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TMI Blog2020 (3) TMI 465X X X X Extracts X X X X X X X X Extracts X X X X ..... s dismissed all the grounds of appeal raised by the appellant and further granted relief of Rs. 2,46,43,987/- added u/s 115-0 of the I.T. Act, without appreciating the fact that the appellant had not raised the said ground before the Ld. CIT(A). 2. The appellant prays that the order of CIT(A) on the above directions be set aside and that of the assessing officer be restored. 3. The appellant craves leave to amend or alter any of the aforesaid grounds or add a new ground of appeal, which may be necessary at any time before or at the time of hearing of appeal." 4. The assessee has raised the following grounds: - "1. The Id Appellate Authority (AA) Commissioner of Income Tax (A)-21. Mumbai, has dismissed Appeal No. CIT (A)-21//IT100/2012-13. without offering sufficient opportunities of being heard and the impugned order was passed ex parte. 2. The AA has erred in taxing the assessee company u/s 56 (1) of the Income Tax Act. 1961 under the head at "Income from Other Sources" the Share Premium amount of Rs. 10.66,23.000 received by the assessee Company. 3. The AO has also erred in upholding the interpretation of section 78 (2) of the Companies Act 1956 made by the AO wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Housing Development Co. Ltd. 5000 10 50000 990 4950000 5000000 Nicco Securities Pvt. Ltd. 2800 10 28000 990 2772000 2800000 Olympus Vision Pvt. Ltd. 7000 10 70000 990 6930000 7000000 Oshin Investments & Finance P.Ltd. 4000 10 40000 990 3960000 4000000 Maharashtra Polybuteness Ltd. 64000 10 640000 990 63360000 64000000 Sunciti Financial Servics P. Ltd. 5000 10 50000 990 4950000 5000000 Yogi Sung Won India Ltd. 4000 10 40000 990 3960000 4000000 Manjula Dave 50 10 500 990 49500 50000 Lata Dave 100 10 1000 990 99000 100000 Swati P. Dave 100 10 1000 990 99000 100000 Gopal Dave 150 10 1500 990 148500 150000 107700 1077000 106623000 10770000 6. The Ld. CIT(A) on perusal of the balance-sheet of the assessee observed that the share premium amount has been utilized for making investments and loan and advances thereby violating the provisions of Section 78 of the Companies Act 1956 which specified the manner in which the share premium amount could be utilized. The assessee gave the justification for premium charged as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Understanding (MOU). By virtue of this MOU, New Era is under obligation to sell the UIL plant and machinery to MPL at cost basis. The manufacturing plant of Unimers India Ltd is the only one of its kind in India. There are no additional EPDM capacities are coming up in India in near future and the replacement cost of such plant is exorbitantly prohibitive. If this EPDM plant and technology is acquired by MPL, it would tremendously help MPL to sky rocket its top line as well as bottom line. The management of MPL was convinced with the New Era proposal as for MPL it was a good opportunity to invest in New Era and acquire the EPDM Plant along with the technology, technical support system, stores and spares etc of UIL. Looking to the valuation of the EPDM plant and machinery and the technology the opportunity cost of the investment made by MPL in New Era is in favour of MPL, and hence MPL agreed to pay the premium on preference shares with a specific object to acquire the EPDM Rubber Plant through New Era. Sunciti Financial 5ervices Pvt Ltd, one of the preference share holders is also an associate company of New Era. Redemption and benefits to share holders : As per the terms of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivately placed and no public documents were issued for this. The fund was raised from select associate companies and business associates. New Era's plans of acquiring UIL as well as debts of other companies/businesses were discussed with the potential investors as mentioned in para 2(a) above and they were willing to invest in New Era. No project report was required for this purpose. New Era has already acquired the debts of UIL from IFCI Ltd on 01-10- 2010 and all the rights in the debts have been assigned to New Era. The recoverable amount from UIL is Rs. 86.55 crore as on 30-06-2008. New Era i5 in the process of taking next step in this matter. The UIL debts were assigned to New Era and a copy of Deed of Assignment signed by and between IFCI Ltd and New Era dated 01-102009 is attached as Annexure -7. Annual Audited financials as at 31-032010,31-03-2011 and 31-03- 2013 are attached as Annexure 8, 9 and 10 respectively. 3 Section 78 of the Companies Act, 1956 states that the premium received on issue of shares should be credited to separate account called security premium account and company has credited all the sum received towards premium in such account and in the balan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er terms of the issue and no such terms have been brought on record despite specific query and sufficient opportunity given. No weightage has been given nor any reason assigned for non consideration of past or future performance of the company for the valuation 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 assessee. 