TaxTMI 
TaxTMI 
2020 (3) TMI 465
X X X X Extracts X X X X
X X X X Extracts X X X X
....circumstances of the case and in law, the Ld. CIT(A) has dismissed all the grounds of appeal raised by the appellant and further granted relief of Rs. 2,46,43,987/- added u/s 115-0 of the I.T. Act, without appreciating the fact that the appellant had not raised the said ground before the Ld. CIT(A). 2. The appellant prays that the order of CIT(A) on the above directions be set aside and that of the assessing officer be restored. 3. The appellant craves leave to amend or alter any of the aforesaid grounds or add a new ground of appeal, which may be necessary at any time before or at the time of hearing of appeal." 4. The assessee has raised the following grounds: - "1. The Id Appellate Authority (AA) Commissioner of Income Tax (A)-21. Mumbai, has dismissed Appeal No. CIT (A)-21//IT100/2012-13. without offering sufficient opportunities of being heard and the impugned order was passed ex parte. 2. The AA has erred in taxing the assessee company u/s 56 (1) of the Income Tax Act. 1961 under the head at "Income from Other Sources" the Share Premium amount of Rs. 10.66,23.000 received by the assessee Company. 3. The AO has also erred in upho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0 98000 990 9702000 9800000 Gyaneshwar Trading & Finance Co. Ltd. 2700 10 27000 990 2673000 2700000 Sidh Housing Development Co. Ltd. 5000 10 50000 990 4950000 5000000 Nicco Securities Pvt. Ltd. 2800 10 28000 990 2772000 2800000 Olympus Vision Pvt. Ltd. 7000 10 70000 990 6930000 7000000 Oshin Investments & Finance P.Ltd. 4000 10 40000 990 3960000 4000000 Maharashtra Polybuteness Ltd. 64000 10 640000 990 63360000 64000000 Sunciti Financial Servics P. Ltd. 5000 10 50000 990 4950000 5000000 Yogi Sung Won India Ltd. 4000 10 40000 990 3960000 4000000 Manjula Dave 50 10 500 990 49500 50000 Lata Dave 100 10 1000 990 99000 100000 Swati P. Dave 100 10 1000 990 99000 100000 Gopal Dave 150 10 1500 990 148500 150000 107700 1077000 106623000 10770000 6. The Ld. CIT(A) on perusal of the balance-sheet of the assessee observed that the share premium amount has been utilized for making investmen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s engaged in the manufacturing of specialty chemicals and is interested in the business expansion. New era and Maharashtra Polybutenes Ltd had arrived on a consensus regarding the acquisition on debts/assets/equity or total acquisition of UIL through a Memorandum of Understanding (MOU). By virtue of this MOU, New Era is under obligation to sell the UIL plant and machinery to MPL at cost basis. The manufacturing plant of Unimers India Ltd is the only one of its kind in India. There are no additional EPDM capacities are coming up in India in near future and the replacement cost of such plant is exorbitantly prohibitive. If this EPDM plant and technology is acquired by MPL, it would tremendously help MPL to sky rocket its top line as well as bottom line. The management of MPL was convinced with the New Era proposal as for MPL it was a good opportunity to invest in New Era and acquire the EPDM Plant along with the technology, technical support system, stores and spares etc of UIL. Looking to the valuation of the EPDM plant and machinery and the technology the opportunity cost of the investment made by MPL in New Era is in favour of MPL, and hence MPL agreed to pay the premium on prefer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....licable value have been affixed on the share certificate. h. Two of the allottes namely Sunciti Financial Services Pvt Ltd and Maharashtra Polybutenes Ltd have two common directors namely Mr. Brijmohan Rathi and Mrs. Sangeeta Rathi i. The company has not raised funds through Equity route and as the preference shares were privately placed and no public documents were issued for this. The fund was raised from select associate companies and business associates. New Era's plans of acquiring UIL as well as debts of other companies/businesses were discussed with the potential investors as mentioned in para 2(a) above and they were willing to invest in New Era. No project report was required for this purpose. New Era has already acquired the debts of UIL from IFCI Ltd on 01-10- 2010 and all the rights in the debts have been assigned to New Era. The recoverable amount from UIL is Rs. 86.55 crore as on 30-06-2008. New Era i5 in the process of taking next step in this matter. The UIL debts were assigned to New Era and a copy of Deed of Assignment signed by and between IFCI Ltd and New Era dated 01-102009 is attached as Annexure -7. Annual Audited financials as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld 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. No authentic documentary evidence has been filed to justify the basis on which premium is charged. The only reason given is as per terms of the issue and no such terms have been brought on record despite specific query and sufficient opportunity given. No weightage has been given nor any reason assigned for non consideration of past or future performance of the company for the valuation purposes or its promoters or directors. As already discussed the company does not possesses any patent, copy right, intellectual property rights etc, which could be considered as hidden assets which could have enhanced the value of the shares of the company and therefore justified to some extent the charging of very high premium for allotment of shares. All the assets held as on date by assessee are volatile with no certainty of realization or realizable values as contended by assessee. Determina....