TaxTMI 
TaxTMI 
2021 (4) TMI 802
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....us expenses such as Discount of issue of NCD, professional fee, Debenture issue expenses, Audit fee etc., aggregating to Rs. 13,55,79,897/- and declared the book profit at Rs. 270,23,45,103/-. 4. In the computation of income, entire claim of expenses have been disallowed and resultant income has been further reduced by "Provision for investment done earlier year no longer required written off' to arrive at Business income of Rs. NIL, claiming it was added back in A.Y. 2011-12. While computing tax payable u/s 115JB, the provision as mentioned above has been reduced from the Book profit as well claiming that such diminution in value of investment was added back while computing book profit of A.Y. 2011-12; to arrive at Book profit as per section 115JB at a loss of Rs. 13,55,79,897/-. 5. On verification of the Balance sheet as on 31.03.2013, AO observed that the assessee has received a sum of Rs. 313,63,93,516/- as Advance against Share capital. During the course of assessment proceedings the AR of the assessee was asked to file the details of actual allotment of shares against advance received in F.Y. 2012-13. Vide reply dated 15.02.2016, the assessee stated that in lieu of ....
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....e ledger account titled as "Essar Retail Holding Ltd- Others" in the earlier two financial years. Thus, having regard to the title of the relevant ledger account, the narration given in the ledger account for the amounts paid by EIL/ICSPL to the appellant and the absence of disclosure of said amounts as Advance against share capital in the balance sheet of the appellant as well as EIL/ICSPL in the financial years 2010-11 and 2011-12, it has to be inferred that the amounts of Rs. 17.26 crores and Rs. 142.00 crores received by the appellant from EIL during the FYs 2010-11 and 2011-12 respectively were in the nature of loans received from EIL and not Advances against share capital/share application money as claimed by the appellant. 28. In this regard, it was explained by the appellant that the share application money of Rs. 159.26 crores received prior to FY 2012-13 was shown under Current liabilities in the balance sheet and that it was classified as Share application money only during FY 2012-13. On perusal of the balance sheet of the appellant as on 31/03/2011 and 31/03/2012 in the light of this explanation of the appellant, It is seen that the relevant amounts o....
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.... by the appellant are required to be examined in this factual background. 30. It has been contended by the appellant that the provisions of section 56(2)(viib) are applicable only in the year in which the shares are issued by the company and not in the year in which the share application money is received on the ground that the "consideration for issue of shares" arises only when the shares are issued. It has been contended that the share application money received by the company prior to Issue of shares does not bear the character of consideration for the issue of shares, since the shares come into existence only on their issue. 31. In this regard, it would be useful to refer to the provisions of section 56(2)(viib), which has been inserted in the Act by the Finance Act, 2012 w.e.f. 01.04.2013, which are as under: 56 (2) In particular, and without prejudice to the generality of the provisions of sub- section (1), the following incomes, shall be chargeable to income- tax under the head "income from other sources" namely :- (viib) Where a company, not being a company in which the public are substantially interested, receives, in any previous year,....
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.... required to be invoked to ascertain whether such consideration exceeds the face value of the shares and whether the aggregate consideration exceeds the fair market value of the shares. 34. In the present case, share application money of Rs. 313.63 crores has been received during the previous year relevant to the assessment year under consideration, as per the factual finding given earlier. Hence, the condition that the relevant amount considered for taxation U/s 56(2)(viib) is received during the previous year, is fulfilled in the present case. Hence, the aspect that requires to be examined now is whether the condition that such receipt during the year represents "consideration for issue of shares", so as to consider the said amount for application of the provisions of section 56(2)(viib). 35. In this regard, it is the contention of the appellant that since the shares were actually issued by the appellant against the said share application money of Rs. 313.63 crores during the subsequent financial year 2013-14, the share application money acquired the character of "consideration for issue of shares" during the AY 2014-15 relevant to the FY 2013-14 and therefore t....
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....ith the disclosures to be mandatorily made in the notes to accounts in respect of Application money received for allotment of securities falling under "Other current liabilities" in the balance sheet that the terms and conditions regarding the number of shares proposed to be issued, the amount of premium if any and the period before which shares shall be allotted shall be disclosed in the notes to the accounts. The instruction further states that it shall also be disclosed whether the company has sufficient authorized capital to cover the share capital amount resulting from allotment the shares out of such share application money. The instruction also states that the period for which the share application money has been pending beyond the period for allotment as mentioned in the document inviting application for shares along with the reason for such share application money being pending shall be disclosed. It is further stated in the instruction that share application money not exceeding the issued capital and to the extent not refundable shall be shown under the head Equity and the share application money to the extent it is refundable shall be separately shown under Other current....
