Income Tax Appellate Tribunal - Mumbai
Ito -6(2)(1), Mumbai vs Chiripal Poly Films Ltd., Mumbai on 19 February, 2019
IN THE INCOME TAX APPELLATE TRIBUNALMUMBAI BENCHES "C", MUMBAI
BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER
AND
SHRI N.K. PRADHAN, ACCOUNTANT MEMBER
ITA No.2671/Mum/2016
Assessment Year : 2011-12
The Income Tax Officer-6(2)(1), M/s. Chiripal Poly Films Ltd.,
MUMBAI 109/110, Peninsula Centre,
Vs. Dr.S.S. Road, Parel,
MUMBAI
[PAN : AADCC7403M]
(Appellant) (Respondent)
Appellant By : Shri H.N. Singh, CIT-DR
Respondent By : Shri Vartik. R. Choksi &
Shri Bhavik Shah, ARs
Date of Hearing : 30-11-2018 Date of Pronouncement :-19-02-2019
ORDER
Per Mahavir Singh, Judicial Member:
This appeal filed by the Revenue is directed against the order of the Commissioner of Income Tax(Appeals)-12, Mumbai, in appeal No. CIT(A)-12/ITO-6(2)(1)/123/14-15, dated 13-01-2016. The assessment was framed by the ITO, Ward- 6(2)(1), Mumbai u/s. 143(3) of the Income Tax Act, 1961 [herein after referred to as 'Act'] for the AY. 2011- 12 vide his order dt. 31-03-2014.
2 ITA No.2671/Mum/2016M/s. Chiripal Poly Films Ltd.,
2. The first two common issues in this appeal of Revenue are raised against the order of CIT(A), deleting the addition made by the AO on account of introduction of share application money and share premium as unexplained credit u/s. 68 of the Act. For this, the Revenue has raised the following two grounds:
"I. The Learned CIT(A) has erred on facts and circumstances of the case in deleting the addition of ₹ 4,47,10,385/- on account of introduction of share application money treated as unexplained credit u/s. 68 of the Income Tax Act, 1961.
II. The Learned CIT(A) has erred on facts and circumstances of the case in deleting the addition of ₹ 23,47,38,900/- on account the share premium collected on issue of shares treated as unexplained credit u/s. 68 of the Income Tax Act, 1961".
3. Briefly stated facts are that the assessee-company was setting up BOPP line in the previous year 2010-11 relevant to the AY. 2011-12. The main activity which were going on over a building, commissioning and setting up of plant for manufacturing a BOPP film. The company is in the process of carrying on business as manufacturers, importers, exporters, buyers, sellers, suppliers, distributors, stockiest, designers of and dealers in polymers, monomers, elastomers and resins of all types, grades and copolymer formulations and in all forms such as 3 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., resins/chips, powder, flakes, granules, films, sheets, tubes, pipes, fibres, laminates or as processed goods and including specifically polyethylene, polypropylene, polyethylene polystyrene, polyvinyl acetate, methacrylate, resins, alkide resins, melamine, polyesters, such as polyethylene, terephihallate and polyethylene, sphathalate or any other or new substances being improvements upon, modifications of our being derived from additions to petrochemicals or other/products or resulting for many processes. The AO during the course of the assessment proceedings noticed that the assessee has introduced/received share application money on 25-03-2011 amounting to ₹4,47,10,385/-. The share application money was pending allotment of shares in the Balance Sheet as on 31-03-2011. The assessee has received this amount from Orange Mauritius Investments Ltd., of Republic of Mauritius. AO noted that the authorized share capital of assessee-company was ₹ 3 Crores and share capital of the capital has not been increased even after the year under consideration. He noted that the paid up capital of the assessee-company is at ₹ 1,78,71,100/- as on 31-03-2011. AO required the assessee to explain the nature and the source of the credit appearing in its books of account u/s. 68 of the Act. The AO applying the decision of the Hon'ble Bombay High Court in the case of Major Metals Ltd., Vs. Union of India [207 Taxmann.com 185] was of the view that the capital introduced by the assessee is unexplained and hence he added the same u/s. 68 of the Act, treating the same as 'unexplained credit'.
4. Similarly, the AO noted that the assessee during the year under consideration has issued, subscribed and paid up capital of assessee- company increased by ₹23,71,100/-. The security premium account 4 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., disclosed that the assessee has received share premium of ₹ 23,47,38,900/- and the details of receipt of shares is as under:
Sr. Name of Date of No. of Face Share Premi Total amount No. the Share allotment shares value premium um ₹ Holder allotted charged per share 1 M/s. 16.08.2010 12977 129770 12847230 990 12977000 Desert 18.10.2010 Diamond 09.12.2010 General 21.02.2011 Trading LLC UAE 2 M/s. 16.08.2010 13462 134620 13327380 990 13462000 Desert 18.10.2010 Diamond 09.12.2010 General 21.02.2011 Trading LLC UAE 3 Shyamsun 16.08.2010 4171 41710 4129290 990 4171000 der 18.10.2010 Sharma 09.12.2010 21.02.2011 4 M/s. 16.08.2010 70000 700000 69300000 990 70000000 Sparrow 18.10.2010 Exports 09.12.2010 Pvt. Ltd., 21.02.2011 5 M/s. 16.08.2010 35000 350000 34650000 990 3535000000 Bhusan 18.10.2010 Profiles 09.12.2010 Pvt. Ltd., 21.02.2011 6 M/s. 16.08.2010 5500 55000 5445000 990 5500000 Shanti 18.10.2010 Education 09.12.2010 al 21.02.2011 Initiatives Ltd., 7 Chiripal 16.08.2010 30000 300000 29700000 990 30000000 Textile 18.10.2010 Mills Pvt. 09.12.2010 Ltd., 21.02.2011 8 Dindayal 16.08.2010 35000 350000 34650000 990 35000000 Processors 18.10.2010 Pvt. Ltd 09.12.2010 21.02.2011 9 M/s. 16.08.2010 30000 300000 29700000 990 30000000 Prakash 18.10.2010 Calender 09.12.2010 Pvt. Ltd., 21.02.2011 10 M/s. Vijay 16.08.2010 1000 10000 990000 990 1000000 Shubham 18.10.2010 Contrade 09.12.2010 Pvt. Ltd., 21.02.2011 Total 237110 2371100 234738900 990 237110000 5 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd.,
5. The AO issued show cause notice and notice u/s. 142(1) requiring the assessee to explain and file the details like confirmation of account from all the above parties along with complete address, PAN details, proof of filing of returns, source of funds supported by bank statements, justification of premium charges, copies of minutes recorded of the Board meeting, copies of share application form, copies of share certificate, name and address of share Registrar of the company, proof of stamp duty paid or share issue expenses incurred.The AO also required the assessee to explain the reasonability of share premium charged at ₹ 990/- per share from the investors, whereas as per the fair market value of share of the assessee, as per Rule 11UA of the Income Tax Rules, 1962 [herein after referred to as Rules] worked out to ₹ 37.87 per share as on 31-03-2010 and ₹ 166.54 per share as on 31-03- 2011.
