TaxTMI 
TaxTMI 
2024 (12) TMI 242
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...., we condone delay in filing of appeal and admit appeal filed by the revenue for adjudication. 3. The revenue has raised the following grounds of appeal for the A.Y. 2013-14: "2. The learned CIT(A) erred in deleting the addition made u/s. 56(1) of the IT Act, amounting to Rs. 615.34 crores, being income from other sources of the assessee, assessable for the A.Y. 2013- 14, after giving a finding that the payment towards equipment purchase was not at arms length price. 2.2 The learned CIT(A) erred in deleting the addition made u/s. 56(1) of the IT Act, without appreciating the fact that the assessee had taken out of its own unaccounted money in the form of purchase cost, by inflating the purchases from Non-residents and the same excess money was brought back to the assessee's own account in the form of share premium, which is nothing but round tripping of the assessee's own unaccounted funds in the quise of share premium. 2.3. The Ld. CIT(A) erred in considering the transaction between the assessee and the non-residents as genuine investments in shares with a premium, covered by the Bombay High Court decision in the case of M/s. Vodafone India Servic....
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....0 (Bombay), and the Board's circular No. 2 of 2015 dated 29.6.2015, without appreciating the fact that the said share premium transactions are not genuine transactions and was only a colourable devise in order to accommodate the assessee's own un accounted funds, through non-residents, and the receipts are taxable as Income from other sources. 3. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of ld. CIT(A)may be set aside and that of the Assessing Officer be restored." 4. The brief facts of the case are that, the Assessee M/s.RKM Powergen Private Limited ('appellant' or 'company') is a private limited company incorporated in the year 2004. The assessee is a Joint Venture between R.K.Powergen Private Limited ('RKP') and Mudajaya Corporation Berhad, Malaysia ('MJC") and Enerk International Holdings Limited, Seychelles ('Enerk'). During the previous years' relevant to the AY 2010- 11 to AY 2015-16, the assessee was engaged in setting up a 1440 MW coal based thermal mega power plant comprising 4 Units of 360 MW each at Chhattisgarh State (here....
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....defined in Section 92CA(l) of the Act, the issue of shares was reported in the Form 3CEB issued by a Chartered Accountant certifying that the shares were issued at arms' length price for AY 2012-13, A Y 2013-14 and A Y 2014-15. MIPP International Limited, Mauritius ('MIPP') is said to be a subsidiary SPV of the MJC Group, engaged in supplying equipment and related activities for power projects. Enerk is also a shareholder in MIPP. The relationship between the appellant and MIPP was disclosed to the Project lenders and in all corporate filings. The majority of the plant and equipment for the appellant's Project were imported from MIPP. Since MIPP was an "associated enterprise" as defined in Section 92CA(1) of the Act, the assessee furnished report in Form 3CEB from a Chartered Accountant certifying that the price of the equipment purchased are at arm's length in accordance with Section 92E of the Act. The appellant filed the return of income for the AY 2010-11 to AY 2015-16 declaring total income as under: Asst Year Date of filing of ROI Returned Income/(Loss) under normal provisions Book profits u/s. 115JB of the Act 2010-11 25-09-2010 (89,6....
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....66,48,047 FD Interest as IOS 51,56,40,547 51,56,40,547 For AY 2010-11, reassessment proceedings were initiated under Section 148 of the Act and order u/s. 143(3) r.w.s.147 was passed on 24.03.2016 without any disallowance/addition. 4.3 Search and seizure operations under Section 132 of the Act were carried out in the premises of the assessee in Tamilnadu and Chhattisgarh on 23.11.2015, on 09.12.2015 and concluded on 13.01.2016. During the search, certain documents were seized from the premises of the appellant. The reassessment for AY 2010-11 and the assessment for AY 2012- 13 to AY 2014-15 were concluded after the search and the details of receipt of share capital from MJC and Enerk was accepted without any adjustment. The Transfer Pricing order u/s. 92CA(3) of the Act for the AY 2013-14 was completed after the conclusion of the search, wherein the TPO proposed TP downward adjustment of Rs. 407.25 crores on the imports from MIPP. The TPO did not propose any adjustment on the receipt of share capital reported in the Form 3CEB. The assessee had filed appeal against the order u/s. 143(3) r.w.s.92A(3) for AY 2013- 14 and the same was pending before t....
