TMI Blog2021 (4) TMI 802X X X X Extracts X X X X X X X X Extracts X X X X ..... e towards share capital. It is not disputed that the net worth of the company is NIL because of investment in step down subsidiary company (due to provision towards revaluation of investment). It is also not disputed that the funds were moved from the holding company to the assessee and the funds were re-invested in the step down subsidiary company in order to revive the step down subsidiary in that process, the investment in such step down company is safeguarded. The receipt of consideration for issue of shares to mean the proceeds for exchange of ownership for the value. The term consideration means something in return i.e. Quid Pro Quo . The receipt is exchanged with the ownership in the company. In the given case, the holding company passed the resolution to finance TMSL through the assessee and the funds intended for TMSL, which is step down subsidiary and the funds were remitted to the assessee as an advance towards share capital during this impugned assessment year (we do not intend to discuss the quantum of actual receipt of the advance during this assessment year at this stage. It is a separate discussion since assessee has only passed journal entries to convert the u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted under section 56(2)(viib) during this assessment year, therefore order of Ld. CIT(A) is set aside. - I.T.A. No. 2050/Mum/2018 - - - Dated:- 5-3-2021 - Shri Mahavir Singh, VP And Shri S. Rifaur Rahman, Am For the Appellant : Shri Percy Pardiwala Shri Sukh Sagar Syal, ARs For the Respondent : Shri V. Sreekar, DR ORDER PER S. RIFAUR RAHMAN (ACCOUNTANTMEMBER): The present appeal has been filed by the assessee against the order of Ld. Commissioner of Income Tax (Appeals)-12, in short Ld. CIT(A) , Mumbai, dated 29.01.2018 for AY 2013-14. 2. The brief facts of the case are, assessee filed its return of income on 19.02.2013 declaring total income of Rs. NIL. Subsequently, the case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued and served on the assessee. In response, AR of the assessee filed the relevant information as called for. 3. The assessee is an investment holding company and holding the securities of unquoted companies. During the year, the assessee has shown Other income of ₹ 283,79,25,000/-.Against such income the assessee has debited various expenses such as Discount of issue of NCD, professional fee, De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27. The Investment and Finance Division of Essar Investment Ltd (EIL) was demerged into Imperial Consultants and Securities P. Ltd (ICSPL) with effect from 01.04.2012. On perusal of the ledger account in the books of the appellant, in which the share application money received from ICSPL during the FY 2012-13 relevant to the present AY 2013-14 is credited, it is seen that the ledger account itself bears the title Imperial Consultants and Securities P. Ltd.- Advance against equity as opposed to the ledger account titled as Essar Investment Ltd-Others in the earlier two financial years. Further, it is noticed that the narration given in the said ledger account for the amounts received during the year clearly states that the receipts are towards Advance against equity. Similarly, it is noticed from the perusal of the ledger account in the books of account of ICSPL, wherein the amounts paid to the appellant during the year are debited, that the said payments to the appellant have been shown as Advance against equity and that the ledger account itself bears the title Essar Retail Holding Ltd-Advance against equity as opposed to the ledger account titled as Essar Retail Holding Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1/03/2011 and 31/03/2012. The said amounts aggregating to 159.26 crores therefore cannot be regarded as share application money received by appellant during the FYs 2010-11 and 2011-12. As the said amount of ₹ 159.26 crores, which represented the outstanding unsecured loan from EIL as on 31/03/2012, was transferred and credited to the ledger account of Imperial Consultants and Securities P. Ltd.- Advance against equity on 01/04/2012 during the FY relevant to the present AY 2013-14, it has to be considered that the unsecured loan of ₹ 159.26 crores from EIL was converted in to Share application money/Advance against share capital during the year under consideration only. Hence, the entire amount of ₹ 313.63 crores shown as Advance against share capital as on 31/03/2013, which is the aggregate of the amount of unsecured loan of ₹ 159.26 crores that was converted in to share application money during the year and share application money of ₹ 154.37 crores received during the year, is required to be considered as the share application money received by the appellant during the year under consideration only. The legal contentions raised by the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (a), clause(b) and clause (c) of [Explanation to clause (23FB) of section 10;] 32. As per the provisions of this section, the aggregate consideration received by a company for issue of shares that exceeds the fair market value of the shares shall be chargeable to Income-tax under the head Income from Other Sources where- a) A company, not being a company in which the public are substantially interested, receives in any previous year. b) From a person being a resident. c) Any consideration for Issue of shares which exceeds the face value of such shares 33. As can be seen from the language employed in the section, the charging provisions of the section are triggered when a company receives in any previous year any consideration for issue of shares that exceeds the face value of such shares. The expression 'receives in any previous year is used in conjunction with the expression any consideration for issue of shares . This shows that where any amount is received during the previous year towards consideration for issue of shares, the provisions of section 56(2)(viib) are required to be