IN INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. No. 1775/HYD/2014 Assessment Year: 2009-10 M/s. Hariom Concast & Income Tax Officer, Steel Pvt. Ltd., Vs Ward-2(2), HYDERABAD HYDERABAD [PAN: AABCH8825N] (Appellant) (Respondent) For Assessee : Shri Laxminiwas Sharma, AR For Revenue : Shri K.J. Rao, DR Date of Hearing : 19-09-2016 Date of Pronouncement : 05-10-2016 ORDER PER B. RAMAKOTAIAH, A.M. : This is appeal by assessee against order of Ld.Commissioner of Income Tax (Appeals)-III, Hyderabad dated 05-09-2014, confirming addition of Rs. 2,18,50,000/- as income of assessee which was received towards share premium, invoking provisions of Section 68 of Income Tax Act [Act]. 2. Briefly stated, assessee during year has issued shares of Rs. 27,50,000/- with premium of Rs. 2,18,50,000/- i.e., Rs. 10/-face value share was issued at Rs. 200/- with I.T.A. No. 1775/Hyd/2014 :- 2 -: M/s. Hariom Concast & Steel Pvt. Ltd., premium of Rs. 190/-. shares were received from following companies and details are as under: Share Premium Share Capital Share (Rs) Premium (Rs) Sahuwan Motors Finance Pvt Ltd 75,000 14,25,000 Eastern Credit Capital Ltd 50,000 9,50,000 Procal Dealcomm Pvt Ltd 75,000 14,25,000 Dashmesh Fincap Pvt Ltd 1,00,000 19,00,000 Aasma Mercantile Pvt Ltd 1,00,000 19,00,000 Virgo Textiles Pvt Ltd 2,75,000 52,25,000 Inex Infotech Pvt Ltd 1,75,000 33,25,000 Essen Marketing Pvt Ltd 2,00,000 38,00,000 Nanchi Marketing Pvt Ltd 1,00,000 19,00,000 Total: 11,50,000 2,18,50,000 3. AO acknowledged that these companies were neither associate companies nor sister concerns nor any of Directors of company has influence over these companies. However, he asked for confirmation of above investments from various companies which assessee has furnished. AO questioned rationale for issuing shares at huge premium. Assessee explained that: a) assessee-company is running company making profits; b) company has all licenses and permissions for running industry in place; c) company is already established and has good future potential of earning profits; d) company has goodwill among investors; e) Investors unanimously have been allotted shares at Rs. 200/- per share; It has also been brought to AO s notice that share premium do not go with books value, since there are various other aspects such as future profitability, potentiality and expectation to earn profit by investor. I.T.A. No. 1775/Hyd/2014 :- 3 -: M/s. Hariom Concast & Steel Pvt. Ltd., It was further justified stating During FY. 2008-09 there was boom in stock market. Reliance power shares, before even company started operating were issued at Rs. 480/- and Eenadu shares issued to Morgan Stanley at Rs. 300/- per share when company was making losses. Similarly in steel sector shares of SAIL, JSW steel and many other companies were sold at very high premium. net profit of company which was Rs. 27.53 Lakhs for period ended 31-03-2008 has increased to Rs. 216.98 Lakhs for period 31-03-2009. Keeping in view all these things, investors have looked into potentiality of company s growth . 3.1. However, AO did not agree and invoking provisions of Section 68 treated amounts as unexplained cash credits holding that as genuineness and creditworthiness of party giving premium is doubtful and defies business logic. 3.2. Before Ld. CIT(A), assessee filed detailed submissions and justification. However, Ld. CIT(A) notes that assessee has not furnished any assessment particulars of companies as sought for and rejected contentions by stating as under: 6.1 It is clear that issue of share premium charged by companies mentioned in assessment order namely Sahuwan Motors Finance Pvt. Ltd., Eastern credit capital ltd., Procal Dealcomm Pvt. Ltd., Dashmesh Fincap Pvt. Ltd., Aasma Mercantile Pvt. Ltd., Virgo Textiles Pvt. Ltd., Inex Infotech Pvt. Ltd., Essen Marketing Pvt. Ltd., Nanchi Marketing pvt. Ltd., all of which have just total share capital of Rs.11,50,000/- is suspect in nature. None of these companies are public/listed companies to have charged substantial share premium as they are not established or known entities. Hence, share premium of Rs.2,18,50,000/- is nothing but sham transaction and colourable and hence ratio of decision relied upon by assessing, officer i.e., Mc. Dowell vs. CTO 154 ITR 148 of Hon'ble Apex Court is applicable. 