HECKYL TECHNOLGIES P. LTD, MUMBAI V. ITO 7(1)(3), MUMBAI

CO 270/MUM/2018

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 7826 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 19 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 23-07-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Assessment Year: 2012-2013
• Appeal Filed On: 04-09-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R BHUPATHI
• Assessee Lawyers: PIYUS CHHAJJED
• Keywords: Unexplained cash credit; Business expenditure; Revenue expenditure; Capital expenditure; Set aside
• Section: 143(3); 56(2); 13; 22; 68; 56; 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES H, MUMBAI BEFORE SHRI RAJESH KUMAR, ACCOUNTANT MEMBER & SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA NO.3087/MUM/2017 ASSESSMENT YEAR: 2012-13 ITO-7(1)(3) ROOM NO.11, GROUND FLOOR AAYAKAR BHAVAN, MUMBAI- 400020 VS. M/S HECKYL TECHNOLOGIES PVT.LTD. UNIT NO.1002, 10 TH FLOOR W, SUPREME BUSINESS PARK HIRANANDANI GARDEN POWAI, MUMBAI-400 076 PAN AA CCH5452L (REVENUE) (ASSESSEE) CROSS OBJECTION NO.270/MUM/2018 (ARISING OUT OF ITA NO.3087/MUM/2017) ASSESSMENT YEAR: 2012-13 M/S HECKYL TECHNOLOGIES PVT.LTD. UNIT NO.1002, 10 TH FLOOR W, SUPREME BUSINESS PARK HIRANANDANI GARDEN POWAI, MUMBAI-400 076 PAN AACCH5452L VS. ITO-7(1)(3) ROOM NO.11, GROUND FLOOR AAYAKAR BHAVAN, MUMBAI- 400020 (ASSESSEE) (REVENUE) REVENUE BY : SHRI R.BHUPATHI ASSESSEE BY : SHRI PIYUS CHHAJJED DATE OF HEARING :10.07.2020 DATE OF PRONOUNCEMENT : 23 .07.2020 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER 1. THE REVENUE BY WAY OF THIS APPEAL AND ASSESSEE BY WAY OF CROSS OBJECTION ARE CHALLENGING THE ORDER OF THE L D. 2 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 COMMISSIONER OF INCOME-TAX (APPEALS)-13 HEREINAFTER CALLED [CIT(A)], MUMBAI, IN APPEAL NO.CIT(A)-13/DCIT- 7(1)(3)/923/2015-16 DATED 06/02/2017. THE ASSESSMEN T FOR IMPUGNED AY WAS FRAMED BY LD. INCOME TAX OFFICER-7( 1)(3), MUMBAI [AO] U/S 143(3) OF THE INCOME TAX ACT,1961 O N 10/11/2015. FIRST WE WILL TAKE THE REVENUE APPEAL. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL. 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WHETHER THE ID. CIT(A) ERRED IN CONSIDERING THE SHARE PREMI UM OF RS. 2,49,89,038/- ARE NOT TAXABLE UNDER SECTION 56(1) AND ALTERNATIVELY U NDER SECTION 68 OF THE IT ACT'. 2. ' ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WHETHER THE LD CIT(A) ERRED IN CONSIDERING THE SHARE PREMIUM OF RS. 2,49,89,0387- AS A GENUINE TRANSACTION BY TREATING THE DISCOUNTED CASH FLOW METHOD VALUATION AT RS. 230.40 AND RS. 2,457.12 FOR EQUITY SHARES AN D COMPULSORY CONVERTIBLE PREFERENCE SHARES OF RS.10/- RESPECTIVE LY AS CORRECT, WHICH WERE BASED UPON THE HYPOTHETICAL DATA AND NEVER BEEN MAT ERIALIZED AND FURTHER NOT CONSIDERING THE FACT (A) THAT PREMIUM ON EQUITY SHA RES, COMPULSORY CONVERTIBLE PREFERENCE SHARES ALLOTTED TO M/S SEED FUND 2 INTERNATIONAL MAURITIUS AND M/S SEED FUND 2 INDIA WERE CHARGED AT RS. 2907- RS. 24,978 AND RS. 25,312/-RESPECTIVELY ON ACTUAL ALLOTMENT (B ) THAT EARNING PER SHARES WAS LESS THAN FACE VALUE OF RS. 10/-. 3. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF CASE AND IN LAW, WHETHER THE LD CIT{A) ERRED IN NOT CONSIDERING VIOLATION OF PROVIS IONS AND PROCEDURES LAID DOWN IN SECTION 78(2) AND SECTION 100 TO 102 OF THE COMPANIES ACT, 1965 IN RESPECT OF UTILIZATION OF SHARE PREMIUM MONEY BY TH E ASSESSES COMPANY AND THEREBY IT LOST ITS CHARACTER AS SHARE PREMIUM AND BECOME TRADING RECEIPTS TAXABLE U/S 56(1) OF THE INCOME TAX ACT, 1961. 4. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF CASE AND IN LAW, WHETHER THE LD CIT(A) ERRED IN RELYING ON JUDGMENTS IN THE CASES O F GREEN INFRA LTD VS ITO (38 TAXMAN 253) (MUMBAI ITAT) WHEREIN FACTS ARE DIS TINGUISHABLE FROM THE CASE OF THE ASSESSEE COMPANY.' 