AO cannot assess share premium as income on the ground that it is excessive


IN THE INCOME TAX APPELLATE TRIBUNAL

“F” Bench, Mumbai
Before Shri B.R. Baskaran (AM) & Shri Ravish Sood (JM)
I.T.A. No. 6991/Mum/2016 (Assessment Year 2012-13)

DCIT 1( 3)( 2)

R.No. 540, 5th Floor Aayakar Bhavan M.K. Road

Mumbai- 400 020.

 

Vs.

M/s. Varsity Education Management Pvt. Ltd.

6A/1, Court Chambers New Marine Lines Mumbai-400 020.

 

 

PAN : AADV6100E

(Appellant)

 

(Respondent)

Assessee by

Shri K. Gopal & Ms.

Neha Paranjpe

Department by

Shri S. Padmaja

Date of Hearing

14.8.2018

Date of Pronouncement

24.10.2018

 
O R D E R
Per B.R. Baskaran (AM) :-

The assessee has filed this appeal challenging the order dated  29-09-  2016 passed by Ld CIT(A)-3, Mumbai and it relates to the assessment year 2012-13. The assessee is aggrieved by the decision of Ld CIT(A) in confirming  the addition of Rs.60.24 crores relating to excess share premium made by AO  u/s 68 of the Act. The grounds of appeal urged by the revenue read as under:-
  1. On the facts and in the circumstances of the case and in law, the Id.CIT(A) erred in deleting addition made to total income of Rs. 60,24,03,736/- on account of share premium when  receipts  of premium over and above the DCF valuation report submitted by the assessee was devoid of justification of its nature as required by the provisions of section 68 of the

  2. On the facts and in the circumstances of the case and in law, the Id.CIT(A) erred in deleting the addition made to total income amounting to 60,24,03,734/-

  3. On the facts and in the circumstances of the case and in law, without prejudice to ground No.1and 2 above, the Id.CIT(A) ought to have held that share premium is a revenue receipt taxable under the Act being accretion to assets without corresponding increase in liability and the corresponding reserves generated can be distributed as dividend in the form of bonus/shares".

  1. The facts as narrated by AO are extracted below:-
Facts of the case:- The assessee company was incorporated on 28.12.2010 the name Anumati Properties Private Limited.  The  assessee company was acquired  by  current  Management  on  14.3.2011 and its name was changed to  Varsity  Education  Management Pvt Ltd w.e.f. 27.3.2011. The assessee is engaged in the business of providing services like content development, facilities management, transportation management, text books and uniforms, mess and canteen services of students of K-10 schools (Kinder garden  to Class 10) and Junior Colleges situated in Karnataka and Andhra Pradesh. The assessee company had two subsidiary companies, the details of which are as under:-
  • Junior Varsity Education Management Pvt Ltd (Formerly known as Diamond Dreamz IT Solutions Pvt Ltd) which was incorporated on 7.4.2010. The company is engaged in the business of providing products & services like curricular, co- curricular or extra-curricular activities in relation to technology, education, content, training, consulting, transport facilities, facility management, brand building and  marketing,  provision of assets and other services to various educational institutions across the state of Andhra
  • K-12 Education Management Pvt Ltd: The company was incorporated on 16.9.2009 and engaged in the business of providing services like curriculum development, teacher recruitment, training, facilities management, transportation, accounting and information Technology, marketing testing services , text books, uniforms, mews and canteen etc  to students up to 10th class in the trust schools  situated  in Karnataka & Andhra ”
  1. The assessee company was acquired by current management on 14.3.2011. The share holders of the company as on 31.3.2012 are following persons, who were allotted shares at Par value on 03.2011:-
  • Trilochan Properties Pvt Ltd 29,41,150 shares
(now known as Coeus Education Management Pvt Ltd)
  • Ms Sushama B 29,425 shares
  • Ms Seema B 29425 shares
  1. The AO noticed that a Mauritius based company named M/s NSR PR Mauritius LLC had invested in the assessee company on 21.3.2011 (relevant to AY 2011-12) in 12,01,923 Compulsory Convertible Preference Shares(CCPS) of Rs.10/- each at premium of ` 1030/- per share. During the year under consideration, i.e., in the financial year relevant to  the  AY  2012-13,  the  assessee company has again issued to the very same investor, viz., NSR PE Mauritius LLC 16,82,692 Compulsory Convertible preference shares (CCPS) of Rs 10/- each at a premium of Rs 1030/- per    Thus,  during  the  year  under consideration, the assessee has received share premium of Rs 173.31  crores during the year under consideration and the same was credited to Securities premium account in the Balance Sheet. The AO noticed that the assessee company has allotted the shares to  management  entities/people  at  par on 24.3.2011, whereas, it has allotted the  Compulsory  Convertible Preference shares to NSR PR at a premium at Rs 1,030/-  per  share  on  21.3.2011 & 5.12.2011. The AO noticed  that  the  book  value  of  the  shares  of the company on the above dates was Nil, as evidenced by the Balance Sheet of  the assessee  company.  Hence the AO asked  the assessee  to give justification  for premium received.
  1. The explanations furnished by the assessee are extracted  by the AO in  the assessment order and for the sake of  convenience,  we  also  extract  the  same below:-
M/s NSR PR Mauritius LLC is (known as New silk route growth capital) is a Mauritius based private equity fund registered with the SEBI as a venture capital fund vide registration no ln/FVCI/08-09/119 dated 16.1.2009 (Herein after referred to as 'NSR') The registration details can be viewed on the SEBI website also. The url address is www. sebi. gov. in/investor/forventure. html. During the Previous year relevant to the AY 2012-13, the company has received Foreign Direct Investment (FDI) from NSR PE Mauritius LLC against allotment of 16.82.692/- Compulsory Convertible Preference shares (CCPS) of Rs.10/- each at a premium of Rs 1030/- per share. The share premium of Rs 173,31,72,760/- credited to Securities Premium account. Further we submit that USD 349,99,993 received from NSR PE Mauritius  LLC on 5.12.2011  and  exchange rate  as  on that date is Rs 51.90/USD. The total amount credited  is  Rs  179.16  crores. The balance of Rs 4.16 cr, after allotting CCPS of 16,82,6927- of  Rs  10 each at a premium of Rs 1030/-per share,  has been refunded  to M/s  NSR PE Mauritius LLC. This allotment is done as per the terms and conditions of the investment agreement dt 16.3.2011, particularly as per clause 2.1(i). As  per this  clause, it is  agreed  that the  assessee  is  required  to allot CCPS of ` 10 each at a premium  of  Rs  1030/-.  Therefore,  the  nature of money received from NSR is towards the allotment of CCPS at a premium. The entire procedure has been followed to infuse capital into the assessee company. It is exclusive commercial decision of the investing company. The copy of the agreement with NSR is already available in the department records in the file of AY 2011-12. In support of  the  above,  we  are herewith enclosing Foreign Exchange Inward Remittance certificate (FIRC) from Axis Bank and Bank statement at Page no 1 & 2.  Return in  form FC-GPR filed with Reserve Bank of India, evidencing the proof of amount received towards allotment of CCPS is enclosed.
The assesse has further stated that its submissions for the earlier year may be considered. The same are reproduced below:-
  1. For the purpose of FDI investment into the assessee company the valuation report has been prepared and has been submitted to you for your perusal. The Receipts and Profits projected in the valuation report are purely on estimated basis. However, your honours may note that the actual profits earned by each company mentioned in the valuation report, are equal or more than the projections made in the valuation This can be verified by your Honours from the Profit & Loss a/c file before you for the future subsequent years of the assessee, i.e. Varsity and also Junior Varsity Education Management Pvt i.e (Jr Varsity). Therefore the assessments/projections made in the valuation are more or less near to the real valuation.
The below table demonstrate the comparison:

