TMI Blog2018 (5) TMI 502X X X X Extracts X X X X X X X X Extracts X X X X ..... ing well reasoned appellate order of CIT(A) keeping in view factual matrix of the case and hence no addition is warranted towards share premium of ₹ 4,18,65,830/- received by the assessee from its holding companies namely Asian Compounds Limited, Hongkong and Finproject Asia Limited, Hongkong, who are non resident entities as the said share premium is on account capital transaction and is not an income within charging Sections of the 1961 Act. So far as deeming fiction of Section 68 is concerned, there is no reliable incriminating finding of fact available on record justifying our interference to the well reasoned order of learned CIT(A) which we sustain. Thus, the appellate order of learned CIT(A) stood confirmed. Revenue fails in this appeal which stood dismissed. - Decided against revenue. - I.T.A. No.4860/Mum/2016 - - - Dated:- 2-5-2018 - SHRI C.N PRASAD, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER For The Revenue : Shri Rajat Mittal (DR) For The Assessee : Shri Prem Prakash Pareek Mrs. Sudha Shetty ORDER PER RAMIT KOCHAR, Accountant Member This appeal, filed by the Revenue, being ITA No. 4860/Mum/2016, is directed against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 31,07,4280 6,21,48,560 Finproject Asia Ltd., Hongkong 10,358 10 1,03,580 10 1,03,580 2,07,160 Finproject Asia Ltd., Hongkong 31,482 10 3,14,820 10 3,14,820 6,29,640 Total 41,86,583 4,18,65,830 4,18,65,830 8,37,31,660 The AO observed that equity shares of the face value of ₹ 10 each were issued at the premium ₹ 10 each by the assessee during the impugned assessment year, the assessee was asked by the AO to submit details and explanation vide notice u/s. 142(1) was issued by the AO along with questionnaire, as detailed hereunder:- Reason for share premium of 4,18,65,830/-, Provide ROC forms for allotment of shares. Copy of income ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed in appellate proceedings is meaningless and once these liabilities are taken into consideration the share valuation will be much below the value arrived at by the assesse. Therefore the valuation arrived at by assesse and reliance on the valuation report in this regard cannot be accepted to justify the premium. (iv) The assessee furnished certain details and documents with regard to the issue and filing compliance made with ROC. (v)As regards the justification and the factors considered for allotting shares at a premium it is submitted that, the assesse placed reliance on the investments in its subsidiary companies and other companies and its present diversified activities and revenue earning potential, future business plans and its impact and returns to the investors etc. These submissions are farfetched in so far as the future prospects are concerned. The subsequent financial results though shows taxable revenues, the same are not exclusively derived from the factors staled now to justify the valuation. As could be seen from the assessee's financial statements the major sources of income in succeeding two years is from interest and dividend on investments. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ast, present and future potentiality to grow. (ii) Memorandum and articles of association of the company, (iii) Projected working results of the company, at least for a base period, (iv) Measurement of any material contingent liabilities expected in future, (v) Company's estimations regarding its taxability positions in future, based on past assessment, tax shields available and current rates of taxation; (vi) Information regarding non-business assets and unusually high values of assets. (vii) Other information and statements of fact submitted orally or in writing relating to the company by Directors, key employees. (viii) Discussion with the Senior Executives of the company. (ix) Working capital requirement based on Management's plans and projections; (x) Capital expenditures requirements based on Management's plans and projections etc. The three methods which are commonly used in this kind of a valuation of shares are: (a) The Profit Earning Capacity Value (PECV) Method, which presumes the continuity of business and uses the past earnings and futures projections to arrive at an estimate of future mainta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion purposes or its promoters' or directors. As already discussed the company does not possesses any patent, copy right, intellectual property rights etc, which could be considered as hidden assets which could have enhanced the value of the shares of the company and therefore justified to some extent the charging of very high premium for allotment of shares. All the assets held as on date by assessee are volatile with no certainty of realization or realizable values as contended by assesse. Determination of virtual certainty that sufficient future taxable income will be available is a matter of judgment based on convincing evidence and will have to be evaluated on a case to case basis. Virtual certainty refers to the extent of certainty, which for all practical purposes, can be considered certain. Virtual certainty cannot be based merely on forecasts of performance such as business plans. Virtual certainty is not a matter of fact. To be convincing, the evidence should be available at the reporting date in concrete form. Thus the assesse company has totally failed to justify the charging of the premium and therefore the receipt of money amounting to ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e needs to be treated as such for the purpose of the income tax Act. (ii) As regards utilization of share premium, the assesse's only submission is that there is no violation u/s. 78 of the companies act in its case. The funds in fact have flown out of the designated account and in to highly risk bearing