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Act, 1956. He also observed that there is a prohibition on the distribution of the share premium account as dividend under the said act and correspondingly the same would have to be treated as reduction of share capital attracting the provisions of the Companies Act in relation thereto. He finally concluded that any distribution of share premium account which is not in accordance with the provisions of Section 78(2) of the Companies Act, 1956 will amount to a reduction of share capital. Therefore, the redemption of preference share capital for above reasons in this case constitute dividend within the meaning of provisions of Section 2(22)(a) of the Act which attracts dividend distribution tax u/s 115O of the Act. Since the assessee failed to pay the dividend distribution tax as required u/s 115O of the Act, the same was also levied by Ld. AO together with the interest u/s 115P of the Act while completing the assessment. The notice was given and after the reply of the assessee, the AO was of the view that the share premium amounting to Rs. 10,66,23,000/- as on 31.03.2010 was utilized for non-specified purposes in violation of provisions of Section 78(2) of the Companies Act, 1956 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of share capital and share premium together with the confirmation from the respective share subscribers before the Ld. AO. We also observed that the identity of the share subscribers, creditworthiness of the share subscribers and genuineness of the entire transactions stood clearly established. The assessee also mentioned that the learned CIT(Appeals) observed that the entire transaction carried out together with the receipt of share premium cannot be termed as unrealistic and cannot be termed as not genuine. We find that the Ld. CIT(A) having given the said observation had proceeded to agree with the addition made by Ld. AO u/s 56(1) of the Act on the only ground that the assessee had violated the provisions of Section 78(2) of the Companies Act 1956 which specifies the manner of utilization of share premium account. In this regard, what is relevant for the purpose of assessment is whether the receipt of share premium by the assessee could be termed as income policy within the meaning of provisions of income tax act. We find that the provisions of Section 78(2) of the Companies Act, 1956 specifies the manner of utilization of share premium account for specified purposes which are....
X X X X Extracts X X X X
X X X X Extracts X X X X
....llowing non-resident entities:- Subscribed by Number of Shares Face Value Equity share capital Share Premium per shar Share premium account Total amount received Asian Compoun ds Limited, Hongkong 10,37,315 10 10,37,315 10, 10,37,3150 2,07,46,300 Asian Compoun ds Limited, Hongkong 31,07,428 10 31,07,4280 10 31,07,4280 6,21,48,560 Finproject Asia Ltd. , Hongkong 10,358 10 1,03,580 10 1,03,580 2,07,160 Finproject Asia Ltd., Hongkong 31,482 10 3,14,820 10 3,14,820 6,29,640 Total 41,86,583 4,18,65,830 4,18,65,830 8,37,31,660 The Revenue had invoked provisions of Section 56(1) wherein additions were made in the hands of the assessee by the AO towards share premium charged by the assessee to the tune of Rs. 4,18,65,830/- . The learned CIT-A deleted the said additions towards share premium as were made u/s. 56(1) of the Act. The Revenue is not aggrieved by the said relief granted by learned CIT-A with respect to the deletion of additions made u/s. 56(1). However , without prejudice in alternate the AO also confirmed additions u/s 68 on the gr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncome within the deeming fiction of Section 68 of the 1961 Act. The assessee has placed its audited financial statements on record which are placed in paper book/page 101-141. The assessee has also filed its certificate of incorporation issued by MCA which shows the date of incorporation of the assessee as 06-01-2010, which is placed in the file. The Directors Report (page 104/pb) states that this is 2nd Annual Report of the company. The company has set up a manufacturing unit for manufacturing soles for footwear at Jaipur, Rajasthan. The assessee company is promoted by two non-resident entities who have subscribed to the shares of the assessee company. The majority shareholding of the assessee company to the tune of 98.99% is held by Asian Compound Limited, Hongkong who is its parent company directly and shares are also held by Finproject Asia Limited, Hongkong who is assessee‟s holding company indirectly (page 138/pb). The assessee has issued equity shares to its holding company namely Asian Compound Limited , Hongkong as well to said Finproject Asia Limited, Hongkong Limited of Rs. 10 each at premium of Rs. 10 each during the impugned year under consideration, details are ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment in volatile companies to prejudice assessee by discarding valuation of shares arrived at by the assessee , which finding of fact are again perverse finding of facts which need to be discarded . Thus, errors had been made by the AO in recording perverse finding of facts not supported by the material/evidence on record to discredit fair valuation of shares arrived at by the assessee by adopting approved valuation method viz. DCF method which valuation was certified by a qualified chartered accountant . It is not shown before the Bench by learned DR that these perverse finding of