6. The assessee replied the show cause notice of the AO and point- wise reply filed by the assessee vide letter dt. 12-02-2014 is as under:
1. Copy of show cause notice dated 03.02.2014 issued u/s. 143(2) & 142(1) of the I.T. Act, 1961 by Ld.AO;
2. Copy of assessee's submissions dated 12.02.2014 filed in response to notice dated 03.02.2014 along with relevant annexures.
i.PAN and complete address of the
investors
6
ITA No.2671/Mum/2016
M/s. Chiripal Poly Films Ltd.,
ii.Copies of confirmations of accounts from investors iii.Acknowledge copy of return of income of investors iv.Copies of bank statement of the appellant company v.Copies of FIRC issued by RBI in the case of NR investors vi.Copies of letter issued by RBI allotting UIN No. in the case of NR investors vii.Copies of letter issued by RBI in case of NR investors in connection with FCGPR viii.Copy of Minutes recorded in the Board Meeting held for allotment of shares to investors ix.Copies of Share Application form received from investors x.Copies of Share Allotment Certificate issued to investors xi.Copies of Form No-2 and Annual Return filed with ROC 7 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., xii.Copies of Audited Financial statements for F.Y. 2010-11, F.Y. 2011-12 and F.Y. 2012-13 xiii.Copy of agreement entered with the supplier for importing various equipment and machineries for BOPP plant xiv.Copy of LC margin availed from IDBI Bank for importing various equipment and machineries for BOPP plant xv.Copy of FD placed against that LC margin
3. Copy of documentary evidences in connection with investment made by Orange Mauritius Investment Ltd., i. Copy of FC-GRP submitted to RBI ii. Copy of FIRC received from the IDBI Bank iii. Copy RBI letter allotting UIN No."
7. Ld. Counsel for the assessee explained the back ground of the business of assessee-company and future prospectus of the assessee- company by stating that Chiripal Poly Films Ltd (CPFL) is a closely held company incorporated under the Companies Act, 1956. The company is promoted by Chiripal Group of Industries, Ahmedabad. CPFL has proposed to set up imported BOPP Line of 3 Layers of 8700 MM width to manufacture BOPP film of specialty to commodity grade in range of 8 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., 10 microns to 60 microns at an installed capacity of 38775 TPA. The project is to be set up at Vraj Integrated Textile Park Ltd., Bidaj Village, Kheda District in Gujarat for manufacture of BOPP Films at an installed capacity of 38775 TPA at a cost of project of ₹24147.61 Lacs. The company also proposed to go for expansion and install 2ndline of BOPP films at an installed capacity of 34200 TPA at a cost of project of ₹ 21565.46 Lacs. With respect to 1st BOPP Line, KBC Bank Dutshland AG, Germany has financed (unsecured loan) the transaction for purchase of BOPP Line and importing other auxiliary Plant and Machinery. For Domestic plant and machinery CPFL has proposed for financial assistance in the form of Term Loan of ₹ 8378.93 Lacs from Indian banks.With respect to 2nd line, CPFL has proposed for financial assistance in the form of Term Loan of ₹ 5755 lacs for 2nd line. Also the KBC Bank Duetshland AG, Germany has financed the transaction for purchase of 2nd BOPP Line and importing other auxiliary Plant and Machinery. The key estimated figures of both BOPP lines which have been estimated for the project in 2009 are attached herewith as annexure A.From the said projects it was expected to derive substantial revenues. It is a prerogative of the board of directors of a company to decide the premium amount and it is the wisdom the shareholder whether they want to subscribe to such premium or not. It is the prospects of business which decides the share price and it cannot be objected at any imagination.
8. In view of the above documentation and explanation, the assessee contended that the genuineness and source of transactions can be verified and from the above documents it can safely be concluded that the share application money received is genuine and 9 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., source is explained. It was also stated that the entire transaction has been done through banking channels duly recorded in the books of account of assessee and duly reflected in the financial statements of the assessee. But the AO noted that the share premium charged by the assessee is supported by Valuation Certificate of M/s. Sanjaykumar Jhabburam & Co., of Ahmedabad being independent valuer, who estimated the projected profit for the FY. 2012-13 at ₹ 22.05 Crores, whereas actually in the audited financial results of assessee-company, the profit for the FY. 2012-13 is only ₹ 6,44,64,840/-. Similarly, he noted that for the FY. 2013-14, the profit after tax estimated by valuer is ₹ 24.10 Crores, whereas actually for the quarter ending December, 2013, such profit was ₹ 16.16 Crores only. According to the AO, the book value of the share as on 01-04-2010 is only ₹ 37.87 and as on 31-03- 2011, it is ₹ 166.54 per share, whereas the assessee has charged the share premium of ₹ 990 for the share which is not at all justified and assessee has received excessive amount by way of share premium. The AO relying on the various case law, added the share premium, as there is no nexus or justification and after going through Rule 11UA of the Rules, added an amount of ₹ 23,47,38,900/- u/s. 68 of the Act. Aggrieved, assessee came in appeal before the CIT(A).
9. The CIT(A) deleted the addition by observing in paras 9.5 and 9.6 i.e., share application money ₹ 4,47,10,385/- which is as under:
"9.5. I have given a careful consideration to the entire facts and circumstances relating to the share application money of ₹ 4,47,10,385/- and have considered the reasoning contained in the assessment order in support of this 10 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., addition as also the cases cited by the Assessing Officer and also considered the submissions of the appellant-company as reproduced above. I am of the view that the addition has been made by the Assessing Officer without allowing adequate opportunity and without examining the correct factual position. As mentioned above, primarily the addition has been made on the assumption that the appellant-company was debarred from receiving the aforesaid share application money unless first the authorized share capital is increased. From the factual position explained in the statement of facts it is clear that there was no necessity for increasing the share capital for allotting 1,98,000 shares to M/s. Orange Mauritius Investments Ltd. the said shares were ultimately allotted on 11th July, 2011 i.e. during the previous year relevant to the subsequent assessment year. The shares are of the face value of ₹ 10/- with a premium of ₹ 990/- per share.