invoked to ascertain whether such consideration exceeds the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers. No investor will make payment of share application money to a company unless he evaluates the terms of the offer/invitation received from a company and finds the same to be a prudent investment. Hence, it is not correct to state that the terms of the proposed issue of shares have not been finalized at the time of receipt of share application money during the year in the case of the appellant and that they were finalized only at the time of actual issue of shares during the subsequent year. 37. The proposition that the terms of the proposed issue of the shares are finalized and made known to the existing/prospective shareholders prior to the payment of share application money by them finds support from the instructions issued by the Ministry of corporate affairs for preparation of the balance sheet of company as a part of the Revised Schedule VI to the Companies Act, 1956 notified by the Ministry vide notification No. SO 447(E) dated 28.02.2011. In the said instructions for preparation of the balance sheet, it has been laid down at instruction appearing at serial No. 6G dealing with the disclosures to be mandatorily made in the notes to accounts in respect of Application m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incorrect and untenable. Having regard to the instructions contained in the Revised Schedule VI to the Companies Act, 1956 referred to above, it is required to be inferred that the appellant had finalized the terms of the proposed issue of shares during the previous year relevant to the assessment year under consideration itself, when the appellant was in receipt of the share application money of ₹ 313.63 crores. The resolution of the Board of directors dated 07.03.2014 furnished by the appellant in order to show that the terms of allotment of shares were finalised at the time of the issue of shares on the said date is considered to be a self serving document without any evidentiary value in light of the statutory requirement laid down in Revised Schedule VI to the Companies Act, 1956 discussed above. Once such an inference on facts is drawn that the appellant had finalized the terms of the proposed issue of shares during the year itself, the share application money received by the appellant during the year on the basis of such terms and conditions qualifies to be treated as Consideration for issue of shares . 40. In this connection, it is pertinent to point out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utation of the fair market value of the shares at an amount that would not result in income chargeable to tax as per the provisions of 56(2) (viib) for AY 2014-15 when the shares were issued by the appellant at ₹ 3,000/- per share. 41. The contention of the appellant that the advance receipt of money from the proposed shareholder by way of share application money cannot partake the nature of Consideration for issue of shares since no promisor-promisee relationship exists between the proposed shareholder and company is considered to be untenable in the light of the inference of fact drawn in the preceding paragraphs that the appellant had finalized the terms of the proposed issue of shares during the year itself and a document inviting application for shares containing the said terms was issued to the prospective /shareholders before the receipt of the share application money during the year. Further, the contention of the appellant that since shares do not come in to existence before they are issued by the company, there cannot be receipt of consideration for the issue of the shares before the shares are issued is also considered to be untenable since the prospective s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the definition of balance sheet in Rule 11U(b), the balance sheet drawn up as on the valuation date has to be considered for the purpose of determining the fair market value of the share and where no balance sheet has been drawn up on the valuation date, the balance sheet drawn up as on a date Immediately preceding the valuation date which has been approved and adopted by the shareholders is required to be taken in to account for the purpose of valuation. In the present case, since the valuation date is 30.03.2013 and since no balance sheet has been drawn up as on the said date, the balance sheet as on 31.03.2012, which represents the balance sheet drawn up as on a date immediately preceding the valuation date which has been approved and adopted by the shareholders, is required to be taken in to account for the purpose of valuation. Hence, consideration of the balance sheet of the appellant as on 31.03.2012 is in accordance with the amended Rule 11U with effect from 29.11.2012 and there is no violation of the provisions of the Act and the Rules in doing so, as contended by the appellant. 44. It was also contended by the appellant that if the receipt of share application mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this section. It has been held by the Hon'ble Karnataka High Court in the case of Patil Vijaykumar Ors Vs Union of India 151 ITR 48 that when-the meaning of the words is clear and unambiguous, the court has to give effect to it whatever be the consequences, as the court has no jurisdiction to mitigate harsh consequences of the statute, if any. In the case of Tarulata Shyam Ors Vs CIT 108 ITR 345, the Hon'ble Supreme Court held that once it is shown that the case of the assesses comes within the letter of law, he must be taxed however great the hardship may appear to the judicial mind. Hence, this contention of the appellant is considered to be unacceptable. 46. In view of the above, various contentions advanced by the appellant against the consideration of the share application money received during the year as the receipt of the consideration for issue of the shares and invoking the provisions of section 56(2)(viib) have been found to be unacceptable. At the same time, it is seen that the authorized share capital of the appellant company during the year under consideration is ₹ 1.00 crore represented by 10 lakh shares having a face value of ₹ 10 each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 56(2)(vii) of the Act. This ground is therefore partly allowed. 