IT : Where assessee-company was incorporated on 3-4-2008 and during previous year ending on 31-3-2009 it had collected share premium on allotment of shares of face value of Rs. 10 each at a premium of Rs. 490 per share, premium in question could not be taxed under section 56(1) as assessee's income from other sources
IT : Where Registrar of companies had issued certificate of commencement of business on 29-4-2008 and assessee had furnished details of all expenses incurred during previous year ending on 31-3-2009, it could be said that assessee had commenced its business during assessment year 2009-10 and was eligible for all legitimate expenses including depreciation
IT : Where assessee earned interest income on FDR and disclosed same as business income, since period of holding FDR was very short, interest earned was to be taxed under head business income
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[2013] 38 taxmann.com 253 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'G'
Green Infra Ltd.
v.
Income-tax Officer-1(1)-4*
D. MANMOHAN, VICE-PRESIDENT
AND N.K. BILLAIYA, ACCOUNTANT MEMBER
AND N.K. BILLAIYA, ACCOUNTANT MEMBER
IT APPEAL NO. 7762 (MUM.) OF 2012
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
AUGUST 23, 2013
I. Section 56, read with section 68, of the Income-tax Act, 1961 - Income from other sources - Chargeable as [Share premium] - Assessment year 2009-10 - Assessee-company was incorporated on 3-4-2008 - During previous year ending on 31-3-2009, it had collected share premium on allotment of shares of face value of Rs. 10 each at a premium of Rs. 490 per share - It had credited said amount in balance-sheet under head share premium account - It claimed that share premium was a capital receipt not exigible to tax - Assessing Officer had taxed share premium under section 56(1) as assessee's income from other sources - Whether since expenditure and receipts directly relating to share capital of a company are of capital in nature, share premium collected by assessee could not be taxed under section 56(1) as income from other sources - Held, yes - Whether since entire transaction relating to allotment of shares had been done through banking channel and assessee had invested share premium in its three subsidiary companies, provisions of section 68 as suggested by revenue had also not applicable to instant case - Held, yes [Paras 10.3, 11.28 & 12] [In favour of assessee]
II. Section 37(1), read with section 32, of the Income-tax Act, 1961 - Business expenditure - Allowability of [Commencement of business] - Assessment year 2009-10 - Assessing Officer had disallowed expenses claimed by assessee and also depreciation on ground that assessee had not commenced its business during assessment year under consideration and, therefore, expenses were of capital in nature - Registrar of companies had issued certificate of commencement of business on 29-4-2008 - Details of all expenses incurred during previous year had been furnished by assessee before Assessing Officer - Such expenses were incurred for setting up of subsidiary companies - One of subsidiary companies had started generating electricity within three months from end of financial year, i.e., by June, 2009 - Whether in peculiar facts of case it could be said that assessee had commenced its business during assessment year under consideration and was eligible for all legitimate expenses including depreciation - Held, yes [Para 17.1] [In favour of assessee]
III. Section 28(i), read with section 56, of the Income-tax Act, 1961 - Business income - Chargeable as [Interest] - Assessment year 2009-10 - In return of income filed for assessment year 2009-10, assessee had shown interest income earned on FDR as business income - Assessing Officer treated said income as income from other sources on plea that assessee had not commenced its business, nor its business was that of money lending and, as such, it had kept unused funds in FDR and earned interest income - Period of holding FDR on which assessee earned interest was very short - Whether in light of holding period, interest earned was to be taxed under head business income - Held, yes [Para 22] [In favour of assessee]
Circulars and Notifications : CBDT Notification dated 29-11-2012
FACTS-I
| ■ | The assessee-company was incorporated on 3-4-2008. During the previous year ending on 31-3-2009, it had collected the share premium on allotment of shares of face value of Rs. 10 each at a premium of Rs. 490 per share. It had credited the said amount in the balance-sheet under the head share premium account. It claimed that the share premium was a capital receipt not exigible to tax. | |
| ■ | The Assessing Officer sought details and information under section 133(6) from the subscribers to the share capital and share premium account. He further considered the entire documents and held that the premium received by the assessee was unscientific and unjustified and the same was collected without following the conditions specified under the Companies Act, 1956. He further held that the alleged share premium was not utilized for the purposes and objects and it had been invested in the shares of subsidiary companies, etc. He also held that the investment made by IDFC PE Fund-II in the assessee-company was in violation of provisions of SEBI (Mutual Fund) Regulations Act, 1993 and 1996. Therefore, the assessee had entered into a sham transaction. He, therefore, taxed the share premium under section 56(1) as the assessee's income from other sources. | |
| ■ | On appeal, the Commissioner (Appeals) upheld the action of the Assessing Officer. | |
| ■ | On second appeal: |
HELD
| ■ | The entire dispute revolves around the charging of share premium of Rs. 490 per share on a book value of Rs. 10 each. This dispute is more so because of the fact that the assessee-company was incorporated during the year under consideration. Therefore, according to the revenue, it is beyond any logical reasoning that a company with zero balance-sheet could garner Rs. 490 per share premium from its subscribers. Such transaction may raise eyebrows but considering the subscribers to the assessee-company, the test for the genuineness of the transaction goes into oblivion. It is an undisputed fact that 10 lakhs equity shares has been subscribed and allotted to IDFC PE Fund-II, which company is a Front Manager of IDFC Ltd., in which company Government of India is holding 18 per cent of shares. The contributors to the IDFC PE Fund-II are LIC, Union Bank of India, Oriental Bank of Commerce, Indian Overseas Bank and Canara Bank, which are all public sector undertakings. Therefore, to raise eyebrows to a transaction where there is so much of involvement of the Government directly or indirectly does not make any sense. [Para 10] | |
