INCOME TAX APPELLATE
TRIBUNAL, HYDERABAD
BHARATHI CEMENT
CORPORATION PVT. LTD. VS ACIT
10-08-2018
ITA Nos. 696 & 697/Hyd/2014
Both these appeals
filed by the assessee are directed against the orders, both, dated 25/02/2014
of CIT(A) – III, Hyderabad for AYs 2009-10 & 2010-11.
2. Briefly the facts as
taken from AY 2009 -10 are, assessee is a company engaged in the business of
manufacture and sale of cement under the name Bharathi Cement. It filed its
return of income f or the AY 2009-10 on 30/09/2009 declaring total income of
Rs.2,91,01,250/ -.
During this AY, assessee has offered income of
Rs. 2,91,01,250/- as ‘income from other sources’ on account of interest earned
on fixed deposits and it did not commence its bus iness during this AY, hence,
there is no income form the head ‘income from business or profession’.
2.1 During this AY,
assessee has offered income of Rs. 2,91,01,250/- as ‘income from other sources’
on account of interest earned on fixed deposits and it did not commence its
business during this AY, hence, there is no income form the head ‘income from business
or profession’.During the assessment proceedings, AO noted that assessee was
incorporated in the year 1999 as the company with limited liability and
initially it is registered as Raghuram Cements. The name of the company was
changed to the present name in August’2008. The assessee has its manufacturing
unit established at Nallalingayapalli Village, Kamalapuram Mandal, Kadapa
District, A.P. with a licensed capacity of 5 million tonnes per annum. The
details of shareholders and directors of the company are as under:
Sri YS Jagan Mohan
Reddy 66.43% equity
M/s Silicon Builders
(P) Ltd. 33.15% equity
(company owned and
controlled by Shri YS Jagan Mohan Reddy)
Directors
S/Shri YS Jagan Mohan
Reddy
Harish C Kamarthy
J Jagan Mohan Reddy
Ravinder Reddy
V.R. Vasudevan
During the current AY,
the assessee issued 0% convertible preferential shares with a face value of Rs.
10/- per share and a premium of Rs. 1,440/- per share in a private placement to
the following investors as detailed below:
|
Name and postal
Address of the shareholder
|
No. of
shares allotted
|
Rate at which
allotted
|
Amount of share
capital allotted
(Rs.)
|
Share
premium
|
Share
allotted on money
|
Total
investment (Rs.)
|
|
Dalmia
cements Ltd., New
Delhi
|
1, 37, 930
|
1, 450
|
13, 79, 300
|
19, 86, 10, 200
|
|
20, 00, 00, 000
|
|
India
Cements
Ltd., Chennai
|
2, 09, 147
|
1, 450
|
20, 91, 470
|
30, 11, 71, 680
|
705
|
30, 32, 63, 855
|
|
Suguni
Constructions Pvt. Ltd., Hyd (company
belonging to Sri
Nimmgadda Prasad
|
1, 37, 931
|
1, 450
|
13, 79, 310
|
19, 86, 20, 640
|
50
|
20, 00, 00, 000
|
|
Total
|
4, 85, 008
|
4, 350
|
48, 50, 080
|
69, 84, 02, 520
|
755
|
70, 32, 63, 855
|
AO observed that the
above investment made by the investors are not technical investments rather in
an arrangement between the investors and directors of the assessee company in
order to pass on the funds through the assessee, this is a method adopted by t
he directors to pass on the contracts and other facilities to the beneficiaries
i.e. investors as directors were influential persons in the, then, State Govt
of A.P. To investigate the above investments, AO issued summons u/s 133(1) to
the above investors and the senior officers of the company appeared before the AO
and recorded the statement. However, none of them agreed that they have invested
under any sort of influence. AO brought on record various incidences in which
the above investors have benefitted from the State Govt. policies and treated
the above receipt of share premium by the assessee as income of the assessee
u/s 28(iv) of the Act.
3. Aggrieved by the
above order of AO, the assessee preferred an appeal before the CIT(A).