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....ated as "Consideration for issue of shares". 40. In this connection, it is pertinent to point out that though the appellant stated in its contentions that that the consideration for issue of shares was received in the subsequent year when the shares were issued against the share application money and the provisions of section 56(2)(viib) would therefore be applicable for the AY 2014-15, the appellant has also stated that there is no income chargeable to tax under section 56(2)(viib) in the hands of the appellant in AY 2014-15 on account of the reason that the relevant balance sheet to be considered for valuation of the shares would be the balance sheet drawn up as on 31,03.2013 since the valuation date is 07,03.2014 and the fair market value of the shares on the basis of the said balance sheet works out to Rs. 3299/-per share as against the consideration of Rs. 3000/- per share at which the appellant issued the shares. As observed by the AO, the appellant reversed the provision for diminution in the value of its investment of Rs. 283.79 crores in the shares of TMSL made by it in the earlier FY 2010-11 during the financial year 2012-13 relevant to the present assessment yea....
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....s are issued is also considered to be untenable since the prospective shareholders pay the share application money in response to the invitation made by the company to them to subscribe to the shares, along with relevant terms of the proposed issue of shares. The share application money so paid partakes the character of "Consideration for issue of shares" since the same was paid in acceptance of the invitation/offer to issue shares made by company at the specified terms. 42. It has also been contended by the appellant that the computation provisions as specified in rule 11U and 11UA will fail in the case of the appellant, if the provisions of section 56(2)(viib) are invoked for the present assessment year since the definition of "valuation date" in rule 11U(j) was amended with effect from 29.11.2012 only so as to make it applicable for computing the fair market value of the shares for the purpose of section 56(2)(viib) and the adoption of the balance sheet of the appellant as on 31.03.2012 as the basis for computing the fair market value of the shares on invoking the provisions of section 56(2)(viib) for the present assessment year will be contrary to the provisions of the....
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....t was also contended by the appellant that if the receipt of share application money is treated as receipt of consideration for issue of shares, it would result in multiple valuation dates as per the definition of valuation date in Rule 11U(j) since the share application money was received on different dates during the financial years 2010-11 to 2012-13 and it becomes impractical to arrive at the fair market value of the shares in such a situation. It was therefore contended that in the absence of specific provisions in the Act/Rules with regard to computation, of FMV of unquoted equity shares at different valuation dates, the computation provisions fail and consequently, the charging provisions of section 56(2)(viib) cannot be enforced. This contention is found to be unacceptable in light of the factual finding already made earlier in this order that the entire share application money of Rs. 313.63 crores has been received during the FY 2012-13 only and not in multiple financial years. In the light of the said factual finding, there is only one valuation date i.e., 30.03.2013 being the last day of receipt of share application money during the year. 45. It was also contend....
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....Rs. 1.00 crore represented by 10 lakh shares having a face value of Rs. 10 each. The issued, subscribed and paid up share capital during the year is Rs. 6 lakh represented by 60,000 shares. Hence, the maximum number of shares for which the appellant could have invited the existing/prospective shareholders to the subscribe to the proposed issue of shares during the year is 9,40,000 shares. In view of this, the share application money received by the appellant computed at Rs. 3,000 per share (at the terms at which shares were actually issued in the subsequent year) in respect of 9,40,000 shares which works out to Rs. 282.00 crores only can be considered as the receipt towards consideration for issue of shares during the present assessment year. The balance share application money of Rs. 31.63 crores has to considered as the receipt towards consideration for issue of shares in the subsequent AY 2014-15 when the authorized share capital has been increased to Rs. 2.00 crores represented by 20 lakh shares having a face value of Rs. 10 each. 47. In view of the detailed discussion in the preceding paragraphs, it is held that the share application money to the extent of Rs. 282.00 ....
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....was always in the nature of advance against equity from FY 2010-11 to FY 2012-13 as the unquoted equity shares were issued and allotted in FY 2013-14 relevant to AY 2014-15. 1(c) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in considering advance against equity as receipt of "consideration for issue of shares", for the reasons which are wrong and contrary to the facts and circumstances of the case, the provisions of Income Tax Act, 1961 and the Rules made there under. 1(d) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding and confirming the action of Id. AO in adopting 30/03/2013 being last date of receipt of advance against equity as the valuation date and thereby considering the Balance Sheet drawn up as on 31/03/2012 (i.e., Balance Sheet drawn up immediately preceding the valuation date) for the purpose of determination of fair market value of unquoted equity shares under Rule 11U read with Rule 11UA(2) of the Income-tax Rules, 1962, for the reasons which are wrong and contrary to the facts and circumstances of the case, the provisions of Income Tax Act, 1961 and the Rules made there under. ....
