TaxTMI 
TaxTMI 
2021 (8) TMI 332
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.... additions made by the Assessing Officer as per the provisions of sec. 56(2) of Rs. 26,42,73,393/- towards the difference in the fair market value of shares of Rochem separation systems (India) Private Limited stating that clause (vii) of sec. 56(2) cannot be applied retrospectively, not taking into consideration the fact that section 56(1) clearly and unambiguously provides that 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 and accordingly the Assessing Officer correctly taxed the benefit accrued to the assessee by buying the shares at lesser price than that of fair market value." iii. "On the facts and circumstances of the case the Ld. CIT(A) erred in deleting the additions made by the Assessing Officer as per the provisions of sec. 56(2) of Rs. 26,42,73,393/- towards the difference in the fair market value of shares of Rochem separation systems (India) Private Limited stating that clause (vii) of sec. 56(2) cannot be applied retrospectively, not taking into consideration the fact that the amendment made to sec. 56(2) adding clause (vii) is curative in natur....
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....le nor believable that any investor would make such kind of investment wherein the subscription prices are shown to be 35.05 times and 21.17 times of the fair values arrived at in the case of equity shares and CCPS respectively. The transaction as shown above are not natural ones and when put to test on human probability the genuineness of the transaction stands disproved. The assessee has come up with various make believe theories to justify its stand, however, it has miserably failed to lead any evidence to justify huge premium, which is many times higher than the value arrived at by various applicable methods, received by it from its foreign investor. As per the provisions of the section 68 of the IT Act, the assessee is required to explain the nature and source of any credit entry appearing in its books of accounts. It means explaining the source alone is not enough. Nature should also be explained and it is then only that the genuineness of the transaction can be believed to be true. Further as per the provisions of this section, if the explanation offered by the assessee is not satisfactory, then the amount may be charged to income tax. Therefore, if the assessee explains tha....
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....to satisfactorily explain the nature of such transaction. Particulars No.of units Fair Value Rs. Premium taken Rs. Difference Rs. (4-3) Higher premium taken Rs. (5x2) 1 2 3 4 5 6 Equity Share 30 1806.75 63,333.33 61,526.58 18,45,797 CCPS 4,20,000 47.24 1000.00 952.76 40,01,59,200 Total 40,20,04,997 Thus in view of the facts as discussed above an addition of Rs. 40,20,04,997/-, as worked out above, is made to the total income of the assessee company u/s. 68 of the Act as the assessee has failed to satisfactorily explain the nature of credit transactions appearing in its books of accounts and the reasonableness of the quantum of premium on equity share and CCPS taken by it. Penalty proceedings u/s. 271(1)(c) are initiated separately for furnishing of inaccurate particulars of income thereby leading to concealment of incomes. 5. Against the above order assessee's appeal before the Ld. CIT(A). Ld. CIT(A) granted relief to the assessee by holding as under:- "Upon assessee's appeal learned CIT(A) noted that this issue though the Assessin....
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....f shares received in excess of the certified valuation and hence treated the difference as income of the appellant under the provisions of Section 68. Though AO has used the term premium for both i.e. equity shares and CCPS, it is effectively the difference between the issue price as per agreement and certified valuation obtained by the appellant itself which has been considered as unexplained cash credit u/s. 68 of the Act. It is seen from the records that the information was sought from the relevant tax authorities in Mauritius under Exchange of Information Article of Indo-Mauritius DTAA in order to verify the genuineness of the transaction. The required information was received on the basis of which the AO has observed as under in the Office Note which forms part of the assessment records: "3. During the year under consideration, there was an increase of Rs. 42.19 crore in the capital of the assessee company and the entire fund was received from M/s. India Waste Water Treatment Company (I.W.W.T.C.) Mauritius. In order to verify the genuineness of the transaction the matter was referred to F.T. & T.R., New Delhi for verification of the source of funds invested b....
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....Information as well as on the observations made in the office note as mentioned above. The AO submitted its reply vide letter dated 3.3.2017 wherein he mentioned as follows: Vide your paragraph 4 of your goodselve's letter under reference it has been mentioned office note appears in contravention to the findings given in the assessment order where in the been made u/s. 68 of the I.T. Act. In this regard, it is submitted that as mentioned in earlier paragraphs the addition in this case is not made on account of source of funds but on account of assessee's failure to explain satisfactorily the nature of funds. Therefore, there is no contradiction as construed by your goodselves." It may be noted that the AO has also received the information about Natixis Private Equity International, France which was pending at the time of concluding the assessment proceedings vide letter dated 18.7.2014 and no adverse observations have been made impacting the issue under consideration. The only issue which requires to be considered is whether the appellant has been able to explain the nature of funds received by it or not. The only basis on which the AO is of the v....
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....e value at which the shares can be issued is the prerogative of the assessee. No adverse inference can be drawn against the appellant merely because it has been able to negotiate a better price with the investor for allotment of its shares. Regarding the valuation of shares as obtained by the appellant, it has been stated that it was obtained only for the purpose of statutory requirement as enforced by RBI and it was not the basis of negotiating the price of shares between the appellant and the investor. Further, such valuation has been made purely on the basis of the book values of the assets of the appellant company as on 31st March, 2009 and without considering the real market prices of its assets which include shares of its various group companies. The necessary provisions under which the difference between the price at which shares have been issued and their fair market value can be taxed are found in clause (viib) of Section 56(2) which is effective from 1st April, 2013 and not applicable to the year under consideration. In this regard, the following observations made by Bombay High Court in the case of Vodafone India Services (P.) Ltd. vs. Union of India 36....