Name of the Company

Assessment year

Profit as per the valuation report

Profit as per actual profit & loss a/c

Varsity education Management Pvt ltd

2012-13

18,60,00,000

17,96,98,259

-do-

2013-14

34,00,00,000

44,63,07,687

Diamond dreams IT Solutions Pvt ltd(presently known as Jr Varsity Education Management Pvt ltd

2012-13

43,60,00,000

78,05,15,719

-do-

2013-14

46,60,00,000

85,42,58,692

  1. It is to submit that as per the valuation report, the value of Varsity Education Management Pvt ltd i.e. assessee works out to Rs 2,31,36,85,924/- whereas the valuation of junior Varsity Education Management Pvt ltd works out to Rs 2,13,01,85,5247-. Thus the total valuation of both the companies works out to Rs 4,44,38,71,449/-.
  • However the valuer at the time of valuation has discounted the above said valuation and accordingly arrived at a value of Rs 682/- per equity share. This valuation has been done based on the discounted cash flow method as per RBI guidelines. The guidelines have been already filed with you. Under the RBI guidelines any FDI coming into Indian company has to be valued as per DCF method. Further, investment in Indian company should not be less than the valuation arrived as per the DCF method. After the valuation as per DCF method, the assessee and the NSR have negotiated the price and arrived at share premium of 1030/-. This premium has worked out making a discount of 30% to the total value of 4,44,38,71,449/-. The discounted value works out to 3,11,07,10,014/- and the no of equity shares are 30,00,000. Thus the value per share works to Rs 1037/-. Base on this valuation CCPS has been allotted to the NSR at 1030/- premium as far as the assessee is
  • As per the agreement the assessee is required to  make  investment in K-12 Education Management Pvt ltd as well as Akash Multimedia. The first tranche of investment made by NSR is used for acquisition of shares in K-12 and also Akash Multimedia which has been reflected in the Balance Sheet of the assessee.
  • Being a startup company the assessee is not in a situation to demand a certain premium. The NSR being a venture capital fund, it is their prerogative to invest or not and normally venture capital funds invest as per their own valuations. It is to submit that there is  no relationship between the assessee company and NSR.
  • NSR has not only invested in assessee company and also in various companies in India and in other countries. Some of the investments they made are Vector Life  sciences    Cafe  Coffee  day, VRL logistics, 9X Media Pvt Ltd, KS oils etc. you may visit their website to know their total investments http://nsrpartners. Com/portfiolio.
  • After the investment by the NSR in assessee, the assessee has created huge employment opportunity in group companies and has paid substantial tax to the
  • The valuation report pertains to equity value whereas the assessee has allotted the CCPSs. The CCPS allotted to NSR will be converted after a certain date e. after completion of second tranche of investment. While valuing the shares the assessee has also considered benefits that are going to be derived from the acquisition of K-12 and also Akash Multimedia. Whereas the valuer has not considered same at the time of valuation report.
  • Your Honours may also observe that K-12 has become 100% subsidiary of the assessee over a period of time. In view of the above, it is not justified to for any addition under section 68 of the Act.
  1. The assessee further submitted that the assessee has discharged the onus placed upon it u/s 68 of the Act by providing all the documents. It also submitted that the provisions of sec.68 will not be applicable to this receipt as  the investment has been made by Foreign Venture Capital Fund. The AO had referred to the decision rendered by Hon’ble Bombay High Court in the case of Major Metals Limited vs. Union of India (207 Taxman 185) in the query raised  by him.   The assessee submitted that the  above said decision is not applicable   to the facts of the present case. It was  submitted  that  the  Hon’ble  Bombay High Court, in the above said case, refrained from interfering with the decision reached by the Settlement Commission as the petitioner has failed to demonstrate before the Court that the order passed by the Settlement Commission was perverse. The assessee placed reliance on the decision rendered by Delhi bench of ITAT in the case of Russian  Technology Centre  P  Ltd vs. DCIT (25 ITR (Trib) 521) to contend that no addition is warranted u/s   68 of the Act if the identity of the non-resident remitter is established and the money has come in through banking channels.
  1. The assessing officer noticed that the assessee has furnished a valuation report to the Reserve Bank of India (RBI), wherein the value per share was estimated at Rs.682/- (Face value of Rs.10/- plus premium of Rs.672/-) only by following “Discounted Cash Flow” (DCF) method. Accordingly the AO took the view that the assessee should have collected premium of Rs.672/- only per share and accordingly held that there is no justification for collecting premium at Rs.1030/- per share, meaning thereby, the difference amount of Rs.358/- per share was considered by AO as unjustified premium. Accordingly the AO took the view that the unjustified premium amount of Rs.358/- cannot be considered as “Share premium amount” as claimed by the assessee. The AO held that the assessee is required to explain the “nature” and “Source” of the cash credits in order to discharge the burden placed upon him u/s 68 of the Act. The AO took the view that the assessee has only proved the “source” and not the “nature of receipts” in respect of unjustified premium amount of Rs.358/- per share. Accordingly, the AO took the view that the decision rendered by Hon’ble Bombay High Court in the case of Major Metals Ltd (supra) is applicable to the facts of the present case, as the question of reasonableness of premium was also examined in the above said case. The AO further took support of the following decisions to contend that the unjustified share premium can be added u/s 68 of the Act:-
  • ZARS Trading P Ltd (ITA No.3284/Del/90) (2010 TIOL 308)
  • Kushara Real Estate P Ltd (ITA 4247/Del/2009).
The AO also observed that the assessee has not received funds from Venture Capital Funds & Venture Capital Company and  hence exemption provided in  sec. 68  of the  Act is not applicable to the assessee. Further  the AO held that   the assessee has allotted shares at par to the management people, but collected premium from M/s NSR PR Mauritious LLC, which is against all rationale and logics.
  1. Accordingly the AO took the view that the assessee has failed to justify excess premium of Rs.358/- per share, which amounted  to  60.24  crores. The AO noticed that unjustified excess premium amounting to Rs.43.02 crores was assessed as income of the assessee in AY 2011-12  also.  Further,  the  AO  also took the view that the phrase  “nature” occurring in  section  68 takes  care  of situation where premium received is beyond justification.  Accordingly, the  AO assessed the above stated excess premium amount of Rs.60.24 crores as income of the assessee u/s 68 of the Act.
  1. We have earlier noticed that the assessee had received funds in the immediately preceding year,  e., in AY 2011-12 by issuing CCPS at a premium  of Rs.1030/- per share. In that year also, the AO had considered the excess premium of Rs.358/- per share as unjustified premium and accordingly added Rs.43.02 crores as income of the assessee u/s 68 of the Act. In the appellate proceedings pertaining to AY 2011-12, the Ld CIT(A) had deleted the addition    by holding that the assessee has proved the identity and creditworthiness of investor/shareholder as well as genuineness of transactions  in  terms of sec.68  of the Act. The assessee had also contended before Ld CIT(A) that the amounts received on account of issue of equity shares are in the  nature  of  capital  receipts as held by Hon’ble Bombay High Court in the case of Vodafone India Services P Ltd.
  1. In the instant year, the ld CIT(A) followed the decision rendered by him in AY 2011-12 and deleted the addition made by the AO by observing that there is no logic in making addition of alleged excess  premium  of  358/-  per  share, when the identity and source of the same have been proved. Aggrieved,  the revenue has filed this appeal. 
  1. The Ld CIT-DR submitted that the addition made in the year under consideration is identical in nature to the addition made in AY 2011-12,  e., both relate to the assessment of  excess  premium  as  income  of  the  assessee u/s 68 of the Act. The Ld D.R submitted that the Ld CIT(A) has deleted the addition in AY 2011-12 and during the year under consideration, the Ld CIT(A) has granted relief to the assessee by following his order passed for AY 2011-12. The Ld D.R submitted that the order passed by Ld CIT(A) in AY 2011-12 has since been reversed by the co-ordinate bench of ITAT in  ITA  No.486/Mum/2015 dated 11.01.2017. Accordingly the Ld  D.R  submitted that the order passed by the Tribunal for AY 2011-12  should  be  followed  in  this year also and accordingly the addition should be confirmed by reversing the order of Ld CIT(A) passed for this year. The Ld D.R submitted that the judicial discipline demands that the order passed in an earlier year on identical set of facts on the very same issue by one bench of Tribunal should be followed by another bench.  In support  of this proposition, the Ld D.R placed her reliance   on the following case law:-
  • Blue Star Ltd (217 ITR 514)(Bom)
  • Societe Generale (ITA No.1314 of 2013)
  • HDFC Bank Ltd (ITA No.1753 of 2016)
  • Hinduja Global Solutions Ltd (W.P 1451 of 2015)
  • Hatkesh Co-op Hsg Society Ltd