6.2 It is obvious that appellant company has sought to introduce cash credits without establishing identity, creditworthiness and genuineness as required u/s.68 of IT. Act. In this context, it would be I.T.A. No. 1775/Hyd/2014 :- 4 -: M/s. Hariom Concast & Steel Pvt. Ltd., most pertinent to refer to ratio of decisions in plethora of cases including cases of Agarwal Coal Corporation vs Addl.CIT [135 ITD 270-Indore], Dhingra Global Credence (P) Ltd vs ITO [1 ITR(T) 529 Delhi], Nova Promoters & Finlease [342 ITR 169-Delhi], NR Portfolio(P) Ltd [263 CTR 456-Delhi],Onassis Axles(P) Ltd vs CIT [364 ITR 53-Delhi], Gayathri Associates vs ITO [221 Taxman 143-Andhra Pradesh], Dr. D. Siva Sankara Rao vs ITO[356 ITR 117-Andhra Pradesh],Sri Chakra Cements Ltd vs ITO [221 Taxman 181-Andhra Pradesh],Vijay Kumar Talwarvs CIT[330 ITR 1-Supreme Court], CIT vs MAF Academy(Pvt) Ltd[361 ITR 258- Delhi]. Considering ratio of plethora of these decisions, in brief, it is clear that three vital limbs of Section 68 of IT Act i.e., identity, creditworthiness and genuineness have to be clearly established. While agreeing with findings of assessing officer, it is clear that share premium received from various companies is clearly cash credits as identity, genuineness and creditworthiness of companies mentioned in assessment order is doubtful and there is no reason to interfere with finding of Assessing Officer. assessment order in this case reflects good attempt made by assessing officer to bring out modus operandi and hence same has been brought out in detail in this appellate order. order of assessing officer is upheld . 4. Assessee is aggrieved and contested by raising following grounds: 1. learned CIT erred in facts and law while passing order. 2. learned CIT erred in arriving at conclusion that company has sought to introduce cash credits without establishing identity, creditworthiness and genuineness as required u/s. 68 though assessee has provided details of investor companies along with letters confirming investment. 3. learned CIT (A) erred in treating transactions as unexplained cash credits even though all transactions were made through banking channels. 4. learned CIT erred in concluding that any outsider will not pay such high amount of premium for present situation of business of assessee though assessee has also provided logical reasons for issue of shares at premium and it is investor judgement to invest. 5. CIT erred not to consider case of Green Infra Ltd. v. ITO [TS-420-IT AT2013(Mum), Income-tax Appellate Tribunal (Tribunal) wherein it was held that share allotment at premium by newly I.T.A. No. 1775/Hyd/2014 :- 5 -: M/s. Hariom Concast & Steel Pvt. Ltd., incorporated company cannot be taxed as income invoking section 56(1) of Income Tax Act (Act). Furthermore, if genuineness and identity of depositor is established and transaction was carried out through banking channels, transaction cannot be taxed under section 68 of Act. 6. For these and other grounds which may be raised during or before hearing of appeal, it is prayed that relief sought be granted . 5. Ld. Counsel for assessee submitted that order of CIT(A) is both factually incorrect as well as legally. It was submitted that those companies have their own share capital and what Ld. CIT(A) has noted as total share capital of Rs. 11,50,000/- is share capital allotted by assessee-company to them as noted in AO s order. Therefore, finding of CIT(A) that they have meager share capital is not correct. Further, it was submitted that assessee-company has allotted shares at premium not only in this year, but also in earlier year as can be seen from assessment order itself. In earlier year, as on 31-03- 2008, 1.30 Crores of share capital was issued with premium of Rs. 2.29 Crores. This was accepted. It was further submitted that assessee has justified premium with market conditions at that point of time and business profile of assessee-company. Ld. Counsel relied on case law for various propositions to submit that Revenue authorities cannot question charging of such huge premium which has no bar by any legislated law of land. It was further submitted that details of subscribers are before authorities and without making any enquiries, annual reports and other details filed by