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....ly of equipment to the assessee were invested as 'share capital' by framing the assessment u/s. 143(3) r.w.s 153B r.w.s 153C r.w.s 153A of the Act vide order dated 19.02.2019 for A Y 2010-11 to AY 2013-14 and draft assessment order for AY 2014-15 as under: AY Treatment of shares premium as Income TP Adjustment Assessed total income Demand raised 2010-11 189,26,79,120 189,26,79,120 134,00,32,126 2011-12 286,37,33,520 288,55,68,096 186,64,95,391 2012-13 230,46,51,600 233,55,66,922 137,83,70,108 2013-14 615,34,48,800 641,28,07,603 352,92,52,393 2014-15 525,59,82,720 832,05,84,608 577,16,23,267 "8. The contentions and submissions of the assessee company have been considered carefully and found that the same are not tenable for the following reasons: 8.1.Original assessments: The assessee's contention that the issues mentioned in the show Cause notice were already considered in the original assessment made for the A.Y. 2013-14 dated 31/03/2017 is factually incorrect, since the issue of unexplained income in the nature of share premium was not....
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....vested at a premium ofRs.240/- in the said shares of M/s.R.K.M.Powergen Pvt. Limited. Also, it is noticed from page nos.248 to 250 of the seized annexure - ANN/ST/RKMLS/S-1 that M/s.R.K.M.Powergen Pvt. Ltd. had passed on huge amounts running into crores of US Dollarsto M/s.MIPP International Ltd. towards supply of Plant and Equipments during the period from July, 2007 to March, 2010. Also, it is noticed from page nos. 68 to 74 of the seized annexure - ANNIST/RKM/LS/S-1 that M/s. R.K.M.Powergen Pvt. Ltd. had passed on huge amounts running into crores of US Dollars/INR to M/s MIPP International Ltd. Towards supply of Plant and Equipments during the F.Y. 2010-11 to 2014-15 totalling to INR4071,64,01,520. Further, it is noticed from the financials of M/s.Enerk International Holdings Limited and M/s.Mudajaya Corporation Berhad that M/s.MIPP International is an associate company of M/s.Enerk lnternational Holdings Ltd. and M/s.Mudajaya Corporation RK from these seized material, it is categorically clear that funds flown out from M/s. Berhad. From these seized material, it Is categorically clear that funds flown out from M/s. RKM. Powergen Pvt. Ltd. passed on to M/s.MIPP International (a ....
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....quipments from M/s. MIPP International Limited, the TPO (JCIT, TPO-2, Chennai) vide order u/s 92CA(3) of the Act dated 01/02/2017 for the AY 2013-14 proposed a downward adjustment of Rs. 407,25,95,597I- out of the total value of imports made of Rs. 1471,30,09,946/-. It is also noticed from the TPO's orders that the business of M/s MIPP International Limited was limited to procure and supply of power plant equipments to M/s.RKM Powergen Private Limited only and that M/s.MIPP International Limited did not do any other business. It is also noticed that from the huge/undue profits earned from the supply of equipments to M/s.RKM Powergen Private Limited, the said company M/s.MIPP International Limited distributed dividends to its shareholders viz.,M/s.Mudajaya Corporation Berhad and M/s.Enerk International Holdings Limited which in turn invested in the shares of M/s.RKM Powergen Private Limited i.e., in the assessee company with a huge premium of Rs. 240 per share. 8.3.2.2.Further, the following findings were made in the order of the TPO dated 20/12/2018of the JCIT, TPO-2, Chennai made for the A.Y. 2014-15: i. M/s.R.K.M.PPL entered into a mechanical and electrical ....