Comprehensive documentary evidences have been placed on record by the appellant- company to establish the nature and the genuineness of the transaction and the source of the money received after fulfilling all the mandatory requirements of RBI. The entire 11 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., transaction is only through banking channels. The identity of the party, the financial capacity and the source have been fully explained by the appellant-company. The two cases referred to in the assessment order cannot be made the basis for such addition having regard to the correct factual position of the case here. In the case of Shreelekha Banerjee it was held by the Hon'ble Supreme Court that addition for unexplained cash credit would be justified if the appellant fails to offer any explanation or explanation offered by the appellant is not found satisfactory by the Assessing Officer. In the present case the appellant-company has provided satisfactory explanation which is supported by documentary evidences. The Assessing Officer has also referred to the Hon'ble Bombay High Court decision in the case of Major Metals Ltd. For ready reference, the relevant part of the head-note of this case is reproduced below:-
"Section 68, read with sections 245D and 245C, of the Income-tax Act, 1961 - Cash Credits - Assessment 2008-09 and 2009-10 - Appellant an unlisted company was given huge loan of ₹ 6 crores by two companies - Later on 12 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., these companies were allotted 30,000 shares each of face value 10 at huge premium of ₹ 990 - Settlement Commission found that neither these two companies had financial standing for giving such huge loan nor pas performance of appellant would justify payment; hence addition was made under section 68 in appellant's hand - Appellant submitted that Commissioner's had identified two companies being income-tax appellants, recourse to section 68 was not in order - Whether since view taken by Settlement Commission was borne out on basis of material record, same could not be interfered with - Held, yes ( In favour of revenue)"
9.6. From the above, it is seen that in this case, firstly loan of ₹ 6.00 crores was received by the appellant-company and subsequently shares were issued at premium and it was found that the two companies had no financial standing for giving such a huge loan. So, in my view this case is not relevant to the facts of the present case. There is no justification for 13 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., the addition of ₹ 4,47,10,385/- and the same is deleted. Ground of Appeal No. 2 is allowed".
10. Further, the CIT(A) deleted the addition of share premium added by the AO u/s. 68 amounting to ₹ 23,47,38,900/- by observing in paras 9.17 to 9.20 as under:
"9.17. I have carefully considered the factual position pertaining to the share application premium of ₹ 23,47,38,900/- vis-à-vis the provisions of section 68 of the I.T. Act. I have also duly considered the legal position as emerging from the various judicial pronouncements relied upon by both the A.O. and the appellant. There is no dispute about the proposition that the primary onus u/s. 68 of the I.T. Act is cast upon the appellant to prove and establish the following:-
i) Identity of the creditor
ii) Financial capacity of the creditor
to advance the money, and
iii) Nature and genuineness of the
transaction.
9.18. After going through the various
documentary evidences which have been brought on record there is no dispute 14 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., whatsoever that the appellant-company has successfully and fully established the aforesaid three legal requirements. As a matter of fact, even the Assessing Officer has not disputed this fact which is apparent from the following remark given at para-2 of the remand report.
"In this case, the appellant has been able to prove the source of the credit but the appellant has not mentioned anything about the nature of the transaction".
From this remark of the Assessing Officer it is clear that the Assessing Officer himself has not disputed the identity, creditworthiness and the source of the credits by way of share application money. As a matter of fact, A.O. has only disputed the reasonableness of the share premium charged. It is noted that he has not made any addition with regard to the credit equivalent to the valuation of the shares as determined by him. The Assessing Officer has time and again reiterated in his order and the remand report that the appellant has not mentioned anything about the nature of the transaction. In my view, this is not a correct observation by the Assessing Officer. It has been again and again submitted by the 15 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., appellant that the nature of the transaction is share application money received alongwith share premium of Rs.990 per share. The identity, creditworthiness and the source have been totally established by the appellant- company. In its reply filed in response to the remand report the appellant-company has reiterated that the Assessing Officer has wrongly denied that he did not issue any notices u/s.133(6) of the I.T. Act. In the paperbook filed, the appellant-company has compiled the officially signed notices issued to all parties by the Assessing Officer u/s.133(6) of the I.T. Act as also the copies of the replies filed before the Assessing Officer. It is strange that the Assessing Officer without any verification whatsoever has made a wrong statement that he did not issue any notice u/s.133(6) of the I.T. Act. In this situation there is no alternative but to accept the contention of the appellant-company that it has fully discharged the legal onus cast upon it u/s.68 of the I.T. Act. As mentioned above, even the Assessing Officer has admitted in the remand report that the identity of parties and the source of deposit have been established by the appellant-company.
16 ITA No.2671/Mum/2016M/s. Chiripal Poly Films Ltd., 9.18 In the remand report the Assessing Officer has tried to justify this addition by referring to the provisions of the IT. Act and the Companies Act contained in the following sections: -
(i) Section 56(vii)(b) (ii) Section 56(v) (iii) Section 78(2) of the Companies Act.
9.19 It may be mentioned that section 56(vii)(b) has been inserted in the Income-tax Act with effect from 1.4.2013 and, therefore, it has no applicability in respect of the assessment year under appeal. Further, this section permits the Assessing Officer to bring to the charge of tax income under the head "Income from other courses" if certain conditions are satisfied. On the contrary, the present addition has been made u/s.68 of the I.T. Act. Similarly, section 56(v) referred to by the Assessing Officer permits the Assessing Officer to bring to the charge of tax certain money under the head "Income from other sources". This provision is applicable whenever any sum or money exceeding the prescribed limit is received without consideration by an individual or a 17 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., HUF. Obviously, this provision is totally irrelevant in the present case. Lastly, the Assessing Officer has tried to draw support from the provisions of section 78(2) of the Companies Act, which is as under:-
"78. Application of premiums received on issue of shares.
(1) Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account, to be called"the share premium account"; and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the share premium account were paid- up share capital of the company.
(2) The share premium account may, notwithstanding anything in sub- section (1), be applied by the company-18 ITA No.2671/Mum/2016
M/s. Chiripal Poly Films Ltd.,
(a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; or
(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.
(3) Where a company has, before the commencement of this Act, issued any shares at a premium, this section shall apply as if the shares had been issued after the commencement of this Act:..."
9.20 From the above provision, it is absolutely clear that under no circumstances the premium on shares can be treated as revenue profit of the company. Further, the Assessing Officer has not been able to make out any case that 19 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., the appellant-company has violated the provisions of section 78 of the Companies Act. Moreover, even if it is presumed that the conditions of section 78(2) are not fulfilled by any company, there is no corresponding provision in the Income-tax Act authorizing the Assessing Officer to bring to the charge of tax the premium on issue of shares under any circumstances whatsoever. The reliance by the part of the Assessing Officer on the aforesaid provisions of the I.T. Act and the Companies Act only shows that the Assessing Officer is trying to find out some or other basis for the addition made by him. In my view the present addition has to be considered solely and entirely with regard to the provisions of section 68 of the I.T. Act under which the addition has been actually made by the Assessing Officer. There is no justification for travelling beyond the scope and ambit of section 68 of the I.T. Act. The Assessing Officer's observation that the appellant- company has failed to properly explain the nature of the credit, does not contain any force. The entire facts and circumstances clearly show that the nature of the receipt has been fully explained by the appellant-company as share premium actually received. There may 20 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., be a difference of opinion regarding the basis on which the amount of share premium is calculated. The appellant-company in its reply dated 10th September, 2015 in response to the remand report has explained in detail the methodology adopted for estimating the share premium per share. A detailed chart has also been given summarizing the position contained in the audited financial statements for the financial years 2010-11 to 2013-14. On this basis of these parameters it has been rightly contended by the appellant-company that the share premium has been determined on the basis of the projected cash-flow method. In any case, a company is free to determine the share premium at the time of issue of shares and it is for the share subscribers to decide whether they would like to subscribe the shares at the demanded share premium.
