Tribunal orders reassessment on share premium & income tax issues, partially allowing appeal.

The Tribunal directed the deletion of the addition related to the opening balance of share premium and share premium received from a specific individual. It ordered a fresh assessment for share premium from foreign investors and verification of an arrangement with Ms. Jacqueline Fernandez. The appeal was partially allowed for statistical purposes, overturning the lower authorities' decisions on various issues related to income tax implications and compliance with regulations.

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Issues Involved:

1. Addition under Section 68 of the Income Tax Act, 1961.
2. Identity, creditworthiness, and genuineness of transactions with investors.
3. Applicability of Section 68 to opening balances of share premium.
4. Valuation of share premium and compliance with RBI/FEMA regulations.
5. Verification of investment details from foreign investors.
6. Treatment of shares issued to Ms. Jacqueline Fernandez.

Issue-Wise Detailed Analysis:

1. Addition under Section 68 of the Income Tax Act, 1961:

The main grievance of the assessee was the confirmation of an addition of Rs.115,56,95,385/- under Section 68 of the Income Tax Act, 1961. The assessee had filed its return declaring a total loss of Rs.41,85,61,758/-, and the case was selected for scrutiny. The AO proposed to add back the amount under Section 68, arguing that the share premium charged was unreasonable given the company's increasing losses. The assessee contended that the entire closing amount was not received in the relevant year and provided detailed information about the investors and the share premium received.

2. Identity, Creditworthiness, and Genuineness of Transactions with Investors:

The assessee provided extensive documentation to establish the identity, creditworthiness, and genuineness of the transactions with investors, including financial statements, PAN cards, and Foreign Inward Remittance Certificates (FIRCs). The assessee argued that the investors were reputable foreign entities and that the initial onus under Section 68 was discharged. The AO/NFAC, however, did not find the valuation reports reliable and labeled the transactions as 'hawala,' suggesting the applicability of the Black Money Act.

3. Applicability of Section 68 to Opening Balances of Share Premium:

The Tribunal noted that the impugned addition comprised an opening balance of Rs.63,32,28,987/- from earlier years, which could not be assessed under Section 68 in the relevant year. The Tribunal referenced the Bombay High Court's decision in Ivan Singh vs ACIT, which held that Section 68 applies only to sums credited in the books during the relevant year, not to those from earlier years. Consequently, the Tribunal directed the deletion of the addition related to the opening balance.

4. Valuation of Share Premium and Compliance with RBI/FEMA Regulations:

The assessee supported the share premium valuation with a certificate from a Chartered Accountant using the Discounted Cash Flow (DCF) method, as prescribed by RBI guidelines. The Tribunal noted that the share premium received from foreign investors complied with FEMA/RBI regulations and that the RBI had not disputed the fair value of the shares. The Tribunal also clarified that Section 56(2)(viib) of the Act, which pertains to the valuation of shares issued to residents, was not applicable to shares issued to non-residents.

5. Verification of Investment Details from Foreign Investors:

The Tribunal criticized the lower authorities for not making independent inquiries from the foreign investors through appropriate channels, such as the FT & TR, as outlined in the CBDT's SOP dated 19.11.2020. The Tribunal emphasized that the lower authorities should have used their statutory powers to verify the creditworthiness of the foreign investors instead of shifting the entire burden onto the assessee. The Tribunal set aside the addition related to the share premium received from foreign investors and directed the AO/NFAC to conduct a de-novo assessment.

6. Treatment of Shares Issued to Ms. Jacqueline Fernandez:

The Tribunal found that the shares issued to Ms. Jacqueline Fernandez were in lieu of her services as a celebrity endorser, and no actual cash inflow was involved. The Tribunal noted that the AO/NFAC failed to verify whether the consideration had been subjected to GST and TDS. The Tribunal directed the AO/NFAC to confine their inquiries to the genuineness of the arrangement and to make direct inquiries from Ms. Fernandez if necessary, while providing the assessee with a reasonable opportunity of being heard.

Conclusion:

The Tribunal set aside the impugned order of the Ld. CIT(A) and directed the deletion of the addition related to the opening balance of share premium and the share premium received from Mr. Anuj Rakyan. The Tribunal also directed the AO/NFAC to conduct a de-novo assessment for the share premium received from foreign investors and to verify the genuineness of the arrangement with Ms. Jacqueline Fernandez. The appeal of the assessee was partly allowed for statistical purposes.

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