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....f M/s.RKM travelled to China during the last 5-6 years. It is also noticed that M/s MIPP was not making purchases on its own but M/s RKM decided the material to be purchased. identifies the suppliers and negotiates the price. Further, it is seen that M/s MIPP that only the job of placing formal orders with the suppliers and monitoring their supplies in time and ensuring shipment are the functions carried out by M/s MIPP. ix. All these facts indicate that M/s MIPP International Lid. is equipment supplier for the sake of record only. 8.3.2.3. It is also pertinent to mention here that he TPO (JCIT, TPO- 2, Chennai) made downward adjustment of Rs. 407,25,95,597/- for the A.Y. 2013-14 vide his order u/s 92CA(3) of the Act dated 01/02/2017 out of the total value of Imports made of Rs. 1471,30,09,946 and that the TPO made downward adjustment of Rs. 32,05,84,608/- out of the total value of imports made of Rs. 1350,64,11,226/- for the A.Y.2014-15 vide order w's 92CA(3) of the Act dated 20/12/2018. 8.3.3. Circuit of funds flow: M/s.Enerk International Holdings Ltd. is a 20% shareholder and M/s.Mudajaya Corporation Berhad is 80% shareholder (ultimate beneficiari....
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....of four weeks from the date of receipt of the copy of the said order. The Hon'ble High Court permitted the assessee to raise all grounds other than the ground on limitation and validity of satisfaction note which has been decided against it. For AY 2014-15, the assessee had filed writ against the draft assessment order passed on 19.02.2019. Consequent to the order of the Hon'ble High Court referred above, the Assessing Officer passed the final order under section 143(3) r.w.s.144C(1) r.w.s.153B r.w.s.153C r.w.s.153A on 14.10.2022 served on the assessee on17.10.2022 assessing the total income at Rs. 577,16,23,267/- and raised a demand of Rs. 375,86,97,070/-. 4.9 Aggrieved by the order of the AO u/s. 143(3) of the Act, the assessee preferred an appeal before the ld.CIT(A) in the appeal filed against the assessment under Section 143(3) for Assessment Year 2013-14, the ld.CIT(A) confirmed the downward adjustment made and further enhanced the downward adjustment. Further, the assessee preferred an appeal before the Ld.CIT(A) against the order passed u/s. 153C of the Act by the Assessing Officer for Assessment Years 2010- 11 to 2014-15. 5. The ld.CIT(A) deleted the addition....
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....nd 2014-15. For the AY 2013-14, the assessee's cost of such import was claimed at Rs. 1471.30 crores; the TPO arrived at the ALP of the above transaction at Rs. 1064.04 crores (refixed at Rs. 727.27 crores in the appeal order against the 143(3) order of AY 2013-14}and made a downward adjustment of Rs. 407.26 crores (reworked at Rs. 744.03 crores). For the AY 2014-15, such import cost claimed by the assessee was Rs. 1350.64 crores; the TPO arrived at its ALP at Rs. 518,58,26,618 and made a downward adjustment of Rs. 832.06 crores. 7.5.5 For making the addition of share premium from Mudajaya (AYs 201011 to 2014-15) and Enerk (AYs 2013-14 and 2014-15) u/s 56(1) as shown in the table above, the AO quoted the following reasons: - The share premium is in excess of the value arrived at through DCF by assessee itself. - For the AYs 2013-14 and 2014-15, the TPO has made downward adjustments on the value of import from MIPP. - Mudajaya and Enerk hold 80% and 20% shareholding in MIPP respectively. They are the ultimate beneficiaries of profits earned by MIPP. They obtained dividends from MIPP, which were used to make investments in the assessee company ....
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....stors pay a premium based on the prospects of the company. Based on the prices at which shares were issued based on information obtained from the portals of SEBI, National Stock Exchange and Bombay Stock Exchange, the appellant stated that during the same period certain power companies have issued shares with the premium ranging from Rs. 210 to Rs. 480 per share. In that context, the assessee stated that in Reliance Power, the promoters were issued shares at par whereas in the IPO shares were issued at a premium and likewise, in the case of KSK Power Ventures Ltd, the promoters were issued shares at par whereas the investors were issued shares at Rs 250. It was in this commercial and financial context that the Appellant was therefore able to obtain the investment from the foreign investors at the price of Rs. 250 per share. 7.5.9 Appellant stated that the share premium from foreign investors has been received based on the Shareholders Agreement. A Shareholders Agreement dated 8th February 2007 and a Supplemental Shareholders Agreement dated 20 February 2009, incorporating this share price for foreign investors was executed by the Appellant, RK and Mudajaya, copies of which....
