TaxTMI 
TaxTMI 
2022 (1) TMI 116
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....ssment order"), as erroneous and prejudicial to the interest of the revenue. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law; 2. The Pr. CIT failed to appreciate that the Assessing Officer after due application of mind as regards the nature & source and justification for valuation relating to receipt of monies amounting to Rs. 673 crores against issuance of Compulsorily Convertible Debentures (hereinafter referred to as "CC1amed the assessment order without making any addition on the said count; 3. The Pr, CIT failed to appreciate that, where two views are possible and the Assessing Officer, after conduct of due enquiry, has taken one view with which the Pr. CIT does not agree, the assessment order cannot be treated as erroneous and prejudicial to the interest of the revenue; 4. Assuming without admitting that the present case was a case of inadequate enquiry, the Pr. CIT failed to appreciate that the power of revision envisaged under section 263 of the Act and the Explanation 2 thereto can be exercised only where no enquiry as required under the law is done and that it is not open to in....
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....r, now the Assessing Officer has called for the valuation report of the share, debenture deed. Based on the above observation he issued notice under section 263 of the Act on 28.02.2019 with the observation that the Assessing Officer has failed to carry out proper investigation of the premium money as well as the debentures/shares. In response, the assessee filed submission dated 11.03.2019 that during the course of assessment proceedings the Assessing Officer sought various details, information and explanation through various notices issued under section 142(1) of the Act and to which assessee has filed detailed explanation, replies and information. 4. The Ld. Pr. CIT in his order observed that the assessee is a Private Limited Company and issued compulsory convertible debenture which is equal to issue of equity shares to Edisons Utility Works Pvt. Ltd., Group Company by charging premium amount which is credited to general reserve account. If the securities premium is debt, he observed that should be reported and classified as loan and advances in the Balance Sheet, which was not done in this case. Even there is no explanation from the company as to why the security premium mon....
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....rest and premium has been received, which does not need to be repaid, hence, the same represents income which is to be taxed in the year of receipt itself. In response, the assessee submitted its submission vide letter dated 26.03.2019 stating that in the earlier notice under section 263 of the Act, the Ld. Pr. CIT had proposed to revise the assessment order alleging to be erroneous and prejudicial to the interests of Revenue for non-enquiry into the premium received on issue of compulsory convertible debentures. Further it submitted as below:- "1. The assessee is incorporated on 11.062013 i.e. FY 2013-14 relevant to AY 2014-15. It is engaged in the business to construct, maintain develop or control any buildings, factories, highways, railways, bridges etc. and other building for housing work and otherwise assists to any infrastructure related projects. The assessee had c-filed its return of income for the assessment year 2014-15, declaring total income at Rs. 3,84,3441-) as per normal provisions of the Act and Rs. (4,40,6871-) as book profit u/s 115J of the Act on 25.09.2014. 2. During the year, the assessee issued and allotted 6,73,00,000 0% CCDs of fact value R....
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....ering the submissions of the assessee, the Ld. Pr. CIT found not acceptable with the observation that the assessee had neither furnished debenture deed & share valuation report nor the Assessing Officer has called for. He observed that the total number of CCD issued was 6,73,00,000 instead of share, issued on 22.07.2013 to Edisons Utility Works Pvt. Ltd. at a face value of Rs. 10/- each. The premium was charged at Rs. 90/- per debenture/share and thereby the assessee company has received total premium money of Rs. 605.70 crore. As per the financial statement ended with 31.03.2014, the valuation of per share is in negative (-Rs. 8.81/-). Thus, the fair market value of shares is Rs. (-)8.81/- whereas premium is charged at Rs. 90/- per debenture/share. Hence, the premium in excess of the fair market value is to be treated as income as per section 56(2)(viib) of the Act. Further, he observed that CCD includes premium amount which is no longer payable by the assessee, the money changes its character when such amount becomes the assessee's own money as the assessee itself has treated and accounted it as its own money and credited to Reserves and Surplus of Balance Sheet as at 31.03.2014.....
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.... response to specific queries / details required by the AO, the assessee submitted following details: (a) financial statement which disclosed the fact that the assessee has issued 0% CCDs of Rs. 10 at premium of Rs. 90 and purchased 67.30 crore equity shares of Essel Publishers Private Limited at Note 13 and 14 respectively (b) Details of issue of CCD along with copy of debenture certificate (c) Return of Income, financials, relevant extract of bank statement of Edison evidencing the nature and source of monies received by the assessee towards CCD5. (d) Extract of bank statement of the assessee highlighting relevant transactions showing receipt of money towards CCDs from Edison to prove the genuineness of the transaction. (e) Board Resolution for issuance of CCDs. (f) The source of sources of monies received towards CCDs was from Essel Corporate Resources Pvt. Ltd. and Jayneer Capital Pvt. Ltd. Their return of income, financials and relevant extract of bank statements were provided to establish the genuineness of source of source. (g) Submitted justification of premium on CCD5 whereby the assessee, inter alia, specifically mentioned that the amount received by it on issue of CCD5 w....