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF CASE A ND IN LAW, THE LD.CIT(A) ERRED IN TAKING THE FACTUAL DISCUSSION MADE ON VIOL ATION OF FEMA AND NON- APPLICABILITY OF SECTION 56(2)(VIIB) FOR AY 2012-13 AS GROUND FOR DELETION OF UN- JUSTIFIED SHARE RS.2,49,89,038/- 3 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE FILED RETURN OF INCOME ON 29/12/2012, DECLARING A LOSS OF RS.15,10,965/-. THEREAFTER, THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND SHOW CAUSE NOTICE WAS DULY SERVED UPON THE ASSESSEE. 3. THE ONLY ISSUE RAISED IN THE VARIOUS GROUNDS OF APPEAL IS AGAINST THE DELETION OF ADDITION OF RS.2,49,89,038/ - BY LD.CIT(A) AS MADE BY THE LD. AO U/S 56(1) OF THE ACT AND ALS O ALTERNATIVELY U/S 68 OF THE I.T.ACT, 1961. THE FACTS IN BRIEF ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE LD. AO OBSERV ED THAT THE ASSESEE HAS ISSUED SHARE AT A PREMIUM AND ACCORDIN GLY, THE ASSESSEE WAS ASKED TO CLARIFY THE HUGE SHARE PREMIU M RECEIVED FAILING WHICH WHY THE SAME SHOULD NOT BE ADDED AS INCOME FROM OTHER SOURCES. THEREAFTER, THE ASSESSEE REPLIED THE SAID SHOW CAUSE BY FILING VARIOUS DETAILS/EXPLANATION FROM TI ME TO TIME. THEREAFTER A REFERENCE WAS MADE TO THE UNITED KINGD OM TAX AUTHORITIES FROM WHERE THE MAJOR FUNDS WERE RECEIVED IN BOOKS O F SEED FUND 2, INTERNATIONAL MAURITIUS. THE REFERENCE S MADE THROUGH JOINT SECRETARY FT & TR, NEW DELHI TO THE U K TAXATION AND MAURITIUS AUTHORITY WERE STILL NOT RECEIVED AND THE LD. AO PROCEEDED AHEAD WITH THE FRAMING OF ASSESSMENT. THE ASSESSEE ENGAGED IN THE BUSINESS OF BROKERAGE, FINANCIAL INS TITUTIONS AND FUND MANAGERS ETC. THE LD. AO NOTED THAT THE SHAREH OLDERS OF MAURITIUS BASED COMPANY HAS CONTRIBUTED THE CAPITAL AS EQUITY FUNDS AND OUT OF THAT PARTIAL FUNDS WERE TRANSFERRE D FROM SEED FUND 2 INTERNATIONAL TO THE ASSESSEE COMPANY. THE A SSESSEE COMPANY IN TURN HAS ALLOTTED THE REDEEMABLE PREFERE NCE SHARE 4 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 AS COMPULSORILY CONVERTIBLE PREFERENCE SHARE (CCPS) OF FACE VALUE RS.10/- EACH. UPON ALLOTMENT OF SHARES, THE SHARE PREMIUM WAS IMMEDIATELY TRANSFERRED TO RESERVE AN D SURPLUS. THE LD. AO WAS NOT SATISFIED WITH THE GENUINENESS O F THE TRANSACTIONS AND WAS OF THE VIEW THAT SUCH TYPES OF PRIVATE EQUITIES SHARE PREMIUMS ARE NOTHING BUT THE PROFITS IN THE HANDS OF THE COMPANY AND LIABLE TO BE TAXED AS INCOME FRO M OTHER SOURCES UNDER SECTION 56(1) OF THE I.T.ACT, 1961 AN D WHICH WAS VERY MUCH AVAILABLE BEFORE THE NEW SECTION 56(2) BR OUGHT INTO STATUTE BOOK. ACCORDINGLY, THE SAME WAS ADDED U/S 56(1) AS INCOME FROM OTHER SOURCES. WITHOUT PREJUDICE THE L D. AO ALSO RECORDED A FINDING THAT THE SAID SUM MAY ALSO BE ADDED U/S 68 AS ASSESSEE HAS FAILED TO PROVE THE IDENTITY, GENUI NENESS AND CREDITWORTHINESS OF THE INVESTORS. THE SHARE PREMIU M RS. 2,49,89,038/- CREDITED THROUGH RESERVE AND SURPLUS ACCOUNT WAS ADDED AS UNEXPLAINED CASH CREDIT U/S 68 OF THE I. T.ACT, 1961. 4. IN THE APPELLATE PROCEEDINGS, THE LD.CIT(A) ALLO WED THE APPEAL OF THE ASSESSEE BY OBSERVING AND HOLDING AS UNDER;- 3.3 DECISION- I HAVE CAREFULLY CONSIDERED THE AOS ORDER AS WELL THE ARS SUBMISSIONS. THE ARGUMENTS FROM BOTH THE SIDES ARE DISCUSSED HEREWITH IN DETAIL. 3.3.1 FIRSTLY, THE AO HAS CLEARLY MENTIONED AT PA RAGRAPH NO. 5 ON PAGE NOS, 6 AND 7 OF HIS ORDER THAT HE HAD MADE TWO REFERENCE S TO THE TAX AUTHORITIES IN MAURITIUS AND THE UK. THESE REFERENCES HAD BEEN MAD E UNDER SECTION 90 OF THE ACT AND HAD BEEN ACCORDINGLY MADE THROUGH THE C OMPETENT AUTHORITY. THE AO HAS ALSO MENTIONED THE DATES OF THE SAID REF ERENCES (VIZ. 19 TH NOVEMBER 2014 TO MAURITIUS AND 22 ND JULY 2015 TO UK). IT RESULTED IN THE EXTENSION OF THE DATE OF LIMITATION TO 18 TH NOVEMBER 2015, BY WHICH DATE THE AO HAD PASSED THE ORDER UNDER APPEAL. IT IS HOWEVER CLEAR THAT