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2020 (1) TMI 455
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....filed by the revenue in ITA No.780/Mum/2016 for A.Y 2010-11 is taken as the lead case and the decision rendered thereon would apply with equal force for other appeals also except with variance in figures. 3. The first issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in deleting the disallowance made u/s 14A of the Act in the facts and circumstances of the case. 3.1 We have heard rival submissions. It is not in dispute that the assessee had not derived any exempt income during the year. Hence, in our considered opinion, the provisions of Sec. 14A of the Act cannot be made applicable. This issue is now very well settled by the decision of Hon'ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640 (SC). Accordingly the ground No.1 raised by the revenue is dismissed. 4. Ground No. 2 raised by the revenue is with regard to the action of Ld. CIT(A) in deleting the addition of share premium and share capital added by the Ld. A.O u/s 56(1) of the Act. 4.1 Brief facts of this issue are that the assessee is engaged in the business of import and wholesale trading in branded readymade garments. The assessee had created follow....
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....essee submitted the copies of the Foreign Inward Remittance Certificates (FIRCs) together with Chartered Accountant's (CA) certificate for share receipt transactions. The assessee also submitted the copy of the Board resolution for issue of shares. The assessee submitted that since the shares were allotted directly to the investors, no Registrar was appointed for issue of shares. The assessee also submitted that franking stamp for payment of stamp duty have been affixed on copy of share certificates. It was specifically submitted that the directors of the assessee company or their relatives were not related to the directors of the investor company to whom shares were allotted during the year. The Ld. A.O issued show cause notice vide dated 30.03.2013 as under: "From the Share Valuation as per the CI guidelines, the fair value of the equity shares of Brand Marketing (India) P Ltd has been determined at Rs. 10. However, the shares have been issued at a premium of Rs. 9/-. Vide notice u/s 142(1) dated 25.02.2013 you were specifically asked in point No. 7(f) to justify the premium charged on the issue of shares with reference to the basis of valuation with supporting docum....
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....ertible Participative Preference Shares at Rs. 10/- per share and the remaining amount has been credited to the Share premium Account. Thus, the conversion can be treated as fresh issue of Shares of Face Value Rs. 10/- and share premium of Rs. 210/- per share. Clearly, as on the date of conversion, the value of the fair market value of the shares as per the Net Asset Value Method was Rs. NIL. However, considering the scope and limitations of the method of valuation, the CA certificate furnished by the assessee indicates that the fair market value of the shares has to be taken at Rs. 10/- per share. Thus, the shares of Fair Market Value of Rs. 10/- per share have been allotted at a premium of Rs. 2 10/- per share while converting the 0% Compulsory Convertible Participative Preference Shares. iii. Vale notice U/s 142(1) dated 13.03.2013 the assessee was specifically asked to justify the charging of share premium. In its reply dated 19.012013 the assessed has merely stated that shares are never issued at book value by any listed company nor are the shares listed on stock exchange on the basis of hooL value prices. The assessee contends that the shares are always issued at a p....
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....ar has been either used for giving loans and advances to subsidiary companies or for routine business purpose. Thus, the funds received on account of Share premium have been utilized for purposes other than those specified U/s 78(2) of the Companies Act. There is no justification for the premium charged on the shares. Looking at the accumulated losses of the assessee company the payment of huge share premium cannot be justified by any means. Considering the fact that the shares have been issued to Promoter companies, the entire transaction can be seen to be a sham transaction by which money has been brought into the books of the assessee company in the guise of 'Share Premium'. Any transaction which is a genuine business transaction has to be justified by the principles of commercial expediency. Foreign investor companies based in Mauritius have invested in the shares of the assessee company year on year despite the assessee company making huge losses and showing no prospects of any good return on investment in future. Vide show-cause notice U/s 142(1) dated 25.02.2013 the assessee was specifically asked to furnish the names and addresses of the persons to whom sha....
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....um but it represents only return oti such business activity. The utilization of such funds subsequently for any purpose is clearly distinguishable and separate from the share premium account. The book entry in reduction in share premium is only an accounting formality and cannot represent the transaction in real sense. Hence the introduction of the fresh capital at a premium of Rs. 210/- and Rs. 9/- amounting to R. 66,52,60,820/-partakes the character of income uls.56(1) of the Act. B. Treating share premium received as income U/s 56(1) of the Act. Having established above facts and in law that the transaction in question is not genuine and the form in which it is brought in to the books of assessee (i.e the introduction of alleged share premium) the taxability of the same in the hands of assessee under section 56(l) under the head income from other sources is analyzed as under: (a) In response to a specific question as to why the amount involved should not be taxed as assessee's income as income from other sources uls.56(1) of the Act., the assessee has only stated that the question of-treating the said amount as income does not arise as Sec....