8. Now before us, the assessee has preferred the appeal by raising the following grounds of appeal as under:- 1(a) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the Id. AO in invoking the provisions of section 56(2)(viib) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) and thereby erred in making addition of ₹ 282,00,00,000/- under the head Income from Other Sources , for the reasons which are wrong and contrary to the facts and circumstances of the case, the provisions of Income Tax Act, 1961 and the Rules made-there under. 1(b) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in invoking the provisions u/s 56(2)(viib) of the Act under the head Income from Other Sources by drawing an inference that terms of proposed issue of shares were finalised in Financial Year (FY) 2012-13 without appreciating that such terms were finalised only at the time of actual issue of shares in FY 2013-14 relevant to Assessment Year (AY) 2014-15 and the said sum received was always in the nature of advance against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to AY 2013-14. 2(b) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in considering ₹ 159,26,24,655/- received by appellant company from Essar Investments Limited (EIL) during the FY 2010-11 and FY 2011-12 as unsecured loan without appreciating that it was always an advance against equity received in the said financial years and as such the reasons assigned for doing so are wrong and contrary to the facts and circumstances of the case, the provisions of Income Tax Act, 1961 and the Rules made there under. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in giving direction to Id. AO for taking necessary action towards balance amount of ₹ 31,63,93,516/- (inadvertently mentioned as ₹ 31,13,63,93,516/-) for applying the provisions of section 56(2)(viib) (inadvertently mentioned as section 56(2)(vii)) of the Act in AY 2014-15, for the reasons which are wrong and contrary to the facts and circumstances of the case, the provisions of Income Tax Act, 1961 and the Rules made there under. The above grounds of appeal are independent of and without prejudice to each other. The appellant craves leave to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the funds so received in TMSL by way of subscribing to its shares. In this regard, the then holding company of the assessee, i.e. EIL, passed a Board Resolution on 20th March, 2010 (on page 245 of the paperbook) resolving that it would provide financial assistance upto ₹ 200 crores to the assessee as advance towards share application money for subscription of equity shares of the assessee. To this end, a sum of ₹ 17.26 crores was advanced to the assessee in the F.Y. 2010-11 (details on page 247 of the paperbook). In this regard, attention is invited to schedule 9-Notes to accounts of Audited Financial Statements of the assessee for F.Y. 2010-11 (on page number 84 of the paperbook). The relevant part of the schedule is as follows- The Company has agreed to provide further assistance in the form of equity/quasi equity/debt to The Mobile Stores Ltd., subsidiary, to the extent of ₹ 240 cr. The funding of the same will be by issue of further equity to Essar Investments Ltd.. holding company. Events in the F.Y. 2011-12: 6. Further sums aggregating ₹ 142 crores were advanced to the assessee by EIL in the F.Y. 2011-12 (details on page 178 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15 crores in F.Y. 2010-11 had reduced to ₹ 56.71 crores in this year. In view of the same, the assessee decided to write back the provision for diminution in the value of investments created in F.Y. 2010-11 in accordance with Accounting Standard-13. The same is disclosed in Note 8-Non Current Investments of the Audited Financial Statements of assessee for F.Y. 2012-13 (on page 43 of the paperbook). Moreover, the write back of provision for diminution in value of investments in TMSL of ₹ 283,79,25,0007- was substantiated through Business Performance presentation of TMSL (Page No. 191-201 of Paperbook) alongwith justification for write back of provision made for diminution in value of investments (Page No. 202-203 of Paperbook) and Audited Financial Statements of TMSL for FY 2010-11 (Page No. 104-130 of Paperbook) and FY 2012-13 (Page No. 131-164 of Paperbook). Events in the F.Y. 2013-14; 11. In F.Y. 2013-14, 10,95,425 equity shares were issued to ICSPL, at a price of ₹ 3,000 per share, for a total issue price of ₹ 328.63 crores. The Board of directors approved the issue of equity shares on right basis by way of Resolution dated 17th December, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.26 crores (from EIL) 283.79 crores (provision created) F.Y. Advances received towards share capital (Rs.) Provisionfor diminution in the value of investments created/ written back (Rs.) Issue of shares 2011-12 142 crores (from EIL) - - 2O12-13 154.37 crores (from ICSPL) 283.79 crores (provision - written back) - 2013-14 - - 10,95,425 equity shares issued to ICSPL at a price of ₹ 3,000 per share Legal submissions- 13. In view of the above facts, three broad issues arise for consideration in the present appeal- - Keeping in mind the object behind introducing section 56(2)(viib), i.e., to deter the generation and use of unaccounted money, can such provisions apply in the instant case of issue of shares by a wholly owned subsidiary to its holding company, especi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of unaccounted money into the system. It may be appreciated that the FinanceMinister's Budget speech, while moving-the Finance Bill is very crucial in interpreting the provision. Reliance in this regard is placed on the judgment of the Hon'ble Supreme Court in the case of KP Varghese vs. FTO (1981) (131 ITR 597), wherein it was held as under- Now it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted. This is in accord with the recent trend in juristic thought not only in western countries but also in India that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible. In fact there are at least three decisions of this Court, one in So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney laundering of unaccounted income, it would not apply to bonafide business transactions. 