THERE IS NO MENTION OF EITHER THE DETAILS OF THE EXACT REFERENC E MADE TO EITHER COUNTRY OR THE RECEIPT OF ANY INFORMATION CONSEQUENT THERETO O R THE RESULTS OF THE 5 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 INVESTIGATION OF THE AO SUBSEQUENT TO THE OBTAINING OF THE SAID INFORMATION. IN FACT, IT IS CLEAR FROM THE ORDER UNDER APPEAL THAT THE APPELLANT HAS NOT BEEN CONFRONTED WITH ANY INFORMATION OBTAINED UNDER SECT ION 90 OF THE ACT. IN THESE CIRCUMSTANCES, I FIND CONSIDERABLE MERIT IN T HE ARGUMENT OF THE ARS THAT NOTHING HAD BEEN FOUND AGAINST THE APPELLANT AS A R ESULT OF THE EXERCISE OF THE POWERS AVAILABLE TO THE AO UNDER SECTION 90 OF THE ACT. 3.3.2. SECONDLY, THE AO HAS MENTIONED THAT WHILE FU NDS HAD BEEN RECEIVED FROM SFM ON 22 ND DECEMBER 2011 BY THE APPELLANT, THE DATE OF ALLOTM ENT OF CCPS AS GIVEN TO THE RBI WAS 28 TH DECEMBER 2012, THE ALLOTMENT ITSELF HAVING BEEN DONE EARLIER ON 22 ND NOVEMBER 2011. IT IS NOT CLEAR AS TO HOW THE AO HAS REACHED THIS CONCLUSION, THERE BEING NO MATE RIAL AVAILABLE TO SUBSTANTIATE THIS FINDING. EVEN IF IT WERE TO BE TRUE, THERE IS NO SCOPE FOR CONTEMPLATING AN ADDITION EITHER UNDER SECTION 56 O R UNDER SECTION 68 OF THE ACT ON THE BASIS OF SUCH DISCREPANCIES. THE AO HAS HIMSELF MENTIONED AT PARAGRAPH NO. 7.3 ON PAGE NO. 9 OF HIS ORDER THAT T HE REASON FOR DISTORTING THE DATE OF ALLOTMENT GIVEN TO THE RBI WAS TO ESCAPE TH E PENAL PROVISIONS OF FEMA. BE THAT AS IT MAY, HE HAS NOT MADE OUT ANY CA SE OF ANY CONSEQUENCES UNDER THE ACT ON ACCOUNT OF THE ALLEGED FUDGING OF DATES. THE ONLY MATERIAL STATUTE INSOFAR AS THIS APPEAL IS CONCERNED WOULD B E THE ACT AND NOT FEMA. 3.3.3 THIRDLY, THE AO HAS SOUGHT TO ADVANCE AN A RGUMENT AT PARAGRAPH NO. 3 ON PAGE NO. 9 OF HIS ORDER WITH REGARD TO THE REC EIPT OF THE SAID FUNDING OF THE APPELLANT FROM ENTITIES WHICH ARE NEITHER VENTU RE CAPITA! COMPANIES NOR VENTURE CAPITAL FUNDS. BRIEFLY, HIS ARGUMENT IS THA T SFM IS NEITHER A VENTURE CAPITAL COMPANY NOR A VENTURE CAPITAL FUND IN TERMS OF PROVISIONS OF SECTION 10(23FB) OF THE ACT. AS SUCH, IN TERMS OF PROVISION S OF SECTION 56(2)(VIIB) OF THE ACT, ANY CONSIDERATION FOR ISSUE OF SHARES EXCE EDING THE FACE VALUE OF SUCH SHARES HAS TO BE CHARGED TO TAX UNDER THE SAID PROVISION, UNLESS THE CONSIDERATION HAS BEEN RECEIVED FROM A VENTURE CAPI TAL COMPANY OR A VENTURE CAPITAL FUND. THE ARS' ARGUMENT IS THAT WHILE SFI I S A REGISTERED VENTURE CAPITAL FUND (AS SEEN FROM THE CERTIFICATE OF REGIS TRATION GRANTED BY SEBI FORMING PART OF THE PAPER-BOOK, IT HAVING BEEN FILE D BEFORE THE AO AS WELL), SFM IS NEITHER A VENTURE CAPITAL FUND NOR A VENTURE CAPITAL COMPANY. AS SUCH, THE SHARE PREMIUM PAID BY SFM HAS TO BE CHARGED TO TAX UNDER SECTION 56(2)(VIIB) OF THE ACT, IT AT ALL. AS POINTED OUT B EFORE ME BY THE ARS, THE SAID PROVISION OF SECTION 56(2)(VIIB) OF THE A CT HAS BEEN INSERTED BY THE FINANCE ACT 2012 WITH EFFECT FROM 1 ST APRIL 2013. AS SUCH, IT WOULD BE / APPLICABLE ONLY FROM AY 2013-14 ONWARDS, WHILE THE ASSESSMENT YEAR UNDER CONSIDERATION IS SEEN TO BE AY 2012-13. CLEARLY, TH E AO HAS NO BASIS FOR INVOKING THE PROVISIONS OF SECTION 56(2)(VIIB) OF T HE ACT READ IN THE UNDER CONSIDERATION. 3.3.4 FOURTHLY, THE AO HAS EXPLAINED THE BASIS F OR HIS INVOKING OF THE PROVISIONS OF SECTION 68 OF ACT AT PARAGRAPH NO. 11 ON PAGE NOS. 10 AND 11 OF THE ORDER UNDER APPEAL. HE HAS BRUSHED ASIDE THE JU DGMENTS CITED BY THE APPELLANT IN FAVOUR OF ITS CLAIM THAT PROVISIONS OF SECTION 68 OF THE ACT WOULD NOT BE APPLICABLE TO IT. HOWEVER, NONE OF THESE HA VE BEEN REPRODUCED BY HIM. ON THE OTHER HAND, THE QUESTION FACED BY THE A O HAS BEEN IDENTIFIED IN 6 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 THE FOLLOWING FASHION, 'HERE, THE ISSUE INVOLVED IS , WHY SHOULD THE PROFIT ARISING OUT OF THE ISSUE OF SHARES NOT BE