TaxTMI 
TaxTMI 
2013 (12) TMI 949
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....utinizing the balance sheet of the assessee as on 31.3.2009, the Assessing Officer observed that an amount of Rs. 47,97,10,000/- is found credited under the head share premium account. The AO further observed that the assessee was incorporated on 3.4.2008 and has collected the share premium of Rs. 47,97,10,000/- on allotment of shares of face value of Rs. 10/- each at a premium of Rs. 490/- per share. The assessee was asked to furnish complete details and explanations vide letter dt. 17.11.2011, which was duly served on the assessee on 21.11.2011. The questionnaire issued by the AO is as under: "Show-cause notice dated 17.11.2011: You are hereby required to furnish in writing and verified in prescribed manner, the information and explanations called for on the points and/or matters specified below. In case of increase in share capital and receipt of share/securities premium please furnish following details: a. Justification for premium charged on the shares issued with specific reference to the basis of valuation and method applied with supporting documentary evidences. b. Copies of the Minutes recorded of the board meeting held for incr....
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....remium. The Companies Act, 1956 does not specify the price at which shares are to be issued. It does not limit the premium at which shares are to be issued. It was contended that the premium is a capital receipt which has to be dealt with in accordance with Sec. 78 of the Companies Act, 1956 and other related provisions. To substantiate, the assessee filed the internal valuation report which was obtained prior to the issuance of equity shares on premium. The assessee also filed all the necessary documents relating to the determination and charging of premium with names and addresses of all the Directors and share holders of the assessee company and also enclosed the copy of Minutes of the Board Meeting held on April 14, 2008 to approve the issue of share capital and to approve the issue of equity shares at a premium. 5.1 On the point raised by the AO as to why such receipts received in excess of any justifiable amounts should not be treated as income u/s. 56(1) and taxed under the head Income from Other Sources , the assessee strongly contended that the company is not required to prove the genuineness, purpose or justification for charging a premium on shares. Even otherwise the....
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....t the assessee has avoided to reply to specific query with regard to basis of valuation of shares and determination of premium thereon. The assessee has only placed reliance on unauthenticated power sector report and adopted the Discounted Cash Flow method in valuation which in itself is unrealistic and purely based on vague projections without any supporting evidence. The AO continued stating that the assessee is a new company and yet to commence its business operations, therefore no weightage can be ascribed to its past record. To test the credibility of the valuation, the AO went on to verify the future results of the assessee company with reference to the return of income filed for A.Y. 2009-10, 2010-11 & 2011-12. The comparative figures are as under: A.Y Total turnover achieved Net Profit shown EPS 2009-10 7806814 (-)17427088 (45.85) 2010-11 22827505 (-)29765661 (9.22) 2011-12 92058801 (-)13993736 (0.25) 5.4 Taking a leaf out of the aforementioned figures the AO was of the opinion that the premium charged by the assessee is unscientific and unjustified. Considering all these defects/lacunas, the AO went on to disrega....
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....s a Mutual Fund registered with SEBI whereas the correct fact is that IDFC Infrastructure Fund-2 is a venture capital fund. After considering all the facts and submissions and the remand report of the AO, the Ld. CIT(A) came to the conclusion that the assessee has failed to substantiate the genuineness of share premium and Sec,. 56(1) is wide enough to cover all the cases of residuary nature not falling u/s. 4 & 5 of the Act. The Ld. CIT(A) was also not convinced with the fact that the premium is received at the stage of initial offer itself and cannot be accepted as genuine. Further, the assessee has failed to utilize the share premium received as per the provisions of Sec. 78 of the Companies Act. The Ld. CIT(A) also showed his discontentment regarding valuation of share premium. Ld. CIT(A) was of the opinion that no complete evidence was filed by the assessee so far as growth and profitability was concerned. The Ld. CIT(A) finally concluded that the genuineness of share premium is not established by the assessee. The purpose and conditions specified u/s. 78 of the Companies Act have been violated by the assessee thereby the nature of the transaction lost the character of capital....
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....4.50 crores. Thus the total share premium received by way of these allotments was at Rs. 47,97,10,000/-. 8.2 It is the say of the Ld. Senior Counsel that the valuation of share premium is not without any basis. Drawing our attention to page-31 of the Paper Book, the Ld. Counsel pointed out that the Board of Directors have received an internal report on valuation of shares of the assessee company. The Ld. Counsel further explained that the valuation has been done on discounted Cash Flow method. Drawing out attention to the Notification issued by the CBDT on 29.11.2012 at pages 353 to 356 of the Paper Book, the Ld. Counsel submitted that the CBDT has approved vide this notification that the Fair Market value of the unquoted equity shares determined by a merchant banker or an accountant can be as per the Discounted Free Cash Flow method. The Ld. Counsel further submitted that the allegations of the Revenue authorities that the valuation of the share premium is absurd and without any basis are incorrect. 8.3 It is the say of the Ld. Counsel that the share premium is to be decided by the Board of Directors and there is no prohibition under the Companies Act so far as the amount of....