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 matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1956 will amount to a reduction of share capital. Therefore, the redemption of preference share capital for above reasons in this case constitute dividend within the meaning of provisions of Section 2(22)(a) of the Act which attracts dividend distribution tax u/s 115O of the Act. Since the assessee failed to pay the dividend distribution tax as required u/s 115O of the Act, the same was also levied by Ld. AO together with the interest u/s 115P of the Act while completing the assessment. The notice was given and after the reply of the assessee, the AO was of the view that the share premium amounting to Rs. 10,66,23,000/- as on 31.03.2010 was utilized for non-specified purposes in violation of provisions of Section 78(2) of the Companies Act, 1956 and held as dividend distribution within the meaning of provisions of Section 2(22)(a) of the Act. The assessee failed to pay the dividend distribution tax u/s 115O of the Act. Accordingly, dividend distribution tax u/s 115O of the Act was imposed on an amount of Rs. 10,66,23,000/-. The interest was also charged u/s 115P of the Act. 10. Before the Ld. CIT(A), the assessee reiterated the assertion made before the Ld. AO with regard to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermed as unrealistic and cannot be termed as not genuine. We find that the Ld. CIT(A) having given the said observation had proceeded to agree with the addition made by Ld. AO u/s 56(1) of the Act on the only ground that the assessee had violated the provisions of Section 78(2) of the Companies Act 1956 which specifies the manner of utilization of share premium account. In this regard, what is relevant for the purpose of assessment is whether the receipt of share premium by the assessee could be termed as income policy within the meaning of provisions of income tax act. We find that the provisions of Section 78(2) of the Companies Act, 1956 specifies the manner of utilization of share premium account for specified purposes which are relevant only for compliance with the provisions of the Companies Act, 1956 and have agreed absolutely no relevance for the purpose of Income Tax Act, 1961. In the instant case, there is absolutely no dispute with regard to receipt of share premium by assessee at Rs. 990/- per share was duly justified. There is no dispute that all the necessary documents were duly filed before the AO and all the share subscribers have directly replied to the notice issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d., 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 Revenue had invoked provisions of Section 56(1) wherein additions were made in the hands of the assessee by the AO towards share premium charged by the assessee to the tune of Rs. 4,18,65,830/- . The learned CIT-A deleted the said additions towards share premium as were made u/s. 56(1) of the Act. The Revenue is not aggrieved by the said relief granted by learned CIT-A with respect to the deletion of additions made u/s. 56(1). However , without prejudice in alternate the AO also confirmed additions u/s 68 on the grounds that the share premium charged is in excess of the intrinsic valuation of shares because in the opinion of the AO , the assessee is not only required to explain the "source‟ of credit entry but also its "nature‟ which as per AO the assessee could not explain . The learned CIT(A) also deleted the said addition u/s 68, wherein the learned CIT(A) relied on the decisions of Vodafone India Services Limited(supra) , decision of ITAT, Mumbai in the case of Green Infra Limited(supra) and CBDT instruction no. 2/2015 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jasthan. The assessee company is promoted by two non-resident entities who have subscribed to the shares of the assessee company. The majority shareholding of the assessee company to the tune of 98.99% is held by Asian Compound Limited, Hongkong who is its parent company directly and shares are also held by Finproject Asia Limited, Hongkong who is assessee‟s holding company indirectly (page 138/pb). The assessee has issued equity shares to its holding company namely Asian Compound Limited , Hongkong as well to said Finproject Asia Limited, Hongkong Limited of Rs. 10 each at premium of Rs. 10 each during the impugned year under consideration, details are tabulated in table above. The perusal of audited financial statement reveals that the share capital at the end of the preceding previous year viz. 31-03-2011 was Rs. 48.47 lacs while reserves and surplus were to the tune of Rs. 77.79 lacs. The assessee share capital as at the end of the current previous year i.e. 31-03-2012 was Rs. 4.67 crores while reserves and surplus were to the tune of Rs. 6.09 crores. The assessee has achieved turnover of Rs. 3.49 crores for the financial year ended 31-03-2011 with profit before tax of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Bench by learned DR that these perverse finding of facts as were arrived at by the AO were indeed correct finding of facts recorded by the AO and the assessee is hiding the correct facts from the authorities . The AO also erred in holding that there is a violation of Section 78 of the 1956 Act by holding that the assessee ought to have utilised the proceeds of share premium for certain specified purposes as is stipulated in the said Section 78 of the 1956 Act viz. paying up unissued shares of the company as bonus shares, writing off preliminary expenses , buy-back of shares etc. as are specified in the said section 78 of the 1956 ( see preceding para wherein Section 78 of the 1956 Act is reproduced). The AO erred in not distinguishing what is