assessee were doubted and transaction was held to be sham and bogus. He relied on proposition that share premium realised from issue of shares is of capital nature and forms part of share capital of I.T.A. No. 1775/Hyd/2014 :- 6 -: M/s. Hariom Concast & Steel Pvt. Ltd., company and therefore, cannot be taxed as revenue receipt . It is also settled proposition of law that any expenditure incurred to expansion of capital base of company is to be treated as capital expenditure as has been held by Supreme Court in case of CIT Vs. Allahabad Bank Ltd., [73 ITR 745]. It was submitted that share premium received by company cannot be taxed u/s. 56(1) of Act. It was submission of Ld. Counsel that share premium by its very nature as capital receipt and is not income in ordinary sense. He relied on following case law: i. ITO Vs. Lanyard Foods Ltd. ITA No. 5549/Mum/2003; ii. CIT Vs. Divind Leasing & Finance Ltd., ITA No. 53/2005(Del); iii. CIT Vs. Lovely Export Pvt Ltd., ITA No. 305/2006 (Del); iv. DCIT Vs. M/s. Misty Meadows (P) Ltd., New Delhi ITA No. 422/JP/2012; v. ACIT Vs. Salasar Nylon Pvt. Ltd., ITA No. 2997/Ahd/2008; vi. ARL Infratech Ltd. Vs. ACIT, ITA No. 619/JP/2013; vii. ITO, Ward-11(1) Vs. M/s. Empire Buildtech Pvt. Ltd., ITA No. 4656/Del/2009; viii. ITO Vs. M/s. Trident Shelters Pvt. Ltd., ITA No. 1160/Hyd/2012; ix. Green Infra Ltd., Vs. ITO [TS-420-ITAT-2013(Mum)]; 6. Ld. DR submitted that there is no justification for receiving so much premium and therefore, same is to be considered as cash credits and hence orders of AO and CIT(A) are correct on facts. I.T.A. No. 1775/Hyd/2014 :- 7 -: M/s. Hariom Concast & Steel Pvt. Ltd., 7. We have considered rival contentions and perused orders of authorities. There is no denial that all said nine companies are assessees on record and they have confirmed investing in assessee-company. Whatever may be reason for issuing shares at premium, share premium per se cannot be considered as cash credits in absence of any evidence to contrary. It is fact that those companies invested in share capital and they were allotted shares also. If it is kept as share application money, then presumption can be raised that amounts were received as share application money instead of loans or credits, however, in this case, these amounts are received as share capital and shares were allotted to those companies. It is also true that those companies also reflected investments and shown amounts invested in assessee-company in its Balance Sheets. However, AO instead of enquiring with those companies, simply drew presumptions which are not based on any facts. If he is doubting extent of premium as well as receipt of moneys, he should enquire from those companies or at least record some statements from those parties so as to examine very nature of transaction. Nothing was done by AO. 7.1. Co-ordinate Bench in case of M/s.Green Infra Ltd., in ITA No. 7762/Mum/2012 dt. 23-08-2013, has considered similar treatment of share premium of Rs. 47,97,10,000/- on issue of equity shares to shareholders as income of that assessee. ITAT considered issues which are similar to present case and held as under: 10. We have considered rival submissions and carefully perused orders of lower authorities and material evidences I.T.A. No. 1775/Hyd/2014 :- 8 -: M/s. Hariom Concast & Steel Pvt. Ltd., brought on record in form of Paper book. entire dispute revolves around charging of share premium of Rs. 490/- per share on book value of Rs. 10/- each. This dispute is more so because of fact that assessee company was incorporated during year under consideration. Therefore, according to revenue authorities, it is beyond any logical reasoning that company with zero balance sheet could garner Rs. 490/- per share premium from its subscribers. Such transaction may raise eyebrows but considering subscribers to assessee company, test for genuineness of transaction goes into oblivion. It is undisputed fact admitted by Revenue authorities that 10,19,000 equity shares has been subscribed and allotted to IDFC PE Fund-II which company is Front Manager of IDFC Ltd., in which company Government of India is holding 18% of shares. contributors to IDFC PE Fund-II who is subscriber to 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 transaction where there is so much of involvement of Government directly or indirectly does not make any sense. 