TAXED?' IN MY C ONSIDERED OPINION, THIS EXERCISE WOULD REQUIRE EXPLICIT LEGISLATIVE SANCTIO N OR FOR THAT MATTER SPECIFIC JUDICIAL PRECEDENT. UNFORTUNATELY, THE AO HAS BE EN ABLE TO DEMONSTRATE NEITHER. HE HAS ON THE OTHER HAND DISCUSSED VARIO US CASE-LAWS FOR ALMOST TEN PAGES OF HIS ORDER. THE PROMINENT ONES AMONG ST THEM HAVE BEEN ALREADY BEEN REPRODUCED IN PARAGRAPH NO. 3.1 EARLIE R IN THIS ORDER. THE AO HAS TERMED THE APPELLANT'S ACTION AS 'SUBTERFUGE'. HE HAS THEN CITED THE RATIO OF, THE HON'BLE SUPREME COURT IN THE CASE OF MCDOWE LL (158 ITR 148) TO DEMONSTRATE THAT WHAT THE APPELLANT HAS DONE IS TO USE A COLOURABLE DEVICE. HE HAS THEN CITED THE DECISION OF AZADI BACHAO ANDO LAN & OTHERS V. UNION OF INDIA (256 ITR 563). HE HAS THEN PROCEEDED TO CITE THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF HILLCREST REALITY S ON BHD V. RAM PARSHOTAM MITTAL (SUPRA) WHICH HAD DEALT WITH THE ISSUE OF TH E UTILISATION OF MONEY RAISED BY WAY OF SHARE PREMIUM FOR PURPOSES OTHER THAN THO SE SPECIFIED IN SECTION 78(2) OF COMPANIES ACT, 1956. HE HAS THEN TRAVELLED TO THE DECISIONS OF THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT FIRE & GENERAL INSURANCE LTD. V. CIT (SUPRA) AND CIT V. RAM BAHADUR THAKUR (SUPRA), THE LATTER BEING THE ACTUALLY A DECISION OF THE HON'BLE KERALA HIGH COUR T. BUT IT IS NOT CLEAR AS TO HOW ALL THESE DECISIONS WOULD BE RELEVANT IN THE CO NTEXT OF THE MATTER UNDER CONSIDERATION. THE AO HAS THEN PROCEEDED TO EXAMINE THE PRINCIPLES OF STATUTORY INTERPRETATION AS IAID DOWN IN THE CASE O F BENGAL IMMUNITY COMPANY V. STATE OF BIHAR (SUPRA). HE HAS FURTHER CITED THE DECISION OF CIT V. HINDUSTAN BULK CARRIERS (SUPRA) WHEREIN THE HON'BLE SUPREME C OURT HAD COMMENTED THAT IT SHOULD NOT BE LIGHTLY ASSUMED THAT 'PARLIAM ENT HAD GIVEN WITH ONE HAND WHAT IT TOOK AWAY WITH OTHER'. ONCE MORE IT IS NO T CLEAR AS TO WHAT WOULD BE THE PURPOSE BEHIND SUCH DISCUSSIONS, SINCE THE FINA L CONCLUSION OF THE AO VIZ. THE CHARGING TO TAX OF THE ENTIRE AMOUNT OF SHARE P REMIUM RECEIVED BY THE APPELLANT AS INCOME FROM OTHER SOURCES UNDER SECTIO N 56(1) OF THE ACT DOES NOT AT ALL FLOW FROM THEM. 3.3.5 FIFTHLY, THE AO HAS TAKEN AN ALTERNATE GRO UND BY INVOKING THE PROVISIONS OF SECTION 68 OF THE ACT. AT PARAGRAPH N O. 22.3 ON PAGE NO. 19 OF HIS ORDER, THE AO HAS GIVEN THE DETAILS FURNISHED B Y THE APPELLANT VIZ. COPY OF ACCOUNT OF THE INVESTOR-COMPANY ALONG WITH ITS NAME AND ADDRESSES. BUT THE ISSUE OF GENUINENESS AND CREDITWORTHINESS OF THE IN VESTOR HAS - ACCORDING TO THE AO - NOT BEEN ADDRESSED. IN THIS CONTEXT, IT WOULD BE NOTEWORTHY TO SEE THE DOCUMENTATION FILED BY THE APPELLANT EARLIER BE FORE THE AO AND NOW BEFORE ME. FIRSTLY, IT HAS FILED A COPY OF THE PAN CARD O F SFM ALONG WITH A COPY OF THE FIRST PAGE OF ITS RELEVANT RETURN OF INCOME. IT HAS ALSO FILED AUDITED FINANCIAL STATEMENTS OF SFM FOR THE FINANCIAL YEAR ENDING 30 TH JUNE 2012, IT BEING A MAURITIAN COMPANY. AS PER THE STATEMENT OF FINANC IAL POSITION (ROUGHLY EQUATED WITH THE BALANCE SHEET), WHILE THE TOTAL AS SETS OF SFM WERE US$ 17.93 MILLION, ITS TOTAL LIABILITIES WERE ONLY US$ 0.012 MILLION, PLACING ITS NET ASSET BASE AT US$ 17.92 MILLION. AT AN EXCHANGE RAT E OF RS. 67 PER US-DOLLAR, THIS WOULD AMOUNT TO NET ASSETS OF OVER ? 