| ■ | No doubt a non est company or a zero balance company asking for a share premium of Rs. 490 per share defies all commercial prudence, but at the same time one cannot ignore the fact that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a heavy premium. The revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land. Details of subscribers were before the revenue authorities. The Assessing Officer has also confirmed the transaction from the subscribers by issuing notice under section 133(6). The Board of Directors contain persons, who are associated with IDFC group of companies. Therefore, their integrity and credibility cannot be doubted. The entire grievance of the revenue revolves around the charging of such of huge premium so much so that the revenue authorities did not even blink their eyes in invoking provisions of section 56(1). [Para 10.1] | |
| ■ | A simple reading of section 56(1) shows that income of every kind which is not to be excluded from the total income shall be chargeable to income-tax. The emphasis is on that income of every kind. Therefore, to tax any amount under this section, it must have some character of income. It is a settled proposition of law that capital receipts, unless specifically taxed under any provisions of the Act, are excluded from income. It is also well settled that share premium realized from the issue of shares is of capital in nature and forms part of the share capital of the company and, therefore, cannot be taxed as a revenue receipt. It is also a settled proposition of law that any expenditure incurred for the expansion of the capital base of a company is to be treated as a capital expenditure. Thus the expenditure and the receipts directly relating to the share capital of a company are of capital in nature and, therefore, cannot be taxed under section 56(1). The assessee succeeds and revenue fails on this account. [Para 10.3] | |
| ■ | The revenue has raised an altogether new plea by stating that the nature of the transaction should also be judged within the parameters of section 68. As per section 68 the initial onus is upon the assessee to establish identity, genuineness of the transaction and the capacity of the lender or the depositor. The subscribers to the share capital are all companies. The confirmations of the transactions have been received by the Assessing Officer by issuing notice under section 133(6). Therefore, identity has been established beyond all reasonable doubts, nor the revenue authorities have questioned the identity of the shareholders. The genuineness of the transaction can also be safely concluded, since the entire transaction has been done through the banking channels duly recorded in the books of account of the assessee and duly reflected in the financial statement of the assessee. In the bank statement furnished by the assessee, the transactions relating to the allotment of shares are duly reflected. In the instant case, the capacity of the shareholders cannot be doubted, as 98 per cent of the shares are held by IDFC PE. Equity Fund-II, which is a front manager of IDFC Ltd., and the contributors in IDFC PE Fund -II are LIC, Union Bank of India, Oriental Bank, of Commerce, Indian Overseas Bank and Canara Bank, which are public sector undertakings. [Paras 11 and 11.1] | |
| ■ | Now the only point of dispute is the nature of transaction, which according to the revenue authorities is beyond any logical sense and which is the charging of share premium at the rate of Rs. 490 per share. According to the revenue authorities this is a sham transaction. The assessee-company has invested funds in its three subsidiary companies, wherein it is holding 99.88 per cent of share capital, which means that the funds have not been diverted to an outsider. This clears the doubt about the application of funds and the credibility of the company in whom the funds have been invested. Since the assessee itself is holding 99.88 per cent of shares and in turn the assessee-company's 98 per cent of shares are held by IDFC PE Fund-II, this entire share holding structure cannot be said to generate any transaction which could be said to be sham. [Para 11.2] | |
| ■ | For the reasons discussed hereinabove, the provisions of section 68 have also not applicable to the instant case. Therefore, the addition made to the income of the assessee was liable to be deleted. [Para 12] |
CASE REVIEW-I
Punjab State Industrial Development Corpn. Ltd. v. CIT [1997] 225 ITR 792/93 Taxman 5 (SC) (para 10.3) and Brooke Bond India v. CIT[1983] 140 ITR 272/[1982] 10 Taxman 18 (Cal.) (para 10.3) followed.
CASE REVIEW-III
CIT v. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 (Bom.) (para 22) followed.
CASES REFERRED TO
McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11 (SC) (para 5.5), CIT v. Ramdeo Samadhi [1986] 160 ITR 179/29 Taxman 360 (Raj) (para 5.5), CIT v. Smt. Shanti Meattle [1973] 90 ITR 385 (All) (para 5.5), CIT v. K. Thangamani [2009] 309 ITR 15/177 Taxman 499 (Mad.) (para 5.5), CIT v. Mogul Line Ltd. [1962] 46 ITR 590 (Bom.) (para 5.5), CIT v. Allahabad Bank Ltd. [1969] 73 ITR 745 (SC) (para 8.3),CIT v. Standard Vacuum Oil Co. [1966] 59 ITR 685 (SC) (para 8.4), Addl. CIT v. Om Oils & Oil Seeds Exchange Ltd. [1985] 152 ITR 552/[1984] 18 Taxman 337 (Delhi) (para 8.4), CIT v. Krishnaram Baldeo Bank (P.) Ltd. [1983] 144 ITR 600/[1980] 4 Taxman 187 (MP) (para 8.4), CIT v. Durga Prasad More [1971] 82 ITR 540 (SC) (para 9.1), Sumati Dayal v. CIT [1995] 214 ITR 801/80 Taxman 89 (SC) (para 9.1),Sreelekha Banerjee v. CIT [1963] 49 ITR 112 (SC) (para 9.1), Punjab State Industrial Development Corpn. Ltd. v. CIT [1997] 225 ITR 792/93 Taxman 5 (SC) (para 10.3), Brooke Bond India Ltd. v. CIT [1983] 140 ITR 272/[1982] 10 Taxman 18 (Cal.) (para 10.3), Kapurchand Shrimal v.CIT [1981] 131 ITR 451/7 Taxman 6 (SC) (para 11), CIT v. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 (Bom.) (para 22), CIT v. Lok Holdings[2009] 308 ITR 356/[2010] 189 Taxman 452 (Bom.) (para 22) and CIT v. Paramount Premises (P.) Ltd. [1991] 190 ITR 259 (Bom.) (para 22).