17. In the instant case, it is an uncontroverted factual position that the shares were issued by the assessee to its holding company, ICSPL, and the funds obtained therefrom were infused into TMSL by way of subscribing to its shares in order to revive it from its adverse financial position. This was done in terms of the Board resolutions dated 2Oth March 2010 (EIL) and 30th March 2012 (ICSPL). Furthermore, since the money has simply flown from holding company to its subsidiary, it is not anybody's case and it cannot be that any unaccounted money has been laundered in the process. In any event, all the details, such as relevant ledger accounts, audited financial statements, board resolutions, return of allotment, valuation reports etc. are on record. Therefore, the genuineness of the entire transaction is beyond any shadow of doubt. 18. It may be further appreciated that the entire transaction, right from the receipt of advances to issue of shares, to the outward investment in TMSL is on capital account. At no stage in the entire transaction, has any income accrued or any u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholder or to the assessee under 100% shareholding structure since the rights of the shareholder and the obligations of the assessee have remained unchanged. 21. Accordingly, a transaction between holding company and its wholly owned subsidiary company cannot be equated with generation/circulation of unaccounted money. Therefore, having regard to the intention of Legislature in the assessee's case, provisions of Section 56(2)(viib) of the Act cannot be invoked. 22. Such being the case, the subsequent issues as to the determination of the Valuation date' for the purpose of Rule 11U and Rule 11UA and the correctness of the assessee's valuation become academic. Be that as it may, the assessee's submissions on these aspects are stated hereunder. II. Valuation date and balance sheet date for the purpose of Rule nU read with Rule 11UA- 23. At the outset, the relevant provisions of section 56(2)(viib) of the Act are reproduced hereunder- (viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26. On appeal, the CIT(A) observed that the receipt alone will not trigger the provisions of section 56(2)(viib) of the Act. It is only when the receipt is attributed towards the consideration for issue of shares will the section apply. The CIT(A) was of the opinion that the receipt takes the colour of consideration upon the finalisation of the terms of issue of shares. The CIT(A) was of the opinion that the terms of the issue must have been finalised in the F.Y. 2012-13, i.e., the previous year relevant to the present assessment year. In holding so, the CIT(A) brushed aside the assessee's Board resolutions and the financial statements of the subsequent year which stated that the terms were in fact finalised in the F.Y. 2013-14. The CIT(A) was of the opinion that these are self-serving documents and ought to be ignored. 27. It may be appreciated that the AO's contention of adopting the date of receipt of money as the triggering event for the purpose of section 56(2)(viib) has been rejected by the CIT(A) as the CIT(A) has held that the date of finalisation of the terms is the relevant event. The Department has not challenged the order of the CIT(A). It is, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be sufficient authorised capital or the issuer company may get dissolved. In such an eventuality, if the date of receipt of share application money or the date of finalisation of terms is adopted as the triggering event, it would mean that an addition is made under section 56(2)(viib) without an actual eventual issue of shares, which is strictly against the mandate of the section. As a matter of fact, in the present case, such an absurdity has presented itself. Since, in the relevant previous year, there wasn't sufficient authorised share capital, the CIT(A) has artificially split the section and spread its effect over two years. To the extent of availability of authorised share capital in this year, an addition of ₹ 282 crores has been confirmed in this year and addition to the extent of the balance authorised share capital of ₹ 31.63 crores has been directed to be considered in the next year. It is submitted that the section does not provide for such an artificial split, which in itself shows that the conclusion of the CIT(A) is wrong and leads to manifestly absurd results. 30. It may also be noted that if the date of receipt of share application money i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppear for the moment expedient. Next comes allotment. To take the words of Stirling J. in Spitzel v. Chinese Corporation, [1899] 80 LT. 347, he says : What is an allotment of shares? Broadly speaking, it is an appropriation by the directors or the managing body of the company of shares to a particular person... It is beyond doubt from the authorities to which we have earlier referred, and there are many more which could be cited to show the same position, that in company law allotment means the appropriation out of the previously unappropriated capital of a company of a certain number of shares to a person. Till such allotment the shares do not exist as such. It is on allotment in this sense that the shares come into existence. (ii) The Hon'ble Bombay High Court in the case of Sesa Goa Ltd. vs. State of Maharashtra (2008) (WP no. 254 0/2008) held as under- In the present case, the question of misappropriation of the amount which was paid towards the purchase of shares