4. During the course of
appeal proceedings, the assessee filed additional evidence and the CIT(A) sent
the same to the AO for a remand report. AO along with remand report, also submitted
additional information which was collected by him subsequent to passing of the
assessment order, which is related to subsequent findings in search operation
in the case of Dalmia Bharat Enterprises on 21/01/2012. Assessee was given a
copy of such information and also assessee was asked to submit its argument on
all the issues before the AO, so that a comprehensive remand report can be submitted
by the AO. Accordingly, AO submitted remand report.
5. Ld. CIT(A) issued a
notice of enhancement to the assessee on 31/01/2014 to show cause as to why the
entire receipt from the three investors amounting Rs. 70.32 crores not to be
assessed under the head ‘income from other sources’. Assessee filed its
objections before the CIT(A) and first objection of the assessee was that
information submitted by the AO during the appeal proceedings was nothing but
additional evidence and as per Rule 46A, only assessee can file additional
evidence and not the AO. On this issue, ld. CIT(A) relying on the decision in
the case of Goel Die Cast Ltd., [2008] 297 ITR 72 (P&H) observed that the
CIT(A) is bestowed with powers which are co-terminus with that of the AO and
during the course of appeal proceedings, CIT can call for information or take
cognizance of any information presented before him even if it is from the AO. He
observed that information supplied by the AO was collected during the search
proceedings in the case of Dalmia Bharat Enterprises and information was also
collected by AO during other assessments and penalty proceedings in the case of
group companies belong to the assessee and accordingly, dismissed the argument of
the assessee on this count and justified the information submitted by the AO to
be used against assessee.
On the main issue, i.e. addition on account of
share premium collected by the assessee, assessee has filed the following
arguments before the CIT(A):
“• The appellant has
received money in the form of investments in preference shares from reputed
companies. Their sources are not in doubt and they have fully confirmed all the
investments. Therefore, section 68 cannot be invoked.
• With regard to
section 28 of the income tax act, the appellant argued that the amount of share
premium cannot be treated as a perquisite under the aforementioned section.
• There is also no
applicability of section 56 of the Income Tax Act in the current year as the
section is applicable from the assessment year 2013-14.
• With regard to the
amount of premium, the appellant states that it is the prerogative of the
investor as to what he deems to be the amount he would like to pay for certain
investments. The appellant has also relied upon the ruling of the honourable
ITAT Mumbai in the case of Green Infra Ltd ITA 7762/2012/Mum.
• Further, it was
stated that it is an un-controverted fact that all the investors have confirmed
the investment including the price at which it was made. It's also argued that
just because an investor has purchased a controlling stake in another company
and not done so in the case of the appellant, it does not lead to any
conclusion that it was not logical to do so.
• Even if the
Nimmagadda group may have been involved in routing unaccounted money, that can
merely lead to taxation of such money in their hands.
• Further if any
investments are considered to be irretrievable payments, then it is for the
assessing officer to apply section 41 or any other applicable provision to that
investor and not to the appellant.
The assessee also
argued that there was no doubt about the fact that the investment in shares inclusive
of share premium was a capital investment and accordingly it could not be brought
to tax as a revenue receipt.
After considering the submissions of the
assessee and the information available before him, the CIT(A) confirmed the
additions made by the AO by appraising further evidence before him. He brought
on record, certain schemes and benefits allotted by the Govt. of AP to the
investors like permission for industrial water supply to the India Cements
Ltd., environmental clearances and clearance of change of land use to
subsidiary companies of Dalmia Cements Ltd. and issue of licence for land for
ports and giving clearance for various plots of land owned by Nimmagadda Group
and their relatives.
By relying on the above incidences of benefits
passed on to the investors in the assessee company, the CIT(A) opined that the investors
received huge benefits and largesse from the Govt. of AP during the period of making
investment. He further opined that there is unmistakable connection between
huge concessions received by the three investors from the Govt. of AP and the
investments in preferential share capital in the assessee company and,
therefore, it is clear from the substantial evidence and documentary evidence uncovered
during the search proceedings, referred to that concessions and so-called
investments are not co-incidental, but, they are definitely part and parcel of
one integrated plan for quid -pro- quo. Further, he made comparison with the
investments made in the assessee company and the shares available in the market
of the same cement industry and brought out following points before
adjudicating the issue and the same are as under:
• The three companies
i.e. M/s Dalmia Cements Ltd, MIs India Cement Ltd and M/s Suguni Constructions
Private limited together invested Rs. 70,32,63,855/- were allotted 0%
convertible preference shares at a total price of Rs. 1,450/- per share i.e. at
a premium of Rs. 1,440/- per share.
