TaxTMI 
TaxTMI 
2022 (11) TMI 223
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....rnished the details of the shareholders to whom shares were issued along with the relevant valuation report. Vide notice dated 06-04-2021, the AO, NFAC proposed a draft assessment order, wherein it observed that merely because the assessee had filed all primary evidences regarding the investors, it could not be said that the onus stood discharged u/s 68 of the Act. The AO noted that, the losses incurred by the company had increased over the years in contradiction to the valuation reports furnished by the Chartered Accountants, and therefore according to them, the share premium charged upon issuance of shares was unreasonable. Relying on the decision of the Hon'ble Supreme Court in the case of Pr. CIT Vs NRA Iron & Steel Pvt Ltd (103 taxmann.com 48), the NFAC proposed to add back Rs.115,56,95,385/- under Section 68 of the Act. In response the assessee furnished its rebuttal/submission vide letter dated 12-04-2021. It explained that, the assessee company was a start-up promoted by Mr Anuj Raykan, with the intent to Make-in-India fresh health beverages/juices using cold-pressed technology. It was brought to the notice of the AO that this idea was supported by marquee PE investors such....
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....after complying with the foreign investment procedure laid down by Reserve Bank of India and therefore, according to the assessee, the initial onus laid down u/s 68 of the Act stood discharged. The assessee further stated that, these investors are reputed foreign entities over whom it does not exercise influence so as to compel them to furnish their confidential documents such as IT returns, bank statements, etc. The assessee therefore requested the AO to exercise the statutory powers vested in him and call for the necessary documents from these investors for verification. 5. Qua the investment of Rs.85,588/- made by the founder-promoter, Mr. Anuj Rakyan, the assessee had furnished his ITR, financial statements and bank statement, as sought for by the NFAC. 6. In respect of Ms. J. Fernandez, it was explained that there was no actual cash inflow from her. The assessee had engaged the services of Ms. J. Fernandez as a celebrity endorser for their products for which it had entered into a Service Agreement dated 10-03-2018. In terms of thereof, Ms. J. Fernandez was allotted 13,992 shares in lieu of the services offered by her, for which a Supplementary Agreement was executed on the s....
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....ssee has shifted its onus of not providing documents of shareholders by saying that it did not have the confidential documents such as IT returns, bank statements etc. of the shareholders. (g) The media reports provided by assessee evidencing the huge fund size of the foreign PE investors was not admissible as evidence and that the assessee ought to have provided their IT returns; (h) It was not clear as to why Ms. J. Fernandez agreed to receive shares of a loss making company in lieu of her services. Aggrieved by the order of the Ld. CIT(A), the assessee in now in appeal before us. 9. Assailing the action of the lower authorities, the Ld. Senior Counsel Shri. J. D. Mistry argued that, in this case, neither did the AO nor the Ld. CIT(A) applied their mind to the facts of the present case and that they had not only ignored the evidences produced by the assessee, but had acted in violation of the extant provisions of the law. He argued that both the Ld. CIT(A) and the AO/NFAC had simply casted certain aspersions against the foreign investors and the transactions which were totally un-called for. The Ld. Senior Counsel painstakingly narrated the background history of the assesse....
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....that the assessee had furnished the following documents in support of the share premium received from the existing foreign shareholders: - Name and address of shareholders; - Copies of their PAN Cards; - Copies of the Financial Statements; - Brief profile of the foreign investors and the assets being managed by them; - Copy of Global Business License of both foreign investors; - Copy of Tax Residency Certificate of Saama Capital; - Copy of FIRC issued by RBI; and - Copy of FC-GPR submitted in relation to receipt of foreign investments 10. Taking us through the above documents, he brought to our notice that from perusal of the balance-sheets of the M/s Sequoia Capital India Investments--IV, it was evident that it had assets worth US $ 952 Million which is US $211 crores which comes to approximate Rs.1700 crores and that only Rs.24 crores has been invested in the assessee company. Likewise, he drew our attention to the balance-sheet of the M/s. Saama Capital III Ltd. which had assets to the tune of US $ 62 million and they invested in assessee's company only to the tune of Rs.11 crores, which also fully tallied with their accounts. He further submitted that both thes....
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..... Fernandez who was an actress to be the brand ambassador and promote/advertise the company's product "Raw Press". The Ld. Sr. counsel submitted that, she is still the brand ambassador of the company and she regularly features in the print as well as electronics advertisements and also take part in the promotion/marketing campaign of its product. For rendering the aforesaid that services, an agreement was signed between her and the assessee company wherein the consideration was fixed at Rs.4.02 crores and in lieu thereof shares of that value (on premium) was allotted to her. It was also brought to our notice that the Ld. CIT(A)'s aspersion regarding the reasonability of such an arrangement was unfounded as the agreement explicitly contained an exit clause in terms of which if she intended to off-load the shares at any later date, then the assessee would buy back the shares from her, thus protecting her interest. 13. Per contra, the Ld. CIT-DR appearing on behalf of the Revenue supported the order of the lower authorities. Referring to a newspaper article, he submitted that M/s. Sequoia Capital was being investigated for funding a start-up company which had suffered heavy losses an....
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....hare premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless- (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB)of section 10." 16. The phraseology of Section 68 of the Act is clear. The Legislature has laid down that in the absence of a satisfactory explanation regarding any sum which is found credited in the books of an assessee during the previous year, such unexplained cash credit may be charged to income- tax as the income of the assessee of that previous year. In this case, the Legislative mandate is not in terms of the word 'shall' be charged to income-tax as the income of the assessee of that previous year. T....