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.... shareholders. Sub-section (lA) provided for allotment on a non-proportionate preferential basis if it was authorized by a special resolution. However, sub-section (3) excluded the application of Section 81 to private companies. As a result, under Companies Act, 1956, private companies were free to allot shares to any persons at differential prices and on differential rights. In accordance with Section 75 of the Companies Act, 1956 appellant filed all the returns of allotment with RoC. The Ministry of Corporate Affairs have taken on record these returns and no questions have been raised in relation thereto. As per Section 78 of the Companies Act, 1956 when shares are issued at premium, the aggregate amount of premium is to be transferred to an account called the share premium account. This share premium account is not distributable as income just like as any other capital assets. On winding up, the surplus monies in the share premium account are to be returned to the shareholders as capital. So long as the company is a going concern, the monies in share premium account can never be returned to the shareholders except through the medium of a reduction petition, or, in other....
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....nt. The per share price of Rs. 250/- was agreed taking into account the market conditions. A Shareholders Agreement dated 8 February 2007 and a Supplemental Shareholders Agreement dated 20 February 2009, incorporating this share price was executed by the Appellant, RK and Mudajaya, copies of which have been furnished to the AO. This was approved by the shareholders at the EGM of Mudajaya Group Berhad, 100% Holding Company of MCB on 15th June 2007 and 28 April 2009, copy of which has been furnished to the AO. Their Investment Banker, OSK Investment Bank, Berhad, had given an independent opinion dated 17thMay 2007 and 8thApril 2009 on the fairness of the subscription price of the equity shares. Mudajaya has been a listed company. The appellant stated that all these particulars were given to the AO. In the show-cause notice, the AO proposed to assess the share premia as undisclosed income. It was stated that once, it was pointed out by the appellant that this was impermissible, he chose to assess the share premia under section 56(1). Appellant stated that it cannot be assessed as unexplained income in view of the latest decision of the Hon'ble Supreme Court in PCIT v Bharat S....
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.... determination of arm's length price to the Transfer Pricing Officer in respect of an international transaction with an AE, Section 92CA (4) requires that he determines the total income of the assessee in conformity with the arm's length price determined by the TPO. 7.5.13 The appellant submitted that the AO has surmised that the profits on the supply of equipment that were made by MIPP were distributed to Mudajaya and Enerkwho have in turn contributed to the share capital of the company. The TPO / AO have accepted the import value of the equipment in Assessment Years 2011-12 and 2012-13. Downward adjustments have been made only in the AYs 2013-14 and 2014-15. This downward adjustment cannot be the ground for another addition in the form of unexplained income. In fact, it is unclear from the impugned orders as to how this would be unexplained income in the hands of the Appellant. The downward adjustment made by the TPO cannot be ground for another addition in the form of unexplained income. Even if the statements made in the show cause notice that the profits made on the supply of equipment were the source of the share capital were assumed correct, it would still n....
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....application of the money received by the payee; the application of such funds thereafter has to be treated as a separate transaction and that would never be the income of the payee. The Appellant had not commenced its business or commercial operations and the payments to MIPP were made through banking channels. These remittances were funded by secured loans obtained from banks and financial institutions. As such these would not be said to constitute undisclosed income. Further, without prejudice, the downward adjustment of TPO for AYs 2013-14 and 2014- 15 with reference to transaction with MIPP cannot be extrapolated by the AO to all the AYs and when specifically, the TPO held the equipment import transaction with MIPP for AYs 2011-12 and 2012-13 were at arm's length and cannot also be extrapolated to another assessee RK Powergen Pvt. Ltd for the AYs involved, where there was no such import transaction with MIPP. 7.5.14 Appellant relied on the Supreme Court decision in G. S. Homes &Hotels (P.) Ltd. [2016] 73 taxmann.com 120 (SC) to submit that the amount of share capital received from the various shareholders cannot be as assessed as business income. 7.5.15 Re....