Porus Kaka for the Appellant. Ms. Abha Kala Chanda for the Respondent.
ORDER
N.K. Billaiya, Accountant Member - With this appeal the assessee has challenged the correctness of the order of the Ld. CIT(A)-1, Mumbai dt. 19.11.2012 pertaining to A.Y. 2009-2010.
2. The assessee has raised 7 substantive grounds of appeal. Ground No. 1 is general in nature and covers the entire addition sustained by the Ld. CIT(A).
3. The specific grounds are ground No. 2&3 which relate to the treatment of share premium of Rs. 47,97,10,000/- on the issue of equity shares to the shareholders , as the income of the assessee. The assessee is further aggrieved by the action of the Revenue authorities for treating the transaction between the assessee and the investors as sham on the ground that it lacks commercial substance.
4. During the course of the scrutiny assessment proceedings on scrutinizing the balance sheet of the assessee as on 31.3.2009, the Assessing Officer observed that an amount of Rs. 47,97,10,000/- is found credited under the head share premium account. The AO further observed that the assessee was incorporated on 3.4.2008 and has collected the share premium of Rs. 47,97,10,000/- on allotment of shares of face value of Rs. 10/- each at a premium of Rs. 490/- per share. The assessee was asked to furnish complete details and explanations vide letter dt. 17.11.2011, which was duly served on the assessee on 21.11.2011. The questionnaire issued by the AO is as under:
"Show-cause notice dated 17.11.2011:
You are hereby required to furnish in writing and verified in prescribed manner, the information and explanations called for on the points and/or matters specified below.
In case of increase in share capital and receipt of share/securities premium please furnish following details:
| a. | Justification for premium charged on the shares issued with specific reference to the basis of valuation and method applied with supporting documentary evidences. | |
| b. | Copies of the Minutes recorded of the board meeting held for increasing of the share capital and determination and charging of the premium with names and addresses of all the directors and share holders of your company who attended the board meeting, | |
| c. | Documentary and supporting evidences with detailed note on the factors considered for allotting shares at a premium. | |
| d. | Copies of the share application form submitted, or offer letters received if any, | |
| e. | Copies of the share certificates/counterfoils with certificate numbers and distinctive numbers of such shares. | |
| f. | Name and address of the share registrar of your company. | |
| g. | Proof of stamp duty or share issue expenses incurred | |
| h. | Please state whether any of the directors or their relatives are in any way related to the directors of the company to whom shares were allotted. If so please specify such relationship. | |
| i. | Furnish copy of Transaction Overview, Proposed Business Plan, Financial overview prepared or submitted for Fund Raising through Equity route and presented to potential investors in the your company. Also furnish actual achievements in those areas as at 31.03.2009, 31.03.2010 & 31.03.2011 along with your Balance Sheet, Profit and Loss Account etc., if any. |
2. It is observed from the ledger of the share capital and share premium received, you have charged premium at Rs.490/- per share. Please reconcile the gross amount of share premium received with the amounts shown in your Balance Sheet.
3. In case if you fail to prove the genuineness, purpose and justification for charging the premium in excess of any justifiable amounts should not be treated as your income u/s.56(1) and taxed under the head income from Other Sources.
The assessee has, been asked to furnish details and explanations on or before 24.11.2011."
5. The assessee filed a detailed reply vide letter dt. 5.12.2011 and explained the basis and justification for premium charged on the shares issued. It was further explained that the issuance of shares at premium was a commercial decision which does not require any justification under any law for the time being in force. It was further explained that the subscribers to the Memorandum of Association have subscribed to 50,000 equity shares of Rs. 10/- each amounting to Rs. 5,00,000/-. These shares were allotted at par and all the remaining shares were allotted at a premium. The Companies Act, 1956 does not specify the price at which shares are to be issued. It does not limit the premium at which shares are to be issued. It was contended that the premium is a capital receipt which has to be dealt with in accordance with Sec. 78 of the Companies Act, 1956 and other related provisions. To substantiate, the assessee filed the internal valuation report which was obtained prior to the issuance of equity shares on premium. The assessee also filed all the necessary documents relating to the determination and charging of premium with names and addresses of all the Directors and share holders of the assessee company and also enclosed the copy of Minutes of the Board Meeting held on April 14, 2008 to approve the issue of share capital and to approve the issue of equity shares at a premium.