facts as were arrived at by the AO were indeed correct finding of facts recorded by the AO and the assessee is hiding the correct facts from the authorities . The AO also erred in holding that there is a violation of Section 78 of the 1956 Act by holding that the assessee ought to have utilised the proceeds of share premium for certain specified purposes as is stipulated in the said Section 78 of the 1956 Act viz. paying up unissued shares of the company as bonus shares, writing off preliminary expenses , buy-back of shares etc. as are specified in the said section 78 of the 1956 ( see preceding para whe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee did not utilised the funds raised through share premium for specified purposes u/s 78 of the 1956 Act without any basis and understanding the rational for both concepts which are altogether meant for different purposes , while the assessee did rightly utilised the proceeds of funds raised towards share premium for setting up manufacturing unit for manufacturing soles for footwear at Jaipur and business purposes as the funds were stated to be entrusted by the shareholders for the said approved purposes of setting up the said unit / business purposes as per terms and conditions of the invitation to offer , and the assessee do transfer share premium raised to "Share Premium Account‟ under the head "Reserves and Surplus‟ in books of accounts as is mandated u/s 78 of the 1956 Act . Section 78 of the 1956 Act allows application of Share Premium Account for certain specified purposes by way of write off/knocking against issuance of bonus shares, writing off preliminary expenses , buy-back of shares etc by book entry . Thus as is emerging from material on record, the conclusions arrived at by AO so far as violation of Section 78 of the 1956 Act by the assessee were wrong and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....are by basing its decision based on perverse finding of facts which are already discarded by us. Thus, the assessee was on the right side of the law by issuing equity shares at a value of Rs. 20 per equity shares so far as FEMA/RBI compliances are concerned. RBI has also accepted the said fair price of shares supported by CA Certificate using DCF method and FC-GPR form filed by the assessee through its banker Axis Bank was accepted by RBI and taken on record, which is placed in file(pb/44-45). The assessee has filed its bank statements as well FIRC issued by its bankers as an evidences which are placed in file. Thus based on material on record before us, no fault lies with the assessee in issuing equity shares of face value of Rs. 10 each at share premium of Rs. 10 each so far as compliances under FEMA/RBI are concerned. It is pertinent to mention that Section 56(2)(viib) r.w.s. 2(24)xvi) of the 1961 Act were placed in statute by Finance Act, 2012 w.e.f. 01-04-2013 and the said sections are relevant for issuance of shares to residents while in the instant case , undisputedly equity shares were issued by the assessee to non-resident in the instant case. Thus the said section 56(2)(v....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of capital transactions and does not give rise to an income chargeable to tax. Section 56(2)(viib) r.w.s. 2(24)(xvi) of the 1961 Act were introduced by Finance Act, 2012 w.e.f. 01-04-2013 and had applicability to the receipt of consideration towards shares from resident entities and has no application when consideration towards shares are received from non-resident entities which are excluded in order to encourage foreign investments. The learned DR erred in making contentions that the said decision of Hon‟ble Bombay High Court is relevant for TP proceedings while in Vodafone case, Hon‟ble Bombay High Court has held that TP provisions as are contained in chapter X are machinery provisions while there has to be firstly an income chargeable to tax and then only machinery provisions can be applied. The issue of shares at share premium by tax-payer to nonresident holding entities was held to be on account of capital transaction which were not found to be having character of income chargeable to tax. CBDT has also accepted this position vide instruction no. 2 /2015 dated 29-01-2015 . Thus, this contention of learned DR that decision of Hon‟ble Bombay High Court in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reby dismissed is not pressed. 9. The ground no. 4 raised by assessee is general in nature. ITA. NO.3861/M/2016 10. We find the revenue has challenged the action of the Ld. CIT(A) dismissing the invocation of provisions u/s 115O of the Act. We find that the main grievance of the revenue seems to be that relief has been granted by Ld. CIT(A) without there being any specific ground raised by the assessee before the Ld. CIT(A). In this regard, it is pertinent to note that Ld. AO had addressed the entire issue of receipt of share premium and taxability of share premium of Rs. 10,66,23,000/- u/s 56(1) of the Act as well as invoking the dividend distribution tax in terms of 2(22)(a) r.w. Section 115O of the Act in the assessment order. The primary reason for making such additions u/s 56(1) was due to non compliance of provisions of Section 78(2) of the Companies Act, 1956 in the opinion of Ld. AO. We find that the observation of the Ld. AO for levying the dividend distribution taxed u/s 115O of the Act is dependent upon this primary finding that the provisions of Section 78(2) of the Companies Act, 1956 has been violated by assessee hence both the issues are interconnected....