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....Delhi for verification of the source of funds invested by IWWTC. There is no whisper whatsoever about this aspect in the order of the AO. Ld. CIT(A) has noted about this information obtained, but has chosen not to verify the same himself, he has chosen to referred to the notes of the AO on this issue, which was said to be forming part of a assessment records. There is no reference whatsoever to the actual information received from resources. Ld. CIT(A) by referring to the note sheet of the AO observed that AO has no doubt of transaction from IWWTC and N.P.E India. However, In this regard to Ld. CIT(A) was very well aware that funds to N.P.E. India Holdings, Mauritius were from Natixis Pvt. Equity International France here also the Ld. CIT(A) did not refer to the information obtained about this French company. Rather, he referred that AO has received information about this company, which was pending at the time of concluding of assessment proceedings and no adverse observation has been made impacting the issue under consideration. Here there is no detail as to where the Assessing Officer made such observations, when the information by way of a letter dated 17.7.2014 was received, wh....
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....ayered transaction shifting the onus on the assessee to discharge the onus cast upon it. Merely stating that actual valuation made by the valuer is low but the negotiated value is much higher can by no stretch of imagination be a cogent explanation. 10. Furthermore, we find that Ld. Counsel of the assessee has contested that AO has accepted part of the transaction and is doubting the rest, which is not sustainable. In this regard, we note that an error on the part of the AO cannot be fatal to the case of the revenue. Which is more so, when Ld. CIT(A) has chosen not to examine the issue himself properly and in this regard also we find support from the aforesaid decision of Hon'ble Supreme Court in the case of Kapurchand Shrimal (supra) i.e. it is the duty of the appellate authority to correct the errors in the orders of the authorities below. If, the AO mistakenly agrees for a part of the amount to be claimed, the same analogy cannot explain the rest of the same, when the unexplained nature is palpably evident. Further, it has been pleaded on behalf of the assessee that issue of share premium could not have been examined in the impugned assessment year. We note that this is n....
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.... from the related parties be considered as sham transactions and it was requested to explain the bonafide of the same if the said transaction have been claimed to be natural one and not in the category of colourable devise. The assessee was also asked to explain the ultimate motive of the directors in entry into such transactions resulting into undue benefit passing into the hands of the company without paying legitimate taxes thereon. 13. The assessee in response to the same stated that there is no provision in law wherein the declared value of purchase consideration of an asset can be enhanced unless there is an evidence of payment of any such consideration outside the books of account. Fair market value could not be put in the place of cost of acquisition during the relevant period as the concept of arms length price in such transaction was missing from the statute. That the law also did not prohibit to acquire any property at a consideration which was lower than the fair market value. That the shares in Rochem Separation Systems (India) Pvt. Ltd. have been transferred in the name of the assessee by the transferors due to which the said company has become a subsidiary company....
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....ee in earlier show cause letter/order sheet noting. However, the same was not correct as it was not worked out on the basis of the prescribed formulae applicable for calculating it. Therefore, in the course of assessment hearing on 10.03.2014 the A.R. of the assessee company was asked to work out the fair market value of the shares of RSSIPL as on 31.3.2009. Shri Gaurav Bansal, CA who was present for hearing on 10.03.2014 worked out the fair market value of the equity share of RSSIPL as on 31.03.2009 at Rs. 7067/- per share. The fair market value is worked out as under: i) Share capital of RSSIPL as on 31.03.2009 Rs. 40,00,000/- ii) Reserve and surplus .. Rs. 27,86,82,024/- Total Rs. 28,26,82,024/- Therefore, Rs. 28,26,82,024/- divided by 40,000 shares = Rs. 7067/- per share. The fair market value of Rs. 7067/- per share as on 31.03.2009 is also confirmed on order sheet noting by the A.R. of the assessee in the course of hearing on 10.03.2014. However, as the transaction relating to the purchase of shares by the assessee company has taken place on 24.08.2009, as per the share purchase agreement, the net profit generated by M/s. RSSIPL from 01.04.....
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....of Appeal is thus allowed." 16. Against this order Revenue is in appeal before us. 17. We have heard both the counsels and perused the record. On this issue, we note that assessee has purchased shares of RSSIPL a private limited company for a purchase consideration of Rs. 4,81,20,000/- from five persons at an average rate of Rs. 1,203/- per share. However, the AO has found that actual value of shares was much higher as the same was approximately Rs. 6,875/-. The AO was of the opinion that the transaction is sham and not natural one. In explanation to this assessee claimed that there is no provision of law wherein the declared value of purchase consideration of an asset can be enhanced, unless there is an evidence of payment of any such consideration outside the books. Further, it was pleaded that the necessary provision was not existing in the statute books to tax such amounts. The Ld. CIT(A) has aggrieved with the view of the assessee that the said sum is not taxable u/s. 56. He referred to the decision of Hon'ble Bombay High Court in Vodafone India Services Pvt. Ltd. (supra) and found that the principles are same. 18. Upon careful consideration, we note that even ass....