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....out prejudice to each other. The appellant craves leave to add, alter, amend and/or modify all or any of the above grounds of appeal on or before the date of hearing as may be advised. 9. At the outset, Ld. AR Shri Persi Pardiwala appearing on behalf of the assessee argued before us and submitted written submissions, which are as under:- 1. The assessee is an investment holding company. It was incorporated as a wholly owned subsidiary of Essar Investments Limited ('EIL'). Pursuant to the demerger of the investment and finance division of EIL to Imperial Consultants and Securities Private Limited ('ICSPL') with effect from 1st April 2010 (being the appointed date as per the scheme of demerger), the assessee became a wholly owned subsidiary of ICSPL. The assessee holds shares of various unlisted companies. One of such companies, which is a wholly owned subsidiary of the assessee, is The Mobile Stores Limited ('TMSL'). Transaction;- 2. The transaction which is the subject matter of the present appeal is the issue of 10,95,425 equity shares at a price of Rs. 3,000 per share to the assessee's holding company, ICSPL. ....
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....essee by EIL in the F.Y. 2011-12 (details on page 178 of the paperbook). 7. Subsequently, the investment and finance division of EIL was demerged into ICSPL, which led to ICSPL becoming the holding company of the assessee. ICSPL then passed a Board Resolution on 30th March, 2012 (on page 246 of the paperbook) resolving to provide further financial assistance of upto Rs. 200 crores to the assessee as advance towards share application money for subscription of equity shares of the assessee. Events in the F.Y. 2012-13; 8. In view of the above Board Resolution, another sum of Rs. 154.37 crores was advanced by ICSPL to the assessee in the financial year relevant to the present appeal, i.e. F.Y. 2012-13 (details on page 247 of the paperbook). These advances towards share capital are disclosed on the face of the balance sheet of the assessee for the F.Y. 2012-13 (on page 38 of the paperbook). To the same effect, is a disclosure in Note 18 of Notes of Accounts of the Audited Financial Statements for the F.Y. 2012-13 (on page 46 of the paperbook), which is reproduced hereunder: "During the year, Company has received advance against equity share from its h....
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.... basis by way of Resolution dated 17th December, 2013 (on page 215 of the paperbook). The shareholders approved the said issue in EGM vide resolution dated 31st January, 2014 (on page 217 of the paperbook). Finally, the issue of shares on the above terms was approved by the Board of directors vide Resolution dated 7th March, 2014 (on page 219 of the paperbook). As required under section 75 of the Companies Act, 1956, a return of allotment in Form 2 was filed with the Registrar of Companies (on page 167 of the paperbook), which also discloses the date ofallotment to be 7th March, 2014. The details regarding the issue of shares are also disclosed in the assessee's Audited Financial Statements for F.Y. 2013-14. In this regard, reference may be made to Note 2 which provides details of share capital (on page 94 of the paperbook) and Note is(C) which provides details of related party transactions (on page 99 of the paperbook). Reference may also be made to Note 18 (on page 99 of the paperbook), the relevant extract of which is reproduced hereunder- "During the year, Company has received advance against share capital from its holding company, Imperial Consultants & Securities....
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.... 11UA of the Income-tax Rules, 1962? - Can the Assessing Officer ('AO') tinker with the value of assets for the purpose of Rule 11UA (2) which requires the adoption of 'book value of the assets in the balance sheet'? The findings of the lower authorities qua each of the three issues and the assessee's submissions thereon are stated in the ensuing paragraphs. I. Object behind section 56(2)(viib); 14. Section 56(2)(viib) was introduced vide the Finance Act, 2012 with effect from the A.Y. 2013-14 with an intent to deter the generation and use of unaccounted money. In this regard, reliance is placed on the Finance Minister's Budget Speech given at the time of introduction of the Finance Bill, 2012. Para 155 of the Budget Speech is reproduced- '155. I propose a series of measures to deter the generation and use of unaccounted money. To this end, I propose- Increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value." 15. Similarly, the Memorandum explaining the provisions of the Finance Bill, 2012 classified....
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....ose of ascertaining what was the reason for introducing that clause." 16. In addition to the above, there have been a series of decisions of the Tribunal, where the invocation of section 56(2)(viib) has been negated in view of the absence of any evidence to suggest that any unaccounted money was sought to be introduced in the transaction of issue of shares. In this regard, reliance is placed on the following decisions- (i) In the case of Cinestaan Entertainment P. Ltd. vs. ITO (2019) (177 ITD 809) (Delhi) (para 27) (sr. no. 4 in the legal compilation), the Tribunal held that where nothing was brought on record to show that any kind of tax abuse or laundering of unaccounted money was being done, the provisions of section 56(2)(viib) could not be pressed into service. (ii) In the case of DCIT vs. Pali Fabrics P. Ltd. (2019) (no taxmann.com 310) (Mum) (para 16) (sr. no. 14 in the legal compilation), the Tribunal noted that section 56(2)(viib) as well as the proviso to section 68 were introduced together so as to only deal with those cases where there was an allegation that any income from undisclosed sources was being introduced and where the assessee had fa....