120 CRORE S. THIS HAS TO BE CONTRASTED WITH THE INVESTMENT OF THE SAID FUND IN THE APPELLANT-COMPANY TO THE TUNE OF RS. 2.49 CRORES, WHICH IS A LITTLE OVER 2% OF ITS NET ASSETS, THE APPELLANT HAS ALSO FURNISHED COPIES OF THE CERTIFIC ATE OF INCORPORATION ISSUED 7 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 BY THE REGISTRAR OF COMPANIES OF MAURITIUS, THE BUS INESS LICENCE ISSUED BY THE FINANCIAL SERVICES COMMISSION OF MAURITIUS AND THE TAX RESIDENCY CERTIFICATE ISSUED BY THE MAURITIUS REVENUE AUTHORI TY, THE LAST DOCUMENT HAVING BEEN SUBMITTED FOR TWO MAURITIAN FINANCIAL Y EARS SO AS TO COVER THE INDIAN FINANCIAL YEAR 2011-12 CORRESPONDING TO AY 2 012-13, WHICH IS THE ASSESSMENT YEAR PRESENTLY UNDER CONSIDERATION. THE APPELLANT HAS ALSO SUBMITTED ITS DOCUMENTATION FILED WITH THE RBI, IT HAVING BEEN FILED IN FORM FC- GPR. IT HAS ALSO FILED A COPY OF THE ACKNOWLEDGMENT OF THE SAID FC-GPR. IT HAS THEN FILED A COPY OF THE BANK ACCOUNT OF SFM HI GHLIGHTING THE DEPOSIT OF MONIES WHICH WERE EVENTUALLY TRANSFERRED TO THE APP ELLANT, FT HAS ALSO FILED A COPY OF ITS BANK ACCOUNT MAINTAINED WITH STATE BANK OF INDIA, PAREL BRANCH, MUMBAI TO DEMONSTRATE THE INFLOW OF FUNDS FROM MAUR ITIUS. AFTER CAREFUL CONSIDERATION OF ALL THESE DOCUMENTS, I AM OF THE C ONSIDERED OPINION THAT APPELLANT HAS MORE THAN SATISFACTORILY ACQUITTED IT SELF WHEN IT COMES TO ESTABLISHING ALL THE THREE CRUCIAL COMPONENTS REQUI RED TO BE VALIDATED UNDER SECTION 68 OF THE ACT VIZ IDENTITY, GENUINENESS AND CREDITWORTHINESS OF THE INVESTOR. 3.3.6 THE HON'BLE SUPREME COURT HAS HAD OCCASION TO GO INTO THE LEGALITY OF THIS MATTER. IN THE CASE OF CIT V. ALLAHABAD BANK L TD. (73 ITR 745), IT HAD BEEN HELD THAT THE SHARE PREMIUM ACCOUNT HAD TO BE INCLUDED IN THE PAID-UP CAPITAL ACCOUNT, THUS LEADING TO IT BEING TREATED O N A PAR WITH THE PAID-UP CAPITAL. IN THE CASE OF CIT V. STANDARD VACUUM OIL CO. (59 ITR 865), IT HAD BEEN HELD THAT PREMIUM REALIZED ON ISSUE OF SHARES IS NOT IN THE NATURE OF A REVENUE RECEIPT AND IS HENCE NOT CHARGEABLE TO TAX. THE HON'BLE BOMBAY HIGH COURT TOO HAD OCCASION TO GO INTO THIS MATTER IN ITS DECISION RENDERED IN THE CASE OF VODAFONE INDIA SERVICES (P) LTD. (50 TA XMANN 300). IT HAD THEN UNEQUIVOCALLY HELD THAT THE AMOUNTS RECEIVED ON ISS UE OF SHARE CAPITAL INCLUDING THE PREMIUM - ARE UNDOUBTEDLY ON THE CAPI TA! ACCOUNT. IN A RELATIVELY RECENT JUDGMENT, THE MUMBAI BENCH OF THE HON'BLE TR IBUNAL HAD OCCASION TO EXAMINE THIS VERY ISSUE ONCE MORE IN THE CASE OF GR EEN INFRA LTD. V. ITO (38 TAXMANN 253). IT HAD CITED THE JUDGMENTS OF THE HON 'BLE SUPREME COURT DISCUSSED EARLIER IN THIS ORDER. IT HAD THEN EXAMIN ED THE FACTS OF THAT CASE AND STATED THAT A NON ESF AND A ZERO BALANCE COMPANY AS KING FOR PREMIUM OF ? 490A PER SHARE WITH A FACE VALUE OF ? 10A DEFIES CO MMERCIAL PRUDENCE. NEVERTHELESS IT HAD CONCLUDED THAT IT WAS THE PRER OGATIVE OF THE BOARD OF THE ASSESSEE-COMPANY TO DECIDE THE QUANTUM OF THE PREMI UM AND IT WAS THE WISDOM OF THE SHARE-HOLDERS TO INVEST ON THOSE TERM S. THUS, THE REVENUE WAS BARRED FROM CHARGING THE SAID PREMIUM TO TAX IN THE ABSENCE OF ANY EXPLICIT LEGISLATIVE SANCTION. AS HAS ALREADY BEEN SEEN IN T HE MATTER UNDER CONSIDERATION, THE APPELLANT-COMPANY IS FAR FROM BE ING A NON COMPANY OR A ZERO BALANCE ONE. FT WAS IN POSSESSION OF ASSETS FA R IN EXCESS OF THE PREMIUM CHARGED EVEN ON THE DAY OF THE CHARGE OF SUCH PREMIUM. IN THESE CIRCUMSTANCES, THERE WOULD BE ALL THE MORE REASON FOR NOT CHARGING TO TAX THE SHARE PREMIUM COLLECTED BY THE APPELLANT. 3.3.7 IN VIEW OF THE DETAILED DISCUSSION IN THE PRE CEDING SUB-PARAGRAPHS, AFTER TAKING INTO ACCOUNT ALL THE FACTUAL ASPECTS OF THIS CASE AND AFTER RESPECTFULLY FOLLOWING THE DECISIONS OF AFORECITED JUDICIAL AUTH ORITIES, THE ADDITION OF 8 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 RS.2,49,89,033/- AS MADE BY THE AO UNDER SECTION 56 OF THE ACT ON A SUBSTANTIVE BASIS) AND UNDER SECTION 68 OF THE ACT (ON AN ALTERNATE BASIS) IS HEREBY SET ASIDE. THE AO IS SO DIRECTED. 5. AFTER HEARING THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD, WE OBSERVE THAT IN TH IS CASE, THE ASSESSEE HAS ENTERED INTO A SHARE PURCHASE AGREEMEN T ON 22/12/2011 WITH SEED FUND 2, INTERNATIONAL AND SEED FUND 2 ,INDIA FOR PURCHASES OF SHARES. BASED ON THE SAID AGREEMENT, THE ASSESSEE HAS ISSUED 100 EQUITY SHARES OF RS.10/ - EACH AND 1000 CCPS OF RS.10/- EACH TO THE SHAREHOLDERS. 