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....Conversion of debentures into shares was treated as transfer for the purposes of capital gain but for Section 47(x) which exempts such conversion from capital gains which makes it clear that "shares" and "debentures" are distinct. Therefore, only "shares" are covered within the provisions of section 56(2)(viib) and other securities such as "debentures" are outside the ambit and scope of section 56(2)(viib) of the Act. 2.2.3. Notwithstanding the fact that provision of section 56(2)(viib) is inapplicable to the assessee, the assessee has justified the premium vide letter dated 29.11.2016 (Pg 41-56 of the Paper Book) in the course of assessment proceedings. The assessee has issued CCDs at Rs. 100/- each, and allotted 6.73 crore CCDs of Rs. 10/- at a premium of Rs. 90 each on 22.07.2013 to the Edison. Further, the CCD5 are convertible into redeemable preference shares which are to be redeemed at a premium of Rs. 150 per share. Hence, the valuation is justified as one has to see the redemption value to determine as to whether the receipt of the premium was justified in the first place. 2.2.4. Once, it is found that the provisions of section 56(2)(viib) cannot be applie....
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....valued inter alia on the basis of the redemption value of the security and on such basis, the premium of Rs. 90 for the issue of debenture was certainly justified. 3.2. In Para 4.4. of the order of the Pr.CIT, it is alleged that the premium on issue of CCDs is no longer payable by the assessee company and that the AO has not verified the receipt of share premium. Reply: The assessee has issued CCD5 at Rs. 100/- each, and allotted 6.73 crore CCDs of Rs. 10/- at a premium of Rs. 90 each on 22.07.2013 to the Edison. The CCD5 are convertible into redeemable preference shares at the end of 7 years which are to be redeemed at a premium of Rs. 150 per share after another 8 years. The premium on issue of debentures has been classified under the head "securities premium" in the financial statements in line the section 78 of the Companies Act, 1956 (Pg 132 of the Paper Book-11). In terms of section, the securities premium would be utilized in repaying premium on redemption of preference shares. Hence, it cannot be said that the premium is not repayable. 3.3. In para 4 of the Show Cause Notice under section 263 of the Act (Pg 81 of the Paper Book), the Pr.CIT has qu....
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....0 each. No specific query raised as regards the premium on debentures. Calls for details of Share Application Money Query 2.9 [APB Page 17] whereas the assessee has not received any share application money during the year. b. General Query raised for justification of Premium Charged [Query 2.2.5 APB Page 17] Assessee submits reply vide letter dated 23.09.2016, offers no justification for premium charged [APB Page 20] except submitting Debenture Certificate [APB Page 23] and Resolution passed by the Board of Directors of the Assessee Company [APB Page 39]. Assessee submits another reply vide letter dated 29.11.2016, offers no justification for premium charged [APB Page 41] and to the contrary claims that "premium is actually loan, which is to be repaid by the assessee with interest in the form of premium." [It validates the observation of the CIT(A) that "If the securities premium is debt, then it should be reported and classified as Laon and Advances in the Balance Sheet" | Para 4 ] ii. AO has not called for valuation report share debenture deed A. Assessee company was incorporated on 11.06.2013 [APB Page 6|, i....
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....1.03 2013. • A shell entity is generally an entity without any significant trading, manufacturing or service activity, or with high volume low margin transactions- to give it colour of a normal business entity, used as a vehicle for various financial manoeuvres. • The operations carried out by these entities, are only to facilitate financial manoeuvring tor the benefit of its clients, or, with that predominant underlying objective, to give the colour of genuineness to these entities. Pavankumar M. Sanghvi v, ITO [2017] 165 1TD 260 (Ahmedabad - Trib.) confirmed in [20181 404 ITR 601 (Gujarat) affirmed in [2018] 97 taxmann.com 398 (SC) (SLP Dismissed) E. There is no presumption that merely because the payment is made by cheque, it is a genuine transaction: • C1T vs. P. Mohanakaia & Ors. (2007) 2911TR 278 (Supreme Court) "The transactions though apparent were held to be not real one. May be the money came by way of bank cheques and paid through the process of banking transaction but that itself is of no consequence." • Naresh K. Pahuja vs. ITAT: (2015) 375 ITR 526 (Bombay) "mere routing of a gift through a ....