  1. The Ld D.R submitted that the book value of shares on the date of investment was NIL and hence the basis for receiving premium of Rs.1030/- per share is not borne out of record except the financial projections made by the assessee. As per the valuation report submitted by the assessee, the premium on shares was arrived at Rs.672/- per share only. Hence the assessee has failed to prove the genuineness of the excess premium of Rs.358/- per share. She submitted that the assessee is required to prove the “nature” as well as “source” of the cash credit to the satisfaction of the AO as per the provisions of sec.68 of the Act. She submitted that the assessee has failed to explain the “nature” in respect of receipt of Rs.358/- per share and hence the assessee cannot be said to have discharged the onus placed upon its shoulders under sec. 68 of the Act. By placing reliance  on  the  decision  rendered by Mumbai bench of ITAT in the case of M/s Angel Pipes and Tubes
(P) Ltd (2014)(50 taxmann.com 128), the Ld D.R contended that the burden of proof would shift back to the shoulders of the Assessee, when the AO was not satisfied with the explanations furnished by the assessee. In the instant case, the assessee has failed to prove the genuineness of excess premium of Rs.358/- per share and hence the burden has shifted back to the assessee and the assessee has failed to discharge the same.
  1. The Ld D.R further submitted that the decision rendered by Hon’ble Bombay High Court in the case of M/s Major Metals Ltd (2012)(19  com 176) would squarely apply to the  facts  of  the  present  case.  In  the above said case, the assessee collected huge premium  of  Rs.990/-  per  share. The Settlement Commission found that neither the subscribers had financial standing for giving such huge amount nor the past performance of assessee would justify payment. Hence the addition was  made  u/s 68  of  the Act. The Hon’ble Bombay High Court has refused to interfere with the decision taken by the Settlement Commission. The Ld D.R submitted  that,  in  the  present case also, the assessee has failed to justify the excess premium of Rs.358/- per share, as the valuation report justifies premium to the extent of Rs.672/- per share only.
  1. The Ld D.R submitted that the assessee has placed its reliance on the decision rendered by Hon’ble Bombay High Court in the case of Vodafone India Service P Ltd (supra) to contend that the share premium is capital receipt. She submitted that the decision was rendered by the Hon’ble Bombay High Court in the context of Transfer pricing provisions and not u/s 68 of the Act.  Hence  the assessee cannot take support of the above said
  1. The Learned AR, on the contrary, submitted that the  assessee  has entered into an agreement with M/s. NSR PR Mauritius LLC on 16.3.2011,  as  per which the above said Mauritius company has invested funds in the assessee company in three tranches. The first tranche of funds was received in the financial year relevant to AY 2011-12; the second trench of funds  was received during the year under consideration and the third trench of funds was received during F.Y. 2013-14 relevant to AY 2014-15. The  Learned  AR  submitted that the assessee has received funds by  issuing  CCPS  in  all  the  three years. He submitted that the assessee has  issued  CCPS  by  complying  with the all formalities prescribed by Reserve Bank of India (RBI). As per the requirement of RBI, the assessee is required to furnish Valuation certificate estimating the Share premium amount. As per the  RBI  rules,  the  assessee could not issue shares/CCPS less than the value so determined through  valuation certificate. However, there is no restriction in  issuing  shares  at  a price higher than that arrived at through Valuation Certificate. In support  of  this submission, the Ld A.R referred to the Notification No.FEMA 205/2010-RB dated April 7, 2010 issued by the Reserve Bank of India. This notification is placed at pages 207-208 of paper book and Clause 5 of the notification states  that the price of shares issued to persons resident outside India under this Schedule “shall not be less than” ….   As per the valuation certificate the value     of equity  share was arrived at Rs.682/-, i.e. par value of Rs.10/- plus premium   of Rs.672/-. However, the Assessing Officer has taken  the  view  that  the assessee should not have collected money more than the  share  value  determined through Valuation Certificate. Accordingly he did not accept the alleged excess premium in AY 2011-12 and 2012-13.  Accordingly  he  has assessed the excess premium amount as unexplained cash credit u/s 68 in AY 2011-12 & 2012-13. The Ld A.R submitted the assessee has received  third  tranche of funds in AY 2014-15 at the same premium amount of ` 1030/- per share.  The AO has accepted the  same in AY 2014-15 and accordingly, he did   not make any  addition  towards alleged  excess premium in  AY  2014-15.  The  Ld A.R, accordingly contended that the addition made by the AO in this year should be deleted.
  1. The Learned AR submitted that M/s NSR PR Mauritius LLC (also known as New Silk route growth capital) is a venture capital fund registered  with SEBI, vide registration No.IN/FVCI/08-09/119 dated 16.1.2009. He submitted that the above said investor company is not related to the assessee     in any manner. The Learned AR  further  submitted  that  the  above  said investor company has given a letter dated 3.3.2014 to the assessee,  copy  of which is placed at page No. 200 of the paper book, wherein the above said investor company has explained that it has  taken  commercial  decision  to  invest in the assessee company looking at the  bright  future  it    The  Learned AR submitted that above said investor-company has invested funds in other concerns in India as well as in other Countries also. In this regard, he invited our attention to the material placed at page No. 198-199 of the paper book, wherein newspaper report about the investments made by the above said company with the assessee firm and other concerns is given. The Learned AR further submitted that the assessee and the investor company has entered into  an agreement on 16-03-2011 and it has invested funds in the assessee as per     the terms and conditions agreed between the parties. He submitted that the agreement so entered between the parties is a detailed one containing various terms and conditions on the issue of preference shares, exit policy, conversion policy, rate of return, if the CCPS is returned back etc. The learned AR, in particular, invited our attention to page No. 61 of the paper book, wherein the condition relating to “Benchmark price” is stated. The above said clause states that in the event that the investor exercised buy back option and/or the put option pursuant to clause 4.6(i), a price per investor shares at which investor receives IRR of 18% is the bench mark price. If it is under clause  4.6(ii),  then  the IRR shall be 12% etc. The Learned AR submitted that this clause would indicate that investor has taken a conscious  decision  to  make  investment  in the assessee expecting a particular rate of return, duly considering the earning potentials of the assessee. The same has been confirmed by the investor by its letter dated 3.3.2014.
  1. The Learned AR submitted that the assessee has issued CCPS at a premium of Rs.1030/- as per agreement reached between the parties. He submitted that it was a commercial decision reached by the investor company and the assessee. He submitted  that the was not right  in law in questioning   the commercial decision reached by both the parties, as he is not entitled to  sit  in the arm chair of the assessee and dictate the manner in which the business should be conducted. Accordingly,  he  submitted  that  the  Assessing  Officer was not justified in accepting share premium only to the extent of ` 672/- per share and further not justified in holding difference amount of `  358/-  per share does not represent share premium. The Learned AR submitted that the assessee as well as the investor company has accepted share  premium amount  as Rs.1030/- per share and the said amount was collected as Share premium only. It is the AO,  who has  bifurcated  the share premium as justified  amount  of Rs.672/- and unjustified amount of ` 358/- per share. Accordingly he submitted that “nature” of amount of Rs.358/- per share  cannot be considered  to be something else other than “Share premium”.
  1. The Learned AR submitted that the Tribunal has passed the order for
A.Y. 2011-12 on 11.1.2017 upholding the view of the Assessing Officer in  assessing alleged excess premium as income of  the  assessee.  He  submitted  that Hon'ble Bombay High Court has considered the issue of excess share premium in the case of CIT Vs. Green Infra Limited (2017) 392 ITR 7 (order dated 16.1.2017). He submitted that Revenue itself has accepted before the Hon’ble High Court  that Share premium should also be judged on touch  stone  of section 68 of the Act. Accordingly, it was held that once the assessee has discharged burden placed upon him u/s. 68 of the Act, no addition could be made on account of share premium collection. The Learned AR submitted that identical view was expressed by Hon'ble Bombay High Court in the case of Gagandeep Infrastructure P. Ltd. (2017) 394 ITR 680.  The ld AR submitted   that the Coordinate Bench of the Tribunal, while disposing of the appeal of the assessee for A.Y. 2011-12, did not have benefit of decisions rendered by Hon'ble Bombay High Court in the case of Green Infra Ltd. (supra) as well as in the case of Gagandeep Infrastructure P. Ltd. (supra). He submitted that the decision rendered by Hon’ble jurisdictional Bombay High Court  is  binding  upon the Tribunal and hence the Tribunal need not follow  the  decision  rendered by it in the assessee’s own case in AY 2011-12, when it is required to follow the decision rendered by jurisdictional Bombay High Court. The Ld A.R took support of the following observations made by Hon’blle Bombay High  Court in the case of Hatkesh Co-op Housing Society Ltd (2016)(243 Taxmann 2013):-

