TMI Blog2018 (8) TMI 1193X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt is the benefit intended to pass on to the director/shareholdes of the company. We noticed that this capital investment was received by the assessee as 0% convertible preferential shares. No doubt there is no immediate outflow to the company in terms of dividend but it is convertible in the near future as equity share capital. The AO/CIT(A) have restricted themselves by stopping the investigation based on circumstantial evidence and applying test of human probabilities. In order to lift the corporate veil for the purpose of determining whether any benefit is passed on to the shareholders/directors, they have to bring on record proper evidence/cogent material. We direct the AO to redo the assessment keeping in mind that no doubt the assessee has received this capital receipt and what circumstances which lead to investment is not important but whether the assessee company was used as a vehicle to pass on the benefit to shareholders/directors. Decided in favor of assessee for statistical purposes. - ITA Nos. 696 And 697/Hyd/2014 - - - Dated:- 10-8-2018 - SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Assessee : Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13,79,300 19,86,10,200 20,00,00,000 India Cements Ltd., Chennai 2,09,147 1,450 20,91,470 30,11,71,680 705 30,32,63,855 Suguni Constructions Pvt. Ltd., Hyd (company belonging to Sri Nimmgadda Prasad 1,37,931 1,450 13,79,310 19,86,20,640 50 20,00,00,000 Total 4,85,008 4,350 48,50,080 69,84,02,520 755 70,32,63,855 2.4 AO observed that the above investment made by the investors are not technical investments rather in an arrangement between the investors and directors of the assessee company in order to pass on the funds through the assessee, this is a method adopted by the directors to pass on the contracts and other facilities to the beneficiaries i.e. investors as directors were influential persons in the, then, State Govt of A.P. To investigate the above investments, AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and justified the information submitted by the AO to be used against assessee. 5.1 On the main issue, i.e. addition on account of share premium collected by the assessee, assessee has filed the following arguments before the CIT(A): The appellant has received money in the form of investments in preference shares from reputed companies. Their sources are not in doubt and they have fully confirmed all the investments. Therefore, section 68 cannot be invoked. With regard to section 28 of the income tax act, the appellant argued that the amount of share premium cannot be treated as a perquisite under the aforementioned section. There is also no applicability of section 56 of the Income Tax Act in the current year as the section is applicable from the assessment year 2013-14. With regard to the amount of premium, the appellant states that it is the prerogative of the investor as to what he deems to be the amount he would like to pay for certain investments. The appellant has also relied upon the ruling of the honourable ITAT Mumbai in the case of Green Infra Ltd ITA 7762/2012/Mum. Further, it was stated that it is an un-controverted fact that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng points before adjudicating the issue and the same are as under: The three companies i.e. M/s Dalmia Cements Ltd, MIs India Cement Ltd and M/s Suguni Constructions Private limited together invested ₹ 70,32,63,855/- were allotted 0% convertible preference shares at a total price of ₹ 1,450/- per share i.e. at a premium of ₹ 1,440/- per share. In other words, by spending far more than the existing capital of the appellant company, the so-called investors obtained only 4,85,008 shares i.e. 0.43% of shareholding in the assessee company. They also obtained 0% voting power because preference shares do not carry any voting power. The so-called investors also ensured that they would never get any return on their investment because the shares were 0% preference shares. Not only that, if and when the appellant company became profitable, these three investor companies would not gain any return because dividend would be given only to the equity shareholders. Further, the investor companies had provided 99.4% of their money to the appellant as premium i.e. this amount would never be counted whenever any return was to be given and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Cements Ltd. 121.25 125.00 133.20 69.25 2538.50 5.4 The CIT(A) adjudicated the issue by observing as under: 6.15 In the present circumstances, the situation and conditions warrant that the test of human probability be applied and the real should be unearthed from the cloak of the apparent. As discussed in detail supra, the entire set of transactions smacks of non-genuineness and is absolutely contrary to normal human behaviour, especially in case of three companies. 6.16 From above it is clear that the entire amounts received in the form of preference share payments as well as the premium are in the nature of income. They are not exempt under any section of the Income Tax Act. Thereafter, it is seen that the fact that these transactions have been classified as Preference Shares and Premium does not mean that these receipts are in the form of a Capital receipt. The entire classification is done with a motive for tax evasion. As has already been discussed in detail, the entire amount has been paid as a quid pro quo for the favours which the assessee has has obtain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in law including pages 31 to 34 of the same., is a bundle of contradictions and several inconsistent, contradictory and unsubstantiated reasons are cited and the entire decision in making process is completely vitiated . The conclusions reached are incorrect and deserve to be set aside/ quashed 5. The Ld. CIT-A has neither properly appreciated nor set out any reason as to why the judgments cited by the assessee were not applicable to the matter under appeal and has further placed reliance on judgments whose facts are clearly distinguishable from those of the Appellant. Further the conclusions reached are contrary to decisions of Hon'ble Court(s) and law. 6. The Ld. CIT-A has wrongly applied section 56 to a transaction that is capital in nature. 