Insofar as the statutory requirements of section 68 are concerned, the appellant-company has fully discharged its onus and nothing more could have been done by it. Even the Assessing Officer has issued notice u/s.133(6) of the I.T. Act (though incorrectly denied by him) and all the share subscribers have directly replied to the Assessing Officer in response to the notices. It is also noted that the Assessing 21 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., Officer has himself accepted the genuineness of the share subscription by accepting the share application money to the extent of the face value. This itself shows that the transaction has been considered to be genuine by the Assessing Officer. Considering the totality of the facts and circumstances as also the legal position vis-à-vis section 68 of the I.T. Act, I find no justification for the addition of ₹ 23,47,38,900/- and the same is therefore deleted. Ground of Appeal No. 3 is allowed".
11. We have heard rival contentions and gone through the facts and circumstances of the case. As regards to the introduction of share application money amounting to ₹ 4,47,10,385/- from Orange Mauritius Investment Ltd. of Republic of Mauritius, the same was received by assessee on 25.03.2011. This share money was pending allotment as on 31.03.2011 in the balance sheet. From the assessment order it is noticed that the allegation of the AO that the authorized share capital of the assessee was only ₹ 3 crore out of which the assessee company is already issued share capital worth ₹ 1,78,71,100/- as on 31.03.2011 and subsequently also the company has not increased authorized share capital or filed any application for increasing the authorized share capital. The allegation of the AO as that out of the balanced authorized share capital, the assessee could have issued and allotted the shares to Orange Mauritius Investment Ltd. to the extent of ₹ 1,21,28,900/- only. This allegation of the AO, according to us and the facts of the case, that the assessee is not having sufficient authorized share capital and the 22 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., whole allegation for treating the investment transaction as unexplained, is without any basis. From the factual position, according to us under the Income Tax Act, there is no requirement for increasing the share capital for allotment of shares of 1.98 lakhs to Orange Mauritius Investment Ltd. but in any case the shares were ultimately allotted only on 11.07.2011 i.e. during the previous year relevant to next assessment year. Even otherwise, under the provisions of section 68 of the act, the only requirement is that the transaction should be genuine, identity of the party should be established and credit worthiness of the party should be proved. We find that the assessee entered into share holder agreement dated 15.03.2011 with Orange Mauritius Investment Ltd. is to be allotted 1.98 lakh shares of ₹ 10 each at a premium of ₹ 990 by the assessee company. The allotment of equity shares was to be made by the assessee company to the investor on receipt of full payment of ₹ 19.8 crores. We also find that the assessee has filed all the requirements complying with RBI guidelines by filing FIRE with RBI and also filed unique identification No. from RBI. Further, it has also filed FCGPR with RBI in this connection. Hence, there was no requirement of increasing the authorized share capital as the assessee was having sufficient authorized share capital to issue shares to the investor. During the year under consideration, the assessee received fund of ₹ 4,47,10,385/- on 25.03.2011 out of total investment of ₹ 19.80 crores. The balanced funds were remitted by the investor in subsequent years, which is already mentioned in FCGPR attached in assessee's paper book. We find from the case records and the assessment order and the order of CIT(A) that the assessee has filed complete paper book in respect to these investments like the following details: -
23 ITA No.2671/Mum/2016M/s. Chiripal Poly Films Ltd., Sr. Name of the No. of Amount of Details submitted No. shareholders share premium Particulars Paper Paper Paper Book 1 Book 2 Book 3 Page No. Page No. Page NO
1. M/s Orange Mauritius 44,710,385 1. Letter issued by RBI 232-239 Investment Ltd. (Share in connection with Application money FCGPR
2. FIRC issued by IDBI 240-245 in the case of NR investors 3. Complete address 513
4. shareholder's 514-552 666-704 agreement
5. Share application 553-554 705-706 form received from investor
6. FIRC issued by bank 555-560
7. Letter issued by RBI 246-249 561-564 allotting UIN No. 8. Share Allotment 565 707 certificate issued to investor
9. FCGPR submitted to 566-574 RBI
12. The assessee filed all these details before the AO and before CIT(A), it means that the assessee has established the nature and genuineness of transaction and the source of the money after fulfilling all the mandatory requirement of the RBI. To prove the genuineness of transaction, the assessee has filed the details that the entire transaction is done through banking channels only. The identity of the parties, the financial capacity and the sources, has fully been explained by the assessee company. According to us, in the given facts and circumstances of the case records, documentary evidences, arguments of both the sides clearly established that this transaction carried out by assessee receiving share application money party to the extent of ₹ 24 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., 4,47,10,385/- seems to be genuine and explained. Further, the AO has not carried out any further inquiry except the fact recorded that there is no authorized share capital to that extent and moreover, the AO also noted that there is unjustifiable amount of share premium and hence, entire transactions is not genuine. We have noted that for the purpose of section 68 of the Act, three requirements are required to be fulfilled which is the genuineness of transaction, source of money i.e. creditworthiness of the party and identity of the party. According to us, the assessee has fulfilled all the three ingredients of section 68 of the Act. We also noted that share premium can only be added under section 56(2)(vii)(b) of the Act which was inserted by the Finance Act, 2013 with effect from 01.04.2013 i.e. for and from the AY 2013-14. We will dealt with the case laws in the next part of this order which was cited before us by both the sides.