meant by utilisation of the funds being proceeds of share premium raised for the specified approved purposes as per terms and condition of invitation to offer issued by the assessee for raising share capital , and the creation of "Share Premium Account‟ in the books of accounts for share premium received to be reflected as part of "Reserves & Surplus‟ as stipulated u/s 78 of the 1956 Act which is to be applied for certain spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit / business purposes as per terms and conditions of the invitation to offer , and the assessee do transfer share premium raised to "Share Premium Account‟ under the head "Reserves and Surplus‟ in books of accounts as is mandated u/s 78 of the 1956 Act . Section 78 of the 1956 Act allows application of Share Premium Account for certain specified purposes by way of write off/knocking against issuance of bonus shares, writing off preliminary expenses , buy-back of shares etc by book entry . Thus as is emerging from material on record, the conclusions arrived at by AO so far as violation of Section 78 of the 1956 Act by the assessee were wrong and misconceived and are hereby rejected/discarded. Now, coming to the allegation of the AO that share premium being higher than the intrinsic worth/fair value of the equity shares, the assessee has supported the said fair value of equity shares being Rs. 20 per equity share as against face value of Rs. 10 per equity share with a certificate issued by a chartered accountant using DCF method which is an approved method as prescribed by RBI . The AO has arrived at wrong finding of facts as to the losses in the last two years as wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatements as well FIRC issued by its bankers as an evidences which are placed in file. Thus based on material on record before us, no fault lies with the assessee in issuing equity shares of face value of Rs. 10 each at share premium of Rs. 10 each so far as compliances under FEMA/RBI are concerned. It is pertinent to mention that Section 56(2)(viib) r.w.s. 2(24)xvi) of the 1961 Act were placed in statute by Finance Act, 2012 w.e.f. 01-04-2013 and the said sections are relevant for issuance of shares to residents while in the instant case , undisputedly equity shares were issued by the assessee to non-resident in the instant case. Thus the said section 56(2)(viib) r.w.s. 2(24)(xvi) of the 1961 Act are not made applicable to the shares issued to non residents mainly to encourage foreign investments .The Revenue has accepted the receipt of share capital from both the above stated foreign investors to the extent of the face value of the equity shares issued to the tune of Rs. 4.19 crores and as per Revenue ingredients of Section 68 stood complied with so far as equity shares issued by the assessee to the tune of Rs. 4.19 crores comprising face value of equity shares issued to these tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court is relevant for TP proceedings while in Vodafone case, Hon‟ble Bombay High Court has held that TP provisions as are contained in chapter X are machinery provisions while there has to be firstly an income chargeable to tax and then only machinery provisions can be applied. The issue of shares at share premium by tax-payer to nonresident holding entities was held to be on account of capital transaction which were not found to be having character of income chargeable to tax. CBDT has also accepted this position vide instruction no. 2 /2015 dated 29-01-2015 . Thus, this contention of learned DR that decision of Hon‟ble Bombay High Court in the case of Vodafone India Services Private Limited(supra) is not applicable to the facts of the instant appeal is hereby rejected. The Revenue has already accepted the share capital to the tune of face value of equity shares amounting to Rs. 4.19 crores raised by the assessee from these two non-resident holding companies during the year as no additions were made , wherein by implication ingredients of Section 68 were deem to have been fulfilled and even ECB to the tune of Rs. 7.50 crore raised by the assessee from Asia Compound L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premium and taxability of share premium of Rs. 10,66,23,000/- u/s 56(1) of the Act as well as invoking the dividend distribution tax in terms of 2(22)(a) r.w. Section 115O of the Act in the assessment order. The primary reason for making such additions u/s 56(1) was due to non compliance of provisions of Section 78(2) of the Companies Act, 1956 in the opinion of Ld. AO. We find that the observation of the Ld. AO for levying the dividend distribution taxed u/s 115O of the Act is dependent upon this primary finding that the provisions of Section 78(2) of the Companies Act, 1956 has been violated by assessee hence both the issues are interconnected. Therefore, there is no dispute that the assessee has challenged this entire aspect of taxability of share premium. The assessee has duly challenged before the Ld. CIT(A) that there was no violation of provisions of Section 78(2) of the Companies Act, 1956 by it. We find that the Ld. CIT(A) had granted relief to the assessee on the aspects of the dividend distribution tax by observing as under.:- "17 The Assessing Officer has also held that the share premium amount utilized in violation of Section 78 of the 1956 Act amounts to reduction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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