of SIL does not arise as once shares were allotted to the Respondent the monies became the property of the Company over which she had no right. As already observed there was no entrustment of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of such shares , what it seeks to cover is the amount of share premium on the issue of shares. It may be noted that share premium arises only on issue of shares and not prior to it. In this regard, reliance is placed on section 78 of the Companies Act, 1956, which reads as under- 78. Application of premiums received on issue of shares- (i) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account, to be called the i[securities] premium account 33. It may be noted that there are at least two decisions of the Tribunal, which have dealt with this very issue and it has been held that it is the date of issue of shares, which triggers the provisions of section s6(2)(viib) and the valuation date has to be determined accordingly. Attention's invited to a recent decision of the Bangalore Tribunal in the case of Taaq Music Pvt. Ltd. vs. ITO (2020) (ITA i6i/Bang/2o) (para 5) (sr. no. 32 in the legal compilation), wherein it was held as under: We find that though the expression used in Sec.56(2)(viib) of the Act is where a compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aluation report as mentioned under Rule 11 U and 11 UA. We are of the considered view that the valuation report which was the counsel sought to file before us should have been filed before the Assessing Officer so that the same can be examined within the purview of rules 11 U and 11 UA. 12. As mentioned elsewhere the part of the share application was received in earlier assessment years but since in those assessment years shares were not allotted, therefore, the share premium could not have been examined by the Assessing Officer u/s 56 (2) (viib) of the Act. Since the entire transaction has crystallized during the year under consideration which also includes the share premium of ₹ 7QQ per share needs to be examined during the year under consideration only. 35. It may be noted that in both the aforesaid decisions, it was the stand of the revenue that the provisions of the section apply in the year in which allotment of the shares takes place and the same was accepted. It is submitted that having adopted such contention, which enabled them to bring to tax a sum under section 56(2)(viib) even though the amounts were received prior to the introduction of the provision, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the Ld. Counsel that the provision of section 56(2)(ix) would not be applicable on the facts of the present case because the said section has come w.e.f. 1.4.2015 and assessee has not received any sum or advance in this year, therefore, this provision would not be applicable. We are unable to subscribe to such an argument, because the deeming provision is attracted in the event when any sum is forfeited out of any sum and money received as advance or otherwise in the course of negotiations for the transfer of a capital asset. Here the factum of forfeiture of the FCDs has taken place in this year; therefore, taxability qua the forfeiture amount has to be seen in this year. Such an argument of the Ld. Counsel, in our opinion, is untenable. 38. In view of the above position, it is submitted that the relevant date for the purpose of section 56(2)(viib) is the date of allotment of shares. In the present case, the shares have been allotted on 7th March, 2014 as is borne out from Form 2 (on page 167 of the paperbook) and the Board Resolution of the same date (on page 219 of the paperbook). The fact that the shares were allotted in the F.Y. 2013-14 has also been accepted by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpilation. In this regard, the Explanation to rule 5 provides as under- Explanation- For the purpose of this rule, balance sheet , in relation to any company, means the balance sheet of such company (including the Notes annexed thereto and forming part of the accounts) as drawn up on the date on which the gift was made and, where there is no such balance sheet, the balance sheet drawn up on a date immediately preceding that date, and, in the absence of both, the balance sheet drawn up on a date immediately after the date on which the gift was made. Therefore, the language of the rule is materially similar to the language of rule 11U(b) of the Income-tax Rules, 1962. In this background, the Hon'ble Supreme Court held that where the gift was made on 28th March, 1973, the balance sheet of 31st March, 1973 would give a much more realistic picture than the balance sheet of 31st March, 1972. In this regard, the following observations of the Hon'ble Supreme Court are noteworthy- The GTO has to find out the correct value of the shares as on the date of the gift. The gift was made only three days before the financial year ending on 31-3-1973- The balance shee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -14. Therefore, even if the assertion of the CIT(A) for accepting the year of finalisation to be the relevant year for section 56(2)(viib) was accepted, the event would fall within the financial year 2013-14 and the relevant balance sheet date would still be 31st March, 2013. The finding of the CIT(A) that the terms must have been finalised in the F.Y. 2012-13 is only an assumption, not backed by an iota of evidence. It is evident from Note 18 of Notes to Accounts of Audited Financial Statements of assessee for FY 2012-13 that the terms for the proposed issue of unquoted equity shares were not finalized in the said year. It will be appreciated that the terms as regard the pricing and number of shares were finalized only at the time of actual issue of shares in FY 2013-14. Thus, the said sum was always in the nature of advance against equity upto FY 2012-13. Apart from making a bald statement that the documentation filed by the assessee evidencing the fact of the terms being finalised in the F.Y. 2013-14 are self serving