96 E QUITY SHARES WERE ISSUED TO SEED FUND 2 INTERNATIONAL AND 4 EQUI TY SHARES WERE ISSUED TO SEED FUND 2 INDIA AT PAR.THE APPELLA NT COMPANY ISSUED 966 CCPS OF RS.10/- EACH TO SEED FUND 2 INTE RNATIONAL AT A TOTAL CONSIDERATION OF RS.2,41,21,020/- (I.E RS. 9660/- AS FACE VALUE + RS.2,41,11,360/-PREMIUM @ RS. 24,978/-) AND 34 CCPS WERE ISSUED TO SEED FUND 2 INDIA FOR TOTAL CONSIDER ATION OF RS.8,48,980/-. THUS THE APPELLANT COMPANY SUBMITS T HAT IN LIGHT OF THE BACKGROUND OF SEED FUND 2, INTERNATION AL, MAURITIUS, THE FUNDS IN FORM OF SHARE CAPITAL RECEIVED BY THE APPELLANT COMPANY FROM SEED FUND2 INTERNATIONAL, MAURITIUS ST ANDS FULLY EXPLAINED. FURTHER THE ABOVE INVESTMENT DONE BY THE INVESTOR IS BEING REFLECTED IN THEIR AUDITED ACCOUNTS. IN FACT THE INVESTMENT MADE BY SEEDFUND2 INTERNATIONAL IN THE APPELLANT CO MPANY IS IN US $4,58,635/-SEED FUND 2 INDIA IS A SCHEME FLOATED BY THE INDIAN SEED INVESTMENT TRUST WHICH IS A TRUST BASED IN INDIA AND ALSO REGISTERED WITH SEBI AS VENTURE CAPITAL FU ND. THE CERTIFICATE OF APPROVAL BY SEBI WAS SUBMITTED VIDE LETTER DATED 9.5.2015 TO LEARNED AO. AS STATED BY THE ASSESSEE SEEDFUND2 9 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 INDIA HAS FILED ITS RETURN OF INCOME FOR A.Y. 2012- 13 AND ITS PAN NO. IS AAJTS7047Q, A COPY OF COMPUTATION AND ACKNOWLEDGEMENT OF RETURNS FILED WERE SUBMITTED BY THE APPELLANT COMPANY.SEEDFUND2 INDIA IS ASSESSED AT WA RD 18(1)(4), MUMBAI. THE ABOVE INVESTMENTS IN THE APPELLANT COMPANY IS BEING REFLECTED IN THE AUDITED BALANCE S UBMITTED TO THE LEARNED AO DURING THE COURSE OF HEARING. SEED F UND 2 INDIA LTD IS REGISTERED UNDER SEBI AS VENTURE CAPITAL FUN D CATEGORY. THE LD. AO ASSESSED THE SHARE PREMIUM RECEIVED AS I NCOME FROM OTHER SOURCES BY HOLDING THAT THIS IS NOTHING BUT P ROFITS RECEIVED BY THE ASSESSEE. ALTERNATIVELY, THE LD. AO HAS ALSO RECORDED FINDINGS IN THE REASSESSMENT ORDER THAT SAID RECEI PT CAN ALSO TAXED AS UNEXPLAINED CASH CREDIT IN THE BOOKS OF THE ASSESSEE COMPANY. THE LD.CIT(A) HAS PASSED A VERY REASONED AND SPEAKING ORDER JUSTIFYING THE DELETION OF ADDITION S BY DEALING WITH ALL THE ISSUES AS RAISED BY THE REVENUE INCLUD ING THE PROVISIONS OF SECTION 78 OF THE COMPANIES ACT . TH EREFORE WE DO NOT FIND ANY INFIRMITY OR DEFECT LEGAL OR OTHERWISE IN THE ORDER OF THE LD.CIT(A) AND HENCE THE CONCLUSION DRAWN BY THE LD.CIT(A) IS AFFIRMED BY DISMISSING THE GROUND NO.1 RAISED BY T HE REVENUE. 6. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLO WED. C.O NO.270/MUM/2018 7. THE ASSESSEE HAS ALSO FILED CO AND RAISED THE VA RIOUS GROUNDS OF APPEAL WHICH ARE REPRODUCED AS UNDER:- 10 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED ASSESSING OFFICER ERRED IN PASSING THE ASSESSMENT ORDER U/S.143(3) ON 10.11.2015 WHICH IS TIME-BARRED AS PER THE PROVISIONS OF THE ACT. 2) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED ASSESSING OFFICER ERRED IN MAKING AN ADDITION OF RS.1,58,333/- ON ACCOUNT OF CONSULTING FEES WITHOUT APPRECIATING THE FACT THAT THE BOOKS OF ACC OUNTS OF THE APPELLANT COMPANY ARE MAINTAINED ON ACCRUAL SYSTEM OF ACCOUNT ING. 3) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED ASSESSING OFFICER ERRED IN MAKING AN ADDITION OF RS.6,48,859/- TOWARDS PROFESSIONAL FEES AND TREATING THE SAME AS CAPITAL EXPENDITURE WITHOUT AP PRECIATING THE NATURE OF THE EXPENSE INCURRED BY THE APPELLANT COMPANY 8. THE ISSUE RAISED IN THE FIRST GROUND OF APPEAL IS AS REGARDS, THE ASSESSMENT BEING TIME BARRED 9. AT THE TIME OF HEARING, THE LD. DR, ON THE OTHE R HAND DID NOT PRESS THE GROUND NO.1 AND ACCORDINGLY THE SAME IS D ISMISSED AS NOT PRESSED. 