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....e money was received on capital account, similar additions have been confirmed in the case of closely held company by the Hon'ble Bombay High Court in the case of • Konark Structural Engineering (P.) Ltd. v. Dy. C1T 9(2) [2018] 90 taxmann.com 56 (Bombay) SLP Dismissed/Rejected in [2018] 96 taxmann.com 255 (SC)/[2018] 257 Taxman 262 (SC) and • Royal Rich Developers (P.) Ltd. v. Pr C1T [2019] 108 taxmann.com 382 (Bombay). This plea is also rejected in Rajmandir Estates (P.) Ltd. v. Principal Commissioner of income-tax, Kolkata-IIl [2016] 386 ITR 162 (Calcutta)/ [2016] 70 taxmann.com 124 (Calcutta) affirmed in [2017] 77 taxmann.com 285 (SC). Further also, similar additions have been confirmed in by the Hon'ble Apex Court in the case of Pr C1T (Central)-l v. NRA Iron & Steel (P.) Ltd. [2019] 103 taxmann.com 48 (SC/[2019] 412 ITR 161 (SC). 6. Similar actions u/s 263 have been affirmed in : • Rajmandir Estates (P.) Ltd. v. Principal Commissioner of Income-tax, Kolkata-IIl [2016] 386 ITR 162 (Calcutta)/ [2016] 70 taxmann.com 124 (Calcutta) affirmed in [2017] 77 taxmann.com 285 (SC) rejecting the plea "that any furth....
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....son to Essel Landmark Private Limited at cost and not at a loss. Hence, there is no question of non-disclosure of the loss in the return of income I financials. A copy of the ledger account of the investment in CCD5 of the assessee is the books of Edison as exhibited at the time of hearing is enclosed herewith as Annexure A. Edison has been assessed under section 143(3) and for this very issue has been even reassessed under section 143(3) r.w.s 147. 4.4. The DR has relied on various case laws which are fact specific and distinguishable as rebutted at the time of hearing. We crave leave to rebut the same in written submission when called upon." 11. Considered the rival submissions and material on record. We noticed that the assessee issued and allotted 6,73,00,000, zero percent Compulsory Convertible Debentures at a face value of Rs. 10, each with a premium of Rs. 90, per CCD to Edison Utility Works Pvt. Ltd. The above CCDs were issued by passing its board resolution dated 22.07.2013. The fund so raised were utilised for the purpose of investment in equity shares of subsidiary company Essel Publishers Pvt. Ltd. of even amount. We also noticed that the debenture certifica....
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....ficer had in fact called for the details related to share premium received, but he has not considered Note-13 forming part of the Balance Sheet which states that company has issued debentures only at Rs. 10 per share. He submitted that the Assessing Officer raised the issues without any application of mind. He further submitted that in reply to the general query raised by the Assessing Officer, the assessee offered no justification for premium charged except submitting debenture certificates and board resolution. He submitted that in another reply, the assessee offered no justification for premium charged and makes contrary claim that premium is actually loan which is to be repaid by the assessee with interest in the form of premium. He supported the findings of the Ld. Pr. CIT that if the securities premium is debt, then it should be reported and classified as loans and advances in the Balance Sheet. He also submitted that Assessing Officer has not called for valuation report as well as share debenture deeds which are necessary documents to verify the genuineness of the transaction which the Assessing Officer has failed and he supported the findings of the Ld. Pr. CIT by relying o....
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....y available to the company considering the fact that the assessee has declared the same under the head reserves and surplus as security premium. We do not agree with the above observation of the Ld. Pr. CIT and even though the assessee discloses the above premium under the head reserves and surplus but as per the promise given in Board resolution clearly indicate that it is in fact a liability on the company until the 15th year and at the end of 15th year, these hybrid instrument has to be redeemed at the premium of Rs. 150 per CCD. That means the subscribers of the debt instrument will redeem Rs. 150 per CCD against the payment of premium Rs. 90 per CCD at the time of investment. Further, we noticed that the Ld. Pr. CIT invoked the provisions of section 56(2)(viib) of the Act in second notice issued under section 263 of the Act and directed the Assessing Officer to complete assessment as per the above section. He considered the hybrid instrument as issue of shares i.e., issue of equity rather than debt. The basic presumption made by the Ld. Pr. CIT is flaw that he treated the hybrid instrument as issue of equity shares in order to invoke the provisions of section 56(2) of the Act.....
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....serve and liability for the company to apply the reserve only in the specified manner. These reserve even though part of reserves and surplus, but can never be applied for any other purpose. In the given case, the assessee has issued promise to the CCD holders to redeem the preference shares after 15 years with premium of Rs. 150 per CCD. Therefore, technically, company can utilize the premium only for the above purpose. Merely because the assessee issued the CCD, which is hybrid instrument to arrange corporate funding thru group concerns, it does not mean that it has indulged in generation of unaccounted money. In this case, there is no finding by any authorities that the assessee has indulged in such activities except that they received premium in issue of CCDs and recorded the same under the head Reserves and Surplus. As discussed above, the assessee cannot utilize the premium other than the manner specified in section 52 of Companies Act, 2013. There is proper safety and binding specified in the Companies Act to monitor the funds generated by the companies. The tax authorities should apply the provisions selectively rather than on general terms without analyzing the real impact....