13. As regards to the addition of share application money of ₹ 23,47,38,900/- by the AO and deleted by CIT(A), the facts relating to this dispute is that the assessee has issued 2,37,100 shares to ten different shareholders along with evidences filed by assessee are as under: -
Ground of Appeal No. (ii)- Share Premium on issue of shares -₹ 23,47,38,900
1. M/s Desert Diamond 12,977 12,847,230 1. PAN and complete 20 377 General Trading LLC address
2. shareholder's agreement 378-413
3. Share Application form 414-415 663-664 received from investor
4. FIRC issued by RBI in the 43-45 416-418 case of NR investors
5. letter issued by RBI 48-51 419-422 allotting UIN No. 6. Share allotment certificate 423 665 issued to investor
7. Letter issued by RBI in 52-53 424-430 25 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., connection with FCGPR
8. Minutes recorded in 54-55 Board Meeting for allotment of shares 2 Mrs. Neelam Sharma 13,462 13,327,380 1. PAN and complete 20 431 address
2. Letter issued by RBI in 52-53 connection with FCGPR
3. Minutes recorded in 56-58 Board Meeting for allotment of shares
4. shareholder's agreement 432-465 708-741
5. Share application form 466-467 742-743 received from investor
6. FIRC issued by bank 46-47 468 7. Share Allotment 469 744 certificate issued to investor
8. FCGPR submitted to RBI 470-471
3. Mr. Shyamsunder 4,171 4,129,290 1. PAN and complete 20 472 Sharma address
2. Letter issued by RBI in 52-53 473-506 connection with FCGPR
3. Minutes recorded in 56-58 507-508 Board Meeting for allotment of shares
4. shareholder's agreement 473-506 745-778
5. Share application form 507-508 779-780 received from investor
6. FIRC issued by bank 46-47 509 7. Share Allotment 510 781 certificate issued to investor
8. FCGPR submitted to RBI 511-512
4.. Ms/s Sparrow Exports 70,000 69,300,000 1. PAN and complete 20 Pvt. Ltd. address
2. Confirmation of Accounts 21 3. Return of income 28
4. Letter issued by RBI in 52-53 connection with FCGPR
5. Minutes recorded in board 59-67 meeting for allotment of shares
6. Share application from 70-73 received from investor
7. Share allotment certificate 89-90 issued to investor
7. Notice 01.11.2013, 828-833 24.12.2013 and 04.02.2014 issued under section 133(6) of the Income Tax Act.26 ITA No.2671/Mum/2016
M/s. Chiripal Poly Films Ltd.,
8. Response to notice issued 834-845 under section 133(6) of the Income Tax Act.
5. M/s BhushanPetrofils 35,000 34,650,000 1. PAN and complete 20 Pvt. Ltd. address
2. Confirmation of Accounts 22 3. Return of income 29
4. Minutes recorded in board 59-64 meeting for allotment of shares 5 Share application from 74-75 received from investor
6. Share allotment certificate 87 issued to investor
7. Response to notice issued 846-856 under section 133(6) of the Income Tax Act.
6. M/s Shanti Educational 5,500 5,445,000 1. PAN and complete 20 Initiatives Ltd. address
2. Confirmation of Accounts 23 3. Return of income 30
4. Minutes recorded in board 59-64 meeting for allotment of shares 5 Share application from 68-69 received from investor
6. Share allotment certificate 84 issued to investor
7. Response to notice issued under section 133(6) of the Income Tax Act.
8. Response to notice issued under section 133(6) of the Income Tax Act.
7. M/s Chiripal Textile Mills 30,000 29,700,000 1. PAN and complete 20 Pvt. Ltd address
2. Confirmation of Accounts 24 3. Return of income 31
4. Minutes recorded in board 59-64 meeting for allotment of shares 5 Share application from 76-77 received from investor
6. Share allotment certificate 88 issued to investor
7. Notices dated 01.11.2013, 789-792 24.12.2013 and 04.02.2014 issued under section 133(6) of the Income Tax Act.
8. Response to notice issued 793-801 27 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., under section 133(6) of the Income Tax Act.
8. M/s Dindayal Processors 35,000 34,650,000 1. PAN and complete 20 Pvt. Ltd. address
2. Confirmation of Accounts 25 3. Return of income 32
4. Minutes recorded in board 59-64 meeting for allotment of shares 5 Share application from 78-79 received from investor
6. Share allotment certificate 86 issued to investor
7. Response to notice issued 857-865 under section 133(6) of the Income Tax Act.
9. M/s Prakash Calendar 30,000 29,700,000 1. PAN and complete 20 Pvt. Ltd. address
2. Confirmation of Accounts 26 3. Return of income 33
4. Minutes recorded in board 59-64 meeting for allotment of shares 5 Share application from 80-81 received from investor
6. Share allotment certificate 85 issued to investor
7. Notices dated 01.11.2013, 802-805 24.12.2013 and 04.02.2014 issued under section 133(6) of the Income Tax Act.
8. Response to Notice issued 806-815 under section 133(6) of the Income Tax Act.
10. M/s Vijay 1,000 990,000 1. PAN and complete 20 SubhamContrade Pvt. address Ltd.
2. Confirmation of Accounts 27 3. Return of income 34
4. Minutes recorded in board 59-64 meeting for allotment of shares 5 Share application from 82-83 received from investor
6. Share allotment certificate 91 issued to investor 28 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., We also find that the assessee has filed details with respect to balance with ROC for share issuance in term of form No. 2 and annual return filed with ROC. As regards to non-resident investors i.e. namely (i) Desert Diamond General Trading LLC (ii) Mrs. Neelam Sharma (iii) Mr. Shyamsunder Sharma, the assessee has filed the details in form No. 2 and Annual Return filed with ROC in respect of share allotted to these non-residents.
14. We have noted that the AO has simply relied on the provisions of Section 56(2)(viib) of the Act for treating the share premium as unexplained. We find that Clause (viib) of sub section (2) of section 56 was inserted vide finance Act, 2013 w.e.f 01 .04.2013 i.e. for and from A. Y. 2013-14 to provide that where a closely held company issues its shares at a price which is more than its fair market value then the amount received in excess of fair market value of shares will be charged to tax in the hand of the company as income from other sources. This amendment was made keeping in view the practice of closely held companies to brought in undisclosed money of promoters/directors by issuing shares at high premium which is normally over and above the book value of share of the company, and moreover which escaped the provisions of section 68 of the Act. Moreover, in case of many closely held companies and even in new companies promoters used to issue share at premium with the main purpose of keeping share capital low, yet capital base stronger so that breakup value and market value is high. This leads to advantage of low cost of servicing share capital and also improved prospects to issue share at premium in future by way of initial issue of offering by promoters. One more practical advantage was to save on account of cost of fees payable on increase of authorized 29 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., capital. When shares are issued at premium, number of shares and authorized capital increase lesser in comparison of capital raised by way of capital and premium. These provisions are deeming provisions as otherwise share premium and capital is a capital receipt which cannot be taxed as income. However, w.e.f A. Y. 2013-14 for closely held companies share premium or share capital is deemed to be normal income if shares are issued exceeding fair market value of shares. But, in any case the amendment will apply for and from AY 2013-14 and not to earlier Assessment Year because the amendment is prospective and not retrospective. Hence, on the issue of share premium, the provisions of section 56(2) (viib) of the Act cannot be applied for making addition even under section 68 of the Act.
15. Now let us go through the decision relied on by the assessee of Hon'ble Bombay High Court in case of CIT vs. Gagandeep Infrastructure (P) Ltd. (2017) 394 ITR 680 (Bom) which reads as under:-
"(c) Being aggrieved, the Revenue carried the issue in the appeal to the Tribunal. The impugned order of the Tribunal holds that the respondent assessee had established the identity, genuineness and capacity of the shareholders who had subscribed to its shares.