• In other words, by
spending far more than the existing capital of the appellant company, the
so-called investors obtained only 4,85,008 shares i.e. 0.43% of shareholding in
the assessee company.
• They also obtained 0%
voting power because preference shares do not carry any voting power.
• The so-called
investors also ensured that they would never get any return on their investment
because the shares were 0% preference shares.
• Not only that, if and
when the appellant company became profitable, these three investor companies
would not gain any return because dividend would be given only to the equity
shareholders.
• Further, the investor
companies had provided 99.4% of their money to the appellant as premium i.e.
this amount would never be counted whenever any return was to be given and the amount
would never be returned back to' these investors.
• Normally, investments
are made at a premium when it is understood after due diligence that the future
returns would be such that in spite of the premium the return would add wealth
in real terms to the investor.
• There is no evidence
of any due diligence having been conducted by the three investing companies.
• In the current case,
the investments were abinitio dead because there was never any hope of any
return on them and neither there was any possibility of the original investment
being returned back.
• In the report sent by
the assessing officer dated 14/06/2013, the details of the average share price
of the top seven cement company in the country is compared. This chart is
reproduced below:-
|
S. No.
|
Name of the
company
|
Share prices of
the Cement companies during the relevant period of investment
|
Sales
turnover during 2008 -09 in
Crores.
|
|||
|
|
|
May/ June 2008
|
July 2008
|
August 2008
|
November 2008
|
|
|
1
|
ACC
|
628. 00
|
533. 60
|
626. 00
|
405. 00
|
7474. 15
|
|
2
|
Ultra
Tech Cement
|
627. 00
|
535. 00
|
635. 00
|
318. 00
|
6436. 96
|
|
3
|
Ambuja
Cements
|
81. 90
|
82. 00
|
81. 00
|
56. 50
|
7100. 00
|
|
4
|
Birla
Cements
|
180. 00
|
161. 00
|
187. 00
|
94. 00
|
2057. 89
|
|
5
|
JK
Cements
|
139. 00
|
125. 00
|
131. 00
|
50. 00
|
1502. 46
|
|
6
|
KCP
Cements
|
32. 80
|
26. 00
|
30. 18
|
13. 25
|
405. 26
|
|
7
|
Madras Cements
|
121. 25
|
125. 00
|
133. 20
|
69. 25
|
2538. 50
|
|
8
|
India Cements Ltd.
|
121. 25
|
125. 00
|
133. 20
|
69. 25
|
2538. 50
|
The
CIT(A) adjudicated the issue by observing as under:
“6.15 In the present circumstances, the situation and conditions warrant that the test of human probability be applied and the real should be unearthed from the cloak of the apparent. As discussed in detail supra, the entire set of transactions smacks of non-genuineness and is absolutely contrary to normal human behaviour, especially in case of three companies.
“6.15 In the present circumstances, the situation and conditions warrant that the test of human probability be applied and the real should be unearthed from the cloak of the apparent. As discussed in detail supra, the entire set of transactions smacks of non-genuineness and is absolutely contrary to normal human behaviour, especially in case of three companies.
From above it is clear that the entire amounts
received in the form of preference share payments as well as the
"premium" are in the nature of income. They are not exempt under any
section of the Income Tax Act. Thereafter, it is seen that the fact that these
transactions have been classified as "Preference Shares" and
"Premium" does not mean that these receipts are in the form of a
Capital receipt. The entire classification is done with a motive for tax
evasion. As has already been discussed in detail, the entire amount has been
paid as a quid pro quo for the favours which the assessee has has obtained for
these persons from the Andhra 'Pradesh Government. No equity of the assessee
company has been given to these people and they have not received any rights on
the income or assets and have 0% voting rights. The entire money has been given
and forgotten. By no stretch of imagination can such transactions be classified
as genuine investment in equity as the equity structure of the appellant
remains unchanged. Therefore the amounts received by the appellant are in the
nature of a Revenue Receipt, to be classified as Income of the year. Since the
income is not in the nature of a business or salary or capital gains, it has to
be classified in the resultant category of "Income from other
sources".