5.1 On the point raised by the AO as to why such receipts received in excess of any justifiable amounts should not be treated as income u/s. 56(1) and taxed under the head Income from Other Sources , the assessee strongly contended that the company is not required to prove the genuineness, purpose or justification for charging a premium on shares. Even otherwise the share premium received by the company cannot be taxed u/s. 56(1) of the Act. It was explained that the share premium by its very nature is a capital receipt and is not income in its ordinary sense.
5.2 During the course of the assessment proceedings, the AO sought details and information u/s. 133(6) of the Act from the subscribers to the share capital and share premium account. The necessary details and explanations were received and were duly placed on record. After considering the entire submissions and the documents filed by the assessee in response to the specific queries raised by the AO, the AO was of the firm belief that the premium charged on allotment of shares is not justified. The AO was of the opinion that these funds were introduced by the assessee through share holders under the guise of the premium. The AO questioned the authenticity of the report dt. 14.4.2008. The AO was of the firm belief that there is no indication or evidence as to how the estimates or projections are made in arriving at the projected figures for profits before the tax, Terminal value and Equity value of the shares, EBIDTA. According to the AO, these values adopted are nowhere near to the actuals and achievements as on date. As such there is no rationale behind the figures adopted in this valuation other than the reasons best known to the assessee. The AO further observed that the company had a paid up share capital of Rs. 5,00,000/- on the date of incorporation. The certificate of registration issued by the Registrar of Companies on 29.4.2008 and the business plan valuation and justification for issue of shares at a premium was prepared and submitted to the subscribers on 14.4.2008. There are no reserves and surplus as on these dates available with the company. The Book value per share of the company is at Rs. 10/- per share could not justify charging of any premium on shares.
5.3 The AO further observed that the assessee does not have any hidden assets in the form of patents, copy rights, intellectual property rights or even investments etc belonging to the company based on which the assessee would be likely to substantially enhance its profits, which may have a bearing on the premium to be charged on allotment of the fresh shares. Thereafter , the AO went on to discuss the methods which are commonly used for valuation of shares. The AO was of the firm belief that the assessee has avoided to reply to specific query with regard to basis of valuation of shares and determination of premium thereon. The assessee has only placed reliance on unauthenticated power sector report and adopted the Discounted Cash Flow method in valuation which in itself is unrealistic and purely based on vague projections without any supporting evidence. The AO continued stating that the assessee is a new company and yet to commence its business operations, therefore no weightage can be ascribed to its past record. To test the credibility of the valuation, the AO went on to verify the future results of the assessee company with reference to the return of income filed for A.Y. 2009-10, 2010-11 & 2011-12. The comparative figures are as under:
| A.Y | Total turnover achieved | Net Profit shown | EPS |
| 2009-10 | 7806814 | (-)17427088 | (45.85) |
| 2010-11 | 22827505 | (-)29765661 | (9.22) |
| 2011-12 | 92058801 | (-)13993736 | (0.25) |
5.4 Taking a leaf out of the aforementioned figures the AO was of the opinion that the premium charged by the assessee is unscientific and unjustified. Considering all these defects/lacunas, the AO went on to disregard the justification of share premium amounting to Rs. 490/- per share. The AO further observed that the alleged share premium collected is not utilized for the purpose and objectives and the same was collected without following the conditions specified under the Companies Act, 1956. The AO noticed that out of the total receipts of Rs. 47,97,10,000/-an amount of Rs. 45,36,95,212/- has been invested in the units of IDFC Mutual Fund and the balance amounts were utilized for investments in shares of subsidiary companies, bank FDR's, advances to subsidiaries etc. The AO further questioned the investments made by IDFC Trustee Co. Ltd. i.e. IDFC Infrastructure Fund-2, IDFC Private Equity Fund-II which according to the AO are in violation of provisions of SEBI (Mutual Fund) Regulations Act, 1993 and 1996, questioning the validity of charging of share premium and making a firm belief that the assessee has entered into a sham transaction.
5.5 The AO further discussed the observations of various higher judicial forums regarding colorable devices used for the purpose of tax evasion and in particular the decision of the Hon'ble Supreme Court in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxmann 11. Invoking the provisions of Sec. 56(1) of the Act, the AO was of the firm belief that the alleged share premium so received is taxable under the head Income from Other sources. For this proposition, the AO relied upon the decision of Rajasthan High Court in the case of CIT v. Ramdeo Samadhi [1986] 160 ITR 179/29 Taxman 360. Allahabad High Court in the case of CIT v. Smt. Shanti Meattle [1973] 90 ITR 385 and Madras High Court in the case of CIT v.K. Thangamani [2009] 309 ITR 15/177 Taxman 499 and finally concluded that the matter of taxability cannot be decided on the basis of the entries which the assessee may choose to make in its account but has to be decided in accordance with the provisions of law relying upon the decision of the Bombay High Court in the case of CIT v. Mogul Line Ltd. [1962] 46 ITR 590.
6. Aggrieved by this addition made by the AO, the assessee strongly agitated the matter before the Ld. CIT(A) but without any success.