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....ges 386 to 401 of the paper Book. The Ld. Counsel pointed out that within three months from the end of the financial year i.e. by June (22.6.2009) one of the subsidiary of the assessee company M/s. Green Infra Wind Farms Ltd. has started generating electricity as is evidenced from the certificates issued by the Tamilnadu Electricity Board at different villages of the State. The ld. Senior Counsel strongly concluded that the share premium received by the assessee company is a genuine transaction, the share holder company and the holding company are held by the Government of India, therefore it cannot be said that the transaction is sham. The AO has wrongly concluded that IDFC is a mutual fund company whereas the same is a venture capital fund registered with SEBI as per the certificate exhibited at page-48 of the paper book ,which clearly certifies that the IDFC Infrastructure Fund-II is a venture capital fund. The Ld. Counsel for the assessee pleaded that the additions made on account of share premium receipt treating it as a revenue receipt is erroneous and bad in law and deserves to be deleted. 9. The Ld. Departmental Representative also filed a written submission to support t....
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....from the source already disclosed by the assessee or from some undisclosed source. The Ld. DR went on to raise an altogether new plea that since the nature of transaction has been questioned by the Revenue authorities, the same should be taxed u/s. 68 of the Act and finally concluded that there is no error committed by the lower authorities and the order of the Ld. CIT(A) deserves to be confirmed. 10. We have considered the rival submissions and carefully perused the orders of the lower authorities and the material evidences brought on record in the form of Paper book. The entire dispute revolves around the charging of share premium of Rs. 490/- per share on a book value of Rs. 10/- each. This dispute is more so because of the fact that the assessee company was incorporated during the year under consideration. Therefore, according to the revenue authorities, it is beyond any logical reasoning that a company with zero balance sheet could garner Rs. 490/-per share premium from its subscribers. Such transaction may raise eyebrows but considering the subscribers to the assessee company, the test for the genuineness of the transaction goes into oblivion. It is an undisputed fact admi....
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.... taxed under any provisions of the Act , are excluded from income. The Hon'ble Supreme Court has laid down the ratio that share premium realized from the issue of shares is of capital in nature and forms part of the share capital of the company and therefore cannot be taxed as a Revenue receipt. It is also a settled proposition of law that any expenditure incurred for the expansion of the capital base of a company is to be treated as a capital expenditure as has been held by the Hon'ble Supreme Court in the case of Punjab State Industrial Development Corpn. Ltd. v. CIT 225 ITR 792 and in the case of Brooke Bond India Ltd. v. CIT. Thus the expenditure and the receipts directly relating to the share capital of a company are of capital in nature and therefore cannot be taxed u/s. 56(1) of the Act. The assessee succeeds and Revenue fails on this account. 11. The Ld. Departmental Representative has raised an altogether plea by stating that the nature of the transaction should also be judged within the parameters of the Sec. 68 of the Act. The counsel for the assessee strongly objected to this but in the interest of justice and fair play, we allowed the DR to raise this issue.....
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....are the ultimate beneficiaries of this share premium which may clear the clouds over the transaction alleged to be a sham. We find that the assessee company has invested funds in its three subsidiary companies namely (i) Green Infra Corporate Wind Ltd. (ii) Green Infra Wind Assets Ltd and (iii) Green Infra Wind Farms Ltd., wherein the assessee is holding 99.88% of share capital which means that the funds have not been diverted to an outsider. This clears the doubt about the application of funds and the credibility of the company in whom the funds have been invested. Since the assessee itself is holding 99.88% of shares and in turn the assessee company's 98% of shares are held by IDFC PE Fund-II, this entire share holding structure cannot be said to generate any transaction which could be said to be sham. 12. We have considered the grievance of the Revenue from all possible angles and by applying the provisions of Sec. 56 of the Act and at our stage we have gone to the extent of testing the transaction within the parameters of Section 68 of the Act. We could not find a single evidence which could lead to the entire transaction as sham. Our view is also fortified by the share ....
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....ent. We find that the Registrar of Companies have issued certificate of commencement of business on 29.4.2008 which is not in dispute. We further find that the details of all the expenses have been furnished before the AO which were incurred for setting up of the subsidiary companies. We have also the benefit of going through the Memorandum of Association of the assessee company. A perusal of the main objects of the company shows that one of the main object of the company is that of financing, investing, sourcing, operating, green or clean technology products and services that optimize the use of natural resource or reduce the negative environmental impact of infrastructure projects and/or related assets. 17.1 Considering these main objects of the assessee company, we find that the assessee company has in fact set up three subsidiary private limited companies namely (i) Green Infra Corporate Wind Ltd. (ii) Green Infra Wind Assets Ltd and (iii) Green Infra Wind Farms Ltd. We also find that one of this subsidiary private limited company has stated generating electricity as per the certificates given by the Tamilnadu State Electricity Board which issue has been discussed elsewhere ....