TMI Blog2013 (12) TMI 949X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee duly reflected in the financial statement of the assessee - Not even a single evidence could be found which could lead to the entire transaction as sham - The share holding pattern also cannot be said to generate any transaction which could be said to be sham - The share holders in all the related transaction under issue are directly or indirectly related to the Government of India - The Revenue authorities have erred in treating the share premium as income of the assessee u/s. 56(1) – The application of funds would be in the subsidiary companies – Decided in favour of assessee. Commencement of business – Held that:- The assessee company received certificate of commencement of business on 29.04.2008 – The main objects of the company shows that one of the main object of the company is that of financing, investing, sourcing, operating, green or clean technology products and services that optimize the use of natural resource or reduce the negative environmental impact - the assessee company has in fact set up three subsidiary private limited companies - One of this subsidiary private limited company has stated generating electricity as per the certificates given by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities premium please furnish following details: a. Justification for premium charged on the shares issued with specific reference to the basis of valuation and method applied with supporting documentary evidences. b. Copies of the Minutes recorded of the board meeting held for increasing of the share capital and determination and charging of the premium with names and addresses of all the directors and share holders of your company who attended the board meeting, c. Documentary and supporting evidences with detailed note on the factors considered for allotting shares at a premium. d. Copies of the share application form submitted, or offer letters received if any, e. Copies of the share certificates/counterfoils with certificate numbers and distinctive numbers of such shares. f. Name and address of the share registrar of your company. g. Proof of stamp duty or share issue expenses incurred h. Please state whether any of the directors or their relatives are in any way related to the directors of the company to whom shares were allotted. If so please specify such relationship. i. Furnish copy of Transaction Overview, Proposed Business Plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should not be treated as income u/s. 56(1) and taxed under the head Income from Other Sources , the assessee strongly contended that the company is not required to prove the genuineness, purpose or justification for charging a premium on shares. Even otherwise the share premium received by the company cannot be taxed u/s. 56(1) of the Act. It was explained that the share premium by its very nature is a capital receipt and is not income in its ordinary sense. 5.2 During the course of the assessment proceedings, the AO sought details and information u/s. 133(6) of the Act from the subscribers to the share capital and share premium account. The necessary details and explanations were received and were duly placed on record. After considering the entire submissions and the documents filed by the assessee in response to the specific queries raised by the AO, the AO was of the firm belief that the premium charged on allotment of shares is not justified. The AO was of the opinion that these funds were introduced by the assessee through share holders under the guise of the premium. The AO questioned the authenticity of the report dt. 14.4.2008. The AO was of the firm belief that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7806814 (-)17427088 (45.85) 2010-11 22827505 (-)29765661 (9.22) 2011-12 92058801 (-)13993736 (0.25) 5.4 Taking a leaf out of the aforementioned figures the AO was of the opinion that the premium charged by the assessee is unscientific and unjustified. Considering all these defects/lacunas, the AO went on to disregard the justification of share premium amounting to ₹ 490/- per share. The AO further observed that the alleged share premium collected is not utilized for the purpose and objectives and the same was collected without following the conditions specified under the Companies Act, 1956. The AO noticed that out of the total receipts of ₹ 47,97,10,000/-an amount of ₹ 45,36,95,212/- has been invested in the units of IDFC Mutual Fund and the balance amounts were utilized for investments in shares of subsidiary companies, bank FDR's, advances to subsidiaries etc. The AO further questioned the investments made by IDFC Trustee Co. Ltd. i.e. IDFC Infrastructure Fund-2, ID ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of Sec. 78 of the Companies Act. The Ld. CIT(A) also showed his discontentment regarding valuation of share premium. Ld. CIT(A) was of the opinion that no complete evidence was filed by the assessee so far as growth and profitability was concerned. The Ld. CIT(A) finally concluded that the genuineness of share premium is not established by the assessee. The purpose and conditions specified u/s. 78 of the Companies Act have been violated by the assessee thereby the nature of the transaction lost the character of capital receipt and was rightly held as 'residuary receipt' and was of the firm belief that the share premium has been rightly brought to tax as income u/s. 56(1) in the light of the clear violation of Sec. 78 of the Companies Act and confirmed the addition of ₹ 47,97,10,000/-. 7. Aggrieved by this finding of the Ld. CIT(A), the assessee is before us. 8. The Ld. Senior Counsel explained the capital structure and the subscribers to the capital of the assessee company. It was explained that M/s. IDFC Ltd was set up in the year 1997 on the recommendation of a committee set up by government to analyse the need for financial intermediaries for infrastructur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Counsel submitted that the CBDT has approved vide this notification that the Fair Market value of the unquoted equity shares determined by a merchant banker or an accountant can be as per the Discounted Free Cash Flow method. The Ld. Counsel further submitted that the allegations of the Revenue authorities that the valuation of the share premium is absurd and without any basis are incorrect. 