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....rk P. Ltd. vs. CIT (2017) (390ITR i) (para 3) (sr. no. 22 in the legal compilation), wherein it was held as under- "The above apart, the voluntary payments made by the parent Company to its loss making Indian company can also be understood to be payments made in order to protect the capital investment oftheAssessee Company. If that is so, we will have no hesitation to hold that the payments made to the Assessee Company by the parent Company for Assessment Years in question cannot be held to be revenue receipts." 19. In fact, the assesse had issued shares at premium to maintain low capital base so that servicing of share capital is easy and better in future. This can be explained by the following example: Particulars Amount (Rs.) Amount (Rs.) Example l: Shares are not issued at premium 1,000 equity shares of Rs. 10 each 10,000 Example 2: Shares are issued at premium 500 equity shares of Rs. 10 each 5,000 Add: Securities Premium (500 equity shares of Rs. 10 per share) 5,ooo 10,000 By referring to the abo....
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....ts of similar nature, whichever is higher." 24. The question which is required to be answered is that at what stage of the transaction of issue of equity shares does the provision get triggered and, consequently, on which date, a comparison has to be made between the price at which the shares are issued and the fair market value of the shares as per section 56(2)(viib) read with rules 11U and 11UA(2). 25. It is the case of the AO that the provisions of section 56(2)(viib) are triggered at the time of receipt of money towards the issue of shares and that the actual issue of shares is not relevant for invoking the section. In the present case, the advances towards the issue of shares were received in 25 tranches over a period of three years (from the F.Y. 2010-11 to F.Y. 2012-13), the last tranche being received on 30th March, 2013 (details on pages 248 to 250 of the paperbook). The AO considered this date of 30th March, 2013 to be the Valuation date' for the purpose of examining the provisions of section 56(2)(viib). Accordingly, in terms of rule 11U (b), the balance sheet of 31st March, 2012 was considered, being the last balance sheet drawn up prior ....
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....is the issue/allotment of shares. It is at such a stage that the share application money (if any, received hitherto) becomes the consideration for the issue of shares. Attention is invited to the Explanation to section 56(2)(viib), which provides the method of determining the fair market value of shares. It may be noted that under the Explanation, there can be two different values (under (a)(i) and (a)(ii) respectively) and the higher of the two values is to be considered as the fair market value of shares. The first value, under Explanation (a)(i), refers to the valuation under the prescribed method, i.e. under rule 11UA(2) and the second value, under Explanation (a)(ii), refers to the value calculated including the value of intangible assets on the date of issue of shares. It may be appreciated that since the Explanation requires the adoption of higher of the two values and the second value is explicitly required to be calculated on the date of issue of shares, it follows that the first value, i.e., under rule 11UA(2) will also have to be undertaken on the same date since it is necessary that the two values being compared be of the same date. Adopting the first value on ....
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....shares by the payer. It is only after the event of allotment is completed, the shares come into being and the rights of a shareholder in the company accrue. Therefore, the acceptance of the offer by way of allotment of shares results in the conclusion of an enforceable contract. In this regard, reliance is placed on the following- (i) In the case of Sri Gopal Jalan & Co. vs. Calcutta Stock Exchange Association Limited (1963) (33 Comp Case 862) (SC) (sr. no. 24 in the legal compilation), the Hon'ble Supreme Court delineated the entire process of allotment of shares in the following words- "What is termed 'allotment' is generally neither more nor less than the acceptance by the company of the offer to take shares. To take the common case, the offer is to take a certain number of shares, or such a less number of shares as may be allotted. That offer is accepted by the allotment either of the total number mentioned in me offer or a less number, to be taken by the person who made the offer. This constitutes a binding contract to take that number according to the offer and acceptance... So Farwell L. J. said in Mostly v. Koffufontein Mines Lid. [191....
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....ed- "An application is an offer by the applicant and, like any other offer to make a simple contract, may, subject to what is said below in connection with an application pursuant to a prospectus issued generally, be revoked at any time before acceptance." Similarly, in para 22.08 (on page 9 of the legal compilation), it is observed- "While the application for shares is normally an offer to take the shares, acceptance is achieved by allotment notified to the applicant." Reference may also be made to para 49.05 of the commentary (on page 21 of the legal compilation)- "A applies to the company for an allotment of a specified number of shares, and agrees to accept the same or any less number that may be allotted to him. In response to this application, the directors resolve that a specified number of shares be allotted to him, and notice of such allotment is given to him. This constitutes the agreement, and his name should at once be entered on the register." (iv) Attention is also invited to the following decisions of the Tribunal, wherein, while dealing with the applicability of section 14A read with Rule 8D, it has been held that share application money cannot be considere....