The assessee has also
argued during appeal proceedings that if at all the additions are to be made,
they should be in the hands of Mr. Jagan Mohan Reddy, in his personal capacity
and not in the hands of the assessee company. This argument is not valid
because the entire payments are received in the hands of the assessee.
Given the above facts
and circumstances and applying the test of human probabilities, I hold that the
entire amount of 70,32,63,855/- received by the assessee from the three
companies referred to supra was in the nature of "Income from Other
Sources" to be assessed as such u/s 56 of the Income Tax Act. The addition
made by the assessing officer on account of only the share premium is enhanced
as such.”
6. Aggrieved by the
order of CIT(A), the assessee is in appeal before us raising the following
grounds of appeal:“1. The Learned Commissioner of Income-tax (Appeals)-III,
Hyderabad ("Ld. CIT-A") has erred in law as well as on facts while:
a. Confirming addition
of Rs.69,84,11,520 /- towards share premium on shares allotted in Assessment Year
("AY") 2009 -10 u/s 56 of the Income Tax Act, 1961 ("the
Act");
b. Enhancing income by
Rs.48,52,335/- u/s 56 of the Act towards face value of the shares allotted in
that year.
2. The order of the Ld.
CIT-A is based on surmises, conjectures and presumptions and does not take into
consideration extensive evidence and material.
3. The impugned order
selectively relies on incomplete investigations which have not reached finality
and reaches incorrect, unsubstantiated and unlawful conclusions.
4. The impugned order
is completely erroneous on facts and in law including pages 31 to 34 of the
same., is a bundle of contradictions and several inconsistent, contradictory
and unsubstantiated reasons are cited and the entire decision in making process
is completely vitiated. The conclusions reached are incorrect and deserve to be
set aside/ quashed.
5. The Ld. CIT-A has
neither properly appreciated nor set out any reason as to why the judgments
cited by the assessee were not applicable to the matter under appeal and has
further placed reliance on judgments whose facts are clearly distinguishable
from those of the Appellant. Further the conclusions reached are contrary to
decisions of Hon'ble Court(s) and law.
6. The Ld. CIT-A has
wrongly applied section 56 to a transaction that is capital in nature.
7. The impugned order
ignores the findings of the AO, approbates and reprobates while enhancing the
income without citing any valid reasons.
The above grounds are
independent and without prejudice to each other. The Appellant craves leave to
add to, alter, supplement, amend, vary, withdraw or otherwise modify the
grounds mentioned hereinabove at or before the time of hearing.”
7. Ld. AR of the assessee
submitted written submissions, which are as under:
“Company is not business
of providing any type of services and is engaged in manufacturing and sale of cement.
Assessee company has a distinct legal entity from its shareholders/promoters.
Representatives from
investor companies were examined on oath and have confirmed making the
investment at premium. Complete details and confirmation of transaction
available and are not contradicted in any why that shares were acquired at a
premium as continues to be reflected in books of accounts of Appellant Company.
Quantity of Share
premium on shares of private company are not regulated by law and is based on
commercial negotiations. Reference to facts noted at para 40 in recent decision
in Flipkart India ITA 202 /Bang/2018 shows that premium is based on perception
and business expectations of investors and in present case the investors were
admittedly experienced and knowledgeable managements of listed/ reputed
companies.
Share premium money
received is fully accounted and continues to remain in the company to date
fully compliant with section 78 of companies Act. Allegations that the same
could be towards services by promoters are totally baseless and not supported
by any material. Amount of share premium is permitted to be negotiated between
investor and company and there are no restrictions on the quantum. Subsequent
investment in April 2010 made by PARFICM (overseas third party investor) which
has brought in huge premium amount Rs. 1440 CRORES out of Rs. 1780 crores
appearing as on date in the share premium account, was also negotiated and clearly
and undoubtedly much more than share premium determined as per prescribed
methods.
Bharati Cement
Corporation Limited as legal entity is disti nct and separate from promoters or
shareholders, presumptions made in impugned order to the contrary are contrary
to settled principles of law, unlawful, factually baseless and invalid. As no
amount of share premium is alleged or even shown to have been allowed as pass
through by the company there is no basis for suspicions and wild allegations.