“….. We are of the view that when an identical issue, which had earlier

arisen before the Co-ordinate Bench of the Tribunal on identical facts and a view has been taken on the issue then judicial discipline would demand that a subsequent bench of the Tribunal hearing the same issue should follow the view taken by its earlier Co-ordinate bench. No doubt this discipline is subject to well settled exceptions of the earlier order being passed per in curium or sub silentio or in the meantime, there has been any change in law either statutory or by virtue of judicial pronouncement……”

Accordingly the Ld A.R submitted that, in view of the binding  decisions  rendered by Hon’ble Bombay High Court, subsequent to the  decision rendered by the Tribunal in AY 2011-12, the decision so rendered by the Tribunal is not required to be followed in this year.
  1. With regard to the reliance placed by Ld D.R on the decision rendered by Hon’ble Bombay High Court in the case of Major Metals Ltd (supra), the Ld A.R submitted that the order was passed in the above said case on the writ filed by the assessee against the order passed by Settlement Commission u/s 245D(4) of the Act. The Hon’ble Court, after considering the arguments  of  both  the  sides as well as the facts, refrained to interfere with the order passed by the Settlement Commission as it found the view expressed by the Settlement Commission was one of the possible view. The Ld  R  that  the  Hon’ble  Bombay High Court has made following observations in the case of Pr. CIT vs. Apeak Infotech (2017)(397 ITR 148) with regard to its decision rendered in the case of Major Metals (supra):-
“(d) We may also point out that decision of this court in Major Metals Ltd vs. Union of India (2013)(359 ITR 450)(Bom) proceeded on its own facts to uphold the invocation of section 68 of the Act by the Settlement Commission. In the above case, the Settlement Commission arrived at a finding of fact that the subscribers to shares of the assessee-company were not creditworthy in as much as they did not have financial standing which would enable them to make an investment of Rs.6,00,00,000/- at premium at Rs.990 per share. It was this finding of the fact arrived at by the Settlement Commission which was not disturbed by this Court in its writ-jurisdiction. In the present case the person who have subscribed to the share and paid share premium have admittedly made statement on oath before the Assessing Officer as recorded by the Tribunal. No finding in this case has been given by the authorities that shareholders/share applicants were unidentifiable or bogus.”