6.1 Before the Ld. CIT(A), the assessee strongly contended that share premium of Rs. 47,97,10,000/- cannot be taxed u/s. 56 of the Act as it is a capital receipt. It was explained that the AO has proceeded under a wrong notion that IDFC Infrastructure Fund-2 is a Mutual Fund registered with SEBI whereas the correct fact is that IDFC Infrastructure Fund-2 is a venture capital fund. After considering all the facts and submissions and the remand report of the AO, the Ld. CIT(A) came to the conclusion that the assessee has failed to substantiate the genuineness of share premium and Sec,. 56(1) is wide enough to cover all the cases of residuary nature not falling u/s. 4 & 5 of the Act. The Ld. CIT(A) was also not convinced with the fact that the premium is received at the stage of initial offer itself and cannot be accepted as genuine. Further, the assessee has failed to utilize the share premium received as per the provisions of Sec. 78 of the Companies Act. The Ld. CIT(A) also showed his discontentment regarding valuation of share premium. Ld. CIT(A) was of the opinion that no complete evidence was filed by the assessee so far as growth and profitability was concerned. The Ld. CIT(A) finally concluded that the genuineness of share premium is not established by the assessee. The purpose and conditions specified u/s. 78 of the Companies Act have been violated by the assessee thereby the nature of the transaction lost the character of capital receipt and was rightly held as 'residuary receipt' and was of the firm belief that the share premium has been rightly brought to tax as income u/s. 56(1) in the light of the clear violation of Sec. 78 of the Companies Act and confirmed the addition of Rs. 47,97,10,000/-.
7. Aggrieved by this finding of the Ld. CIT(A), the assessee is before us.
8. The Ld. Senior Counsel explained the capital structure and the subscribers to the capital of the assessee company. It was explained that M/s. IDFC Ltd was set up in the year 1997 on the recommendation of a committee set up by government to analyse the need for financial intermediaries for infrastructure. IDFC Alternatives Ltd. is a wholly-owned subsidiary of IDFC Ltd., and is engaged in the business of managing venture capital funds, one of which is IDFC Infrastructure Fund-2 which is a venture capital fund registered with the SEBI. IDFC Private Equity Fund-II is a successor fund of IDFC Infrastructure Fund which is also a SEBI registered venture capital fund. The Ld. Counsel for the assessee stated that IDFC Infrastructure Fund was proposed by the Honourable Finance Minister in his budget speech for the year 2002-03. IDFC Private Equity Fund-II is holding 98% shares in the assessee company.
8.1 The Ld. Senior Counsel further drew our attention to the Board of Directors of Assessee Company and stated that almost all the Directors are related with IDFC group. Drawing our attention to the chart which is exhibited at page-7 of the assessment order, the Ld. Counsel for the assessee pointed out that the initial subscription on Memorandum of Association came from IDFC Private Equity Fund-II by which it was allotted 50,000 Equity shares at face value of Rs. 10/- each which became part of equity shares capital at Rs.5,00,000/-. Thereafter on two occasions, subsequent capital infusion were made , on 31.8.2008 IDFC PE Fund-II were allotted 79,000 equity shares of face value of Rs. 10/- at a premium of Rs. 490/- per share totaling to Rs. 3.95 crores and on the same date Emergent Venture Pvt. Ltd., were allotted 10,000 equity shares of face value of Rs. 10/- at a premium of Rs. 490/- per share totaling to Rs. 50 lakhs. Further, capital infusion was made on 20.12.2008 when IDFC PE Fund-II was allotted 8,90,000 equity shares of face value of Rs. 10/- each at a premium of Rs. 490/- per share totalling to Rs. 44.50 crores. Thus the total share premium received by way of these allotments was at Rs. 47,97,10,000/-.
8.2 It is the say of the Ld. Senior Counsel that the valuation of share premium is not without any basis. Drawing our attention to page-31 of the Paper Book, the Ld. Counsel pointed out that the Board of Directors have received an internal report on valuation of shares of the assessee company. The Ld. Counsel further explained that the valuation has been done on discounted Cash Flow method. Drawing out attention to the Notification issued by the CBDT on 29.11.2012 at pages 353 to 356 of the Paper Book, the Ld. Counsel submitted that the CBDT has approved vide this notification that the Fair Market value of the unquoted equity shares determined by a merchant banker or an accountant can be as per the Discounted Free Cash Flow method. The Ld. Counsel further submitted that the allegations of the Revenue authorities that the valuation of the share premium is absurd and without any basis are incorrect.
8.3 It is the say of the Ld. Counsel that the share premium is to be decided by the Board of Directors and there is no prohibition under the Companies Act so far as the amount of premium is concerned. The Ld. Counsel further stated that the action of the Revenue authorities to tax the share premium u/s. 56(1) of the Act is against the law as it has been held by the Hon'ble Supreme Court in the case of CIT v. Allahabad Bank Ltd. [1969] 73 ITR 745 that the share premium received on the issue of shares has to be included in the paid up capital irrespective of whether the share premium has been maintained in a separate account apart from the reserve. Drawing support from this decision of the Hon'ble Supreme Court, the Ld. Senior Counsel submitted that being a capital receipt, the same cannot be taxed as a revenue receipt u/s. 56(1) of the Act.
