TaxTMI 
TaxTMI 
2026 (9) TMI 1959
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....ed AR at the time of hearing. The same is reckoned as a statement made from the bar and accordingly dismissed as not pressed. 4. The Ground Nos. 2 to 2.5 raised by the assessee are challenging the addition of Rs. 814,40,00,000 made under section 56(2)(viib) of the Act on account of reclassification of Compulsorily Convertible Preference Shares (CCPS in short) issued in earlier years from borrowings to securities premium account. 5. We have heard the rival submissions and perused the materials available on record. The assessee is engaged in the business of manufacturing as well as trading of health / sports supplements, vitamins and beauty and health care products. The return of income for the assessment year 2023-24 was filed by the assessee company on 28-12-2023 declaring loss of Rs. 62,44,13,810. The assessee during the financial years 2011-12 to 2019-20 raised share capital inclusive of share premium from various investors predominantly non-residents by way of issuance of equity shares and Series A to Series G of Compulsorily Convertible Preference Shares (CCPS). The said CCPS were issued during financial years 2011-12, 2013-14, 2014-15, 2015-16, 2016-17, 2017-18, 2018-19 ....
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....ial years 2011-12 to 2019-20 (Series A to Series G) contained a 'buyback obligation' on the assessee, the issuance of CCPS was required to be classified as a 'financial liability'. Consequently, the assessee in accordance with Ind-AS 32, reclassified the share capital inclusive of share premium which were earlier accounted under IGAAP as share capital and securities premium respectively as 'financial liability' reflected at fair value i.e. borrowings on 31-3-2020 and 31-3-2021 respectively. The income tax return filed by the assessee for assessment year 2021-22 duly reflected the transitional adjustment of Rs. 444,31,50,000 routed through "other equity" and the said treatment was duly accepted by the revenue. On account of transition to Ind-AS, the assessee was mandatorily required to restate the value of CCPS as on 31-3-2020 and 31-3-2021. Therefore, the opening balance of all CCPS issued in earlier years till 31-3-2020 was restated and the cumulative fair valuation amounting to Rs. 444,31,50,000 was routed through 'Other Equity' in the balance sheet and not through profit and loss account and consequently no adjustment was required to be made in the tax computation. The resultant....
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....reflected in pages 170 to 172 of the paper book. 12. The Learned AO noted that even though the aforesaid amounts were never received by the assessee, still proceeded to invoke the provisions of Section 56(2)(viib) of the Act on account of reclassification of CCPS from 'Borrowings' to 'Securities Premium' account by making an addition of Rs. 814,40,00,000 on the reasoning that the same had been credited based on some valuation adopted which is nothing but a colorable device to avoid payment of taxes. The breakup of the addition made under section 56(2)(viib) of the Act comprise of the following :- a) Transitional adjustment of Rs. 444,31,50,000 being restatement on account of fair valuation of opening balance of all CCPS issued in earlier years till 31-3-2020 which was routed through 'other equity' in the balance sheet as on 31-3-2021 and not through profit and loss account. b) Fair valuation of CCPS of Rs. 18,99,53,885 being the net impact of Ind-AS adjustment on account of fair valuation of borrowings which was routed through the profit loss account for financial year 2020-21 and suo moto disallowed in the tax computation while computing the income for assessm....
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....the amount stood credited to securities premium account and such credit enhanced shareholders funds and accounting treatment adopted by the assessee could not by itself determine the tax consequences. e) The Learned AO held that the assessee failed to satisfactorily establish that the impugned credit did not represent consideration received for issue of shares. The Learned AO observed that the reclassification resulted in credit to securities premium ; the assessee had failed to demonstrate that the amount represented only book adjustment having no tax implication and the accounting treatment adopted by the assessee could not override the charging provisions of the Act. f) The assessee has not produced convincing commercial reasons for such substantial increase in securities premium during the relevant year. g) The accounting treatment materially altered the financial position of the company. h) The Learned AO was therefore justified in examining whether the arrangement has been adopted to avoid incidence of tax. i) The finding regarding colorable device is based upon surrounding circumstances and not merely suspicion. j) The Le....
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.... as just and fair. Such an action cannot be countenanced or appreciated in the eyes of law. The assessee had clearly explained the transaction by taking into account the history of the transaction and the circumstances which prompted the assessee to credit the amount of Rs. 814.40 crores in the securities premium account pursuant to reclassification of value of CCPS from borrowings to securities premium account. These transactions were not properly appreciated and even understood by the lower authorities in the instant case. The suo moto disallowance made by the assessee in various years on account of reclassification as detailed supra, has not been appreciated by the revenue in the instant case, thereby resulting in double addition. There is absolutely no colorable device adopted by the assessee. On the contrary, the assessee had made full and true disclosure in its financial statements on the subject mentioned transaction by giving a detailed note in its audited financial statements and the purpose of amount getting credited to securities premium account. 17. In view of the aforesaid observations and respectfully following the judicial precedent relied upon hereinabove and als....
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....nder Rule 11UA of the Income Tax Rules 1962. The assessee contended that the issue price was lower than the fair market value determined by the merchant banker and therefore the provisions of Section 56(2)(viib) of the Act per se would not be attracted. The Learned AO observed that the valuation report was based upon projected future revenues and profitability of the company and that the projections contained were sought to be compared with the actual financial performance of the assessee which resulted in significant deviations thereon and accordingly, the Learned AO observed that the projected revenues adopted by the valuer were substantially higher than the revenues actually earned by the assessee and that the assumptions adopted in the valuation report were unrealistic and unsupported by the actual financial performance of the assessee company. Accordingly, the Learned AO held that the valuation report could not be accepted for determining the fair market value of the shares. The Learned AO substituted the valuation by adopting the Net Asset Value (NAV) of equity shares and concluded that no premium could be legitimately charged on the issue of shares by the assessee and made a....