The identity was established by the very fact that the detailed names, addresses of the shareholders, PAN numbers, bank details and confirmatory letters were filed. The genuineness of the transaction was established by filing a copy of share application 30 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., form, the form filed with the Registrar of Companies and as also bank details of the shareholders and their confirmations which would indicate both the genuineness as also the capacity of the shareholders to subscribe to the shares. Further the Tribunal while upholding the finding of CIT(A) also that the amount received on issue of share capital along with the premium received thereon, would be on capital receipt and not in the revenue field. Further reliance was also placed upon the decision of Apex Court in Lovely Exports (P) Ltd. (supra) to uphold the finding of the CIT(A) and dismissing the Revenue's appeal".
16. We find that in the given facts of the case the decision of Hon'ble Jurisdictional High Court in case of Gagandeep Infrastructure P. Ltd. (supra) squarely applies to the assessee's case. The decision of Hon'ble Jurisdictional High Court in case of CIT vs. Green Infra Ltd [2017] 392 ITR 7 (Bombay) is squarely applicable to the case of the assessee. Despite being the specific argument of the CIT-DR that the share premium defies commercial prudence, Hon'ble Jurisdictional High Court has held that genuineness of the transaction is proved since the entire transaction is recorded in the books of the assessee and the transaction has taken place through banking channels. The decision of the Hon'ble High Court has specifically held that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the 31 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., wisdom of the shareholders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land. The Tribunal after examining the ingredients of section 68 of the Act held that the addition of share premium under section 68 of the Act cannot be sustained. We hereunder reproduce the relevant paragraph of the decision of Hon'ble Jurisdictional High Court in ease of Green Infra (supra) for ready reference:
3.Regarding question no.(ii):
(a)Before the Tribunal, the Revenue raised a new plea viz. that the so called share premium has also to be judged on the touchstone of Section 68 of the Act which provides for cash credit being charged to tax. The impugned order of the Tribunal allowed the issue to be raised before it for the first time, overruling the objection of the respondent-assessee.
(b)The impugned order examinedthe applicability of Section 68 of the Act on the parameters of the identity of the subscriber to the share capital, genuineness of the transaction and the capacity of the subscriberto the share capital. It found that the identity of the subscriberswas confirmed by virtue of the Assessing Officer issuing a notices under Section 133(6) of the Act to them. Further, it 32 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., holds that the Revenue itself makes no grievance of this identity of the subscribers. So far as the genuineness of the transaction of share subscriber is concerned, it concludes as the entire transaction is recorded in the Books of Accounts and reflected in the financial statements of the assessee since the subscription was done through the banking channels as evidenced by bank statements which were examined by the Tribunal. With regard to the capacity of the subscribers the impugned order records a finding that 98% of the shares is held by IDFC Private Equity Fund which is a Fund Manager of IDFC Ltd.
Moreover, the contributions in IDFC Private Equity Fund-II are all by public sector undertakings.
(c) Mr.Chhotaray the learned counsel for the Revenue states that the impugned orderitself holds that share premium of Rs.490/¬ per share defies all commercial prudence.
Therefore it has to be considered to be cash credit. We find that the Tribunal has examined the case of the Revenue on the parameters of Section 68 of the Act and found on facts that it is not so hit. Therefore, Section 68 of the Act cannot be invoked. The Revenue has not been 33 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., able to show in any manner the factual finding recorded by the Tribunal is perverse in any manner.
(d) Thus, question no.(ii) as formulated does not give rise to any substantial question of law and thus not entertained".
17. In view of the aforesaid, we are of the view that valuation is not relevant for determining genuineness of the transaction for the purpose of section 68 of the Act. We are of the view that CIT(A) has rightly deleted the addition on account of the share premium relying on the decision of Hon'ble Jurisdictional tribunal in case of Green Infra Ltd. (supra). It is a settled position that what is apparent is real unless proved otherwise. It is a settled legal position that "apparent is real" and the onus to prove that the apparent is not the real is on the party who claims it to be so as held by Hon'ble Supreme Court in case of CIT Vs. Daulat Ram Rawatmull (1973) 87 ITR 349.
18. In the present case, the overwhelming evidence proves that the 'nature' of receipt is share premium and share application money. The audited accounts of both parties, the statutory since it was the department which claimed that the share premium is not in fact so, despite the statutory forms viz. Form 2 for return of allotment and Form 20B for annual return filed with the ROC all show the 'nature' as share premium. If the Department wants to contend that what is apparent is not real, it is the onus of the department to prove that it was Assessee's own money which was routed through a third party. Only then can the provisions of section 68 of the Act be invoked. This aspect is considered 34 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., in the decision of Mumbai Tribunal in case of Green Infra Ltd. Vs. ITO (2013) 145 lTD 240, wherein Tribunal has held that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land. The said decision has been affirmed by Hon'ble Jurisdictional high Court in case of Green Infra Ltd (Supra).
19. The Ld. Counsel for the assessee made another argument that the power of carrying valuation is not envisaged by the Legislature for the purpose of Section 68 of the Act. He argued that, wherever the Legislature intended to give the power to determine the value to the AO, it either prescribes Rule for valuation of a particular thing or vested upon the AO the power to refer to the Valuation officer. The power of AO to make a reference to the Valuation Officer is contained in section 142A of the Act. Section 142A of the Act as it stood for the year under consideration reads as under:
"142. (1) For the purposes of making an assessment or reassessment under this Act, where an estimate of the value of any investment referred to in section 69 or section 6911 or the value of any bullion, jewellery or oilier valuable article referred to in section 69A or section 6911 or fair market value of any property referred to in sub-section (2) of section 56 is required to be made, the Assessing Officer may require the Valuation 35 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., Officer to make an estimate of such value and report the same to him".
20. We have considered the issue and find that this section does not cover section 68 of the Act. Thus, the Legislature does not envisage any sort of valuation for the purpose of section 68 of the Act. Indeed, valuation of preference shares is a completely different exercise as compared to valuation of equity shares. The AO makes the mention of the reserves and loss while challenging the charge of share premium on preference shares. "Reserves" could be relevant for valuing equity shares. They are not relevant for valuing preference shares. Preference shareholders get priority over the equity shareholders in terms of payment of dividend and during winding up. They get only a fixed rate of dividend. The redemption amount depends on the terms of issue. The conversion depends on the terms of issue. The terms of issue are relevant for valuing preference shares. Even the present Rule 11UA of the Income Tax Rules 1962 are applicable only to section 56(2) of the Act, requires valuation of preference shares by the merchant bankers. The AO has not even attempted to do any sort of valuation of preference shares. His addition is based entirely on conjectures and surmises. It is settled law that the assessment cannot he made on mere suspicion, conjectures and surmises.