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....reference to Mudajaya, which ousts the jurisdiction of the AO on the issue, as the decision of the TPO on the international transaction with AE is binding on the AO. It is seen that the AO has simply relied on the TPO's findings with reference to equipment transaction for AYs 2013-14 and 2014-15 in making the addition u/s 56(1). The findings of the TPO are in different context of benchmarking the import transaction of equipment and the same cannot be applied simply here. The AO has not given any specific reasons as to how he treated the share premium as unexplained income to come under purview of Section 56(1) of the Act. The AO has not disputed the fact that share premium has been received by the assessee from Mudajaya and Enerk, which are non-residents. Therefore, this is clearly a capital receipt. The AO has also not questioned genuineness of the transactions though he has taken the circuit of funds as one of the arguments for making the addition. Moreover, the AO has not given any reason to treat the receipts as unexplained income. It is settled law that share premium could never be considered as income under Section 56(1) of the Act and to that effect the assessee has quot....
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....ugned AYs. 7.5.21 Whether section 56(2)(viib) would apply to the premium transaction? This section applies only where the shareholder is a resident and does not apply to the premium received from non-residents read with Section 2(24)(xvi) introduced from 1.4.2013. Finance Bill 2023 proposes to extend these provisions to premium received from non-residents as well if it exceeds the fair market value determined u/r 11UA(2), which could be by DCF method. Clause 32 of the Finance Bill 2023 has proposed an amendment to Section 56 as follows: "In Section 56 of the Income Tax Act, in sub-section 2 with effect from the 1° day of April 2024- (a) in clause (vii b), the words "being a resident" shall be omitted'. This makes it crystal clear that it is only from Assessment Year 2024-25 that share premia received from a non-resident in excess of the fair market value can be taxed. Thus, there is no case u/s 56(2)(viib) also for the impugned AYs. This shows Parliament in its wisdom allowed more FDI flowing into India above DCF value (FMV) also till the AY 2023-24 which is not taxable u/s 56(2)(viib) till then. 7.5.22 With reference to differential rate of allotment of s....
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....ful appraisal of the evidence, concluded that the price paid by the Assessee was at arm's length and deleted the downward adjustment made by the TPO. 5.2 Aggrieved by the order of the Ld.CIT(A) dated 13.04.2023 for the A.Y. 2010-11 to 2014-15 (5 years) the Revenue has filed appeals against the said order for Assessment Years only for two (2) years i.e. A.Y. 2013-14 and 2014-15. Further, the Assessee has not filed any appeal against the said order since, the assessee had initiated writ proceedings, which are pending in the hon'ble Madras High Court. 6. The Ld.DR assailing the action of the Ld.CIT(A), stated that the ld.CIT(A) has erred in deleting the addition made u/s. 56(1) of the Act, under income from other source after giving a finding that the payment towards equipment purchase was not at arms length price. Further, ld.DR argued that the Ld.CIT(A) action of deleting the addition u/s. 56(1) of the Act, is erroneous for the fact that the investments made by the non-resident in assessee company represent remittance out of excess billed sums arising out of the supplies made by the non-residents, which is evidenced by the downward TP adjustment carried out by the TPO for the ....
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....emium was explicitly accepted as being at arm's length for one assessment year and no adverse adjustments were done in other years v. The assessment of share premia u/s. 56(1) is contrary to law. 2. The basis of the appeals is the downward adjustment made by the TPO to the cost of equipment which has been deleted by this hon'ble in a detailed and reasoned order : The entire basis of the present appeals is the transfer pricing orders wherein downward adjustments were made to the price paid for the equipment imported by the AE. It is submitted that the Assessee had filed an appeal (IT(TP) A No. 44/ Chny/2023) to this hon'ble Tribunal against the appellate order for Assessment Year 2013-14 (arising from the assessment under Section 143(3) and the TPO order). This appeal was disposed by an order dated08.03.2024 wherein the downward adjustment was deleted in its entirety. This hon'ble Tribunal, which is the ultimate fact-finding authority, had after careful appraisal of the evidence, concluded that the price paid by the Assessee was at arm's length. Thus, the entire basis of the appeal filed by the department stands vitiated and for this reason alone the appea....
