TaxTMI 
TaxTMI 
2018 (5) TMI 502
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....cumstances of the case and in law, the CIT(A) was correct in deleting the addition made on share premium u/s.68 of the Act despite the fact that the assessee did not satisfactorily explain the "nature" of share premium by Justifying the excess premium received compared to its intrinsic value?' The appellant craves leave to add to, amend or withdraw the aforesaid ground of appeal." . 3. The brief facts of the case are that the assessee is engaged in the business of manufacturing of soles for footwear. The assessee filed return of income for the impugned assessment year wherein it declared its total income to the tune of Rs. 1,54,62,230/- . The case of the assessee was selected for scrutiny by Revenue for framing an assessment u/s 143(3) and notices u/s. 143(2) were issued by the AO to the assessee. During the course of assessment proceedings u/s 143(3) r.w.s. 143(2), it was observed by the AO that the assessee had allotted 41,86,583 equity share of face value of Rs. 10 each at a premium of Rs. 10 each, wherein the total amount of Rs. 8,37,31,660/- were received by the assessee from following shareholders, as detailed here under:- Subscribed by Number of Shares ....
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....harged. The assesee's submission is that the issuance of-shares at a premium was a commercial decision and issues as per the terms of issue to group concerns and known persons. The valuation was done using Discounted Cash Flow Method and the same was adopted for charging the premium. The assessee further contended that all the subscribers have the explained sources of income and the assessee group has also shown substantial growth in the subsequent years in a consolidated form. The submission of the assesse in this regard has been made in the context of the newly introduced provisions of section 56(2)(viia) of the Act and CBDT notification dated 29/11/2012. This provision however has no relevance in the present assessment year and as such needs no deliberation at this stage. (iii) The assessee company's return of income filed for the current year as well as the preceding year shows consistent losses. In this scenario the valuation done by adopting DCF method without considering the Income Tax liability of the preceding year which is confirmed and crystallized in appellate proceedings is meaningless and once these liabilities are taken into consideration the share v....
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.... assesse has charged the share premium at Rs. 10/-per share on allotment of shares. (e) In the event of any hidden assets in the form of patents, copy right, intellectual property right, or even realistic investments etc belonging to the company based on which the company would be likely to substantially enhance its profits, the same would have a bearing on the premium to be charged on allotment of the fresh shares. However, the notes to accounts forming part of the final accounts as well as the director's report do not indicate any such hidden assets with its present market values. Therefore, the company has no justification for charge of a huge amount of premium for fresh issue of shares. The same has to be viewed from the angle as to whether any person being a prudent investor would after due diligence of the financial state of affairs of the company would be willing to pay the same without any vested interest or in connivance with the recipient. In this scenario, the basis on which the valuation needs to be done is: i) Nature of assesses business and its past, present and future potentiality to grow. (ii) Memorandum and articles of associ....
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....s values of net assets, earning power, and cash flows, etc are some of the main factors, on which any valuation is usually based. The answer to the question whether some or all of these factors can be applied depends upon the circumstances of each case; The valuation adopted in this case in unrealistic and for which no supporting evidence exists. The realistic figures and actual achievements do not reflect any such valuation. It is only common sense that past performance should be given suitable weightage for the valuation of a company and its shares. Furthermore, no correspondence or any documentary evidence has been brought on record in the course of the assessment proceedings to justify the higher valuation of the shares. (f) To summarize, the valuation, that seeks to justify share premium chargeable amounting to Rs. 10/- per share deserves to be rejected for the following reasons: No authentic documentary evidence has been filed to justify the basis on which premium is charged. No weightage has been given nor any reason assigned for non-consideration past or future performance of the company for the valuation purposes or its promoters' or....
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....eir share is equivalent to the nominal value and premium payable for the shares; 2. The money received by the company is maintained as capital fund to which the creditors can look as security for their debts. (c) The facts available on record shows, the alleged share premium received has not been utilized for any of the above specified purposes. These funds are in fact utilized for investments in inventories, deposits. This fact establishes that, the alleged share premium received by assesse has not been utilized for the specified purposed meant and has been diverted for non-specified purposes in violation of the provisions of the Companies Act, 1956. (i) Therefore the amount brought in to the books of assesse in the form of share premium is not a share premium within the meaning of the provisions of the Companies Act and hence the same needs to be treated as such for the purpose of the Income tax Act. Therefore the very nature of the amount brought in the books is not a share premium but the receipt the purpose of which the assesse in the form of share premium is not a share premium within the meaning of the provisions of the companies Act and hence the ....