Accordingly the Ld A.R submitted that the decision rendered by  Hon’ble Bombay High Court was on the point whether there was any perversity in the order passed by the Settlement Commission or not, i.e., the Hon’ble Bombay High Court did not adjudicate the issue on merits. Hence it cannot be said that the said decision shall have any binding effect.
  1. The Ld A.R submitted that the share premium amount has to be examined under sec.68 of the Act only. The assessing officer has satisfied with the identity, credit worthiness and genuineness of funds invested by NSR PE Mauritius LLC in the preference shares issued by the assessee company, meaning thereby, the assessee has discharged the burden placed upon its shoulders u/s 68 of the Act. The AO has accepted the investment in part, i.e., par value of shares plus share premium to the extent of Rs.672/- per share. When the AO was satisfied with the three main ingredients relating to share application/share premium, there is no reason to disbelieve the remaining amount of share premium of Rs.358/- per share. He submitted that the AO has made addition u/s 68 of the Act stating that the amount of Rs.358/- per share represents unjustified premium. He submitted that there is no scope under 68 of the Act to assess the alleged unjustified premium. He submitted that the AO himself  has  accepted  the  premium  amount  of Rs.1030/- in AY 2014-15 and hence there is no reason to take a different view     in this year, viz., that the share premium amount is unjustified. He submitted that the Share Premium amount represents capital receipts and hence there is  no scope for assessing the same as income of the assessee, when the AO was satisfied with the test of three main ingredients u/s 68 of the Act.
  1. He further submitted that the definition of the term “income” has been expanded by Finance Act 2012 with effect from 1.4.2013 by including following clause in sec.2(24) of the Act:-
“(xvi) any consideration received for issue of shares as exceeds the fair market value of the shares referred to in clause (viib) of sub-section
(2) of section 56.”

The AR submitted that the AO is entitled to assess the excess premium, if any, only from AY 2013-14, that too after proving that the value of shares has exceeded fair market value. The above said clause is held to be applicable only from AY 2013-14 by Hon’ble Bombay High Court in the case of Gagandeep Infrastructure P Ltd (supra) and also in the case of Apeak Infotech (supra). Accordingly the A.R submitted that there is no scope for assessing the alleged excess share premium during the year under consideration, as the same represents capital receipt and further the AO was  satisfied  with  the  identity and creditworthiness of the investor and the genuineness of transactions.  The Ld. A.R submitted that the AO has accepted the  fair  market  value  of CCPS in AY 2014-15, when the above said provisions of sec.2(24)(xvi) read with sec.56(2)(viib) was very much applicable.  Accordingly he  submitted  that there is no reason to suspect the share premium  during  the  year  under  consideration also. Accordingly he submitted that the order  passed  by  Ld  CIT(A) should be upheld.
  1. The Ld D.R, in the rejoinder, submitted that the co-ordinate bench has held that the assessee has failed to explain the basis of  share  premium  collected by it over and above the valuation as per RBI guideline and accordingly held that the assessee has failed to  satisfactorily  explain genuineness of transactions to the satisfaction  of the assessing officer. The ld  DR further submitted that the decision rendered by Hon’ble Bombay  High  Court in the case of Major Metals Ltd (supra) was not referred to in  the  decisions rendered by the Bombay High Court in the case of M/s Green  Infra  Ltd (supra) and Gagandeep Infrastructure Ltd (supra). Accordingly, the Ld D.R submitted that the decision rendered by the Tribunal in AY 2011-12 should be followed.
  1. We have heard rival contentions and perused the record. The assessee has issued CCPS to M/s NSR PR Mauritius LLC, a SEBI registered Venture Capital Fund at a premium of Rs.1030/- per share. In the valuation certificate submitted to Reserve bank of India, the price of share was worked out at Rs.682/- per share, consisting  of Rs.10/- par value plus premium of Rs.672/-  per share. We notice that the assessing officer has taken the view that the premium collected by the assessee over and above the premium worked out in the Valuation Certificate is unjustified premium and accordingly assessed the same as income of the assessee u/s 68 of the Act. There is no dispute  with  regard to the fact that the AO is otherwise satisfied with the identity and creditworthiness of the investor and that the transactions were carried out through banking
  1. The first question that arises is whether the Share premium can be considered as income taxable under the This question was considered by  the co-ordinate bench of Tribunal in the case of Green Infra Ltd (2013)(145 ITD 240). In the above said case, the assessee had collected share premium of Rs.490/- per share on allotment of shares of face  value  of Rs.10/- per share.  The AO considered the share premium as unscientific and unjustified. Accordingly, he assessed the amount collected as Share Premium as income of the assessee u/s 56 of the Act. When this issue came before the Tribunal, the Tribunal deleted the addition with the following observations:-
 