21. Even amendment to section 68 brought by Finance Act, 2012 does not refer to valuation. The insertion of the proviso to section 68 of the Act by Finance Act, 2012 casts an additional onus on the closely held companies to prove source in the shareholders subscribing to the shares of companies. During the course of the hearing, the Ld Counsel explained that the explanatory memorandum to the Finance Bill 2012 36 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., makes it clear that the additional onus is only with respect to source of funds in the hands of the shareholders before the transaction can be accepted as a genuine one. Even the amended section does not envisage the valuation of share premium. This is further evident from a parallel amendment in section 56(2) of the Act which brings in its ambit so much of the share premium as charged by a company, not being a company in which the public are substantially interested, as it exceeds the fair market value of the shares. If one accepts the Ld CIT-DR's contentions that section 68 of the Act can he applied where the transaction is proved to be that of a share allotment that here the valuation for charging premium is not justified, it will make the provisions of section 56(2)(viib) of the Act redundant and nugatory. This cannot be the intention of the Legislature especially when the amendments in the two sections are brought in at the same time.
22. In view of the matter, the Ld Counsel explained that it is a settled law that where two views are possible, the view favorable to the assessee should be adopted as held by Hon'ble Supreme Court in case of CIT Vs. Vegetable Products Ltd. (1973) 88 ITR 192. In view of the above facts and circumstances, we are of the view that the assessee has discharged its onus by adequately disclosing the transaction in its books of accounts, filing statutory forms as regards allotment of shares, providing name, address and PAN of the shareholders, etc. the assessee has sufficiently discharged the onus cast upon it for the purpose of section 68 of the Act and no addition can be made on this account. Hence, we are of the view that the CIT(A) has rightly deleted the addition and we confirm the same. These two common issues of Revenue's appeal are dismissed.
37 ITA No.2671/Mum/2016M/s. Chiripal Poly Films Ltd.,
23. The third issue in this appeal of Revenue is against the order of CIT(A) deleting the addition made by AO by invoking the provisions of section 56(2)(vii)(a) of the Act. For this Revenue has raised the following ground No. 3: -
"II. The learned CIT(A) has erred on facts and circumstances of the case in deleting the addition of ₹ 1,18,67,508/- under section 56(2)(viia) of the Income Tax Act, 1961."
24. Brief facts are that the assessee company became member in Vraj Integrated Textile Park Ltd. (VITPL), which is Special Purpose Vehicle, Textile Park formed on the basis of the Scheme of Integrated Textile Park (SlTP) of the Ministry of Textile, Government of India. The main objective of this scheme is to provide state of the art infrastructure and support to the members who are setting up units in the Textile Park. To become a member in the said Textile Park, the assessee was required to subscribe to the share capital being total 2,45,450 shares of the face value of Rs.10 per share. These shares have been allotted to the appellant-company at the face value and thus a total consideration of Rs.24,54,500/- was paid by the assessee. The Assessing Officer examined this issue and was of the view that the shares have been acquired by the assessee at a value which is less than the fair market value. According to the Assessing Officer, by virtue of the provisions of section 56(2)(vii)(a) the market value of the shares has to be estimated under Rule 11UA of the I.T. Rules. The Assessing Officer worked out such market value at Rs.58.35 per share and, therefore, held the view that the difference of Rs.48.35 per share was required to be brought to the charge of tax as income from other sources as stipulated 38 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., u/s.56(2)(vii)(a). Accordingly, the AO added the amount being different in consideration which is paid less in comparison to the fair market value in excess of ₹ 50,000/- i.e. amounting to ₹ 1,18,67,508/- as taxable in the hands of the assessee company under section 56(2)(viia) of the Act. For this, the AO observed in Para 6.4 as under: -
"a. As per the provisions of section 56(2)(vii)(a) of the Act, where a company receives, in any previous year, from any person or persons on or after the 1" day of June, 2010, any property being shares of a company for a consideration which is less than the aggregate fair market value by an amount exceeding fifty thousand rupees shall be chargeable to income tax under the head income from other sources.
b. The appellant is company which has either purchased or received on allotment the shares in question after 01.06.2010 which is after the provisions of the said section came into effect.
C. The valuation as contended by appellant is not supported by any corroborative evidences. The method as prescribed under the Rule 11UA for valuation of Equity shares of an unlisted company is either Net Asset Valuation Method or the Discounted Cash Flow Method.39 ITA No.2671/Mum/2016
M/s. Chiripal Poly Films Ltd., The appellant's submission is not in accordance with any of the above methods and hence rejected.
d. As per Rule 11UA of IT Rules, the appellant has an option to choose the methods as prescribed therein with regard to valuation of equity shares. Such valuation shall be supported by a report issued by an accountant specified u/s.288 of the IT Act, 1961. The appellant has however not exercised any such option or submitted any such valuation report issued by an accountant. Therefore, the unsigned valuation working without even the basic supporting documents is considered as invalid and not acceptable.
e. As regards the mode of receipts of the shores by appellant, the section specifies only 'Receipt of Share'. It does not specify the mode of receipt. Therefore, the mode of receipt of shares can be either by transfer or by allotment. What is important here for invoking the section is the receipt of an asset and not the more of receipt. The appellant admittedly received the shares for a consideration which is below the fair market value as pointed out in the show cause notice.40 ITA No.2671/Mum/2016
M/s. Chiripal Poly Films Ltd., f. In view of the above stated facts and legalities, the amount of Rs.1,18,67,508 being the difference in the consideration which is paid less in comparison to fair market value in excess of Rs. 50,000 is taxable in the hands of appellant company u/s.56(2)(via9(a) of the Act.
g. Accordingly an amount of Rs.1,18,67,508 is taxed in the hands of appellant under the Head Income from Other Sources."
25. Aggrieved, assessee preferred the appeal before CIT(A), who deleted the addition by observing in Para 9.25 and 9.26 as under: -
"9.25 It is seen that the Assessing Officer was allowed opportunity during the course of the assessment proceedings and he has filed a remand report. In the remand report no submissions have been made by the Assessing Officer on this issue. Therefore, the logical assumption is that the Assessing Officer has been unable to find out any discrepancy in the submissions made by the appellant- company. As mentioned above, the main contention of the appellant-company is that the reserves and surplus appearing in the balance sheet as on 1 April, 2010 and amounting to Rs.23,94,41,958/- entirely comprises of 41 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., grant/subsidy received from the Government of India and, therefore, this amount cannot be taken into account while determining the fair market value of shares under Rule 11UA. In the submissions which have been reproduced above, the appellant-company has provided calculation of fair market value after ignoring the said subsidy and on this basis has contended that the fair market value does not exceed the face value of Rs.10. During the course of the appellate proceedings, it has been submitted on behalf of the appellant-
company, that it is only a matter of presentation in the balance sheet as to how the Government grant is reflected. By following some different method, the Government grant could have been directly reduced from the cost of the assets and if the appellant had followed this method, the fair market value of the shares would have automatically come to a level which is not more than the face value of Rs.10. It is, therefore, contended that having regard to the entire facts and circumstances and the objective of thescheme of integrated Textile Park no income can be brought to the charge of tax u/s 56(2)(vii)(a) of the IT Act.42 ITA No.2671/Mum/2016
M/s. Chiripal Poly Films Ltd., 9.26 I have carefully considered the facts and circumstances relevant to this issue. I have also duly considered the basis provided in the assessment order for making this addition and also the detailed submissions made on behalf of the appellant-company which have been reproduced above. I find considerable force in the submission that the fair market value under Rule 11UA must be determined in an objective manner so as to reflect the correct market value of the shares. VITPL, as mentioned above, is a special purpose vehicle formed to facilitate the scheme of Integrated Textile Park mooted by the Ministry of Textiles, Government of India. It is not a profit making entity. The entire reserves and surplus appearing in the balance sheet as on 1.4.2010 are only on account of the grant received from the Government of India and not on the basis of any business profit earned by the company. In these circumstances, in my view, there can be no inference that the shares of VITPL have been acquired by the appellant- company at a price which is less than its fair market value. Considering the entire facts and circumstances the addition of Rs.1,18,67,508/- is deleted. GroundAppeal No.4 is allowed."43 ITA No.2671/Mum/2016
M/s. Chiripal Poly Films Ltd., Aggrieved, now Revenue is in appeal before Tribunal.