10. THE ISSUE RAISED IN SECOND GROUND OF APPEAL IS AGAINST THE CONFIRMATION OF ADDITION OF RS. 1,58,333/- BY LD.CI T(A) HAS MADE BY THE LD. AO ON ACCOUNT OF CONSULTANCY FEES. 10. THE FACTS IN BRIEF ARE THAT IN THE MONTH OF MARCH, 2012, THE PRODUCT BEING DEVELOPED BY THE APPELLANT COMPANY BE CAME OPERATIONAL AND BASED ON THE SAME, THE COMPANY ENTE RED INTO AN AGREEMENT WITH M/S. ANGEL BROKING LTD FOR PROVIDING THE SOFTWARE TO THE APPELLANT COMPANY FOR RS.5,00,000/- FOR ONE YEAR. HENCE BASED ON THESE TERMS AND UNDERSTANDING, THE INVOICE OF RS.3,80,000/- WAS RAISED ON 6.3.2012 CON SISTING OF RS.1,00,000/- AS ONE-TIME ACTIVATION FEES AND RS.80 ,000/- AS CUSTOMIZATION FEES. SINCE THE CONTRACT FOR USE OF SOFTWARE TO M/S ANGEL BROKING LTD WAS OF RS.5,00,000/- PER ANNUM, H ENCE THE 11 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 PER MONTH USAGE WORKS OUT TO RS.41,667/-. THUS THE APPELLANT COMPANY WAS RIGHT IN ACCOUNTING THE AMOUNT OF RS.2, 21,668/- AS REVENUE FOR THE YEAR (I.E. RS.1,00,000/- ACTIVAT ION FEES + RS.80,000/- CUSTOMIZATION FEES + RS.41,667/- FEES F OR MONTH OF MARCH, 2012).THE LEARNED A.O. WITHOUT APPRECIATING THE ACCOUNTING SYSTEM CAME TO A CONCLUSION THAT SINCE T HE INVOICE HAS BEEN RAISED FOR RS.3,80,000/- IRRESPECTIVE OF T IME PERIOD AND USAGE OF SOFTWARE, THE FULL AMOUNT NEEDS TO BE ACCO UNTED AS INCOME FOR APPELLANT COMPANY AND THEREBY MADE AN AD DITION OF RS.1,58,333/- SHOWN AS CURRENT LIABILITY IN THE APP ELLANTS BOOKS. 11. THE LD CIT(A) DISMISSED THE APPEAL OF THE ASSES SEE BY OBSERVING AND HOLDING AS UNDER: 4. ADDITION OF CONSULTANCY FEES OF ? 3.8 LAKH S RECEIVED FROM M/S ANGEL SHARE BROKING 4.1 AO'S CASE - THE AO NOTICED THAT THE APPELLANT HAD RECEIVED RS.3.8 LAKHS M/S ANGEL SHARE BROKING (HERE INAFTER REFERRED TO AS THE 'ANGEL') FOR PROVIDING ASSISTANC E IN THE SHARE MARKET ON A DAY TO DAY BASIS. WHILE INVOICES OF RS.3. LAKHS HAD BEEN RAISED BY THE APPELLANT, THE TOTAL R EVENUE ACCRUED ON THIS ACCOUNT WAS SHOWN TO BE F 2.21 LAKH S AS PER NOTE NO. 13 OF THE BALANCE SHEET OF THE APPELLANT. THE AO HAD ACCORDINGLY SOUGHT TO BRING TO TAX BALANCE AMOUNT O F RS. 1.58 LAKH ON ACCRUAL BASIS. 4.2 APPELLANT'S CONTENTIONS - THE ARS CONTENDED THAT THE CONTRACT WAS FOR USE OF THE APPELLANT'S SOFTWARE BY ANGEL AT THE RATE OF RS. 5 LAKHS PER ANNUM I.E. RS. 0,41 LAK H PER MONTH. AS THE CONTRACT HAD BEEN ENTERED INTO IN THE MONTH OF MARCH 2012 THE ACTUAL REALISATION AMOUNTED TO ONLY RS. 0.41 LAKH FOR THE MONTH OF MARCH 2012 APART FROM ACTIVAT ION FEES OF RS. 1 LAKH AND CUSTOMISATION FEES OF RS.0.8 LAKH TOTALLING 12 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 RS. 2.21 LAKHS ON ACCRUAL BASIS, THE BALANCE OF RS. 2.79 LAKHS BEING RELEVANT TO FY 2012-13 CORRESPONDING TO AV 2013-14. THE AO HAD HOWEVER MISUNDERSTOOD THIS TRANSACTION AND HAD MADE AN ADDITION OF RS.1.58 LAK H. 12.AFTER HEARING BOTH THE SIDES , WE FIND THAT AS P ER THE ASSESSEES CLAIM THE INCOME HAS NOT ACCRUED WHEREAS BOTH THE AUTHORITIES BELOW HAVE NOTED THAT NO CONTRACT QUA T HIS RECEIPT HAS BEEN FILED BEFORE EITHER OF THEM. THE COUNSEL O F THE ASSESSEE FILED IN THE PAPER BOOK INVOICES RAISED ON ANGEL BROKING LTD AT PAGE NO.148 TO 149 AND PRODUCT LICENCE AGREEMENT ENTERED WITH ANGEL BROKING LTD FROM PAGE NO.150 TO 159. TH E ASSESSEE HAS ACCOUNTED FOR ONE TIME ACTIVATION FEES AND CUST OMIZATION FEES AS CURRENT YEARS INCOME AND 15 DAYS CONTRACT INCOME FOR USE OF SOFTWARE AS THE FEES OF THE APPELLANT COMPAN Y BASED ON THE ACCRUAL SYSTEM OF ACCOUNTING. ON THE THER HAND THE ASSESSING OFFICER WENT ON THE BASIS OF INVOICES RAISED DURIN G THE YEAR AND AS SUCH TREATED THE SAME AS INCOME OF THE APPELLANT COMPANY FOR CURRENT ASSESSMENT YEAR WITHOUT UNDERSTANDING T HE CONCEPT OF ACCRUAL BASIS AND HE SIMPLY MADE AN ADDITION BAS ED ON THE INVOICES RAISED. THE LD. CIT(A) ALSO CONFIRMED THE ADDITION CITING THE REASONS THAT AGREEMENTS WERE NOT BEFORE THE AUT HORITIES BELOW BY IGNORING THE FACTS OF THE CASE. HENCE THE ISSUE IS RESTORED TO THE AO FOR LIMITED PURPOSE OF EXAMININ G WHETHER ACCOUNTED FOR IN THE NEXT YEAR OR NOT AND IF OFFERE D TO TAX THE ADDITION OF RS. 1,58,333/- IS TO BE DELETED . THE A O IS DIRECTED ACCORDINGLY. THE GROUND IS ALLOWED FOR STATISTICAL PURPOSE. 