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....81,142/- (ii) Premium relating to fresh issue of 15,97,742 equity shares of Rs. 10 each, issued at a premium of Rs. 9 Per share : Rs. 1,43,79,678/- Total premium Rs. 66,52,60,820/- Particulars Preference shares Preference shares FV Rs. 10 Equity shares F.V Rs. 10 Share Premium Number Amount Number Amount Number Amount Amount Opening as at 31st march 2009 30,99,415 68,18,71,300 43,07,992 4,30,79,920 94,73,683 9,47,36,830 66,40,04,053 Adjustments (i) converted from preference FV Rs. 220 to preference FV at 10 30,99,715 68,18,71,300 30,99,415 3,09,94,150 65,08,81,142 (ii) converted from Preference FV Rs. 10 to equity FV Rs. 10 23,39,181 2,33,91,810 23,39,181 2,33,91,180 Iii Fresh issue of equity FV Rs. 10 and premium 9 15,97,742 1,59,77,420 1,43,79,678 &....
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.... tranche relating to share premium of Rs. 1,43,79,678, relating to fresh issue of 15,97,742 equity shares of Rs. 10 each issued at a premium of Rs. 9 per share it is submitted as under: - Strong emphasis is laid on the decision of the Hon'ble Bombay High Court in writ petition of 871 of 2014 in the case of Vodafone India Services Private Limited in writ petition 871 of 2014, copy of which is enclosed in the case law paper book placed on record. The appellant has drawn attention to the observations of the Hon'ble High Court in paras 38, 40 and 41 which are strongly relied upon. My attention is also drawn to the fact that Hon'ble Bombay High Court in Vodafone case was dealing with a Transfer Pricing issue but the findings in paras 38, 40 and 41 apply to the facts of this case fully. Reliance is also placed on the decision of Hon'ble Bombay High Court Rockstar Real Estate Pvt. Ltd. (Writ Petition no. 2885 of 2014), copy whereof placed on pages 160 to 161 of the case law paper book where also share premium has been held to be on capital account. Appellant has also drawn my special attention to the case of the Hon'ble Mumbai Income....
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....s. 10 each at premium of Rs. 9 each and also converted 0% compulsorily convertible participating preference shares (CCPPS) of face value of Rs. 220/-each into equity shares of face value of Rs. 10 each at premium of Rs. 210 each. The details of the same are as under: Name of shareholder Date of investment Number of equity shares Face value Equity share capital Share premium per share Share premium account Total amount received Retail India Ltd 18/01/2010 and 19/01/2010 607768 10 6,077,680 9 5,469,912 11,547,592 Matrix Partners Ind 22/03/2010 989974 10 9,899,740 9 8,909,7666 18,809,506 Investment Holding LLC Total 1,597,742 15,977,420 18 14,379,678 30,357,098 Details of issue and conversion of preference shares Name of shareholder Date of investment Number of preference shares Face value Preference share capital Conv. into no of equity shares Conv. into equity shares Amount transferred to share premium account Matrix Partners India 12.10.2007 526,316 220 115,789....
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....ubsidiaries obtained a long term exclusive rights /license/franchise for sale of products of the above brands in the Indian territory. Each subsidiary is dedicated and owning exclusive, long term rights for sale of a single brand in the Indian territory. 4.11 Each of the aforesaid business required substantial capital investment and working capital for the day to day operations. The assessee, being the holding company for the above subsidiaries approached various private equity investors locally as well as international markets to finance the assessee, is retail venture of introducing the above global brands in India. Accordingly, in the year 2007 and 2008, the assessee company identified two investors namely Matrix and Baugur Mauritius Ltd. (Baugur) and issued 30,99,415 CCPPS to these parties at a price of Rs. 220/- each per share. This price was based on a fair valuation of the entire business considering the future prospects. The assessee submitted that the value of the business is generally derived from the following :- - Future prospects of the business and not only from past performance of the business; - The future business plan of the company; ....
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....e company and the profit earning capacity value based on past earning. • The erstwhile exchange control regulations prescribed that the valued price is the floor price (i.e. minimum price of issue of shares) and it is open for the company to issue shares at a price higher than the said price. • The aforesaid certificate considering the CCI method of valuation was issued only to meet the requirement of the RBI for the purposes of issue of shares to non-resident and is not the correct methodology for determining the fair value of the business. In fact the RBI in the year 2010 has now amended the method of the valuation and has adopted the Discounted Cash Flow (DCF) Method for valuation of equity shares while issuing shares to non-residents to arrive at the fair value. • The assessee submitted that it being a new entity, if the valuation of its business is based on the CCI valuation, it is but obvious that the value would be NIL. In view of the above factual position and the fair value of the business of the company as stated above, the assessee submitted that the price at which the shares were issued/conversion of the preference shares ....
