Tribunal upholds assessee's share premium decision, dismisses revenue appeal under Income Tax Act

DCIT 1 (3) (2) Versus M/s. Varsity Education Mumbai

DCIT 1 (3) (2) Versus M/s. Varsity Education Mumbai - TMI Issues Involved:
1. Justification of Share Premium under Section 68 of the Income Tax Act.
2. Applicability of Section 68 to Foreign Direct Investment (FDI).
3. Determination of the "nature" and "source" of cash credits.
4. Relevance of valuation reports and commercial decisions in assessing share premium.
5. Judicial precedents and their applicability.

Detailed Analysis:

1. Justification of Share Premium under Section 68 of the Income Tax Act:
The primary issue in the case was whether the share premium amounting to Rs. 1,030 per share, with a face value of Rs. 10, was justified under Section 68 of the Income Tax Act. The Assessing Officer (AO) contended that the premium should be limited to Rs. 672 per share based on the valuation report, and the excess premium of Rs. 358 per share was unjustified and should be treated as income under Section 68. The AO argued that the assessee failed to prove the "nature" and "source" of the excess premium.

2. Applicability of Section 68 to Foreign Direct Investment (FDI):
The assessee received investment from a Mauritius-based company, NSR PR Mauritius LLC, a SEBI-registered venture capital fund. The AO argued that the exemption under Section 68 for Venture Capital Funds was not applicable as the assessee did not receive funds from a Venture Capital Fund or Company. The assessee contended that the investment was made as per the terms of the investment agreement and RBI guidelines.

3. Determination of the "nature" and "source" of cash credits:
The AO accepted the identity and creditworthiness of the investor and the genuineness of the transactions but questioned the "nature" of the excess premium. The assessee argued that the premium was determined based on commercial considerations and future prospects, and the AO was not justified in questioning the commercial decision.

4. Relevance of valuation reports and commercial decisions in assessing share premium:
The valuation report submitted to the RBI estimated the share value at Rs. 682 per share. The AO used this valuation to justify the premium of Rs. 672 and considered the excess premium as unjustified. The assessee argued that the valuation report provided the minimum value as per RBI guidelines, and there was no bar on collecting a higher premium. The assessee also highlighted that the actual financial results exceeded the projections.

5. Judicial precedents and their applicability:
The case referenced several judicial precedents, including decisions from the Hon'ble Bombay High Court and ITAT. The Tribunal in the case of Green Infra Ltd. held that share premium should be examined under Section 68, and once the assessee proves the identity, creditworthiness, and genuineness, no addition should be made. The Tribunal's decision in the assessee's own case for AY 2011-12 did not consider these precedents. The Hon'ble Bombay High Court in Gagandeep Infrastructure P. Ltd. reiterated that share premium is a capital receipt and should be examined under Section 68.

Conclusion:
The Tribunal concluded that the AO was not justified in questioning the commercial decision of the assessee and the investor. The share premium collected was based on commercial considerations and future prospects, and the AO could not partially accept the premium. The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 60.24 crores made by the AO under Section 68. The appeal of the revenue was dismissed, and the order was pronounced on 24.10.2018.