26. We have heard rival contentions and gone through the facts and circumstances of the case. We have gone through the findings of CIT(A) and noted that the entire reserves and surplus appearing in the balance sheet as on 1.4.2010 are only on account of the grant received from the Government of India and not on the basis of any business profit earned by the company. In these circumstances, in my view, there can be no inference that the shares of VITPL have been acquired by the assessee at a price which is less than its fair market value. Hence, we find no reason to reverse the findings of CIT(A) and accordingly, the same is upheld.
27. The next issue in this appeal of Revenue is against the order of CIT(A) deleting the addition of interest of bank fixed deposits netting of against closing work in progress account. For this Revenue has raised the following ground No. 4: -
"IV. The learned CIT(A) has erred on facts and circumstances of the case in deleting the addition of ₹ 48,30,629/- being interest on bank fixed deposit not offered to tax, but adjusted / netted off in CWIP account."
28. Briefly stated facts are that the AO noted from the from No. 26AS that the assessee has received interest of ₹ 48,30,629/- on account of FDR. During the year, the AO noted that this received of interest was not offered to tax but adjusted against or netted off in the capital work in progress account. The AO treated the interest as income from other sourced and assessed the income accordingly. Aggrieved assessee 44 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., preferred the appeal before CIT(A). The CIT(A) allowed the claim of assessee by observing that the assessee company has earned this interest income from deposits placed with IDBI Bank with the object of availing credit facilities for importing BOPP loan equipment and this interest income is inextricable linked or connected to the setting up of the project of BOPP. This interest income has been derived from fixed deposits placed with bank for availing LC margin against importing plant and machinery and therefore the same is squarely covered by the decision of Hon'ble Supreme Court in the cases of CIT vs. Bokaro Steel Ltd. (236 ITR 315) (SC) and CIT Vs. Karnal Co-operative Sugar Mills Ltd. 243 ITR 2 (SC). We find that even now before us, the Revenue could not dislodge the finding of CIT(A) that the interest earned from FDR's were inextricably linked with setting up of new power plant and therefore interest earned was to be treated as capital receipt. The relevant finding of CIT(A) in para 9.30 reads as under: -
"9.30 In the remand report, the Assessing Officer has not made any submissions and has not controverted the legal position explained in detail by the appellant company in the reply reproduced above. The facts and circumstances about which there is no dispute are that during the previous year relevant to the present assessment year the project of the appellant-company was in the process of being set up and the business had not commenced. No commercial activity whatsoever was started by the appellant-company and the only income 45 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., earned was some commission income. Therefore, all the major expenses incurred in relation to the project have been capitalized by the appellant-company under the head "Capital work-in-progress". During the year the appellant-company earned interest income of Rs.48,30,629/- from deposits placed with IDBI Bank with the sole object of availing credit facilities for importing BOPP Line Equipment. In my view, there is considerable force in the argument that the aforesaid interest income is inextricably connected to the setting up of the project of BOPP. The interest income has been dRveITF5ifixidëposu placed with bank for availing L.C. margin against importing plant and machinery. In view of these facts the interest income has to be treated as part of the process of setting up of the plant and the established legal position which emerges from a chain of decisions cited by the appellant- company including the Hon'ble Supreme Court decision in the case of CIT vs. Bokaro Steel Ltd., is that such income earned which is inextricably linked to the setting up of the business has to be capitalized and reduced from the value of 'Capital work-in-progress'. Such interest income cannot be treated as 'Income from other sources' chargeable to tax 46 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., u/s.56 of the I.T. Act. Therefore, the addition of Rs.48,30,629/- is deleted."
29. We find that this issue is squarely covered by the decision of Hon'ble Supreme Court in the case of Karnal Co-operative Sugar Mills Ltd. (supra). Respectfully following, we confirm the order of CIT(A) deleting the addition. This issue of Revenue's appeal is dismissed.
30. The next issue in this appeal of Revenue is against the order of CIT(A) deleting the addition of expenses relatable to exempt income being interest and other charges to bank capitalized in the capital work in progress account by invoking the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962, hereinafter the Rules, while computing the book profit under section 115JB of the Act. For this Revenue has raised the following ground No. 5:-
"V. The learned CIT(A) has erred on facts and circumstances of the case in deleting the addition of ₹ 1,35,671/- being the amount of interest and other charges to bank capitalized in the CWIP account on account of disallowance under section 14A read with rule 8D of the Income Tax Act, 1961 while computing book profit under section 115JB of the Income Tax Act, 1961."
31. At the outset, we find that the AO computed the disallowance of ₹ 1,36,671/- under Rule 8D while computing the book profit under section 115JB of the Act and this issue is now squarely covered by the decision of Special Bench of this ITAT in the case of ACIT vs. Vireet Investments 47 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., (P.) Ltd. [2017] 58 ITR (AT) 313 (Delhi - Trib.) (SB), wherein it is held as under: -
"6.22 In view of above discussion, we answer the question referred to us in favour of assessee by holding that the computation under clause (f) of Explanation 1 to section 115JB(2). is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8D of the Income-tax Rules, 1962."
32. As the issue is squarely covered, we find no infirmity in the order of CIT(A) and the same is affirmed. This issue of Revenue's appeal is also dismissed.
33. In the Result, the appeal of Revenue is dismissed.
Order pronounced in the open court on day of 19th February, 2019 Sd/- Sd/-
(N.K. PRADHAN) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated: 19th February, 2019 48 ITA No.2671/Mum/2016 M/s. Chiripal Poly Films Ltd., Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A),Mumbai 4. The CIT 5. DR, 'C' Bench, ITAT, Mumbai BY ORDER, #True Copy # Assistant Registrar
Income Tax Appellate Tribunal, Mumbai