INCOME TAX APPELLATE
TRIBUNAL - MUMBAI
DCIT 1(3)(2), MUMBAI VS
VARSITY EDUCATION MANAGEMENT
24 OCTOBER, 2018
I.T.A. No.
6991/Mum/2016
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:-
(i) 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 Act.
(ii) 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 Rs.60,24,03,734/-
(iii) 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 M / s . Varsity Education
Management Pvt. Ltd. corresponding reserves generated can be distributed as
dividend in the form of bonus/shares".
2. 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:-
(i) 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 Pradesh.
(ii) 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 Pradesh."
3. 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 24.03.2011:-
M/s Varsity Education
Management Pvt Ltd
(a) Trilochan
Properties Pvt Ltd 29,41,150
shares
(now known as Coeus Education
Management Pvt Ltd)
Management Pvt Ltd)
(b) Ms Sushama B 29,425 shares
(c) Ms Seema B 29425
shares
4. 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 share.
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.
5. 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 Varsity Education Management Pvt Ltd.
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:-
2. 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
report. 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
|
2012-13
|
43,60,00,000
|
78,05,15,719
|
Varsity Education Management
Pvt. Ltd.
|
2013-14
|
46,60,00,000
|
85,42,58,692
|
3. 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/-.
(i) 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 concerned.
(ii) 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.
(iii) 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 M / s Varsity Education Management Pvt Ltd. funds
invest as per their own valuations. It is to submit that there is no
relationship between the assessee company and NSR.
(iv) 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
Ltd. 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.
(v) 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 government.
(vi) 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 i.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.
(vii) 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.
6. 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 M / s . Varsity Education Management
Pvt Ltd. 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.
7. 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
respe t 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:-
(a) ZARS Trading P Ltd
(ITA No.3284/Del/90) (2010 TIOL 308)
(b) Kushara Real Estate
P Ltd (ITA No.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 M / s . Varsity Education Management Pvt Ltd collected premium from M/s NSR PR Mauritious
LLC, which is against all rationale and logics.
8. Accordingly the AO
took the view that the assessee has failed to justify excess premium of
Rs.358/- per share, which amounted to Rs.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.
9. We have earlier
noticed that the assessee had received funds in the immediately preceding year,
i.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.
10. 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 Rs.358/- per share, when the
identity and source of the same have been proved. Aggrieved, the revenue has
filed this appeal.
M / s Varsity Education
Management Pvt Ltd.
11. 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, i.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:-
(a) Blue Star Ltd (217
ITR 514)(Bom)
(b) Societe Generale
(ITA No.1314 of 2013)
(c) HDFC Bank Ltd (ITA
No.1753 of 2016)
(d) Hinduja Global
Solutions Ltd (W.P No.1451 of 2015)
(e) Hatkesh Co-op Hsg
Society Ltd.
12. 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 M / s .
Varsity Education Management Pvt Ltd.
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.
13. 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 taxmann.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.
14. 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 decision.
15. 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 M / s . Varsity Education Management Pvt Ltd.
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.
16. 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 had. 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.
17. 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".
18. 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 M / s . Varsity Education Management Pvt Ltd.
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.
19. 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 A.R that the Hon'ble Bombay High Court has made following
observations in the case of Pr. CIT vs. M / s . Varsity Education Management
Pvt Ltd.
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.
20. 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 sec.68 of the Act to assess the alleged
unjustified premium. He M / s . Varsity Education Management Pvt Ltd 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.
21. 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.
22. 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 M / s . Varsity Education Management Pvt Ltd.
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.
23. 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 channels.
24. The first question
that arises is whether the Share premium can be considered as income taxable
under the Act. 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:-
M / s . Varsity
Education Management Pvt Ltd.
"10. We have
considered the rival submissions and carefully perused the orders of the lower
authorities and the material evidences brought on record in the form of Paper
book. The entire dispute revolves around the charging of share premium of Rs.