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....SC). Even earlier the hon'ble Delhi Court had held in PCIT v Vikas Telecom Ltd [2022] 135 taxmann.com 362 (Delhi) had held that post-search enquiries cannot be the basis of assessments under Section 153A/153C. It is therefore submitted that reliance of post-search material such as the transfer pricing report for making additions in unabated assessments under Section 153C is illegal. 8.3 The downward adjustment to the cost of equipment purchased from MIPP cannot be the ground for a further addition of share premia. In the Transfer Pricing Orders for Assessment Years 2013-14 and 2014-15, there had been a substantial downward revision of value of import of Capital Equipment from MIPP and as a result, the cost of the equipment would be marked down for depreciation. This downward adjustment cannot be the ground for another addition in the form of unexplained income. The Assessing Officer has surmised that the profits on the supply of equipment that were made by MIPP were distributed to Mudajaya Corporation and Enerk international who have in turn contributed to the share capital of the company. Even if the profits made on the supply of equipment were the source of the share capita....
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.... i) The Assessee was able to enter into a Memorandum of Understanding with the state of Chhattisgarh for setting up of a mega (1440 Mw) power plant; ii) And based on RK Power's track record the Assessee was able to get project financing with RK Power providing corporate guarantees for the loans. iii) The Assessee was able to get coal linkage that was crucial for the project's viability. iv) Nearly fifty statutory clearances including environment, pollution, aviation, water etc. were obtained. It is customary that the anchor Indian promoter gets shares issued at par whereas investors pay a premium based on the prospects of the company. The following table gives the prices at which shares were issued based on information obtained from the portals of SEBI, National Stock Exchange, and Bombay Stock Exchange Company Listing Date Par Value Issue Price Reliance Power Ltd 11.02.2008 Rs 10 Rs 450 BGR Energy Systems Ltd 03.01.2008 Rs 10 Rs 480 IL&FS Engineering & Construction Co. Ltd 25.10.2007 Rs 10 Rs 370 GMR Infrastructure Ltd 21.08.2006 Rs 10 Rs 210 KSK Energy Ventures Ltd 14.07.2008 R....
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.... expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Income Tax Department. iv. CIT v. Panipat Woollen& General Mills Co. Ltd. [1976] 103 ITR 66 (SC): that in order to determine the question of reasonableness of the expenditure, the test of commercial expediency would have to be adjudged from the point of view of the businessman and not of the Income Tax Department." v. Shahzada Nand & Sons v. CIT [1977] 103 ITR 358 (SC): The reasonableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency... vi. S.A. Builders Ltd. v. CIT [2007] 158 Taxman 74/288 ITR 1 (SC): the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximise its profit. The Inc....
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....ive from 1st April 2014 and as such all the allotments were governed by Companies Act, 1956. Section 81 of the Companies Act, 1956 dealt with the further issue of capital. It provided that shares shall be issued in proportion to the persons who are shareholders. Sub-section (1A) provided for allotment on a non-proportionate preferential basis if it was authorised by a special resolution. However, subsection (3) excluded the application of Section 81 to private companies. As a result, under Companies Act, 1956, private companies were free to allot shares to any persons at differential prices and on differential rights. Section 75 of the Companies Act, 1956 provided as follows: 75. Return as to allotments. (1) Whenever a company having a share capital makes any allotment of its shares, the company shall, within thirty days thereafter, - (a) file with the Registrar a return of the allotments, stating the number and nominal amount of the shares comprised in the allotment, the names, addresses and occupations of the allottees, and the amount, if any, paid or due and payable on each share: 8.7 The Assessee has complied with Section 75 and filed all the re....
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....ceipt. The share premium is also verifiable from returns of allotment submitted to the Ministry of Corporate Affairs. As per departmental circular (MCA) No. 3/77 dated 15.04.1977 the monies in the share premium account cannot be treated as free reserves, as they are in the nature of capital reserves. 8.8 To sum up: The Assessee had complied with the provisions of the Companies Act in the allotment of shares and the application of share premia and further because of the provisions of the Companies Act, 1956 the share premium is a capital receipt and cannot be treated as income. The foreign direct investments ("FDI") into India are regulated by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 ('FDI Regulations') issued by RBI. The FDI Regulations require that shares should be issued to foreign investors only at a price equal to or higher than the value of the shares as determined by the discounted cash flow ("DCF") method since by the issue of shares to non-residents, companies create an obligation for India in favour of a foreign country. As required by the FDI Regulations: (a) All the share application ....