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....n for issue of shares. Admittedly, shares were issued in the previous year relevant to AY 2013-14 and therefore the provisions of Sec.56(2)(viib) stood attracted in the present case. The above conclusion is also fortified by the definition of "fair market value" for the purpose of Sec.56(2)(viib) given in Explanation (a)(ii) to Sec. 56(2)((viib) which provides that the fair market value of the shares shall be the value as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how. patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. We, therefore, uphold the order of the revenue authorities on this aspect of applicability of Sec.56(2)(viib) to AY 2013-14 in the facts and circumstances of the case. We may also add that the law is well settled that in the matter of determination of total income, the law as it exists on the 1st day of the previous year is applicable and therefore the provisions ofSec.56(2)(viib) of the Act applies to AY 2013-14." 34. To the same ef....
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....happen at the same time or the accrual can precede the receipt of income but in no case, the accrual can be said to be later than the receipt. The word 'accrual' is used in contradistinction to the word 'receipt' and indicates a right to receive. It represents a stage anterior to thepoint of time when the income becomes receivable and connotes a character of income which is more or less inchoate and which is something less than receipt. The assessee should have acquired a right to receive payment though the receipt may take place later (debitum in praesenti, solvendum in future). There can be no accrual if the right to receive is not perfect or is in doubt or in jeopardy. Reference in this regard is made to the following judgments- * Karur Vysya Bank Ltd. vs. ACIT (2020) (120 taxmann.com 331) (Mad) (para 16) * Dalmia Dairy Industries Ltd. vs. ITO (1986) (19ITD 61) (Delhi) (para 18) * Associated Law Advisors vs. ITO (2017) (167 ITD 695) (Delhi) (para 11) * BR Sundaram (Deed.) vs. CIT(i978) (117ITR 960) (Mad) (para 3) 37. Attention is also invited to the provisions of section 56(2)(ix), which uses similar language. ....
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....rule 11UA(2) read with rule 11U (b) to the above face pattern, it would follow that the balance sheet as on 31st March. 2013 will have to be considered for the purpose of valuation, being the last drawn balance sheet prior to the valuation date of 7th March. 2014. 40. In any event, the Department's assertion that the balance sheet as on 31st March, 2012 should be considered, is not capable of being given effect as rule 11UA(2) was not on the statute at such point of time. The rule was introduced subsequently on 29th November, 2012. There is nothing in the rule which allows for its retrospective application. Such being the position, the case of the AO has no legs to stand on. 41. There is another way of examining this situation. It is the department's case that the last date of receipt of money, being 30th March, 2013, should be considered as the valuation date and, accordingly, the last drawn balance sheet as on 31st March, 2012 should be adopted for the purpose of valuation. It is submitted that even if one were to accept the department's contention that 30 March, 2013 should be considered as the valuation date, still, the balance sheet closest to the....
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....as on 31-3-1972. But if the gift was made three days later on 31-3-1973, the valuation made on the basis of balance sheet as on 31-3-1973 may be much higher even though there is no change in the value of the assets of the company between 28-3-1973 and 31-3-1973. There is no justification for coming to this conclusion. The break-up value method is adopted to find out the correct value of the shares on the date of the gift. The figures of the balance sheet of the year ended on 31-3-1973 will give a more realistic picture of the value of the assets of the company than the figures as on 31-3-1972." 42. Applying the above ratio to the facts of the present case, it ought to be held that even if the Department's contention of taking valuation date as 30* March, 2013 is accepted, the balance sheet to be adopted for the purpose of Rule 11U(b) read with Rule 11UA (2) would be the balance sheet drawn up on 31st March, 2013, being the closest date. It is reiterated that this submission is without prejudice to the primary submission of the assessee that the valuation date should be the date of allotment of shares, i.e., 7th March, 2014 and accordingly, the balance sheet da....
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.... its subsidiary- TMSL. In view of such provision, the effective book value of the investment in TMSL had become NIL as on the financial year ended on 31.03.2011. Owing to the improvement in the financial position of TMSL in the F.Y. 2012-13, the assessee, following Accounting Standard-13, decided to reverse the provision. In view of the reversal of the provision, the value of the investment in TMSL stood restored to Rs. 283,79,25,000. 45. It is the case of the Department that the turnaround in the financial position of TMSL was not enough to justify a write back of the provision in the F.Y. 2012-13. Accordingly, it has been contended that the write back should be ignored and the value of investments should be considered NIL for the purpose of calculating the fair market value under rule 11UA(2). 46. The relevant portion of rule 11UA(2) is extracted hereunder: "(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (i), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such....