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....applicable to persons who are residents, who are further required to substantiate the 'source of source' of funds. This additional burden cast upon by the proviso is noted to be not applicable to non-resident investors. 20. Having regard to the above legal position, we now advert to facts of the case. It is noted that during the year, the company had received share premium of Rs.52,24,66,398/- from five (5) shareholders, out of which four (4) were existing shareholders who had infused capital in earlier years as well and the remaining one (1) was a new shareholder but to her the shares were issued in discharge of her consideration for rendering of services. From the material on record, it is clearly discernible that the impugned addition of Rs.115,56,95,385/- comprises of opening balance of share premium of Rs.63,32,28,987/- brought forward from earlier years. Reading of Section 68 of the Act, as reproduced above, makes its clear that the provision applies to any sum which is found credited in the books of an assessee during the previous year for which no explanation has been furnished or explanation furnished is found to be false. We find merit in the submissions of the Ld. Sr. c....
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........... 9. From the plain reading of the provisions of section 68 of the IT Act, it does appear that where any sum is found to be credited in the books of Account maintained for any previous year and there is no proper explanation for such credit, the sum so credited can be charged to the income tax as the income of the assessee of "that previous year". 10. In the present case, the material on record indicates that the Assessing Officer has relied upon the credits for the financial year 2006-07. However, the sum so credited, in terms of such credit, is sought to be brought to tax as the income of the appellant-assessee, for the assessment year 2009-10, which means for the previous year 2008-09, in terms of the definition under section 3 of the IT Act. Dr. Daniel is justified in submitting that this is not permissible. 11. The view taken by this Court in CIT v. Bhaichand H. Gandhi [1982] 11 Taxman 59/[1983] 141 ITR 67 and by Rajasthan High Court in CIT v. Lakshman Swaroop Gupta & Brothers [1975] 100 ITR 222, supports the contentions raised by Dr. Daniel. Similarly, we find that in Bhor Industries Ltd. v. CIT [1961] 42 ITR 57 (SC), the Hon'ble Apex Court in the context of p....
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....em to insist them to furnish their internal confidential documents such as income-tax returns, bank statements etc. Having provided their PAN details, addresses, tax residence status, the assessee had requested both before the AO/NFAC and the Ld. CIT(A) to make direct enquiries from these investors. We thus note that, although the assessee had furnished the primary evidences in support of the share premium received from these foreign investors, the lower authorities chose to sit back with folded hands till the assessee exhausted all the evidence in his possession and then merely reject the same without conducting any inquiry or verification whatsoever. Such in-action/omission on the part of lower authorities cannot be accepted. 22. We find merit in the contention of the Ld. Sr. counsel that, the lower authorities should have desisted from using the expression 'hawala' when no such case was made out by them. It is noted that such an expression has been used whimsically by the AO/NFAC, which has been surprisingly endorsed by the Ld. CIT(A) without any corroborative evidence. The Ld. CIT(A) is noted to have gone a step ahead and simply branded the documents of the foreign investors a....
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....f assessment proceedings in suitable cases, through the competent Authority, i.e. Joint Secretary, F&TR, CBDT in the format prescribed by the Board. As per FAS, the TU shall assist the AU in requisition and collection of information from FT&TR. Request of VU shall be routed through the AU and the AU shall seek the assistance from TU. 1. On receipt of the request to seek information from any foreign Jurisdiction, the TU shall examine whether the request is accompanied by the prescribed format duly filled and signed by PCIT (AU). Whether the request for information is from a foreign jurisdiction, with whom India has a DTAA or TIEA. The format of making reference to TU is enclosed as Annexure- A 2. The TU shall forward the reference to the concerned JS, FT&TR within 7 days of receipt of request from AU in the prescribed format. 3. In case the TU needs any clarification on the reference received, it should seek clarification from the AU within 5 days of receipt of reference. 4. Any request for clarification from foreign jurisdiction shall be forwarded to the TU by NeAC. TU shall submit the clarification within 7 days. In case, TU requires information from AU/VU, in order to s....
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....ium being significantly higher than the intrinsic worth/fair value of the equity shares, it is noted that the assessee has supported the valuation with a certificate issued by a chartered accountant using DCF method which is one of approved method as prescribed by RBI. The tax-payer while issuing shares to non-resident investors create an foreign obligation for India in favour of third country. Accordingly, in terms of the RBI/FEMA requirements, the tax-payers are required to issue shares for a consideration which has to be necessarily be equal to or higher than the fair value, arrived at by such approved method. Reason being, the tax-payer should not create an foreign obligation for India in favour of third country at a consideration which is below fair value of shares. Thus, to plug this loss to India, FEMA/RBI stipulate that issue price of shares should be equal to or more than fair value arrived at by approved method viz. DCF. Hence, even going by AO/NFAC's analogy that the price at which shares were issued to foreign investors was higher than fair value of shares, according to us, such issuance of shares at a value higher was in compliance with the FEMA/RBI regulations. It is ....
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....to whether such consideration had indeed been subjected to Good Services Tax as agreed upon in Section 5.1 of the Agreement dated 10-03-2018. The NFAC also ought to have enquired as to whether the assessee had withheld taxes on the same and the manner in which the assessee in their books and the shareholder in her income-tax return accounted for such consideration. Instead of doing so, the AO/NFAC mechanically added this share premium as well u/s 68 of the Act, which according to us, was unjustified. 30. In view of our above discussions and findings, and having regard to the entire conspectus of the facts of the case, we set aside the impugned order of the Ld. CIT(A) confirming the addition of Rs.115,56,95,386/- made u/s 68 of the Act and restore the issue back to the file of AO with the following directions: - (i) As noted above, the share capital premium to the extent of Rs.63,32,28,987/- pertained to earlier years; and the nature & source of the same had already been examined and verified in the income tax assessments for the earlier years, and therefore the same is directed to be deleted, since no addition u/s 68 of the Act was legally permissible in the relevant AY 2018-19.....