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....t side of the law by issuing equity shares at a value of Rs. 20 per equity shares so far as FEMA/RBI compliances are concerned. RBI has also accepted the said fair price of shares supported by CA Certificate using DCF method and FC-GPR form filed by the assessee through its banker Axis Bank was accepted by RBI and taken on record. The assessee has filed its bank statements as well FIRC issued by its bankers as an evidence. Thus, based on material on record, no fault lies with the assessee in issuing equity shares of face value of Rs. 10 each at share premium of Rs. 10 each so far as compliances under FEMA/RBI are concerned." 8.9 The assessment of share premia under Section 56(1) is contrary to law. Section 56(1) is a residual section to tax incomes that are not chargeable under other heads (Salaries, House Property, Business) and not to tax receipts that are not income. As stated earlier, the Companies Act 1956 specifically provides that share premium should be kept in a separate account and cannot be used for distribution of dividend. 8.9.1 It is settled law that Section 56(1) cannot be resorted to assess a receipt that does not constitute income. The hon'ble Supreme Cour....
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....n received through banking channels and credited in the books of accounts, section 68 cannot be invoked because of the high premium. Similar views have been expressed by the Supreme Court in CIT v Stellar Investment Ltd. [2001] 115 Taxman 99 (SC) and CIT vs Lovely Exports P Ltd [2008] 216 CTR 195 (SC). The jurisdictional Madras High Court has taken the same view in CIT vs ElectroPolychem Ltd [2007] 294 ITR 661 (Madras) and has held that even if the subscription to share capital was not genuine it cannot be treated as income. 8.9.4 The Bombay High Court in PCIT v Apeak Infotech [2017] 88 taxmann.com 695 (Bombay) has held that share premium receipt is on capital account and cannot be assessed as income. The Supreme Court in G. S. Homes & Hotels (P.) Ltd. [2016] 73 taxmann.com 120 (SC) held that the amount of share capital received from the various shareholders cannot be treated as business income. The Assessing Officer also was aware that Section 56(2)(viib) had no application on share premia received from non-residents. It is only proposed in Finance Bill 2023 to extend Section 56(2)(viib) to share premia received from non-residents with effect from Assessment year 2024-25. It is....
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....on of ALP. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income." 8.9.7 After the decision of the Bombay High Court in the Vodafone India case, the CBDT issued an instruction No 2 of 2015 noting that the Court had held that share premium was a capital account transaction that does not give rise to income and that the Board had accepted the said decision and directed that all field officers should adhere to the ratio decidendi of this judgement. Extracts below: "1. In reference to the above cited subject, I am directed to draw your attention to the decision of the High Court of Bombay in the case of Vodafone India Services Pvt. Ltd. for A.Y. 2009-10 (WP No.871/2014), wherein the Court has held, inter-alia, that the premium on share issue was on account of a capital account transaction and does not give rise to income and, hence, not liable to transfer pricing adjustment. 2. It is hereby informed that the Board has accepted the decision of the High Court of Bombay in the abovementioned Writ Petition. In view of the acceptance of the above judgment, it is directed that the ra....
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....when there is specific provision introduced by the Legislature to bring the specific transaction as income in section 56(2)(viib) because the transaction of issue of shares is capital in nature but under the circumstances as mentioned in above section, this transaction will be considered as income". 8.9.10 The position is reiterated in a recent decision of the hon'ble Bombay High Court in Shendra Advisory Services P Ltd v DCIT [2024] 159 taxmann.com 557 (Bombay) as can be seen from the following extracts: "12. The charge of tax under the Act is on income. The receipt of share premium on the issue of fresh shares is on capital account and constitutes a capital receipt, which is not chargeable to tax under the Act. There is no provision under the Act to tax the receipt of share premium for the assessment year under consideration. As held in Vodafone India Services (P.) Ltd. (supra) the amount received on issue of shares is admittedly a capital account transaction not separately brought within the definition of income during the relevant period. Thus, capital account transaction not falling within the statutory explanation cannot be brought to tax. 13. After the j....