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....upreme Court was dealing with the provisions of section 115J of the Act, the ratio would apply with equal force to any other provision requiring the adoption of the values of a balance sheet. 50. Lastly, reliance is placed on the following decisions, wherein the different benches of the Tribunal, while dealing with the provisions of rule 11UA(2) itself, have held that there is no room for substituting the book value of the assets with any other value- * Minda SM Technocast P. Ltd. vs. ACIT (2018) (170 ITD 12) (Delhi) (para 6.4) (sr. no. 11 in the legal compilation) * Smiti Holding & Trading Co. P. Ltd. vs. PCIT (2018) (99 taxmanm.com 157) (Mum) (para 6.2) (sr. nq. 23 in the legal compilation) * Cinestaan Entertainment P. Ltd. vs. ITO (2019) (177 ITD 809) (Delhi) (para 31) (sr. no. 4 in the legal compilation) 51. It may also be useful to refer to the provisions of rule 11UA(i), which provides the valuation mechanism for the other provisions of section 56(2), i.e. other than section 56(2)(viib). In this regard, rule 11UA(i)(c)(b), after its amendment by the Income-tax (Twentieth Amendment) Rules, 2017, w.e.f. 1-4-2018, permits the substitu....
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....ove even further in the subsequent years. It was also pointed out to the AO that the EBIDTA of TMSL had improved from a loss of Rs. 102.18 crores in the F.Y. 2010-11 (when the provision was created) (on page 202 of paperbook) to a loss of Rs. 15.04 crores in the F.Y. 2012-13 (when the provision was reversed) (on page 145 of paperbook), which shows an improvement of 85%. Similarly, the Loss after tax had also improved from Rs. 200.15 crores in the F.Y. 2010-11 to Rs. 56.71 crores in the F.Y. 2012-13, an improvement of 72%. This fact is also evident from Para 9 of the Director's Report of the appellant company for FY 2012-13 (Page No. 32 of Paperbook), wherein it was mentioned that in the light of prospective turnaround in the business of TMSL, theprovision of diminution in value of investment has been written back during the year under consideration 54. Further, the very fact that the assessee continued to infuse funds into TMSL shows that it was in the process of a financial recovery and there was enough commercial justification to write back the provision. In any event, it is a settled legal position that the Department cannot stand in the shoes of an assesse....
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....Ld. DR submitted written submissions, which are as under:- 1. The basic issues emanating from the AO's order as well as CIT(A) order in the captioned case are . i. Whether the provisions of section 56(2)(viib) of the Income Tax Act,1961 are attracted in this case or not? ii. If it is attracted whether the same applicable for the year under consideration or not ?The amounts received during earlier Asst. Years 2011-12 and 2012-13 be considered as consideration received in this year or not? iii. The year of Consideration of issue of shares is in AY 2014-15 or AY 2013-14? iv. What is the quantum to be considered for the purpose of section 56(2)(viib) for the A.Y.2013-14. 2. The primary question has to be analysed as per Income Tax Act,1961 as to whether the provisions of section 56(2)(viib) are attracted in this case or not?. To ascertain this issue vis a vis the provisions of the relevant section 56(2)(viib) is reproduced hereunder: Section 56 (2) (viib): Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any cons....
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.... CIT(A)'s order. Paragraph No 31 of the CIT(A) order reproduced the statutory provision of sec.56(2)(viib) and in para no. 32 it was brought out to the fact that how the section is applicable to the appellant's case. CIT(A) brought out the fact that the appellant not being a corporate entity in which public are substantially interested . It had received from a resident in the previous year for any consideration for issue of shares which exceeds the face value of such shares. Further clarity on this aspect has been brought out and highlighted by CIT(A)'s order in para 33 and 34 that the amount of Rs. 313.63 Crores received in the previous year and the same is represents' Consideration for issue of shares". 3.4 In the light of the above facts, the primary question as to whether the provisions of section 56(2)(viib) are attracted in this case or not is answered as YES. 4. Since the answer for the primary question is positive on the applicability of the relevant section, now it is imperative to look into the second question whether the same is applicable for the year under consideration or not?. As seen from the balance sheet of the appellant as on 31/03/2013....
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.... receipts of share application money either from existing or prospective shareholders. Investors analyses such terms well in advance ,then only investors will enter into such investments. Any investor's investment depends unless it proves to be prudent and beneficial to them. This proves that since the terms are finalised before investment and upon satisfaction of such offer or invitation itself , investors have come forward and made such investments. All these events occurred in the relevant previous year i.e. FY.2012-13. Further CIT(A) had brought the facts that the appellant 's notes of accounts to mandatory disclosures at instruction appearing at serial No.6G in respect of application money received for allotment of securities falling under' Other current liabilities' in the balance sheet mentions the conditions for issue of shares, premium etc. All the relevant statutory provisions strictly to be adhered and procedure to be followed as per schedule VI to the Companies Act,1956 notified by the Ministry vide notification No. SO447EUR dated 28.02.2011 are analysed by CIT(A) in para No 37 of the captioned order. Paragraphs 37, 38 39 ,40and 41 of CIT(A)'s order brings that how impo....