8.4 The Ld. Counsel further drew support from the decision of the Hon'ble Supreme Court in the case of CIT v. Standard Vacuum Oil Co. [1966] 59 ITR 685 wherein it has been held that premium realized from the issue of its shares represents reserves not allowed in computing the profits of the company for the purpose of Indian Income Tax Act, 1922. To further substantiate its claim, the Ld. Counsel relied upon the decision of Delhi High Court in the case of Addl. CIT v. Om Oils & Oil Seeds Exchange Ltd. [1985] 152 ITR 552/[1984] 18 Taxman 337 and CIT v. Krishnaram Baldeo Bank (P) Ltd. [1983] 144 ITR 600/[1980] 4 Taxman 187 (MP). The Ld. Senior Counsel further drew our attention back to share holding pattern of the assessee company and submitted that the share holders are under direct control of the Government of India as Govt. of India is holding around 18% of shares in IDFC Ltd., and the main contributors to the IDFC PE Fund-2 are LIC, Union bank of India, Oriental Bank of Commerce, Indian Overseas Bank and Canara Bank. Therefore, it cannot be, by any stretch of imagination ,said that the transactions are bogus and have been done with some ulterior motive . Rebutting the allegation that the share premium amount has not been utilized for the purpose for which it has been received , the Ld. Counsel for the assessee stated that this is incorrect and false allegation by the Revenue authorities as the assessee company has set up three subsidiaries and has invested funds in these three subsidiaries which have been floated as "Special purpose Vehicle" to set up balance for generating Wind energy.
8.5 To further strengthen his submission, the Ld. Counsel drew our attention to the certificate issued by the Tamilnadu Electricity Board exhibited at pages 386 to 401 of the paper Book. The Ld. Counsel pointed out that within three months from the end of the financial year i.e. by June (22.6.2009) one of the subsidiary of the assessee company M/s. Green Infra Wind Farms Ltd. has started generating electricity as is evidenced from the certificates issued by the Tamilnadu Electricity Board at different villages of the State. The ld. Senior Counsel strongly concluded that the share premium received by the assessee company is a genuine transaction, the share holder company and the holding company are held by the Government of India, therefore it cannot be said that the transaction is sham. The AO has wrongly concluded that IDFC is a mutual fund company whereas the same is a venture capital fund registered with SEBI as per the certificate exhibited at page-48 of the paper book ,which clearly certifies that the IDFC Infrastructure Fund-II is a venture capital fund. The Ld. Counsel for the assessee pleaded that the additions made on account of share premium receipt treating it as a revenue receipt is erroneous and bad in law and deserves to be deleted.
9. The Ld. Departmental Representative also filed a written submission to support the findings of the Revenue authorities. In the written submission, the Ld. DR questioned the valuation of share premium stating that the pre-requisite of the transaction for issue of bonus or premium share is substantial increase in the worth of the company from the point of departure. It is mainly the profitability, credibility, goodwill of the concern which creates the opportunity and requirement of premium and all this is lacking in the case of the assessee. The ld. DR has further stated that the alleged premium attached to the shares has not been received from the open market. It is an admitted position that it is a limited group transaction and is not entered with open and general subscribers who could pay the premium. It is the say of the Ld. DR that the shares had no capability and no intrinsic value to give price to premium in the industrial , normal and actual worth of the company. The Ld. DR further stated that receipts of premium on the shares , when the accretion of profitability, goodwill and other such element incorporated in formulas of valuation for reference are absent , is actually at best a receipt in the nature of windfall because the other part of the transaction normally the worth of the company is totally non-existent. There is no corresponding accretion to the assets/worth of the company which could justify the alleged premium received on the shares. The Ld. DR strongly submitted that there is no material basis/ingredients which could justify such transaction in substance and also in law.
9.1 Drawing support from the decision of the Hon'ble Supreme Court in the case of CIT v. Durga Prasad More [1971] 82 ITR 540, the Ld. DR stated that when the Revenue has reasons to believe that the apparent is not real then the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probability. The Ld. DR also drew support from the decision of the Hon'ble Supreme Court in the case of Sumati Dayal v. CIT [1995] 214 ITR 801/80 Taxman 89. The Ld. DR further drew support from the decision in the case of Sreelekha Banerjee v. CIT [1963] 49 ITR 112 wherein the Hon'ble Supreme Court has held that if explanation is unconvincing and one which deserves to be rejected, the department can reject and draw the inference that the amount represents income either from the source already disclosed by the assessee or from some undisclosed source. The Ld. DR went on to raise an altogether new plea that since the nature of transaction has been questioned by the Revenue authorities, the same should be taxed u/s. 68 of the Act and finally concluded that there is no error committed by the lower authorities and the order of the Ld. CIT(A) deserves to be confirmed.
10. We have considered the rival submissions and carefully perused the orders of the lower authorities and the material evidences brought on record in the form of Paper book. The entire dispute revolves around the charging of share premium of Rs. 490/- per share on a book value of Rs. 10/- each. This dispute is more so because of the fact that the assessee company was incorporated during the year under consideration. Therefore, according to the revenue authorities, it is beyond any logical reasoning that a company with zero balance sheet could garner Rs. 490/-per share premium from its subscribers. Such transaction may raise eyebrows but considering the subscribers to the assessee company, the test for the genuineness of the transaction goes into oblivion. It is an undisputed fact admitted by the Revenue authorities that 10,19,000 equity shares has been subscribed and allotted to IDFC PE Fund-II which company is a Front Manager of IDFC Ltd., in which company Government of India is holding 18% of shares. The contributors to the IDFC PE Fund-II who is a subscriber to the assessee's share capital, are LIC, Union of India, Oriental Bank of Commerce, Indian Overseas Bank and Canara Bank which are all public sector undertakings. Therefore, to raise eyebrows to a transaction where there is so much of involvement of the Government directly or indirectly does not make any sense.