“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.
  • No doubt a non-est company or a zero balance company asking for a share premium of 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.
  • Let us consider the provisions of 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.'
  • 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.”
  1. The revenue has challenged the order passed by the ITAT by filing appeal before Hon’ble Bombay High Court, which has since disposed of the  appeal,  vide its order dated 16-01-2017 reported in CIT vs. Green Infra Ltd (2017)(392 ITR 7). Before Hon’ble High Court, the revenue has acccepted that the Share Premium collected by the assessee has to be considered as cash credit and examined on the parameters of sec. 68. Hence, there  should  not  be  any  dispute now that the share premium amount collected by the assessee should    be examined within the parameters of sec. 68 of the    In the  instant case,  the assessing officer has assessed the alleged  excess  premium  u/s  68  of  the Act only.
  1. The above said legal position was reiterated by Hon’ble Bombay High Court again in the case of CIT vs Gagandeep Infrastructure Pvt Ltd (2017)(394 ITR 680). In the above said case, the assessee therein issued shares at a premium of Rs.190/- per share and collected  a  sum  of  7.53  crores  including share premium amount of Rs.6.98 crores. The AO questioned the justification for charging Share Premium and it was explained that  the same  was on the basis of the future prospects of the business of the respondent assessee. The AO did not accept the same and invoked sec.68 of the Act to treat the amount of Rs.7.53 crores as unexplained cash credit. The Ld CIT(A) deleted the addition cited above. The Ld CIT(A) observed that the AO has not given any reason to conclude that the investment made (inclusive of premium) was not genuine in spite of furnishing of evidences to prove genuineness. The Ld CIT(A) also held that the appropriate valuation of shares is for the subscriber/investor to decide and not a subject of enquiry by the Revenue. The Tribunal noticed that the assessee has proved the three main ingredients that were required to be proved u/s 68 of the Act, viz., the identity of the subscribers, the creditworthiness of the subscribers and genuineness of transactions. The Tribunal also held that the share premium received by the assessee would be on capital receipt and not in the revenue field.
  1. Before the Hon’ble Bombay High Court, the revenue took support of the proviso inserted to sec.68 of the Act with effect from 1.4.2013 and contended that the same would apply to AY 2008-09 also.  The proviso inserted to  68  of the Act states that when the assessee collected by way of share application/share capital/share premium or any such amount by  whatever  name  called, then an additional burden is placed upon the  assessee to prove   the nature and source of the investor, i.e., the person in  whose  name  such  credit is recorded should also offer explanation about the nature and source of such sum collected. The Hon’ble Bombay High Court rejected  the  same  and held that the proviso would be effective only from AY 2013-14 onwards. With regard to the decision rendered by the Tribunal, the Hon’ble Bombay  High  Court held as under:-
“….In any view of the matter the three essential tests while confirming the pre-proviso section 68 of the Act laid down by the Courts namely the genuineness of the transaction, identity and capacity of the investor have all been examined by the impugned order of the Tribunal and on facts it was satisfied. Further it was a submission on behalf of the Revenue that such large amount of share premium gives rise to suspicion on the genuineness (identity) of the shareholders, i.e., they are bogus. The apex court in Lovely exports P Ltd (supra) in the context to the preamended section 68 of the Act has held that where the Revenue urges that the amount of share application money has been received from bogus shareholders then it is for the Income tax Officer to proceed by reopening the assessment of such shareholders and assessing them to tax in accordance with law. It does not entitle the Revenue to add the same to the assessee’s income as unexplained cash credit.”
  1. The decision rendered by the Tribunal in the case of Green Infra Ltd (supra), which has been confirmed by Hon’ble Bombay High Court (supra) as well as the decision rendered by Hon’ble jurisdictional High  Court in  the case  of Gagandeep Infrastructure Pvt Ltd (supra) makes it clear that no  addition could be made u/s 68 of the Act in respect of Share premium, if the assessee discharges its burden by proving the  three  essential  ingredients,  ,  identity of the subscriber, the capacity of the subscriber and the genuineness of the transaction.
  1. We notice that the decision rendered by the co-ordinate bench in AY 2011-12 in the assessee’ own case in ITA No.486/Mum/2015 did not consider the decision rendered by another Co-ordinate bench in the case of Green Infra Ltd (supra), wherein it was held that the share premium cannot be assessed u/s 56 of the Act, but to be examined within the parameters of sec.68 of the Act. It is a fact that the assessee has failed to quote the same before the Tribunal at the time of hearing of appeal. It is so mentioned in the M.A order dated 23-06-2017 passed in M.A.No.153/Mum/2017. In any case the decisions rendered by Hon’ble Bombay High Court in the cases of Green Infra Ltd (supra) and the Gagandeep Infrastructure P Ltd (supra) have been rendered subsequent to the decision of the Tribunal in AY 2011-12 and hence the co-ordinate bench did not have the benefit of the same. In the above said cases, it has been held that the addition u/s 68 of the Act of share premium is not warranted, if the three essential ingredients , identity of the subscriber, capacity of the subscriber and genuineness of transactions are proved, meaning thereby, if the share subscriber proves all the three ingredients, then there is no scope for partially accepting the share premium and partially assessing the same by holding that the share premium is unjustified. The Hon’ble Bombay High Court has held in the case of Hatkesh Co-op Housing Society Ltd (supra) that the decision rendered by the Tribunal need not be followed if, inter alia, there has been change in law either statutory or by virtue  of judicial pronouncement.  We have noticed that there is change in law by   virtue of decision rendered in the case of Green Infra Ltd (supra)  and  Gagandeep Infrastructure P Ltd (supra) after the decision rendered by co- ordinate bench in AY 2011-12 and hence the is not required to be followed in preference to the binding decisions rendered by Hon’ble Bombay High Court.
  1. The Ld D.R contended that the decision rendered by the Hon’ble Bombay High Court in the case of Major Metals Ltd (supra) supports the view taken by the assessing officer and further the above said decision was not considered in the case of Green Infra Ltd (supra) and Gagandeep Infrastructure P  Ltd  (supra). On the contrary, the Ld A.R submitted that the decision has been rendered in the case of Major Metals Ltd (supra) against the orders passed by Settlement Commission. We notice that the Power of Hon’ble High  Court  against the orders passed by Settlement Commission  is not appellate  power,  but restricted to
    • grave procedural defects such as violation of mandatory procedural requirement of provisions in Chapter XIX-A and or violation of rules of natural justice;
  • absence of nexus between reasons given and decision taken by Settlement
It was so held by Hon’ble Karnanata High Court in the case of N.Krishnan vs. Settlement Commission (1989)(180 ITR 585)(Kar). The  Hon’ble  Karnataka High Court further held that an error of fact or of law alleged to have been committed by Settlement Commission cannot be looked into  by  High  Court. The following observations made by Hon’ble Bombay High Court in the case of Major Metals Ltd (supra) also support the above said view:-
“19. The next aspect of the order of  the  Settlement  Commission  which needs to be looked into relates to the computation of the additional  income  of Rs.6.18 crores in the hands of the assessee. Before we deal  with  the  merits of the challenge, it must be noted at the outset that the extent of judicial review in a determination made by the Settlement Commission must     fall     with     the     parameters      settled      by     decided      cases.      In Jyotendrasinhji v. S.I.  Tripathi        [1993] 201 ITR 611/68 Taxman  59 (SC) the Supreme Court emphasised that the only ground upon which an order passed by the Settlement Commission can be interfered with is that  the  order of the Commission is contrary to the provisions of the Act and that  such contravention has prejudiced the appellant. This would be apart from grounds of bias, fraud or malice which would constitute a  separate category. The Supreme Court held as follows:

"16. ...The scope of enquiry, whether by High  Court  under  Article  226 or by this  Court  under Article 136  is  also  the same -  whether  the order of the Commission is contrary to any  of  the provisions of  the Act and if so, has it prejudiced the petitioner/appellant.  Apart from ground of bias, fraud and malice which, of course, constitute a separate and independent category. Reference in this behalf may be had   to   the   decision    of   this    Court    in Sri    Ram    Durga  Prasad v. Settlement  Commission, 176  ITR 169 :  (AIR  1989  SC 1038), which too was an appeal against the orders of the Settlement Commission. Sabyasachi Mukharji, J., speaking for the Bench comprising himself and S.R. Pandian, J.  observed  that  in  such  a case this Court is "concerned with the legality of procedure followed and not with the validity of the order." The learned Judge added "judicial review is concerned not with the decision but with the decision-making process." Reliance was placed upon the decision of the    House    of     Lords     in     Chief     Constable     of     the N.W. Police v. Evans [1982] WLR  1155.  Thus,  the  appellate  power  under Article 136 was equated to  power  of  judicial  review,  where the appeal is directed against the orders of the  Settlement Commission. For all the above reasons, we are  of  the  opinion  that the only ground upon which this  Court  can  interfere  in  these appeals is that order of the Commission is contrary to the provisions  of the Act and that such contravention has  prejudiced  the  appellant..."
  1. The same principle has since been reiterated in a  more  recent  judgment rendered in relation to the powers of the Settlement Commission constituted under the Central Excise Act in Union of Indiav. Ind-Swift Laboratories [2011] 4 SCC 635 by the Supreme Court:
"22. An order passed by the Settlement Commission could  be interfered with only if the said order is found to be contrary to any provisions of the Act. So far as the findings of fact recorded by the Commission or question of facts are concerned, the same is not open for examination either by the High Court or by the Supreme Court..." 
  1. In an earlier judgment of a Division Bench of the Karnataka High  Court in N. Krishnan v. Settlement Commission [1989] 47 Taxman 294/(Kar.) it was held that  a  decision  of  the Settlement Commission  may be interfered with only, (i) if there is a grave procedural defect such as a violation of the mandatory procedural requirements of the provisions of Chapter XIX-A and/or violation of the principle of natural justice; and (ii) there is no nexus between the reasons given and the decision taken by the Settlement Commission. In other words, the Court under Article 226 would not interfere with an error of fact alleged to have been committed by the Settlement ”
Against the background of above said legal position, the Hon’ble Bombay High Court examined the decision rendered by the Settlement Commission in the case of Major Metals Ltd (supra). The Hon’ble Bombay High Court noticed that the Settlement Commission has given atleast 14 reasons for taking the view that the genuineness of the transactions was not proved by the assessee. In this regard, the Hon’ble Bombay High Court observed as under:-