7. The impugned order ignores the findings of the AO, approbates and reprobates while enhancing the income without citing any valid reasons. The above grounds are independent and without prejudice to each other. The Appellant craves leave to add to, alter, supplement, amend, vary, withdraw or otherwise modify the grounds mentioned hereinabove at or before the time of hearing. 7. Ld. AR of the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... radesh to investor companies, even if presumed to be true for argument sake cannot justify taxation of any amount in the hands of Appellant company, as being a legal entity Appellant Company was neither in business of providing such services or was actually involved in any way. As directed during the course of hearing, we have already filed bank accounts into which the entire share investment including share premium was received, and how the same was subsequently invested into fixed assets owned by company ( cash flow statements), details of profits made by investors from such investment in Appellant Company. Details provided also establish that the entire sum and even subsequent share premium amount received from PARFICM remains invested in Appellant's business as on date of this hearing. Ld. AO brought impugned share premium to tax under Section 28 (iv) and section 68 but the Ld. CIT (A) has confirmed that the same is taxable under section 56. Department is not in appeal against Ld. CIT (A) order. The subsequent amendment by way of section 56 2(viib) effective 1.4.2013 i.e., Ay 1314 cannot be applied for impugned transactions completed during Ay 9-10 and 10-11. Fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t investment was not done upon obtaining any due diligence. 5. The investments made by Nimmagadda group were always in huge profit fetching areas like medical, media entertainment, hospitality etc., but for the first time invested at a huge rate in a Cement Company as stated above, that too in an inexperienced Company which did not commence its production and also without expecting any earning/profit out of the subject investment. 6. The said investment is unscientific and not based on any due diligence. There was no guarantee assured by the assessee that the investors would get any gain out of their investment. 7. The directors in fact stated before the AO that they had no say in fixation of the price for shares. When the investors never had any say in fixation of price of the share or in the affairs of the company, it is inconceivable that such a giant business group, have invested in the assessee company with no track record. The so-called investment is an arm-twisted investment. 8. Everybody is entitled to arrange their financial transactions in such manner to avoid tax liability or lessen the burden, but the arrangement should be real and genuine and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Considered the rival submissions and perused the material on record as well as the decisions cited. We noticed that assessee has issued and allotted shares of 0% convertible preferential shares in private placement to three investors. They are well known companies in the industry. These shares were issued with huge share premium and share premiums were determined without any basis. But all the issue and allotment of shares are within the four corners of law. The AO/CIT(A) has not brought on record any issues with the issue and allotment of shares since these are issued and allotted as per the companies Act and rules that existed at the time of issue and allotment of shares. The determination of share premium may not be as per industries norms or investor norms but these were fixed and accepted by the investing parties. 9.1 We further notice that AO/CIT(A) has noted the timing of issue and allotment of shares with such huge share premium which aroused suspicion. Accordingly, AO issued summons to the investors and none of the investors had agreed that these were invested under any influence by the shareholder/directors. AO and CIT(A) has brought on record the incidences and cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they are not the best of investment decision like:- i) no participation in the management considering only 0.43% shares were allotted to outsiders ( no controlling interest is compromised) ii) without yielding the controlling interest, investment of such huge share premium iii) no basis for issuing shares at such huge premium Apart from this aspect, the investment is legal and within the provisions of Companies Act, 1952. We are not in a position to accept the contention of the ld. AR that the investors have actually earned the profit by investing in the assessee company. We noticed that the shares were allotted with share premium of ₹ 1,440/- and the same shares were sold at ₹ 671.20. We have to compare the same shares which were sold and not compared with the portfolio of investment. We also noticed that in the subsequent submission, AO found that these shares were sold without having any say by the investors. All the negotiations were made by the directors and the proceeds were also reinvested in the assessee company as loans etc. 9.3 Again, we also cannot presume or apply test of human probabilities, we are dealing with the business transaction, it ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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