10.1 No doubt a non-est company or a zero balance company asking for a share premium of Rs. 490/- per share defies all commercial prudence but at the same time we cannot ignore the fact that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the share holders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land. Details of subscribers were before the Revenue authorities. The AO has also confirmed the transaction from the subscribers by issuing notice u/s. 133(6) of the Act. The Board of Directors contains persons who are associated with IDFC group of companies, therefore their integrity and credibility cannot be doubted. The entire grievance of the Revenue revolves around the charging of such of huge premium so much so that the Revenue authorities did not even blink their eyes in invoking provisions of Sec. 56(1) of the Act.
10.2 Let us consider the provisions of Sec. 56(1) of the Act:
'56. Income from other Sources.— (1) 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", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.'
10.3 A simple reading of this section show that income of every kind which is not to be excluded from the total income shall be chargeable to income tax. The emphasis is on that ' income of every kind', therefore, to tax any amount under this section, it must have some character of "income". It is a settled proposition of law that capital receipts , unless specifically taxed under any provisions of the Act , are excluded from income. The Hon'ble Supreme Court has laid down the ratio that share premium realized from the issue of shares is of capital in nature and forms part of the share capital of the company and therefore cannot be taxed as a Revenue receipt. It is also a settled proposition of law that any expenditure incurred for the expansion of the capital base of a company is to be treated as a capital expenditure as has been held by the Hon'ble Supreme Court in the case of Punjab State Industrial Development Corpn. Ltd. v. CIT [1997] 225 ITR 792/93 Taxman 5 and in the case of Brooke Bond India Ltd. v. CIT [1983] 140 ITR 272/[1982] 10 Taxman 18 (Cal.). Thus the expenditure and the receipts directly relating to the share capital of a company are of capital in nature and therefore cannot be taxed u/s. 56(1) of the Act. The assessee succeeds and Revenue fails on this account.
11. The Ld. Departmental Representative has raised an altogether plea by stating that the nature of the transaction should also be judged within the parameters of the Sec. 68 of the Act. The counsel for the assessee strongly objected to this but in the interest of justice and fair play, we allowed the DR to raise this issue. For this, we draw support from the decision of the Hon'ble Supreme Court in the case of Kapurchand Shrimal v. CIT [1981] 131 ITR 451/7 Taxman 6, wherein the Hon'ble Supreme Court has laid down the ratio that
"It is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statute."
11.1 Considering the submissions of the Ld. DR in the light of the above ratio, let us test the transaction in the light of the provisions of Sec. 68 of the Act. As per Section 68 - the initial onus is upon the assessee to establish identity, genuineness of the transaction and the capacity of the lender or the depositor. The subscribers to the share capital are all companies. The confirmations of the transactions have been received by the AO by issuing notice u/s. 133(6) of the Act, therefore, identity has been established beyond all reasonable doubts nor the Revenue authorities have questioned the identity of the share holders. The genuineness of the transaction can also be safely concluded since the entire transaction has been done through the banking channels duly recorded in the books of accounts of the assessee duly reflected in the financial statement of the assessee. The bank statement is exhibited at pages 101 and 102 of the Paper book in which the transaction relating to the allotment of shares are duly reflected . In the instant case, the capacity of the share holders cannot be doubted as has been pointed out elsewhere in our order that 98% of the share is held by IDFC Private Equity Fund-II which is a front manager of IDFC Ltd., and the contributors in IDFC Private Equity Fund-II are LIC, Union of India, Oriental Bank of Commerce, Indian Overseas Bank and Canara Bank which are public sector undertakings.
11.2 Now the only point of dispute is the nature of transaction which according to the Revenue authorities is beyond any logical sense and which is the charging of share premium at the rate of Rs. 490/- per share. According to the Revenue authorities this is a sham transaction . So far till now, we have seen and examined the sources of funds. Let us see the application of funds and who are the ultimate beneficiaries of this share premium which may clear the clouds over the transaction alleged to be a sham. We find that the assessee company has invested funds in its three subsidiary companies namely (i) Green Infra Corporate Wind Ltd. (ii) Green Infra Wind Assets Ltd and (iii) Green Infra Wind Farms Ltd., wherein the assessee is holding 99.88% of share capital which means that the funds have not been diverted to an outsider. This clears the doubt about the application of funds and the credibility of the company in whom the funds have been invested. Since the assessee itself is holding 99.88% of shares and in turn the assessee company's 98% of shares are held by IDFC PE Fund-II, this entire share holding structure cannot be said to generate any transaction which could be said to be sham.
12. We have considered the grievance of the Revenue from all possible angles and by applying the provisions of Sec. 56 of the Act and at our stage we have gone to the extent of testing the transaction within the parameters of Section 68 of the Act. We could not find a single evidence which could lead to the entire transaction as sham. Our view is also fortified by the share holding pattern as explained to us and as substantiated by the material evidence on record. We find that the share holders in all the related transaction under issue are directly or indirectly related to the Government of India. Therefore, considering the entire issue in the light of the material evidence brought on record, in our considerate view, the Revenue authorities have erred in treating the share premium as income of the assessee u/s. 56(1) of the Act. In our considerate view, for the reasons discussed hereinabove, we do not find it necessary to apply the provisions of Sec. 68 of the Act. We, therefore, direct the AO to delete the addition of Rs. 47,97,10,000/-. Ground No. 2 & 3 are accordingly allowed.