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....nd such provision is mainly to streamline the fund flows amongst corporate entities and also to bring out more accountability. It is imperative here to mention that the onus has been increased on corporate entities and this deeming clause is to bring transparency and accountability and also to tax excess premium as a matter of deterrent. This not only curbs unaccounted money flows into corporate entities but also brings a strict vigilance into corporate activities. There was no discretion whatsoever has been given to the assessing authority but to tax the excess amount. The revised schedule VI to the Companies Act also is a move towards this direction. This provision has left no scope to tax officers to apply the section according to their whims and fancies but to strictly to adhere as per the terms of the statute. Therefore no assessing officer is allowed by any other manner other than the strict verbatim of this section. Neither the AO nor CIT(A) in the said case are given any discretionary powers to act in any other manner other than what the literal meaning of the statute that in the present case both followed in its letter and spirit. All the judicial pronouncements i....
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....ies such as registration or allotment of shares etc. 7.4 Appellant also cited various decisions in page No 17 of its written submissions stating that money cannot be considered as investment unless it is converted. These facts do not fit in our case mainly because the share capital has already been received in our case, its no more in the state of advance, since consideration is complete and all the terms are fulfilled and have not been altered. It is also a fact that subsequently neither the value of consideration nor investors and the quantum of allocation in the books of the appellant have been changed. This glaringly supports the argument of the revenue that in the said case the contract is complete. 7.5 In the case of Taaq Music Pvt Ltd Vs ITO decision of the Hon'ble Bangalore Tribunal also not fit into the facts of our case. It is a fact that as long as it is still in the form of advance , appellant's arguments may be considered . However both AO and CIT(A) factually demonstrated that the appellant representation of advances are no more advances but are actual consideration for issue of shares. Since actual consideration for issue of shares is complete in ou....
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....he AO and the CIT(A), the assessee's submissions dated 28th December, 2020 may be considered and to avoid repetition, such averments are not being responded to separately in this rejoinder. 2. In paras one to six of the Department's submissions, some facts have been set out and the observations from the order of the CIT(A) have been relied upon. The said contentions have been responded to in the assessee's submissions dated 28th December, 2020. Specifically, attention is invited to para 5.1 of the Department's submissions, wherein it has been stated that 'Since the terms of the proposed issue of shares are finalised and a document inviting application for shares containing the said terms was issued to the prospective shareholders before the receipt of the share application money during the relevant year under consideration.' It is submitted that this statement is factually incorrect. No document inviting application for shares was ever issued by the assessee to the prospective shareholders before the receipt of the share application money, nor is it the case ofthe AO or the CIT(A) that any such document was issued at that stage. The asserti....
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....he F.Y. 2013-14. Thus, the said sum was always in the nature of advance against equity upto F.Y. 2012-13. 8. It is submitted that the assessee has brought ample documents on record which are certified evidence whereas the assertion made by the Department in its submission, is not borne out from the record. 9. In para 7 of the submissions, reliance has been placed on the Finance Minister's speech given at the time of introduction of the Finance Bill, 2012 wherein it has been stated that the onus of proof on closely held companies for funds received from shareholders has been increased. It is submitted that the part of the Speech relied on by the Department was made while introducting the first proviso to section 68 of the Act, which was also introduced by way of the same Finance Bill, in which section s6(2)(viib) was introduced. These observations do not pertain to section 56(2)(viib) of the Act, which is the subject matter of consideration in this appeal. 10. In para 7.1 of the submissions, Department has extracted one line from the judgment of the Hon'ble Supreme Court in the case of Sri Gopal Jalan & Co. vs. Calcutta Stock Exchange Association L....
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.... speaking, it is an appropriation bu the directors or the managing body of the company of shares to a particular person... It is beyond doubt from the authorities to which we have earlier referred, and there are many more which could be cited to show the same position, that in company law allotment means the appropriation out of the previously unappropriated capital of a company of a certain number of shares to a person. Till such allotment the shares do not exist as such. It is on allotment in this sense that the shares come into existence.' 11. As can be seen from the above, the Supreme Court has clarified that acceptance by the company of the offer to take shares is done by the directors by appropriating shares to a particular person by way of an actual allotment. In the case of the assessee, the Board of Directors have passed a final resolution on 7th March, 2014, i.e. in the subsequent financial year, by appropriating the shares to the holding company by way of allotment. 12. In para 7.2 of the submissions, it has been stated that the judgment of the jurisdictional High Court in the case of Sesa Goa Ltd. vs. State of Maharashtra (2008) (WP no. 25....