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....l be chargeable to income tax under the head "income from other sources" if it is not chargeable to income tax under any of the heads specified in section 14, items A to E. This income is not chargeable under the head "income from other sources". (d) In view of the above stated facts, the amount of Rs. 4,18,65,830/- which is collected and utilized in violation of section 78(2) of the companies Act during, the year is taxed as assessee's income for the year under the head income from other sources within the meaning of section 56(1) of the I.T. Act, 1961. 4.5.5 the following guiding factors laid down by various courts have been considered in concluding that the amounts received by assesse are taxable in the hands of assessee under the head income from the other sources: There must be an identification sources - Before a particular amount can be characterized as an income, there should be definite source which can be an identifiable one, maybe an individual or an institution, or a body of people or any other source - CIT vs. Ramdeo Samadhi [1986] 160 ITR 179 (Raj.). Source need not legal - There is nothing to indicate that the source must be one which i....
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....ons were confirmed by the AO u/s. 68 of the Act, as the assessee, in the opinion of the AO, could not offer satisfactory explanation with respect to the nature of credit entry and as per AO the assessee did not justified the excessive share premium on the bases of intrinsic credit entry which as per AO remained unexplained warranting additions to the income of the assessee u/s 68 of the 1961 Act, vide assessment order dated 25-03-2015 passed u/s 143(3). 4. Aggrieved by assessment order dated 25-03-2015 passed by the AO u/s 143(3), the assessee came in appeal before learned CIT-A and made following submission here under:- "5.2 The assessee company has made the following submissions. "That the assessee M/s. Finproject India Pvt. Ltd. (Appellant) is a Private Limited Company incorporated on 06.01.2010 with 100% FDI. 2. The Company is engaged in manufacturing of Soles for footwear at F-1292, Sitapura Industrial Area, Phase-111, Jaipur, and has two foreign companies as its shareholders & Promoters. Promoter Company has vast experience in its products and raw material required for product because it is using the same technology as its parent company, name as....
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....y proceedings and were not reflected in the Audited Financial Statements, Audit Report and Return filed. 8. The Id. Assessing Officer has referred the letters of 3rd March 2015 and 23rd March 2015 in Para 5.3, both these letters are enclosed herewith as Annexure-2 and Annexure-3. You will find that most of the facts/details mentioned in Assessment order were not mentioned in these letters, more particularly Para highlighted in the Annexure-1. 9. The Id. Assessing Officer has considered premium charged on allotment of shares taxable U/s 56(1} of the Act in para 5.4A and 5.4.1(1), page number 3 to page number 12 which is enclosed as Annexure-1. III. Without prejudice to the apparent mistake pointed out in the earlier para, we want to submit on the illegality of the order passed on the merits: 1.1 That this company was formed by the two international renowned company and both these companies are shareholders at the time of incorporation and at the time of further issue of shares and even as on date. It is further submitted that there is no Indian shareholders, who have any shareholding in the company. 1.2. It is submitted that any Foreign D....
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....here cannot be any direct or indirect benefit to the Company, Investor or any third party, which were earlier used as tax planning and to plug that section 56(2)(vii(a) and 56(2)(vii)(b) were introduced in Income Tax Act,1961 w.e.f. 01.04.2013. 1.7 There would have not be any difference if the shares were allotted to both the shareholders at par, as both are the only shareholders and the intrinsic value in both the situation would have been the same but for the compliance of FEMA and Income Tax Act, Company would have not issued shares on premium Act, 1961 w.e.f. 01.04.2013. 1.8 In view of above, it is clear that whatever Company has done, is as per law of land that is in compliance of FEMA and Income Tax Act, 1961, in which the Discounted Free Cash Flow method was recommended as fair value of the share for allotment at the time of issue. 2.1 Without prejudice to above, here we would also like to draw your attention in the case of Honble Supreme Court in the case of CIT Vs. Allahabad Bank Ltd. 73 ITR 745 that the share premium received on the issue of shares has to be included in the paid up capital irrespective of whether the share premium has been maint....