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....gard to issuance of shares at a premium by the assessee company, which in opinion of the Ld. AO is a sham transaction in view of losses incurred by the assessee and accordingly there is no future prospects for the assessee to enable the investors to make investments in assessee company at a premium is concerned, the Ld. AR submitted before us that the shares were issued to the foreign investors in accordance with the exchange control regulations. The copies of the Foreign Inward Remittance Certificate (FIRCs), Form FCGPR filed with RBI, Valuation certificate from Chartered Accountant, Compliance certificate from Company Secretary and copies of share certificates were provided to the ld AO during the course of the assessment proceedings which clearly prove beyond doubt the identity of the foreign investors. The ld AO had held that the company had suffered losses for the last 5 years and hence the premium of Rs. 210/- on conversion is not justified. The ld AR submitted that the findings of the ld AO are contrary to the above factual position and the basis on which the value of the assessee company was derived and the terms and conversion of the preference shares. The assesssee's ....
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....r entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. This decision cannot be applied to the facts of the case of the assessee. Further the aforesaid case is no longer a good law after the decision in the case of Union of India v Azadi Bachao Andolan [(2003) 263 ITR 706 (SC)] where the Court held that the decision in McDowell & Co. Ltd.'s case (supra) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. In any case, in the context of issuance of shares by the appellant at premium this case law of McDowell is completely irrelevant. 4.15 Accordingly we hold that when there are material evidences to substantiate that the shares were issued to foreign investors, and the conversion of the share was in accordance with the terms of issue of the preference shares appropriately justified with the fair valuation, there is no case treating such an issue/conversion as a means of tax avoidance. 4.16 With ....
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....visions of Sec. 56(1) of the Act in order to bring the receipt of share premium to tax in the hands of the assessee company. For the sake of convenience, the provisions of Sec. 56(1) of the Act are reproduced hereunder:- Income from other sources F- Income from other sources: "Sec. 56(1): Income of every kind which is not to be excluded from the total income under this Act shall 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 Sec. 14, items A to E". 4.20 The receipt of share capital and share premium by the assessee admittedly is not chargeable to tax under any of the heads specified in Sec. 14 in items A to E. That does not mean that the said receipt would automatically get taxed under the head income from other sources. The term "income" is defined in Sec. 2(24) of the Act to include by way of several clauses and one such clause which is relevant to the issue under consideration would be clause (xvi) which was brought into the statute by the Finance Act 2012 w.e.f 01.04.2013 which reads as under: Section - 2(24)(xvi) "Any consideration....
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....facts remain uncontroverted by the Ld. DR before us. 4.23 We also find that with regard to the receipt of share premium of Rs. 1,43,79,678/- relating to fresh issue of 1597742 of equity shares of Rs. 10 each issued at a premium of Rs. 9 per share, the ld. CIT(A) had placed reliance on the various decisions of Hon'ble jurisdictional High Court which are already reproduced in his order and also the Coordinate Bench decision of this Tribunal in the case Green Infra Ltd., reported in 145 ITD 240. We find that Hon'ble Jurisdictional High Court in the case of Vodafone India Services Pvt Ltd., v. Union of India and others reported in 368 ITR 1, had held as under: 25. But we have examined the issue afresh. The word income for the purpose of the Act has a well understood meaning as defined in Section 2(24) of the Act. This even when the definition in Section 2(24) of the Act is an inclusive definition. It cannot be disputed that income will not in its normal meaning include capital receipts unless it is so specified, as in Section 2(24) (vi) of the Act. In such a case, Capital Gains chargeable to tax under Section 45 of the Act are, defined to be income. The amounts received o....
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....n 2(24)(vi) and for that purpose we have to read the sub section strictly. We cannot widen the scope of sub section by saying that the definition as a whole is inclusive and not exhaustive. In the present case, the words "chargeable under section 45" are very important. They are not being read by the Department. These words cannot be omitted. In fact, the prior history shows that capital gains were not chargeable before 1946. They were not chargeable between 1948 and 1956. Therefore, whenever an amount which is other wise a capital receipt is to be charged to tax, section 2(24) specifically so provides.' In view of the above, we find considerable substance in the Petitioner's case that neither the capital receipts received by the Petitioner on issue of equity shares to its holding company, a non-resident entity, nor the alleged short-fall between the so called fair market price of its equity shares and the issue price of the equity shares can be considered as income within the meaning of the expression as defined under the Act. 4.24 We also find that the Coordinate Bench decision of this Tribunal in the case of Green Infra Ltd., is directly on the point herein in ITA ....