10.1. No doubt non-est company or zero balance company asking for share premium of Rs. 490/- per share defies all commercial prudence but at same time we cannot ignore fact that it is prerogative of Board of Directors of company to decide premium amount and it is wisdom of share holders whether they want to subscribe to such heavy premium. Revenue authorities cannot question charging of such of huge premium without any bar from any legislated law of land. Details of subscribers were before Revenue authorities. AO has also confirmed transaction from subscribers by issuing notice u/s. 133(6) of Act. Board of Directors contains persons who are associated with IDFC group of companies, therefore their integrity and credibility cannot be doubted. entire grievance of Revenue revolves around charging of such of huge premium so much so that Revenue authorities did not even blink their eyes in invoking provisions of Sec. 56(1) of Act. 10.2. Let us consider provisions of Sec. 56(1) of Act: 56.1. Income from other Sources Income of every kind which is not to be excluded from total income under this Act shall be chargeable to income-tax under head Income from other sources , if it is not chargeable to income-tax under any of heads specified in section 14, items to E. 10.3. simple reading of this section show that income of every kind which is not to be excluded from total income shall be chargeable to income tax. emphasis is on that income of every kind , therefore, to tax any amount under this section, it must have some character of I.T.A. No. 1775/Hyd/2014 :- 9 -: M/s. Hariom Concast & Steel Pvt. Ltd., income . It is settled proposition of law that capital receipts , unless specifically taxed under any provisions of Act , are excluded from income. Hon ble Supreme Court has laid down ratio that share premium realized from issue of shares is of capital in nature and forms part of share capital of company and therefore cannot be taxed as Revenue receipt. It is also settled proposition of law that any expenditure incurred for expansion of capital base of company is to be treated as capital expenditure as has been held by Hon ble Supreme Court in case of Punjab State Industrial Corporation Ltd. Vs CIT 225 ITR 792 and in case of Brooke Bond India Ltd. VS CIT. Thus expenditure and receipts directly relating to share capital of company are of capital in nature and therefore cannot be taxed u/s. 56(1) of Act. assessee succeeds and Revenue fails on this account. 11. Ld. Departmental Representative has raised altogether plea by stating that nature of transaction should also be judged within parameters of Sec. 68 of Act. counsel for assessee strongly objected to this but in interest of justice and fair play, we allowed DR to raise this issue. For this, we draw support from decision of Hon ble Supreme Court in case of Kapurchand Shrimal Vs CIT 131 ITR 451, wherein Hon ble Supreme Court has laid down ratio that It is well known that appellate authority has jurisdiction as well as duty to correct all errors in proceedings under appeal and to issue, if necessary, appropriate directions to authority against whose decision appeal is preferred to dispose of whole or any part of matter afresh, unless forbidden from doing so by statute. 11.1. Considering submissions of Ld. DR in light of above ratio, let us test transaction in light of provisions of Sec. 68 of Act. As per Section 68 initial onus is upon assessee to establish identity, genuineness of transaction and capacity of lender or depositor. subscribers to share capital are all companies. confirmations of transactions have been received by AO by issuing notice u/s. 133(6) of Act, therefore, identity has been established beyond all reasonable doubts nor Revenue authorities have questioned identity of share holders. genuineness of transaction can also be safely concluded since entire transaction has been done through banking channels duly recorded in books of accounts of assessee duly reflected in financial statement of assessee. bank statement is exhibited at pages 101 and 102 of Paper book in which transaction relating to allotment of shares are duly reflected . In instant case, capacity of share holders cannot be doubted as has been pointed out elsewhere in our order that 98% of share is held by IDFC Private Equity Fund-II which is front manager of IDFC Ltd., and contributors I.T.A. No. 1775/Hyd/2014 :- 10 -: M/s. Hariom Concast & Steel Pvt. Ltd., in IDFC Private Equity Fund-II are LIC, Union of India, Oriental Bank of Commerce, Indian Overseas Bank and Canara Bank which are public sector undertakings. 