other activities. As such the assesse's cannot now contend that the amount has been maintained as capital fund as required under the companies act. The amounts received back or which may be received back subsequently from the assesse's business activities are thus clearly different from share premium but it represents only return on such business activity. The utilization of such funds subsequently for any purpose is clearly distinguishable and separate from the share premium account. The book entry in reduction in share premium is only an accounting formality and cannot represent the transaction in real sense. Hence this contention of assesse is not acceptable and not substantiated with evidences. iii) Hence the introduction of the fresh capital at a premium of ₹ 10/-amounting to ₹ 4,18,65,830/- partakes the character of income u/s. 56(1) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the law for if that were so, then the income derived from illegal business could not be liable to tax - CIT vs. Smt. Shanti Meattle [1973] 90 ITR 385 (All.) / Addl. CIT v. Ramkripal Tripathi [1980] 125 ITR 408(All.}. Illegal income - Primary function of income- tax Act is to bring income of various kinds into tax net and tax authorities are not concerned about manner or means of acquiring income. Income might have been earned illegally or by resorting to unlawful means, but illegally or by resorting to unlawful means, but illegality tainted with earning has no bearing on its taxability and income earned by an offender still would be an income liable for assessment. Thus income earned by assesse from income tax refunds collected by him illegally by producing bogus TDS certificate would be assessed under Act- CIT v. K. Thangamani [2009] 177 Taxman 499/309 ITR 15{Mad.). Legal effect prevails over substance of transaction - In taxing a receipt to income -tax the authorities are only concerned with the legal effect or character of the transaction and not the substance of the transaction - Pandit Lakshmikanta Jha Vs. CIT [1970] 75 ITR 790(SC). Legality or otherwise of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45 years in using in such technology. Finproject Spa is the Leader and Pioneer Company in the market of expansion material. It has operations in 6 countries; Italy, Romania, Canada, Mexico, China and India with 8 production units. The parent company has based most of its activity in invention of new compounds and relatively for them new technologies for their molding, hence has intensive R D. The parent company is the owners of the brand XL Extralight which is used by the company as trademark. They are also owners of the Patent for the Injection Molding Process. Such patent is also registered in India via Reg. No. Pat. IN 18747. The company is also using such injection moulding process machine and mainly producing the Soles for footwear from EVA Compound Material. 3. As mentioned, company was floated by 2 international companies, who wanted to set-up the manufacture facilities in the country and, therefore, the above company was incorporated in which both the companies have invested their own funds. The Company has only two shareholders namely, Asian Compounds limited, Hongkong and Finproject Asia Limited, Hongkong. Meaning thereby, there is 100% FD1 Investment and there is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious Regulations and other applicable Circulars issued by the Reserve Bank of India from time to time in this regard. At the relevant time, shares were allotted by the Company in compliance of the Circular No. A.P. (DIR Series) Circular No. 49 dated 4.5.2010, Refer Annexure-II -Notification No. FEMA 205/2010- RB dated April 7,2010. Copy of Circular alongwith Notification is marked and enclosed as Annexure-4. 1.3 In the Para 5(b) of above Notification, it has been very clearly stated that for allotment of share to Non-Resident, issuing Company will have to value the shares on the basis of Discounted Cash Flow. Relevant Para 5(b) is reproduced hereunder. 5. Issue price Price of shares issued to persons resident outside India under this Schedule, shall not be less than - (b) the fair valuation of shares done by a SEBI registered Category - I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method, where the shares of the company is not listed on any recognised stock exchange in India. 1.4 Here we would also like to mention that not only in FEMA but also in the Income Tax Act, as per Explanation to Clause (vii)[a) and (vii}[b) of Sub-Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived on the issue of shares is a capital receipt and the same cannot be taxed as a revenue receipt u/s. 56(1) of the Act. 2.2 Here we would further like to draw your attention on the decision of Delhi High Court in the case of ACIT Vs Om Oils and Oil Seeds Ltd. 152 ITR 552 and CIT Vs Krishnaram Baldeo Bank (P) Ltd. 144 ITR 600, in which it has been clearly stated that Share Premium amount is a capital receipt. 3. The investment has come from two reputed international companies namely, Asian Compounds Limited, Hongkong and Finproject Asia Limited, Hongkong who are holding 100% shares between both of them. Some facts, explanations, references seem to have been wrongly taken from some other assessee's file. He has wrongly concluded and applied 56(1) to consider share premium amount as Income from other sources . The facts is as under:- a) The investment has come only from two reputed international companies namely, Asian Compound and Finproject Asia Ltd. who are holding 100% equity through banking channel. b) The valuation was done on the Discounted Cash Method approved by RBI for investment from abroad u/s FEMA/RBI Rules and also as per rules of Income Tax Act c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned in sub-section 2 of Section 78 of Companies Act, 1956, which will bring down the Share Premium Account in the Balance Sheet. If a narrow meaning as has been interpreted by the Learned DCIT, there would be interesting situation, where most of the profit making companies who issue share on premium at the time of issue of share capital or further raising of capital on premium may not be permitted to use money for the business purposes. 