“23. Now, it is in this background that the Settlement Commission has arrived at a considered finding of fact that the transactions of the two companies were not genuine transactions; that the two companies lacked a credit standing which would have enabled them to pay large amounts towards share premium of Rs.990/- on a face value of  Rs.10/- per share and that neither the past performance or the financials of the petitioner itself would justify the payment of such a large premium. The Settlement Commission has relied upon  the law  laid down by the Supreme Court inSumati Dayal vs. CIT in  applying  the  test of human probabilities.”
Since the Settlement Commission has given its decision on finding of facts, the Hon’ble Bombay High Court did not interfere with the decision rendered by the Settlement Commission. The Hon’ble Bombay High Court itself has explained this legal position in the case of Apeak  Infotech  (2017)(397  ITR  148)  as under:-
(d) We may also point out that decision of this Court in Major Metals ltd vs. Union of India (2013)(359 ITR 450)(Bom) proceeded on its own facts to uphold invocation of section 68 of  the Act  by  the  Settlement  Commission. In the above case, the Settlement Commission arrived at a finding of  fact that the subscribers to shares of the assessee-company were not  creditworthy inasmuch as they did not have financial standing which would enable them to make an investment of Rs.6,00,00,000 at premium of Rs.990 per share. It was this finding of the fact arrived at by the Settlement Commission which was not disturbed by this Court in its writ- jurisdiction. In the present case the person who have subscribed to the share and paid share premium have admittedly made statement on oath before the Assessing Officer as recorded by the Tribunal. No finding in this case has been given by the authorities that shareholder/share applicants were unidentifiable or bogus.”

In the above said case also, the AO assessed the amount received by the assessee as share capital/share premium as income of the assessee under sec.28(iv) of the Act, which was inserted with effect from 1.4.2013. The revenue relied upon the decision rendered by Hon’ble Bombay High Court in the case of Major Metals Ltd (supra), which was rejected by the Hon’ble High Court.
  1. From the foregoing discussions, we can notice that the decision rendered by Hon’ble Bombay High Court in the case of Major Metals Ltd (supra) cannot  be taken as a binding precedence, since the scope of  judicial  review  of  the  order passed by the Settlement Commission is different from normal appeal jurisdiction. Further the Hon’ble Bombay High Court has noticed that the Settlement Commission has arrived its decision on the basis of facts prevailing therein, viz., the genuineness of transactions and the capacity of the investors were not proved. Even though the Settlement Commission has also observed  that the past performance of the company did not justify payment of large premium, the said observations were made only to support the main observations. In any case, it has now been held  that  the  share  application/share capital/share premium collections have  to  be  examined under the parameters of 68 of the Act.
  1. The Ld D.R also argued that the assessee has not explained “nature” of excess premium amount of Rs.358/- per share, i.e., according to Ld R/AO,  the share premium was justified only to the extent of  Rs.672/-  only.  Accordingly she contended the excess amount of Rs.358/- collected by the assessee cannot be considered as share premium. Since the “nature” of this excess collection is not explained by the assessee to the satisfaction of the AO, the Ld D.R contended that the same was rightly assessed u/s 68 of the Act.
  1. Section 68 of the Act is a deeming fiction to assess cash credits, if the same was not declared by the assessee as his income and further,  if  the  assessee offers no explanation or the explanation offered by the assessee is not satisfactory to the The provisions of sec.68 read as under:-
  2. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the “nature and source” thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income- tax as the income of the assessee of that previous year.”
It is the contention of the Ld D.R that the excess premium  of  Rs.358/-  per share cannot be considered as “share premium” and further the assessee has failed to explain the “nature” of amount of Rs.358/- per share. Accordingly it  was contended that the same was rightly assessed as income of the assessee.
  1. There is no dispute with regard to the fact that the assessee has received the impugned funds by way of “Share Premium” on issue of preference shares. In the books of accounts also, the assessee has credited “share premium  account” only with the amount received. The investor has also given the funds only towards share premium. Hence, according to the assessee as well  as investor company, the nature of receipt/payment is “Share premium” on the preference
  1. Since the revenue is contending that the “nature” of excess amount of premium is not proved, we shall examine the meaning or context in which the word “nature” is used in sec.68 of the   The  courts have time  and  again  held that if an assessee proves three essential ingredients with regard to cash credits, viz., the identity of the creditor, credit worthiness of the creditor and genuineness of transactions, then the “nature and source” of cash credit stands proved. In that case, the  said  cash credit  cannot be assessed as income  of the assessee.  As observed earlier, if any cash credit is  offered as income by  the assessee himself, the question of applying sec.68 does not arise. The requirement of applying provisions of sec.68  shall arise only if any cash credit   is not offered as income by the assessee.
  1. We notice that the Hon’ble Bombay High Court, in the case of Major metals Ltd (supra) has also discussed about  the  scope  of provisions of sec.68  of the Act as under:-
‘Section 68 of the Income Tax Act provides that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year. The Supreme Court held as follows:
"It is no doubt true that in all cases in which a receipt is sought to be taxed as income, the burden lies  on  the  Department to prove that it  is within the taxing provision and if a receipt is in the nature of income, the burden of proving that it is not taxable because it falls within exemption provided by the Act lies upon the assessee. [See : Parimisetti Seetharamamma [1965] 57 ITR 532 at page 536). But, in view of Section 68 of the Act, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income-tax as the income of the assessee of that previous year if the explanation offered by the  assessee about the nature and source  thereof  is,  in  the  opinion  of the Assessing Officer, not satisfactory.  In  such  a  case  there  is,  prima facie, evidence against the  assessee,  viz.,  the  receipt  of money, and if he fails to rebut  it,  the  said  evidence  being  unrebutted, can be used against him by holding that it was a receipt of an income nature. While considering the explanation of the assessee the Department cannot, however, act unreasonably.”
A careful reading of  the above observations would show that the term “nature”  is used in sec.68 of the Act in the context of whether the cash credit  is  of “income nature”  or is “not  of income nature”.  As per the  deeming provisions   of sec.68 of the Act, all cash credits may be considered to be of “income nature”, if the assessee offers no explanation or the explanations offered by the assessee is not to the satisfaction of the AO. While considering the explanation of the assessee, the department cannot, however, act unreasonably. Hence the meaning of the term “nature” is whether the cash credit bears the nature of income or not? Identical views have been expressed in the following cases also:-
  • Mahindranath Das vs. CIT (27 ITR 522)(pat), wherein it was held as under:-
In our opinion the argument of Mr. Gupta must be rejected as unsound. The principle is well established  that  if  the  assessee receives a certain amount in the course of the accounting year, the burden of proof is upon the assessee to show that  the  item  of  receipt is not of an income nature; and if the assessee fails to prove positively the source and nature of the amount of the receipt,  the revenue authorities are entitled to draw an inference that the receipt is of an income nature. The burden of proof in such a case is  not upon the department but the burden of  proof  is  upon  the  assessee to show by sufficient material that the item  of  receipt  was not of an income character.
  • Sreelekha Bannerjee and Ors vs. CIT (49 ITR 112)(SC):-
If there is an entry in the account books of the assessee which shows the receipt of a sum on conversion of high denomination notes tendered for conversion by the assessee himself, it is necessary for the assessee to establish, if asked, what the source of that money is and to prove that it does not bear the nature of income. The department is not at this stage required to prove anything. It can ask the assessee to bring any books of account or other documents or evidence pertinent to the explanation if one is furnished, and examine the evidence and the explanation. If the explanation shows that the receipt was not of an income nature, the department cannot act unreasonably and reject that explanation to hold that it was income. If, however, the explanation is unconvincing and one which deserves to be rejected, the department can reject it and draw the inference that the amount represents income either from the sources already disclosed by the assessee or from some undisclosed source. The department does not then proceed on no evidence, because the fact that there was receipt of money is itself evidence against the assessee. There is thus, prima facie, evidence against the assessee which he fails to rebut, and being unrebutted, that evidence against him by  holding  that it  was  a receipt of an income nature.
  • Panna Devi Chowdhary vs. CIT (208 ITR 849, 858)(Bom):-
…..The Income tax Act imposes a liability to  tax upon  income.  It does  not provide that whatever is received by a  person  can  be regarded  as his income liable to tax. In all cases in which a receipt is sought to be  taxed as income, the burden lies on the Department to prove that it is within taxing provision. It is only in a case where the receipt is in the nature of income, the burden of proving that it is not taxable lies upon the assessee.
  1. In the instant case, there is no dispute to the fact that the assessee has received the sum of 1030/- per share  as Share Premium.  It  is the case of  the assessing officer is that he will accept  the  share  premium  only  to  the extent of Rs.672/- per share worked out as  per  Valuation  certificate. Accordingly the AO has considered the amount of Rs.358/- per share as unjustified premium and assessed the same as income  of  the  assessee u/s  68  of the Act. The question that requires to be considered is whether the alleged excess premium of Rs.358/- per share is in the “nature of income  or  not”,  within the meaning of sec.68 of the Act.
  1. There is no dispute with regard to the fact that the assessing officer was satisfied with the identity of the investor M/s NSR PR Mauritius LLC, its credit worthiness. With regard to the genuineness of transactions also, the  assessee has proved the same by proving that the funds have been received through banking channels and there is no dispute on this fact. However, the AO has  taken the view that the genuineness of the Share premium amount has been proved to the extent of Rs.672/- only and the  AO  has so taken  the  view,  only for the reason that the share premium is determined only to the above said extent as per the valuation certificate, i.e., the  AO  has based his  decision  on  the valuation certificate. The Ld A.R brought our attention to the Notification No.FEMA 205/2010-RB dated 07-04-2010, wherein it is stated the price of shares issued to persons resident outside India under this Schedule shall not  be less than:-
(a)…….