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....9;s reliance on the decision of the Bangalore Tribunal in the case of Taaq Music Pvt. Ltd. vs. ITO (2020) (ITA i6i/Bang/2o) is sought to be refuted. In this regard, it may be noted that the assessee has in its written submissions explained the relevance of each of the decisions relied upon. Apart from making a general statement as above, the Department has not pointed out as to how such judgments are not relevant to the present dispute. The Bangalore Tribunal in the case of Taaq (supra) dealing with the very same issue which arises for consideration in the present appeal has held that the receipt of money takes the colour of consideration upon the actual allotment of shares. The relevant observations of the decision have been reproduced in para 33 of the assessee's submission. 15. In para 8.b), the Department has only stated that the figures in the valuation report have not undergone any change. No infirmity in the said valuation report has been pointed out. 16. In para 8.d), the Department has urged that the assessing authorities have no option but to tax the excess share capital. It is submitted that as per the assessee's valuation report dated 3rd Decem....
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....ing the above said unsecured loan as advance towards share capital and during this assessment year, assessee received further advances towards share capital to the extent of Rs. 154.37 crores. The total cumulative balance of the advance towards share capital stood at the year-end is Rs. 313.64 crores. During this assessment year, assessee wrote back the provision created in assessment year 2011 - 12 to the extent of Rs. 283.79 crores at the year end. 13. The assessing officer noticed that the assessee has received final tranche of advances on 30.03.2013 and assessee has treated the whole advances as an liability in its balance sheet. He noticed that assessee had issued share capital in the subsequent assessment year at the rate of Rs. 3000 per share (with a premium of Rs. 2990 per share). The assessing officer invoked the provisions of section 56 (2) (viib) since the advance received by the assessee were in excess of fair market value of the shares as on the final date of receipt of advances towards share capital ie., on 30.03.2013. The assessing officer rejected the event of actual issue of shares in the subsequent assessment year. The question before us is whether the advances....
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....y company routed through the subsidiary company (i.e. assessee) and merely because the fair market value of the assessee is NIL or negative, the tax authorities are invoking the deeming provisions to tax the advance towards share capital in the hands of the assessee merely because the deeming provision is attracted. 16. The tax authorities i.e. Ld. CIT(A) and Ld. DR argued that the terms of proposed issue of shares are finalized and a document inviting application for shares containing the said terms were issued to prospective shareholders before issue of share application. We find facts on record are different. The advances were received by the assessee only to refinance the same to step down subsidiary, it is evident from the resolution passed by the holding company way back in FY 2010 and evident from the pattern of transfer of funds. It was unsecured loan and later converted into advance towards share capital. The terms were finalized by the holding company and intended for investment in the loss making subsidiary, the assessee company is only pass through entity. The holding company is willing to accept any terms as long as the intended purpose is achieved. The holding comp....
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....he company. In the given case, the holding company passed the resolution to finance TMSL through the assessee and the funds intended for TMSL, which is step down subsidiary and the funds were remitted to the assessee as an advance towards share capital during this impugned assessment year (we do not intend to discuss the quantum of actual receipt of the advance during this assessment year at this stage. It is a separate discussion since assessee has only passed journal entries to convert the unsecured loan into advance towards share capital). The consideration means the promise of the assessee to issue shares against the advances received. In our view, the receipt of advances are a liability and will never take the character of the ownership until it is converted into share capital. The assessee can never enjoy the receipt of money from the investor until the ownership for the money received is not passed on i.e. by allotment of shares. The receipt of consideration during the previous year means the year in which the ownership or allotment of shares are passed on to the allottee in exchange for the investment of money. 19. The tax authorities interpretation that when the receipt....
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....ion s6(2)(viib) could not be pressed into service. (ii) In the case of DCIT vs. Pali Fabrics P. Ltd. (2019) (no taxmann.com 310) (Mum), wherein it was held that section 56(2)(viib) as well as the proviso to section 68 were introduced together so as to only deal with those cases where there was an allegation that any income from undisclosed sources was being introduced and where the assessee had failed to prove the genuineness of the transaction. In the absence of any such circumstance, the provisions of section 56(2)(viib) could not apply. (iii) In the case of Rameshwaram Strong Glass Put. Ltd. vs. ITO (2018) (172 ITD 571) (Jpr), wherein it was held that where shares were allotted to related persons, there was no scope of introduction of any unaccounted income through allotment at an unreasonably high price and, accordingly, the provisions of section 56(2)(viib) could not apply. (iv) In the case of ACIT vs. Subhodh Menon (2019) (175 ITD 449) (Mum), wherein it was held that since the provisions were introduced as a counter evasion measure to prevent money laundering of unaccounted income, it would not apply to bonafide business transactions. 21. We also....