5, The Learned Assessing Officer in Para 3 and 4 of his Order has stated certain facts and applied the Section 56(1) of the Income Tax Act, 1961. [(Page 4 -Para (iii), (iv), (v), 4.4.2 and at Page 5, Para (a), (b), (c), (d), (e)]. In this connection, it is respectfully submitted that none of above para(s) are true in our case, more particularly stating that- (i) Company is incurring loss - whereas Company is earning profit from very first year of its incorporation, (ii) Company has carried forward losses - As the Company incorporated only two years back and there is no carried forward losses. (iii) That the Company has invested money in the Share Market, which is volatile- this fact is again wrong - no investment is ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 015 wherein the AO has added a sum of ₹ 4,18,65,830/- towards Share Premium account citing the reason that the appellant company has not followed proper method of arriving at the value of share premium and also no giving proper explanation for the nature of such credits in his books of accounts. I have gone through submissions given by the AR of the appellant wherein he pleads that the appellant company received share Premium from Asian Compounds Limited, Hongkong and Finproject Asia Limited, Hongkong of ₹ 4,14,47,430/- and ₹ 4,18,170/- respectively. Both the companies are found to be non residents and no single Indian shareholder is involved. 5.4 Further the AR of the appellant relies on the following judicial decisions Hon‟ble Supreme Court in the case of CIT vs. Allahabad Bank Ltd. 73 ITR 745 ACIT vs Om Oil Seeds Ltd. 52 ITR 552 and CIT Vs Krishnaram Baldeo Bank (P) Ltd. 144 ITR 600 Vodafone India Services Pvt. Ltd. v Union of India Others (2014) 268 ITR 01 (Bom HC) Shell India Markets Pvt. Ltd. v Union of India and Others (2014) 369 ITR (Bom HC) Green Infra v ITO (ITA No. 7762/Mum/2012) 5.5 Further the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der dated 29-04-2016 passed by learned CIT(A), the Revenue has come in an appeal before the tribunal . The Ld. DR submitted that the Revenue is aggrieved and is in appeal so far additions stood deleted by the Ld. CIT-A for additions made by the AO under Section 68 of the Act, wherein the assessee did not satisfactorily explained the nature‟ of share premium and the assessee could not justify the excess premium received compared to the intrinsic value of shares which is evident from grounds of appeal filed by the Revenue. The learned DR strongly distinguished the case of Vodafone India Services Limited (supra) relied upon by the assessee and also by the learned CIT-A while granting relief to the assessee . The learned DR submitted that Vodafone India Services Limited(supra) case is related to Transfer Pricing additions and not to additions made u/s. 68 of the Act. The learned DR relied upon the assessment order passed by the AO . The Ld counsel for the assesse on the other hand submitted that it is a company floated by World Class Companies in footwear business for manufacturing sole for footwear for which manufacturing unit was set up by the assessee company in Jaipur, Ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the assessee has neither issued preference shares nor invested its money in subsidiary/other companies as was mentioned by the AO in the assessment order. Our attention was drawn to the audited financial statement of the assessee company which is placed in paper book/page 101-141. Thus, it was submitted that it is a classic case of cut paste‟ action undertaken by the AO wherein the AO had cut paste‟ the material from the some other assessment order of some other tax-payer and pasted the said content of some other assessment order in the assessee‟s assessment order without application of mind which caused great prejudice to the assessee. It was submitted that all facts as are narrated by the AO are incorrect and not applicable to the assessee. Our attention was drawn to page no. 44/ paper book wherein RBI vide letter dated FED.MRO.CAP/ 5380/04.56.198/2012-13 dated 21.09.2012 has recorded/noted the transaction of issue of equity shares of face value of ₹ 10 each at a premium of ₹ 10 each to the two foreign promoting companies by the assessee . Our attention is drawn to page 46 wherein discounted cash flow of the assessee certified by C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity shares of the assessee company as at 31-03-2012, while Finproject Asia Limited,Hongkong is also stated to be holding company indirectly of the assessee company to whom also shares were allotted during the previous year relevant to impugned assessment year. During the relevant previous year, the assessee has issued 41,86,583 equity shares at consideration price of ₹ 20 per equity shares consisting of face value of ₹ 10 of each equity share and premium of ₹ 10 for each equity shares, to the following non-resident entities:- Subscribed by Number of Shares Face Value Equity share capital Share Premium per share Share premium account Total amount received Asian Compounds Limited, Hongkong 10,37,315 10 10,37,3150 10 10,37,3150 2,07,46,300 Asian Compounds Limited, Hongkong 31,07,428 10 31,07,4280 10 31,07,4280 6,21,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esident entities is not in dispute and per-se Section 56(2)(viib) has no applicability as the assessee received consideration for issuance of shares from non-resident entities. The learned CIT(A) held that treating share premium received by the assessee as income is not justifiable even