Services Pvt. Ltd. (supra) and of the Apex Court in M/s. G.S. Homes and Hotel P. Ltd. (supra). In both the above cases the Court has held that the amount received on issue of share capital including premium are on capital account and cannot be considered to be income. It was further pertinent to note that the definition of income as provided under Section 2(24) of the Act at the relevant time did not define as income any consideration received for issue of share in excess of its fair market value. This came into the statute only with effect from 1st April, 2013 and thus, would have, no application to the share premium received by the Respondent - Assesses in the previous year relevant to the assessment year 2012 - 2013. Similarly, the amendment to Section 68 of the Act by addition of proviso was made subsequent to previous year relevant to the subject Assessment year 2012-13 and cannot be invoked. It may be pointed out that High Court in Commissioner of Income Tax vs. M/s. Gangadeep Infrastructure (P) Ltd (Income Tax Appeal No.1613 of 2014 decided in 20 March 2017) has while refusing to entertain a question with regard to Section 68 of the Act has held that the proviso to Section 68 of the Act introduced with effect from 1st April 2013 will not have retrospective effect and would be effective only from Assessment year 2013-14. In view of the above, Question No .B as proposed also does not give rise any substantial question of law as it is an issue concluded by the decision of High Court in M/s. Vodafone India Services Pvt. Ltd. (Supra) and in the Apex Court in M/s. G.S. Homes & Hotels P.Ltd. (supra). Thus not entertained.
14. From the above decision of honourable jurisdictional High Court it is abundantly clear that in the present assessment year the assessing officer was not empowered in examining the justification of share premium and the decisions referred by the assessing officer has been duly held to be not applicable on the facts of this case. The decisions referred by learned DR are with reference to those cases where the source of funds have been doubted by the assessing officer or are not established beyond doubt. However in the present case there is no such doubt as the assessing officer has accepted that the sources of funds are duly explained. Further those decisions refer to the absence of the share applicants and/or their director at the given address. There is no such case made out by the Assessing Officer here. Furthermore some of the cases refer to notices returning unserved, which is not at all the M/s. Singhal General Traders Pr ivate Limited case here. Hence these decisions do not fructify the revenues case in the fact of the present case. The other decisions referred by learned counsel of the assessee duly support the case of the assessee as discussed above.
15. Accordingly in the background of aforesaid discussion and precedents, we do not find any infirmity in the order of learned CIT(A). Accordingly we uphold the same.
16. In the result appeal filed by the revenue stands dismissed. Order has been pronounced in the Court on 24.2.2020. Sd/- Sd/- (RAMLAL NEGI) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 24/02/2020 Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT(A)
4. CIT
5. DR, ITAT, Mumbai
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