11.2. Now only point of dispute is nature of transaction which according to Revenue authorities is beyond any logical sense and which is charging of share premium at rate of Rs. 490/- per share. According to Revenue authorities this is sham transaction . So far till now, we have seen and examined sources of funds. Let us see application of funds and who are ultimate beneficiaries of this share premium which may clear clouds over transaction alleged to be sham. We find that assessee company has invested funds in its three subsidiary companies namely (i) Green Infra Corporate Wind Ltd. (ii) Green Infra Wind Assets Ltd and (iii) Green Infra Wind Farms Ltd., wherein assessee is holding 99.88% of share capital which means that funds have not been diverted to outsider. This clears doubt about application of funds and credibility of company in whom funds have been invested. Since assessee itself is holding 99.88% of shares and in turn assessee company s 98% of shares are held by IDFC PE Fund-II, this entire share holding structure cannot be said to generate any transaction which could be said to be sham. 12. We have considered grievance of Revenue from all possible angles and by applying provisions of Sec. 56 of Act and at our stage we have gone to extent of testing transaction within parameters of Section 68 of Act. We could not find single evidence which could lead to entire transaction as sham. Our view is also fortified by share holding pattern as explained to us and as substantiated by material evidence on record. We find that share holders in all related transaction under issue are directly or indirectly related to Government of India. Therefore, considering entire issue in light of material evidence brought on record, in our considerate view, Revenue authorities have erred in treating share premium as income of assessee u/s. 56(1) of Act. In our considerate view, for reasons discussed hereinabove, we do not find it necessary to apply provisions of Sec. 68 of Act. We, therefore, direct AO to delete addition of Rs. 47,97,10,000/-. Ground No. 2 & 3 are accordingly allowed . 8. other case law relied on by assessee is also on issue that share premium cannot be brought to tax invoking provisions of Section 68, unless there is link with either quid pro quo transaction or investing by assessee-company in their accounts so as to receive it back as share capital. No such I.T.A. No. 1775/Hyd/2014 :- 11 -: M/s. Hariom Concast & Steel Pvt. Ltd., evidence was brought on record. On given facts of case, and on basis of confirmation filed by companies, we cannot hold that this amount can be brought to tax invoking provisions of Section 68. genuineness and credit worthiness of those companies is not in dispute. What AO disputed was amount of premium. Moreover, if amounts are doubted from those companies, amount of share capital at Rs.10 was not doubted. Only amount of premium was doubted. Therefore companies transactions with assessee are partly accepted as genuine. On facts of case provisions of Sec. 68 can not be invoked. Respectfully following principles laid down by Co- ordinate Bench in case of M/s.Green Infra Ltd., in ITA No. 7762/Mum/2012 dt. 23-08-2013 (supra), we have no hesitation in holding that orders of AO and CIT(A) are bad in law. In view of this, we delete addition so made by AO and confirmed by CIT(A). 9. In result, appeal of assessee is allowed. Order pronounced in open Court on 05th October, 2016 Sd/- Sd/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 05th October, 2016 TNMM I.T.A. No. 1775/Hyd/2014 :- 12 -: M/s. Hariom Concast & Steel Pvt. Ltd., Copy to : 1. M/s. Hariom Concast & Steel Pvt. Ltd., 15-8-511/1/2, Feelkhana, Hyderabad. 2. Income Tax Officer, Ward-2(2), Hyderabad. 3. CIT (Appeals)-III, Hyderabad. 4. CIT-II, Hyderabad. 5. D.R. ITAT, Hyderabad. 6. Guard File. M/s. Hariom Concast & Steel Pvt. Ltd. v. Income-tax Officer, Ward-2(2), Hyderabad