Without prejudice, even if lifting of corporate veil is permissible, the consequence
would not lead to taxation of share premium in the hands of Appellant Company.
Presumptions of some
service/benefits being allowed by government of state of Andhra Pradesh to
investor companies, even if presumed to be true for argument sake cannot
justify taxation of any amount in the hands of Appellant company, as being a
legal entity Appellant Company was neither in business of providing such
services or was actually involved in any way.
As directed during the
course of hearing, we have already filed bank accounts into which the entire
share investment including share premium was received, and how the same was
subsequently invested into fixed assets owned by company ( cash flow statements),
details of profits made by investors from such investment in Appellant Company.
Details provided also establish that the entire sum and even subsequent share
premium amount received from PARFICM remains invested in Appellant's business
as on date of this hearing. Ld. AO brought impugned share premium to tax under
Section 28 (iv) and section 68 but the Ld. CIT (A) has confirmed that the same
is taxable under section 56. Department is not in appeal against Ld. CIT (A) order.
The subsequent amendment by way of section 56 2(viib) effective 1.4.2013 i.e.,
Ay 1314 cannot be applied for impugned transactions completed during Ay 9 -10
and 10-11. Facts on record confirm that section 68 and section 28 (iv) have no
application at all. Hon'ble Tribunal's pointed query to Ld. DR ( at earlier
hearings of these appeals) on limb of sections 56, 28 and 2(24) under which
share premium of the nature involved in present appeal would be taxable did
not result in any response, much less reasonable response.
Appellant referred to
and relied upon decisions of courts in Larsco entertainment (ITA 249/HYD/2014),
Subhlakshmi Vanijya Pvt. Ltd., (ITA 1l04/KOL/2014), Green infra (ITA
7762/MUM/2012), Vodafone decision 3411TR l(at paras 71 and 619) ,26 ITR 736
Dhirajlal Giridharilal and 66 ITR 725 Ramakrishna pillai (SC)” .
Referring to the above, the ld. AR submitted
that share premium amount received during AY 2009-10 and 2010-11 by the
assessee is capital receipt and cannot be taxed as revenue receipt under the
provisions of the Act as applicable to extant period. He, therefore, prayed
that the additions made to returned income on this count be deleted in toto. He
relied on the following cases:
1. Vodafone India
Services Pvt. Ltd., [2014] 368 ITR 1 (Bom.)
2. Credit Suisse
Business Analysis (India) Pvt. Ltd. Vs. ACIT, ITA No. 993/Mum/2015, order dated
05/08/2016.
8. The ld. DR also
filed synopsis of arguments, which are as under:
“
1.Non-Genuineness Of The Transaction :
1. The promoter of the assessee company was having huge political clout during the period relevant for the assessment year, having regard to the fact that his father was the chief minister of the State of Andhra Pradesh.
1. The promoter of the assessee company was having huge political clout during the period relevant for the assessment year, having regard to the fact that his father was the chief minister of the State of Andhra Pradesh.
2. The investing
Companies viz., MIs. Dalmia cements, MIs. Gilchrist Investments Pvt Ltd., MIs.
Alpha Villas Pvt Ltd. & MIs. Alpha Avenue Pvt Ltd, have obtained huge
benefits from the Government of Andhra Pradesh in various forms. As a gratuitous
measure, they have remitted huge amounts into the assessee company in which Mr.
Y.S. Jagan Mohnan Reddy is the major shareholder. The said remittance was
termed as" investment" and were allotted 0% convertible preference
shares.
3. All the investors by
spending more than the existing capital of the assessee obtained only 0.3% of shareholding
in the company. The investors never had any say in the management of the
affairs of the Company. They did not have voting power and were not entitled to
any profits of the assessee.
4. The subject
investment was not done upon obtaining any due diligence.
5. The investments made
by Nimmagadda group were always in huge profit fetching areas like medical,
media & entertainment, hospitality etc., but for the first time invested at
a huge rate in a Cement Company as stated above, that too in an inexperienced
Company which did not commence its production and also without expecting any
earning/profit out of the subject investment.
6. The said investment
is unscientific and not based on any due diligence. There was no guarantee
assured by the assessee that the investors would get any gain out of their
investment.