documents, the CIT(A) has not given any reason for reaching this conclusion. It is submitted that if a party brings on record certified evidence, which has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the book value of the assets in the balance sheet. It does not permit the assessee or the department to substitute any other value with such book value. It is submitted that in view of the clear mandate of the rule, the action of the AO in ignoring the book value of the assessee's investments, such books having been audited without qualification, and substituting such value with a perceived fair value is unfounded and beyond the prescription of the rule. 48. In this regard, reliance is placed on the judgment of the Hon'ble Bombay High Court in the case of Commissioner of Wealth-tax vs. GMAbhayankar (1995) (214ITR 269) (sr. no. 5 in the legal compilation). In this case, the High Court was dealing with rule ID of the Wealth-tax Rules, 1957. The relevant portion of the rule provided- The value of all the liabilities as shown in the balance sheet of such company shall be deducted from the value of all its assets shown in that balance sheet. The High Court held that what has to be considered is only the book value of the assets in the balance sheet and adopting any other value would be against the mandate of the rule. It is submitted that the language of rule 1D is simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; C =fair market value of shares and securities as determined in the manner provided in this rule: D = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property; L= book value of liabilities shown in the balance sheet 52. Therefore, it is submitted that the provisions of rule 11UA(2) [relevant for valuation for the purpose of section 56(2)(viib)] seen in contrast with the provisions of rule 11 UA(i) [relevant for valuation for the purposes of other provisions of section 56(2)] leaves no room for doubt that for the purpose of sub-rule (2), only the book values in the balance sheet can be considered. Adopting any other value, as has been done by the AO in the present case, falls foul of the clear mandate of the rule. Accordingly, the book value of the assessee's investments in TMSL of ₹ 283,79,25,000 must be adopted for the purpose of valuation under rule 11UA(2). 53. Without prejudice to the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Alternate submissions- 56. In the alternate and without prejudice to any of the above, it is submitted that even if an addition is to be sustained in the subject assessment year, the advances received in the preceding financial years (₹ 17.26 crores received in the F.Y. 2010-11 and ₹ 142 crores received in the F.Y. 2011-12) cannot be brought to tax as these were received prior to the conception of section 56(2)(viib), which was introduced by the Finance Act, 2012 with effect from 1st April, 2013. The Department's assertion in this regard that even though the money was received in the preceding years, it was 'received as share application money' in this year is completely misconceived. Once a sum of money has been received in an earlier year, it cannot be said that it is received again in a later year. 57 Without prejudice to the primary submissions of the assessee, it is urged that the action of the CIT(A) in directing the AO to take necessary action in the next assessment year with respect to the addition not sustained in this year, i.e. to the extent of ₹ 31.64 crores, is completely unfounded. There is nothing in section 56(2)(viib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which requires a Company (issuer), not being a company in which the public are substantially interested, to issue shares at Fair Market Value (FMV). Any consideration received by such issuing Company in excess of the FMV, to the extent it exceeds the face value of such shall be liable to tax. For the purpose of this section, FMV shall be the value, Higher of the following: (a) as may be determined in accordance with such methods as may be prescribed( Methods prescribed under Rule 11UA are Book value Method (NAV) and Discounted Cash flow method); or (b) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature .. 3.2 Here the appellant is a corporate entity in which public are not substantially interested. Therefore, primarily the said appellant fits into this section. Appellant had received consideration for issue of shares from a resident in the previous year . The consideration received was fairly in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 142 crores in the respective F. years 2010-11 and 2011-12, it was recorded in the books as ― Loans received from Essar Investment Ltd(EIL). This clarifies that the said amounts are only loans and advances and not as advance paid against share capital. CIT(A) has depicted the flow of the event in a systematic manner and the nature of such funds flown into the accounts of the appellant in para no 25, 26,27,28 and 29. From these facts, it clarifies that the funds reflected in the appellant s balance sheets for the F.Y.2010-11 and 2011-12 are only loans and advances and not by any stretch of imagination be advances for share Capital . 4.1 As emerged facts from AO s order and CIT(A) s order in the relevant paragraphs about sec.56(2)(viib) and its applicability in the appellant s case is undoubtedly for the previous year relevant to the AY.2013-14. 5. Now the main aspect of the appellant s contention that since shares have been alloted during the AY 2014-15 relevant to the FY 2013-14 and therefore the provisions of section 56(2)(viib) would applicable for AY 2014-15 only. It is glaringly clear that all the terms of the proposed issue of shares are determined and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application money during the relevant year under consideration. Further it was also a fact that all the relevant money has been received in the year under consideration. These facts are elaborately discussed by CIT(A) in its order in para No 41 of the order. Though the minutes of the corporate entity finalised in the early April about the allocation of shares , however the fact remains that all the terms have been finalised, money received, offer and acceptance has been completed , value of share application money, premium has been finalised .Valuation of such shares been completed by the appellant in the relevant year i.e., FY2012-13. In short entire process of such allocation of shares has been finalised in the captioned year i.e. AY 2013-14 , therefore the year to be considered is AY 2013-14 and not AY 2014-15 as contended by the appellant. 