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....ount may, notwithstanding anything in subsection (1), be applied by the company- (a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares; (b) in writing off the preliminary expenses of the company; (c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; or (d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company......" The Assessee has used this Premium Amount for creation of Industrial Unit and other business purposes. It is respectfully submitted that the Learned Assessing Officer has grossly misunderstood Section 78 of Companies Act, 1956 and confused with the word Application of Share Premium Account with utilization of money received as Share Premium. The simple reading of the Section 78 clearly indicates that Application means the adjustment/application of the liability head or intangible assets with the Share Premium Account rather utilization of cash received i.e. (Asset) for a specific purpose. Meaning thereby that....
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.... "68 .......... (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and............." In view of above, it is clear that Section 68 of Income Tax Act, 1961 is not applicable on the Non-Resident, therefore, same should be deleted. 7. Without prejudice to our above submissions, it is further submitted that even the definition of income, which is inclusive does not consider any receipt for issue of shares as income before 1st April, 2013 even if the consideration received for issue of shares exceeds the fair market value. 8. It is further submitted that transactions more particularly from the foreign/investing company only if started being treated income U/s 56(1) and 68 will send seriously adverse indication to the foreign investors, to whom the Hon'ble Prime Minister is encouraging in his campaign to "Make in India". It is respectfully submitted that this case is a live example of' „Make in India', where both the investors are sitting abroad and Company is having 100% FDI and have invested money in a State like Rajast....
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....ought to the notice of the ITAT, DRPs and CIT(Appeals)" I have gone through Vodafone India Services Pvt.Ltd. Vs. Union of India & Others (2014) 368 ITR 01 (Bom HC) wherein it is as under : "For all the above reasons, we find that in the present facts issue of shares at a premium by the Petitioner to its non resident holding company does not give rise to any income from an admitted International Transaction. Thus, no occasion to apply Chapter X of the Act can arise in such a case." 5.6 After considering the above submissions given by the AR of the appellant and taking into account the jurisdictional Bombay High Court decision in the case of Vodafone India Services Pvt. Ltd. vs. Union of India &. Others (2014)and Hon‟ble ITAT "G" Bench order in the case of Green Infra Ltd. ITA No. 7762/Mum/2012 dated 23.08.2013 and also the CBDT Instruction No. 2/2015 dtd. 29.01.2015, I am of the considered opinion that share premium of Rs. 4,18,65,830/- treated as income by the Assessing Officer is not justifiable and accordingly I direct the Assessing Officer to delete the addition of Rs. 4,18,65,830/-. Accordingly Ground no. 1 to 3 are disposed off. 4. Gro....
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....determined under DCF method to foreign investors . The fair value of shares to be determined using DCF method is to be certified by CA or SEBI registered Category-1, Merchant Banker. Our attention was drawn to RBI circular no. RBI/2009-10/445 A.P.(DIR Series) Circular no. 49 dated 04-05-2010 which stipulate that the fair value of shares is to be determined using DCF method and consideration for shares has to be not less than the fair value of shares as determined using DCF method in case of closely held companies whose shares are not listed on recognized stock exchanges. It was submitted that equity shares of Rs. 10 each were issued at premium of Rs. 10 each for total consideration price of Rs. 20 per equity shares to the two promoting companies of the assessee company namely Asian Compound Limited, Hongkong and Finproject Asia Limited, Hongkong based on the fair value of shares determined by a qualified chartered accountant using DCF method wherein fair value of the equity shares comes to Rs. 20 per equity share as against face value of Rs. 10 per equity shares. Thus it was submitted that fair valuation of the equity shares was done following rules prescribed by the RBI and it was....
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.... setting up of manufacturing unit for sole for footwear in Jaipur and for business purposes, for which the proceeds of share premium were used . It was submitted that application of share premium for specified purposes as are mentioned in Section 78 of the 1956 Act is directed for application by write off of „Share Premium Account‟ as is appearing in the books of accounts for the specified purposes and is not meant for utilisation of funds from the proceeds of share premium. Thus, it was submitted that the AO completely erred and misdirected himself while holding that there is a breach of Section 78 of the 1956 Act. 7. We have considered rival contentions and perused the material on record . We have observed that the assessee is engaged in the business of manufacturing of soles for footwear and had set up manufacturing unit at Jaipur, Rajasthan for said manufacturing .The assessee is stated to be promoted by two foreign companies who are its shareholders namely Asian Compound Ltd., Hongkong and Finproject Asia Ltd., Hongkong . Both the above entities are non-resident which is undisputed between rival parties as is emerging from material on record before us. In the au....