7. The directors in
fact stated before the AO that they had no say in fixation of the price for
shares. When the investors never had any say in fixation of price of the share
or in the affairs of the company, it is inconceivable that such a giant
business group, have invested in the assessee company with no track record. The
so-called investment is an arm-twisted investment.
8. Everybody is
entitled to arrange their financial transactions in such manner to avoid tax
liability or lessen the burden, but the arrangement should be real and genuine
and cannot be sham or make belief arrangement.
9. In the facts of the
facts of the present case the entire transaction is a bogus transaction smacks
of non-genuineness.
5 2. Lifting Of Corporate Veil :
What is apparent is not
real. The AO as well as the CIT(A) gave a categorical finding that what is
shown is not real. The amounts have been paid as a quid pro quo for the
benefits received by the four investors. The payments are kickbacks. The net
worth of the assessee was RS.185 Cr. By investing more than the promoters of
the assessee, the investors could get only .03% of shareholding in the assessee
company. There is direct nexus between the investments made by the so-called
investors and the benefits that they derived from the Government of A.P. The
sale of shares of the Company were never offered to general public thus what is
apparent is not real. The AO, who is entitled to lift the corporate veil to
examine the realities behind the legal facade, did so in the instant case. The
entire transaction was pushed as genuine.
3.Whether
The Receipt Is Capital Receipt Or Revenue Receipt :
The definition of income as defined under Sec.2(24) of the Act is an inclusive definition. Any receipt which can be described as income is taxable unless it is exempted under the provisions of the Act.
The definition of income as defined under Sec.2(24) of the Act is an inclusive definition. Any receipt which can be described as income is taxable unless it is exempted under the provisions of the Act.
The finding of the AO
as well as the CIT(A) is that the subject investment did not go into capital
expansion of the company. The investment did not result in any change in
capital or equity structure of the company.
The three investors
have come and given their money without expectation of any return out of the
said investment and lef t the scene. They never wanted to derive any benefit
out of the said investment. There was never any obligation on the part of the
assessee to part any of its profits in favour of the investors. The entire
receipt is cloaked as "Capital receipt".
Referring to the above submissions, the ld. DR
submitted that the appeal filed by the assessee is devoid of any merit and liable
to be dismissed. He relied on the following cases:
1. CIT Vs. L.N. Dalmia,
[1994] 207 ITR 89 (Cal.)
2. Sunil Siddharthbai
Vs. CIT, 156 ITR 509 (SC)
3. Workmen of
Associated Rubber Industry ltd., 157 ITR 77 (SC)
4. Juggilal Kamlapat
Vs. CIT, 73 ITR 702 (SC)
5. CIT Vs. Durga Prasad
More, 82 ITR 540 (SC)
9. Considered the rival
submissions and perused the material on record as well as the decisions cited.
We noticed that assessee has issued and allotted shares of 0% convertible
preferential shares in private placement to three investors. They are well
known companies in the industry. These shares were issued with huge share
premium and share premiums were determined without any basis. But all the issue
and allotment of shares are within the four corners of law. The AO/CIT(A) has
not brought on record any issues with the issue and allotment of shares since
these are issued and allotted as per the companies Act and rules that existed
at the time of issue and allotment of shares. The determination of share
premium may not be as per industries norms or investor norms but these were
fixed and accepted by the investing parties.
We further notice that AO/CIT(A) has noted the
timing of issue and allotment of shares with such huge share premium which aro
used suspicion. Accordingly, AO issued summons to the investors and none of the
investors had agreed that these were invested under any influence by the
shareholder/directors. AO and CIT(A) has brought on record the incidences and
circumstantial events to infer that these are quid-pro-quo arrangements between
the investors and director of the company. The arrangement and circumstances
leading to issue and allotment of shares may draw some doubts that certain
benefits may have passed on to the directors. But the question is whether the
directors/shareholders have really benefited with this arrangement and the
assessee company was used as arrangement to pass on the benefit. The revenue
has to prove that the investors have passed on the benefit to the
shareholders/directors through this arrangement by bringing cogent material.