490/- per share on a book value of Rs. 10/- each. This dispute is more so
because of the fact that the assessee company was incorporated during the year
under consideration. Therefore, according to the revenue authorities, it is
beyond any logical reasoning that a company with zero balance sheet could
garner Rs. 490/- per share premium from its subscribers. Such transaction may
raise eyebrows but considering the subscribers to the assessee company, the test
for the genuineness of the transaction goes into oblivion. It is an undisputed
fact admitted by the Revenue authorities that 10,19,000 equity shares has been
subscribed and allotted to IDFC PE Fund-II which company is a Front Manager of
IDFC Ltd., in which company Government of India is holding 18% of shares. The
contributors to the IDFC PE Fund-II who is a subscriber to the assessee's share
capital, are LIC, Union of India, Oriental Bank of Commerce, Indian Overseas
Bank and Canara Bank which are all public sector undertakings. Therefore, to
raise eyebrows to a transaction where there is so much of involvement of the
Government directly or indirectly does not make any sense. 10.1 No doubt a
non-est company or a zero balance company asking for a share premium of Rs.
490/- per share defies all commercial prudence but at the same time we cannot
ignore the fact that it is a prerogative of the Board of Directors of a company
to decide the premium amount and it is the wisdom of the share holders whether
they want to subscribe to such a heavy premium. The Revenue authorities cannot
question the charging of such of huge premium without any bar from any
legislated law of the land. Details of subscribers were before the Revenue
authorities. The AO has also confirmed the transaction from the subscribers by
issuing notice u/s. 133(6) of the Act. The Board of Directors contains persons
who are associated with IDFC group of companies, therefore their integrity and
credibility cannot be doubted. The entire grievance of the Revenue revolves
around the charging of such of huge premium so much so that the Revenue
authorities did not even blink their eyes in invoking provisions of Sec. 56(1)
of the Act.
'56. Income from other
Sources.-- (1) Income of every kind which is not to be excluded from the total
income under this Act shall be chargeable to income-tax under the head
"Income from other sources", if it is not chargeable to income-tax
under any of the heads specified in section 14, items A to E.' 10.3 A simple
reading of this section show that income of every kind which is not to be
excluded from the total income shall be chargeable to income tax. The emphasis
is on that 'income of every kind', therefore, to M / s . V Varsity Education
Management Pvt Ltd. 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."
25. 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 Act. In the instant case, the assessing officer
has assessed the alleged excess premium u/s 68 of the Act only.
26. 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 Rs.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 M / s . Varsity Education Management Pvt Ltd. 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.
27. 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 sec.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 M / s . Varsity Education Management Pvt Ltd. 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."
28. 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, viz., identity of the subscriber, the capacity
of the subscriber and the genuineness of the transaction.
29. 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 viz.,
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 M / s . Varsity Education Management Pvt Ltd.
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.
30. 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:
(i) grave procedural defects such as violation
of mandatory procedural requirement of provisions in Chapter XIX-A and or
violation of rules of natural justice;
(ii) absence of nexus
between reasons given and decision taken by Settlement Commission.
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 M / s . Varsity Education Management Pvt Ltd 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] 1 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..."
20. 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 Ltd. [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..."
M / s . Varsity
Education Management Pvt Ltd 21. 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
Commission."
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 M / s . Varsity Education Management Pvt Ltd 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.
31. 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 sec.68 of the Act.
32. 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 D.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 M / s . Varsity Education
Management Pvt Ltd. 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.
33. 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 AO. The provisions of sec.68 read as under:-
68. 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.
34. 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
shares.
35. 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 Act. 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 M/s. Varsity Education Management Pvt Ltd. 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.
36. 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 M / s . Varsity Education Management Pvt Ltd.
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:-
(a) 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.
(b) 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 M / s . Varsity
Education Management Pvt Ltd unrebutted, that evidence against him by holding
that it was a receipt of an income nature.
(c) Smt. 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.
37. In the instant
case, there is no dispute to the fact that the assessee has received the sum of
Rs.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.
38. 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 M / s . Varsity Education
Management Pvt Ltd. 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.
39. 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 M / s . Varsity Education Management Pvt Ltd. "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.
40. 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 projections.
41. 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 shares.
42. 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 above.
43. In the result, the
appeal of the revenue is dismissed.
Order has been
pronounced in the Court on 24.10.2018.
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