u/s 68 of the Act keeping in view factual matrix of the case. The Revenue is aggrieved by the deletion of the addition by learned CIT(A) within the provisions of Section 68 of the Act, for the reasons as are emanating from the Revenue‟s ground of appeal taken before the tribunal that the assessee did not satisfactorily explained the nature‟ of share premium and the assessee could not justify the excess premium received compared to the intrinsic value of shares. Thus, main grievance of the Revenue is w.r.t. share premium being received of ₹ 10 per share as against face value of shares of ₹ 10 each, wherein as per Revenue the said share premium of ₹ 10 per equity shares is not supported by intrinsic value of the shares leading to bringing it within the regime of taxability as income within the deeming fiction of Section 68 of the 1961 Act. The assessee has placed its aud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is a perverse finding of fact arrived at by the AO that the assessee is making losses and has accumulated losses in its balance sheet and these finding of fact arrived by the AO needs to be discarded . The AO has questioned and disputed the fair value arrived at by the assessee of the equity shares on these perverse finding of facts as to losses in both the years as well accumulated losses held by it, wherein both these observations of the AO to discard fair value of shares adopted by the assessee are perverse finding of facts arrived at by the AO which cannot be relied upon to prejudice assessee . On perusal of the audited financial statements, it is also revealed that the assessee only issued one class of shares viz. Equity shares of the face value of ₹ 10 each and it never issued any preference shares till the end of the financial year 2011-12. It also transpires from the audited financial statements placed on record that the assessee‟s investments as on 31-03-2011 and 31-03-2012 were at Nil‟ . The AO has given finding of fact that the assessee has issued preference shares as well the assessee had made investment in volatile companies to prejudice assessee b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t‟ from books of accounts to be set off against specified purposes which can be for applying towards issuance of bonus shares, writing off of preliminary expenses, buy back of shares etc as specified u/s 78 of the 1956 Act, so thus utilisation of proceeds of funds raised towards share premium in accordance with terms and conditions agreed with shareholders as per invitation to offer by the assessee and application of share premium account created in books of accounts for specified purposes u/s 78 of the 1956 Act by writing off/knocking against the said specified purposes by book entry as application of Share Premium Account‟ for non specified purposes such as writing off normal losses against Share Premium Account will not reflect true and fair view of affairs of the taxpayer company and similarly paying dividends despite losses in the books of the tax-payer company out of Share Premium Account‟ will erode capital base of the taxpayer company, thus these are altogether different concepts which AO ought to have understood in right perspective, while AO erred in making such erroneous conclusion that the assessee did not utilised the funds raised through share prem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue arrived at by such approved method because otherwise the tax-payer will create an foreign obligations for India in favour of third country at a consideration price received which is below fair value of shares computed by an approved method of valuation which will be loss to India as it will create higher foreign obligation of India in favour of third country represented by fair value of shares wherein the consideration price received for issue of shares was lower than fair value of shares, thus to plug this loss to India, FEMA/RBI stipulate that issue price of shares should be equal to or more than fair value arrived at by approved method viz. DCF. The guidelines issued by RBI vide RBI/2009-10/445 A.P.(DIR series ) Circular no. 49 dated 04-05-2010 as was applicable during the relevant period is placed in paper book at page 80-86. The CA has arrived at value of ₹ 20 per equity share which consisted of face value of ₹ 10 and share premium of ₹ 10 per share using DCF method which is an approved method specified by RBI in its circular dated 04-05-2010(page 46/pb). The AO tried to demolish this fair value of ₹ 20 per equity share by basing its decision based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g (ECB) to the tune of ₹ 7.50 crores from the said holding company namely Asian Compounds Limited, Hongkong during the previous year relevant to the impugned assessment year which was also accepted by Revenue and no additions were made by Revenue by invoking provisions of Section 68 of the 1961 Act w.r.t. ECB raised by the assessee and once again identity, creditworthiness and genuineness of transaction of raising ECB to the tune of ₹ 7.50 crores from its holding company Asian Compounds Limited, Hongkong stood proved. This holding company namely Asian Compounds Limited, Hongkong is also the major subscriber of the equity shares issued by the assessee during the previous year relevant to impugned assessment year (see table above). The learned CIT(A) has rightly relied upon decision of Hon‟ble Bombay High Court in the case of Vodafone India Services Private Limited v. UOI reported in (2014) 368 ITR 1(Bombay) which was further reiterated by Hon‟ble Bombay High Court in Vodafone India Services Private Limited v. UOI reported in (2014) 369 ITR 511(Bombay) to hold that issue of shares at share premium by the taxpayer to non resident holding companies is on account ..... X X X X Extracts X X X X X X X X Extracts X X X X
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