(b) the fair valuation of shares done by SEBI registered  Category-I Merchant banker or a Chartered Accountant as per the  discounted  free  cash flow method, where the shares of the company is not listed on any recognised stock exchange in India; and…..
Hence there is merit in the contention of the Ld A.R that the share premium amount worked out in the Valuation Certificate is the minimum amount that can be collected by the assessee and hence there is no bar on collecting higher amount as share premium. The Ld CIT(A) has rightly observed that there are several factors that are taken into consideration while issuing the equity shares to shareholders/investors, such as Venture capital funds and Private Equity funds. The Ld CIT(A) has also noticed that the actual financial results achieved by the assessee has exceeded the financial projections. Accordingly he has held that the premium of Rs.1030/- was determined between the parties on the basis of commercial considerations and agreed to by them, which cannot be questioned by the tax authorities. It is well settled proposition of law that the AO was not entitled to sit on the arm chair of a businessman and regulate the manner of conducting business. Hence, in our view, the AO was not justified in holding that he will accept the share premium amount only to the extent of Rs,672/- only. Hence the AO was not justified in partially not accepting the share premium and accordingly he could not have doubted the genuineness of transactions on this reason.
  1. We have noticed that the AO has assessed the alleged excess premium u/s 68 of the Act. The Hon’ble Bombay High Court has held in the  cases  of Green Infra Ltd (supra) and Gagandeep Infrastructure P Ltd (supra) has held that the amount received on issuing of Shares should be examined by the AO within the parameters of sec.68 of the Act. Accordingly, once the AO was satisfied with the identity and credit worthiness of the  investor  and  genuineness of transactions, the assessee can be said to have proved the
 
“nature and source” of the cash credits. The amounts received as  Share  premium are in the nature of capital receipts as per the decision rendered by Hon’ble Bombay High Court in the case of Vodafone India Services P  Ltd  (supra) and the assessee  has also discharged  the  onus placed  upon  it  u/s  68 of the Act. In fact, the AO himself accepted the share premium to the extent of Rs.672/- per share as Capital receipt. Hence the “nature” of  alleged  excess  share premium amount cannot be considered as receipt of income nature.
  1. The amendment brought in sec.68 of the Act w.e.f. 1.4.2013 has been held to be applicable from AY 2013-14 onwards by Hon’ble Bombay High Court in the case of Gagandeep infrastructure P Ltd (supra). Even otherwise, the amendment will not apply to the assessee herein as the investor is a SEBI registered Venture Capital Fund. The amendment brought in sec. 2(24) and sec.56(2)(vii) of the Act relating to assessing of excess share premium as income, has been held to be applicable from AY 2013-14 onwards as held by Hon’ble Bombay High Court in the case of Apeak Infotech (supra). We have seen that the AO himself has accepted the quantum of share premium in AY 2014-15 and further the actual financial results have far exceeded the financial
  1. We also notice from the agreement entered between the parties, the investor is entitled to a particular rate of return in case the call option/put option is exercised. It also provides for the manner of conversion of preference shares into equity shares etc. In any case, the question of present book value  shall apply only to equity shares and not to preference
  1. In view of the foregoing discussions, we are of considered view that the decision reached by Ld CIT(A) does not call  for any interference.  Accordingly we uphold the order passed by Ld CIT(A) on the reasons discussed
 
  1. In the result, the appeal of the revenue is dismissed. Order has been pronounced in the Court on 10.2018.
 
Sd/-                                                                         Sd/-
(RAVISH SOOD)                                                     (B.R.BASKARAN) JUDICIAL MEMBER                                                            ACCOUNTANT MEMBER
 
Mumbai; Dated : 24/10/2018
Copy of the Order forwarded to :
  1. The Appellant
  2. The Respondent
  3. The CIT(A)
  4. CIT
  5. DR, ITAT, Mumbai
  6. Guard
//True Copy//
BY ORDER,
 
(Senior Private Secretary)
PS                                                                                                                                   ITAT, Mumbai

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