But the AO/CIT(A) has brought on record so many incidences and alleged benefits
which were enjoyed by the investors from the Govt. of AP. But, what is important
is that the funds were invested in the company and the company has demonstrated
that it has treated the investment as part of share capital fund and also the
share premium as part of capital reserve within the company as per the
provisions of Companies Act. Since the assessee is artificial person created by
the Statute, we cannot trespass the legal entity. It cannot be trespassed
provided the authority has evidence to prove that this legal person was used to
pass on the benefit to interested shareholders by lifting the corporate veil.
In this case, no such evidence was brought on record rather circumstantial
evidence and test of human probabilities were applied to convert the capital
transaction as per Companies Act into revenue transaction under Income-tax Act.
We notice that AO has invoked section 28(iv)
to convert the capital receipt as revenue. This section refers to any
benefit/perquisite arising from business or exercise of a profession. This
capital receipt is not generated in the business whereas ld. CIT(A) confirmed
the capital receipt as income from other sources without establishing that this
is income of the assessee when the assessee has not even commenced the
business. The alleged receipt is the benefit intended to pass on to the
director/shareholdes of the company. We noticed that this capital investment
was received by the assessee as 0% convertible preferential shares. No doubt
there is no immediate outflow to the company in terms of dividend but it is
convertible in the near future as equity share capital. There are certain
aspects of this investment which certainly raises eyebrows as they are not the
best of investment decision like:-
i) no participation in
the management considering only 0.43% shares were allotted to outsiders ( no
controlling interest is compromised).
ii) without yielding
the controlling interest, investment of such huge share premium.
iii) no basis for
issuing shares at such huge premium.
Apart from this aspect,
the investment is legal and within the provisions of Companies Act, 1952. We
are not in a position to accept the contention of the ld. AR that the investors
have actually earned the profit by investing in the assessee company. We
noticed that the shares were allotted with share premium of Rs. 1,440/- and the
same shares were sold at Rs. 671.20. We have to compare the same shares which
were sold and not compared with the portfolio of investment. We also noticed
that in the subsequent submission, AO found that these shares were sold without
having any say by the investors. All the negotiations were made by the
directors and the proceeds were also reinvested in the assessee company as
loans etc.
Again, we also cannot presume or apply test of
human probabilities, we are dealing with the business transaction, it has to be
based on cogent material. Considering the whole situation, in our considered
view, the AO/CIT(A) have restricted themselves by stopping the investigation
based on circumstantial evidence and applying test of human probabilities. In
order to lift the corporate veil for the purpose of determining whether any
benefit is passed on to the shareholders/directors, they have to bring on
record proper evidence/cogent material. We direct the AO to redo the assessment
keeping in mind that no doubt the assessee has received this capital receipt
and what circumstances which lead to investment is not important but whether
the assessee company was used as a vehicle to pass on the benefit to
shareholders/directors. In this regard, we direct the AO to make the assessment
as below:
a) We noticed that
assessee has declared loss in AY 2010-11 as per Income-tax Act, Rs. 189.76
crores and in cash flow, they are declaring decrease in cash from operating
activities to the extent of Rs. 71.94 crores. On careful analysis, it can be
seen that assessee received through share capital Rs. 181.99 crores and secured
borrowings Rs. 334.47 cores but made investment in fixed assets to the extent of
Rs. 370.75 crores. The investment in fixed assets are already covered in
secured borrowings, the decrease in cash from operation has to be verified
properly.
b) He has to verify
whether any benefit is passed on to shareholders/directors through other means
as the assessee is declaring huge loss in the initial years of operation
itself.
Therefore, this issue
is remitted back to the AO for re-verification as per above direction and in
simple terms, verify all the funds and cash flow management of the company for
both AYs 2009-10 & 2010-11. AO should not resort to rely on circumstantial
evidence or on test of human probabilities but on factual evidence of passing
of benefit to the shareholders/directors. Hence, grounds of appeal raised by
the assessee are allowed for statistical purposes.
10. As the facts and
grounds raised in AY 2010 -11 are materially identical to AY 2009-10, following
the conclusions drawn therein, the grounds raised in this appeal are also
treated as allowed for statistical purposes.
11. In the result, both
the appeals of the assessee are allowed for statistical purposes.
Pronounced in the open
Court on 10th August, 2018.
----------------------------------------------------------------------------
No comments:
Post a Comment