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.... of Vodafone India Services Limited(supra), decision of ITAT, Mumbai in the case of Green Infra Limited(supra) and CBDT instruction no. 2/2015 dated 29.01.2015. The learned CIT(A) while deleting the addition noted that the assessee has received share premium from non-resident companies and no single Indian shareholder is involved. This finding of fact arrived at by learned CIT(A) so far as receipt of share premium by assessee from non-resident entities is not disputed by Revenue and is not in challenge before us which has attained finality. It is pertinent to mention here that Section 56(2)(viib) which was placed in statute by Finance Act, 2012 w.e.f. 01-04-2013 is applicable for consideration received by a company in which public are not substantially interested, from a person who is resident while in the instant appeal before us, this finding of fact that shares were issued by the assessee to two non-resident entities is not in dispute and per-se Section 56(2)(viib) has no applicability as the assessee received consideration for issuance of shares from non-resident entities. The learned CIT(A) held that treating share premium received by the assessee as income is not justifiable ....
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....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. 1.12 crores while for the financial year ended 31-03-2012, the turnover was Rs. 7.78 crores with profits before tax of Rs. 1.73 crores. The assessee has made provisions for payment of income-tax in its audited financial statements for both the said years and the income declared by the assessee for the impugned assessment year 2012-13 was Rs. 1.55 crores in the return of income filed with the revenue. Thus, as is evident from audited financial statements placed on record before us, neither the assessee incurred any loss during the first two years of its existence nor do it have any accumulated losses in its books of accounts as at 31-3-2011 as well as at 31-03-2012, as is alleged by AO in assessment order which is a perverse finding of fact arrived at by the AO that the assessee is making losses and has accumulated losses in its balance sheet and these finding of fact arrived by the AO needs to be discarded . The AO has questioned and disputed the fair value arrived at by the assessee of the equity shares on these perverse finding of fa....
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....r 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 specified purposes as specified in Section 78 of the 1956 Act. The proceeds of the funds raised towards share premium account can only be utilised for the purposes specified as per agreed terms and conditions of invitation to offer for issuing securities by the issuing company with the shareholders, such as in the instant appeal before us is stated to be for setting up of manufacturing unit for soles for footwear and business purposes, while application of „Share Premium Account‟ which was created in books of accounts is more concerned with protection of capital base in the tax-payer company and reflection of true and fair view of affairs of the taxpayer company which entails writing off „Share Premium Account‟ from books of accounts to be set off against specified purposes which can be for applying towards issuance of bonus shares, writing off of preliminary expenses, buy back of shares etc as specified u/s 78 of the 1956 Act, so thus utilisation of proceeds of funds raised towards share premium in acco....
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....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 well accumulated losses in the audited financial statements while the assessee is in profits since its inception as well there are no accumulated losses in the audited financial statements which are placed in paper book filed with tribunal. The assessee‟s valuation is discredited by the AO using these perverse finding of fact . The tax-payer while issuing shares to non resident investors create an foreign obligation for India in favour of third country and as per RBI/FEMA requirements, the tax-payers are required to issue shares using valuation methods which are approved method ( DCF is approved method of valuation) and the consideration for issuance of shares has to be necessarily equal to or above fair value arrived at by such approved method because otherwise the tax-payer will create an foreign obligations for India in favour of third country at a consideration price received which is below fair value of shares computed by an approved method of valuation which will be loss to India as it....
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....er 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 two non-resident entities. Thus, the Revenue has accepted compliance of provisions of Section 68 of the 1961 Act to the extent of face value of equity shares issued to these two non resident entities and as per Revenue version their identity, creditworthiness and genuineness of the transactions by way of raising of equity share capital at the face value to the tune of Rs. 4.19 crores stood proved, the only grievance of Revenue being share premium to the tune of Rs. 4.19 crores being in excess of intrinsic value of share so issued is an income chargeable to tax within provisions of Section 68 of the 1961 Act. The assessee has also received External Commercial Borrowing (ECB) to the tune of Rs. 7.50 crores from the said holding company namely Asian Compounds Limited, Hongkong during the previous year relevant to the impugned assessment year which was also accepted by Revenue and no additions were made by Revenue by invoking provisions of Section 68 of the 1961 Act w.r.t. ECB raised by the assessee....