6. The final question what quantum to be considered for the relevant year under consideration is also dealt at length by CIT(A) order in the para Nos 44, 45 and 46, therefore it may not required to be elaborated further. 7. Analysis of the appellant s written submissions: Appellant had brought out the relevant objective behind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apex court judgement . 7.2 The Hon ble jurisdictional High court s decision in Sesa Goa Ltd as mentioned by the appellant in its written submissions in page 16 is on misappropriation of the amount paid for purchase of shares and right to attend meetings of share holders and vote. These facts are not applicable to our present case. Therefore the same may not be considered. 7.3 Appellant s commentary on offer and acceptance by citing Palmer s Company law is also not factual fit into the relevant case. In this case the appellant made an offer to its investors and the same is accepted by its investors by paying adequate consideration. It is also a fact that entire consideration in our case has been fully received . According to Contract Law, all the essential ingredients such offer, acceptance and full and complete consideration was also received in the relevant previous year. In the appellant s case neither substance or form has been changed in any manner. All the terms are fully adhered. No alteration/ modifications of the terms were found. Mere citing the allotment in the early of the subsequent financial year is only a formality and all the terms as per Contract Law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whereas our case is on consideration for issue of shares. This is clear as per statute. d). As the consideration for issue of shares is complete without any alteration of the terms of the offer and acceptance , assessing authorities have not been given any discretion to leave such taxation of excess share capital but to tax. e). Our case is on the consideration for issue of shares not on allotment of shares wherein allotment is only a mere formality. In the present case neither terms nor quantum of allocation nor in any manner the share allocation has been changed . It is also a fact that the entre consideration has been received in the relevant year under consideration , therefore assessing authority does not have discretion but to tax in the relevant year under consideration. f). Both AO and CIT(A) have thoroughly and systematically brought the excess share premium for taxation on the issue of consideration for issue of shares as per letter and spirit of the statute. Therefore the same may kindly be considered 11. In rejoinder, Ld. AR submitted as under:- 1. In response to the assessee's written submissions dated 28th December, 2020, the Department had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10-11 (on page 84 of the paperbook) and Board Resolutions passed by EIL on 20th March, 2010 (on page 245 of the paperbook) and by ICSPL on 30th March, 2012 (on page 246 of the paperbook). 5. Further, it is evident from Note No. 18 of Notes to Accounts of Audited Financial Statements of the assessee for the F.Y. 2012-13 (on page 46 of the paperbook) that the terms for proposed issue of unquoted equity shares were also not finalized in the said year. In fact, there was no acceptance by the assessee in the F.Y. 2012-13. The Board of directors approved the issue of equity shares on right basis by way of Resolution dated 17th December, 2013 (on page 215 of the paperbook). The shareholders approved the said issue in EGM vide resolution dated 31st January, 2014 (on page 217 of the paperbook). Finally, the issue of shares on the above terms was approved by the Board of directors vide Resolution dated 7th March, 2014 (on page 219 of the paperbook). 6. In fact, the statement in the Department's submission that the valuation of shares was also made in the F.Y. 2012-13 is also contrary to record which is evident from the fact that the valuation report was dated 3rd December, 2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeds to issue the shares depending on the condition of the market. That only means inviting applications for these shares. When the applications are received, it accepts them and this is what is generally called allotment. No doubt there may be an allotment of shares with out an application, but no instance exists where that word is used to describe a transaction whereby one becomes a shareholder otherwise than by appropriation to him of a share out of the previously un-appropriated share capital. So Farwell L. J. said in Mostly v. Kqffyfontein Mines Lid. [1911] i Ch. 73 84 As regards the construction of these particular articles it is plain that the words 'creation', 'issue', and 'allotment' are used with the three different meanings familiar to business people as well as to lawyers. There are three steps with regard to new capital: first, it is created: till it is created the capital does not exist at all. When it is created in may remain unissued for years, as indeed it was here; the market did not allow of a favourable opportunity of placing it. When it is issued it may be issued on such terms as appear for the moment expedient. Next com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tary, Palmer's Company Law, has been sought to be distinguished by urging that in the present case, the transaction was concluded in this year as the assessee's offer to the investors was accepted by them by paying adequate consideration. It is submitted that the Department has misconstrued the observations in the commentary. The commentary states that the acceptance of the offer is complete when the issuer company (i.e. the assessee in this case) accepts the prospective investor's offer, and having alloted the shares to such investor, notifies it of such allotment. The acceptance has to be qua the issuer company and not the investor. In any event, as highlighted in the commentary, acceptance is complete only upon the notification of the allotment of shares. The relevant extracts of the commentary are reproduced on page 16 of the assessee's submissions. In the present case, undoubtedly, the allotment of shares has happened on 7th March, 2014 and the said fact is not disputed by the AO or the CIT(A). 