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.... transaction on the capital account and there is no income to be chargeable to tax. So, applying any pricing formula is irrelevant. ** ** **(c) The tax can be charged only on income and in the absence of any income arising, the issue of applying the measure of Arm's Length Pricing to transactional value/consideration itself does not arise." (d) If its income which is chargeable to tax, under the normal provisions of the Act, then alone Chapter of the Act could be invoked. Sections 4 and 5 of the Act brings/charges to tax total income of the previous year. This would take us to the meaning of the word income under the Act as defined in section 2 (24) of the Act. The amount received on issue of shares is admittedly a capital account transaction not separately brought within the definition of Income, except in cases covered by section 56(2)(viib) of the Act. Thus, such capital account cannot be brought to tax as already discussed herein above while considering the challenge to the grounds as mentioned in impugned order." (e) The issue of shares at a premium is on Capital account and gives rise to no income. The submission on behalf of the revenue that th....
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....t was proposed. 9.2 The Assessing Officer relying on the order of the TPO for AY 2013-14 & AY 2014-15, assessed the share premium as other income on the basis that profits made by MIPP on supply of equipment to the assessee were invested as 'share capital' by framing the assessment u/s. 143(3) r.w.s 153B r.w.s 153C r.w.s 153A of the Act vide order dated 19.02.2019 for A Y 2010-11 to AY 2013-14 and draft assessment order for AY 2014-15 as under: AY Treatment of shares premium as Income TP Adjustment Assessed total income Demand raised 2010-11 189,26,79,120 189,26,79,120 134,00,32,126 2011-12 286,37,33,520 288,55,68,096 186,64,95,391 2012-13 230,46,51,600 233,55,66,922 137,83,70,108 2013-14 615,34,48,800 641,28,07,603 352,92,52,393 2014-15 525,59,82,720 832,05,84,608 577,16,23,267 We note that the appeal of the assessee against the order of the TPO for the A.Y. 2013-14 in respect of downward adjustment of Rs. 832.05 crores has been deleted by this Tribunal in IT(TP)A No.44/Chny/2023 dated 08.03.2024. This order was passed after the impugned order of the C....
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....s. 56(1) made by the AO based on the TP order alone cannot stand in the eyes of law. 9.5 Further, it is observed that the assessment for Assessment Years 2013-14 and 2014-15 were originally concluded u/s. 143(3) on 31.3.2017 and 21.12.2016 respectively. The date of the search is 23.11.2015. The dates of the TP orders for Assessment Years 2013-14 and 2014-15 are 01.02.2017 and 20.12.2018 respectively, well after the search. Therefore, any assessments under Sections 153A/153C in respect of unabated assessments must be based on incriminating materials obtained during search proceeding and not based on post-search materials, in this case TP orders passed subsequent to search materials. The reliance placed by the assessee in support of this issue on Hon'ble supreme Court in PCIT v Abhisar Buildwell P Ltd [2023] 149 taxmann.com 399 (SC), it was held as follows: "14. In view of the above and for the reasons stated above, it is concluded as under: (i) that in case of search under section 132 or requisition under section 132A, the AO assumes the jurisdiction for block assessment under section 153A; (ii) all pending assessments/reassessments shall stand abated; ....
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.... Section 56(1) cannot be resorted to assess a receipt that does not constitute income. This proposition has been upheld by the hon'ble Supreme Court of India in CIT v D P Sandu Bros [2005] 142 Taxman 713 (SC), where the Assessing Officer attempted to tax under Section 56 what could not be assessed under Section 45, stating as follows: "The argument of the appellant that even if the income cannot be chargeable under section 45, because of the inapplicability of the computation provided under section 48, it could still impose tax under the residuary head is thus unacceptable. If the income cannot be taxed under section 45, it cannot be taxed at all". 9.9 It appears that the Assessing Officer resorted to Section 56(1) since he could not invoke Section 68, since the identity and the solvency of Mudajaya and Enerk had been well established. Both parties had been subject to KYC verification by the banks as part of the process under FDI Regulations. The genuineness or credit worthiness of these parties has not been questioned in the impugned assessments. The hon'ble Supreme Court in PCIT v Bharat Securities [2020] 113 taxmann.com 32 (SC) and PCIT v Rohtak Chain Co P Ltd [2019]....