8.3 It is the say of the Ld. Counsel that the share premium is to be decided by the Board of Directors and there is no prohibition under the Companies Act so far as the amount of premium is concerned. The Ld. Counsel further stated that the action of the Revenue authorities to tax the share premium u/s. 56(1) of the Act is against the law as it has been held by the Hon'ble Supreme Court in the case of CIT v. Allahabad Bank Ltd. [1969] 73 ITR 745 that the share premium received on the issue of shares has to be included in the paid up capital irrespective of whether the share premium has been maintained in a separate account apart from the reserve. Drawing support from this decision of the Hon'ble Supreme Court, the Ld. Senior Counsel submitted that being a capital receipt, the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transaction is sham. The AO has wrongly concluded that IDFC is a mutual fund company whereas the same is a venture capital fund registered with SEBI as per the certificate exhibited at page-48 of the paper book ,which clearly certifies that the IDFC Infrastructure Fund-II is a venture capital fund. The Ld. Counsel for the assessee pleaded that the additions made on account of share premium receipt treating it as a revenue receipt is erroneous and bad in law and deserves to be deleted. 9. The Ld. Departmental Representative also filed a written submission to support the findings of the Revenue authorities. In the written submission, the Ld. DR questioned the valuation of share premium stating that the pre-requisite of the transaction for issue of bonus or premium share is substantial increase in the worth of the company from the point of departure. It is mainly the profitability, credibility, goodwill of the concern which creates the opportunity and requirement of premium and all this is lacking in the case of the assessee. The ld. DR has further stated that the alleged premium attached to the shares has not been received from the open market. It is an admitted position that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rging of share premium of ₹ 490/- per share on a book value of ₹ 10/- each. This dispute is more so because of the fact that the assessee company was incorporated during the year under consideration. Therefore, according to the revenue authorities, it is beyond any logical reasoning that a company with zero balance sheet could garner ₹ 490/-per share premium from its subscribers. Such transaction may raise eyebrows but considering the subscribers to the assessee company, the test for the genuineness of the transaction goes into oblivion. It is an undisputed fact admitted by the Revenue authorities that 10,19,000 equity shares has been subscribed and allotted to IDFC PE Fund-II which company is a Front Manager of IDFC Ltd., in which company Government of India is holding 18% of shares. The contributors to the IDFC PE Fund-II who is a subscriber to the assessee's share capital, are LIC, Union of India, Oriental Bank of Commerce, Indian Overseas Bank and Canara Bank which are all public sector undertakings. Therefore, to raise eyebrows to a transaction where there is so much of involvement of the Government directly or indirectly does not make any sense. 10.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Brooke Bond India Ltd. v. CIT. Thus the expenditure and the receipts directly relating to the share capital of a company are of capital in nature and therefore cannot be taxed u/s. 56(1) of the Act. The assessee succeeds and Revenue fails on this account. 11. The Ld. Departmental Representative has raised an altogether plea by stating that the nature of the transaction should also be judged within the parameters of the Sec. 68 of the Act. The counsel for the assessee strongly objected to this but in the interest of justice and fair play, we allowed the DR to raise this issue. For this, we draw support from the decision of the Hon'ble Supreme Court in the case of Kapurchand Shrimal v. CIT 131 ITR 451, wherein the Hon'ble Supreme Court has laid down the ratio that It is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statute. 11.1 Considering the submissions of the Ld. DR i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 88% of shares and in turn the assessee company's 98% of shares are held by IDFC PE Fund-II, this entire share holding structure cannot be said to generate any transaction which could be said to be sham. 12. We have considered the grievance of the Revenue from all possible angles and by applying the provisions of Sec. 56 of the Act and at our stage we have gone to the extent of testing the transaction within the parameters of Section 68 of the Act. We could not find a single evidence which could lead to the entire transaction as sham. Our view is also fortified by the share holding pattern as explained to us and as substantiated by the material evidence on record. We find that the share holders in all the related transaction under issue are directly or indirectly related to the Government of India. Therefore, 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, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of natural resource or reduce the negative environmental impact of infrastructure projects and/or related assets. 17.1 Considering these main objects of the assessee company, we find that the assessee company has in fact set up three subsidiary private limited companies namely (i) Green Infra Corporate Wind Ltd. (ii) Green Infra Wind Assets Ltd and (iii) Green Infra Wind Farms Ltd. We also find that one of this subsidiary private limited company has stated generating electricity as per the certificates given by the Tamilnadu State Electricity Board which issue has been discussed elsewhere in our record. Considering all these facts in totality, we have no hesitation to hold that the assessee has commenced its business and therefore is eligible for all the legitimate expenses including depreciation. The AO is accordingly directed to allow the expenses so claimed alongwith depreciation. Ground No. 4 5 are accordingly allowed. 18. Ground No. 6 relates to the treatment of interest income on fixed deposits with the banks as income under the head income from other sources. According to the assessee, the same is to be taxed under the head Income from profits and gains of business. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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