13. Ground No. 4 & 5 relate to the grievance of the assessee relating to the rejection of the plea of the assessee that it has commenced business and therefore disallowance of expenses of Rs. 2,51,94,611/- and depreciation of Rs. 1,58,640/- is unwarranted.
13.1 The AO has disallowed the expenses claimed by the assessee and also the depreciation on the ground that the assessee has not commenced its business and therefore the expenses are of capital in nature.
14. The Ld. CIT(A) confirmed the view taken by the AO holding that since the business has not commenced and the asset in question has not come into existence and also not put to use, the AO has rightly held that any expenses towards such acquisition are capital expense and not allowable u/s. 37(1) of the Act. The Ld. CIT(A) further observed that this is only a consequential disallowance since the assessee has not commenced any business activity and the said expenses are not incurred for the purpose business.
15. The Ld. Counsel for the assessee strongly objected to this action of the Revenue authorities and stated that as per the certificate of commencement of business exhibited at page-270 of the Paper book, the assessee has commenced business on 29.4.2008. The Ld. Counsel further drew our attention to the expenses incurred for setting up of the subsidiaries, the details of which are exhibited at pages 338 to 344 of the paper book.
16. Per contra, the Ld. Departmental Representative supported the findings of the lower authorities.
17. We have carefully gone through the orders of the lower authorities and the material evidences brought to our notice during the course of the argument. We find that the Registrar of Companies have issued certificate of commencement of business on 29.4.2008 which is not in dispute. We further find that the details of all the expenses have been furnished before the AO which were incurred for setting up of the subsidiary companies. We have also the benefit of going through the Memorandum of Association of the assessee company. A perusal of the main objects of the company shows that one of the main object of the company is that of financing, investing, sourcing, operating, green or clean technology products and services that optimize the use of natural resource or reduce the negative environmental impact of infrastructure projects and/or related assets.
17.1 Considering these main objects of the assessee company, we find that the assessee company has in fact set up three subsidiary private limited companies namely (i) Green Infra Corporate Wind Ltd. (ii) Green Infra Wind Assets Ltd and (iii) Green Infra Wind Farms Ltd. We also find that one of this subsidiary private limited company has stated generating electricity as per the certificates given by the Tamilnadu State Electricity Board which issue has been discussed elsewhere in our record. Considering all these facts in totality, we have no hesitation to hold that the assessee has commenced its business and therefore is eligible for all the legitimate expenses including depreciation. The AO is accordingly directed to allow the expenses so claimed alongwith depreciation. Ground No. 4 & 5 are accordingly allowed.
18. Ground No. 6 relates to the treatment of interest income on fixed deposits with the banks as income under the head "income from other sources. According to the assessee, the same is to be taxed under the head Income from profits and gains of business.
18.1 During the course of the scrutiny assessment proceedings, the AO noticed that the assessee has earned gross interest income on bank fixed deposits amounting to Rs. 6,09,802/- which was shown under the head profits and gains of business. The AO was of the firm belief that since the assessee has not commenced its business nor the business of the assessee is that of money lending, as such, the assessee has kept the unused funds in the Bank FDR and earned interest income and any income earned prior to the commencement of business by parking unused funds in bank FDR's par takes the character of income from other sources.
19. The assessee carried the matter before the Ld. CIT(A) but without any success.
20. Before us, the Ld. Counsel for the assessee strongly objected to the actions of the lower authorities and stated that the assessee has parked funds in fixed deposits for a very short period of time thereafter the money has been used for setting up the subsidiaries. The Ld. Counsel drew our attention to page-357 of the Paper book showing the statement of fixed deposits. It is the say of the Ld. Counsel that considering the period of deposit, the interest earned on such deposit should be taxed under the head business income.
21. Per contra, the Ld. Departmental Representative supported the findings of the lower authorities.
22. We have carefully perused the orders of the lower authorities and the material evidence brought on record and as pointed out by the Ld. Counsel which is exhibited at page-357 of the paper book. We find that fixed deposit of Rs. 3.5 crores was purchased for only one day on which the assessee earned interest of Rs. 38,490/-. The second fixed deposit of Rs. 1.50 crores was purchased on 18.8.2008 and attained maturity on 15.9.2008. Meaning thereby, the period of holding is only 28 days on which the assessee earned interest at Rs. 63,114/-. The third fixed deposit of Rs. 2 crores was purchased on 18.8.2008 and attained maturity on 19.11.2008. Meaning thereby that it was held for 90 days on which the assessee earned interest at Rs. 5,08,197/-. Considering the peculiar facts of the case, in the light of the holding period, in our considerate view, the interest earned is to be taxed under the head business income. For this we Draw support from the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 (Bom.) and CIT v. Lok Holdings [2009] 308 ITR 356/[2010] 189 Taxman 452 (Bom.) and also another decision of the Jurisdictional High Court in the case of CIT v. Paramount Premises (P.) Ltd. [1991] 190 ITR 259 (Bom.) Ground No. 6 is accordingly allowed.
23. Ground No. 7 relates to the levy of interest u/s. 234B and 234D of the Act. The levy of interest is mandatory. In the instant case, it would be consequential, therefore, the AO is directed to levy interest as per the provisions of law.
24. In the result, the appeal filed by the assessee is allowed.
S.K.JRegards
Prarthana Jalan
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