13 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 13. THE NEXT ISSUE ISSUE IS AGAINST THE CONFIRMATION OF RS.6,48,859/- TOWARDS PROFESSIONAL FEES AND TREATIN G THE SAME AS CAPITAL EXPENDITURE WITHOUT APPRECIATING THE NAT URE OF THE EXPENSE. 14. THE FACTS IN BRIEF ARE THAT ALL RELEVANT EXPEN DITURES PERTAINING TO DEVELOPMENT OF PRODUCTS AND ALL DIREC TLY RELATED EXPENDITURE FOR THE DEVELOPMENT OF PRODUCTS WERE C APITALIZED. HOWEVER, THE PROFESSIONAL EXPENDITURE TO THE EXTENT OF RS.7,00,000/- WERE NEVER CAPITALISED DUE TO FACT TH AT THESE LEGAL & PROFESSIONAL CHARGES DO NOT HAVE ANY BEARING TO T HE DEVELOPMENT OF THE PRODUCT BUT THEY WERE SIMPLY IN THE NATURE OF REVENUE EXPENDITURE. THE LEARNED ASSESSING OFFICER HAD COME TO A CONCLUSION THAT SINCE THE OTHER EXPENDITURE ON TH E PRODUCT DEVELOPMENT WERE CAPITALIZED ON NUMBER OF DAYS, THE LEARNED A.O. ALSO APPLIED THE FORMULA TO PROFESSIONAL FEES PAID BY THE APPELLANT COMPANY AMOUNTING TO RS.7,00,691/- AND CA ME TO A CONCLUSION THAT SAME NEEDS TO BE PRO-RATA BASIS ON NUMBER OF DAYS AND THEREBY DISALLOWED RS.6,48,859/-. 15. IN THE APPELLATE PROCEEDINGS, THE LD.CIT(A) SUS TAINED THE ADDITIONS BY OBSERVING AND HOLDING AS UNDER:- 5.3 DECISION:- I HAVE CAREFULLY CONSIDERED THE AOS ORDER AS WELL AS THE ARS SUBMISSIONS. IT IS CLEAR THAT THE APPELLANT HAD SUO MOTU ALLOWED ONLY A PORTION OF THE EXPENDIT URE TO THE EXTENT THAT THE APPELLANT-COMPANY HAD COMMENCED ITS OPERATIONS IN THE LAST MONTH OF THE RELEVANT PREVIO US YEAR, 14 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 SUCH HEADS BEING PREPARATION OF LEGAL AGREEMENTS, R OC PAYMENTS, BANK FORMALITY-RELATED PAYMENTS, OTHER RE PORTS ETC. THE AOS ACTION OF CAPITALIZATION OF THE BALAN CE PAYMENT AFTER FRACTIONALLY ALLOWING THE EXPENDITURE TO THE EXTENT OF NUMBER OF DAYS FOR WHICH THE COMPANY COMMENCED AND CONDUCTED OPERATIONS DURING THE RELEVANT PREVIOUS Y EAR IS THUS QUITE FAIR AND JUST. HIS ACTION OF ADDING BACK AN AMOUNT OF RS.6,48,859/- IS HENCE SUSTAINED. 16. AFTER HEARING BOTH THE PARTIES WE NOTE THAT THE LEGAL AND PROFESSIONAL CHARGES PAID BY THE APPELLANT COMPANY DOES NOT DIRECTLY OR INDIRECTLY PERTAIN TO THE PRODUCT DEVEL OPMENT COST NOR DOES IT GIVE THE BENEFIT OF ENDURING NATURE BUT IT S A NORMAL ROUTINE BUSINESS EXPENDITURE INCURRED BY THE APPELL ANT COMPANY. THE LD CIT(A) HAS GIVEN A FINDING THAT TH E SAID EXPENSES INCLUDED LEGAL CONSULTANCY, VETTING CHARGE S FOR DOCUMENTS , ARCHITECT FEE AND COMPLIANCE RELATED FE E. IN OUR OPINION THE CONCLUSION OF LD. CIT(A) UPHOLDING THE ORDER OF AO THAT THESE WERE CAPITAL IN NATURE APPEARS TO BE WRO NG AND CONTRARY TO THE FINDINGS RECORDED IN THE APPELLATE ORDER AND HENCE CANNOT BE SUSTAINED. AT PAGE NO.161 OF PAPE R BOOK , THE ASSESSEE HAS FILED THE BREAK-UP OF LEGAL FEES PAID TO VARIOUS PROFESSIONALS HAVE BEEN PROVIDED. AFTER PERUSING AL L THESE DETAILS AND NATURE OF THESE EXPENSES , WE ARE OF THE OPINIO N THAT THESE ARE REVENUE IN NATURE AND HAVE TO BE ALLOWED AS DED UCTION. ACCORDINGLY THEN= GROUND NO 3 IN THE CROSS OBJECTIO N IS ALLOWED. 15 ITANO.3087/MUM/2017 C.O. NO.270/MUM/2018 17. IN THE RESULT THE APPEAL OF THE IS DISMISSED AN D CROSS OBJECTIONS OF THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE . ORDER PRONOUNCED ON 23 /7/2020 UNDER RULE 34 (4) OF THE ITAT RULES 1963. SD/- SD/- (AMARJIT SINGH) (RAJES H KUMAR) JUDICIAL MEMBER ACC OUNTANT MEMBER MUMBAI, DATED : 23 /07/2020 * THIRUMALESH COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. THE CIT 5. THE DR, H BENCH, ITAT, MUMBAI BY ORDER (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL, MUMBAI