14. In paras 7.4 to 7.6 and para 8.c) of the submissions, it has been stated that the judgments relied on by the assessee do not deal with the present dispute as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We notice from the record that the assessee is an investment holding company, wholly-owned subsidiary of EIL, pursuant to the merger of the investment and finance division of EIL, the assessee became a wholly owned subsidiary of ICSPL. The assessee has invested in various unlisted companies including M/s The Mobile Stores Ltd (TMSL), which is wholly-owned subsidiary of the assessee company. From the records we notice that TMSL incurred huge losses in the initial years of its business. Owing to the huge adverse financial position of TMSL, in financial year 2010-11, assessee has revalued its investment in TMSL and reduced the value of investment on account of provision to the extent of ₹ 283.79 crores (page 80 of the paper book). Because of the above said revaluation of the investment, the net worth of the assessee company has become nil or negative. In order to improve the financial position of TMSL, the holding company of the assessee passed a resolution on 20 March 2010 to provide financial assistance to the assessee in order to immerse the same in TMSL. Accordingly, assessee received unsecured loans from its holding company until previous assessment year that is AYs 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o prudent investor will invest more than fair market value. Yes, we agree that no prudent investor will invest but prudent businessman will invest in order to safeguard the investment in the subsidiary or to revive the subsidiary company. The tax authorities invoked the provision u/s 56(2)(viib) without bringing on record whether the investment received by the assessee are genuine or not. We notice that the provision introduced by the legislature in order to curb the practice of generation and circulation of unaccounted money. In the current case, the tax authorities have not brought on record any generation or circulation of unaccounted money. Rather they acknowledged that the funds were invested by the holding company and received by the subsidiary company as advance towards share capital. It is not disputed that the net worth of the company is NIL because of investment in step down subsidiary company (due to provision towards revaluation of investment). It is also not disputed that the funds were moved from the holding company to the assessee and the funds were re-invested in the step down subsidiary company in order to revive the step down subsidiary in that process, the invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards consideration for issue of shares , then the provision of section 56(2)(viib) are attracted to ascertain whether such consideration the face value of the shares or aggregate consideration exceeds the fair market value of the shares. Based on the above interpretation, he came to the conclusion that assessee has received advance towards share capital during this year to the extent of ₹ 282 crores and the assessee has finalized the terms of issue of such shares during this assessment year only. Further, Ld. CIT(A) relied on the Revised Schedule VI to Companies Act, in which assessee has to declare the portion of share application separately and declaration of unsecured loan etc. to sustain the receipt of advance towards share capital as the addition under section 56(2)(viib). We notice that Ld. CIT(A) has interpreted the section 56(2)(viib) without any finding on the generation and circulation of black money in the assessee s case and further, he interpreted the words receipts of consideration for issue of shares during the previous year . We do not agree with the above interpretation. The receipt of consideration for issue of shares to mean the proceeds for exchange of o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly get attracted to the deeming provision under section 56(2)(viib). In normal condition, all the required funds were first invested in such subsidiary companies and subsequently the terms are finalized only when such subsidiaries are in the process of recovery. By merely transferring funds as unsecured loan or advances towards share capital will not trigger the deeming provision under section 56(2)(viib). We do not foresee that the legislature must have intended to tax such legitimate investment under section 56(2)(viib). This is a peculiar case where not only share premium are brought under the deeming provision but including face value of shares. In our view, the tax authorities have mechanically invoked the deeming provision without actually investigating whether the assessee has actually indulged in any money laundering activities. The tax authorities are not expected to act mechanically without appreciating the soul and purpose of introduction of the particular and specific provision. We get strength from the following decisions of Co-ordinate benches:- (i) In the case of Cinestaan Entertainment P. Ltd. vs. ITO (2019) (177 ITD 809) (Delhi), wherein it was held that where n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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