ARM INFRA & UTILITIES PRIVATE LIMITED, MUMBAI V. PR.COMMISSIONER OF INCOME TAX RANGE-6, MUMBAI

ITA 2212/MUM/2019

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 8650 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-11-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 08-04-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RA J IV HARIT
• Keywords: Gift; Revision of order; Source of fund; Date of conversion; Corroborative evidences; Valuation report; Capital receipt; Set aside; Capital Gains
• Section: 68; 56; 263; 143(3); 142(1); 56(2); 143(2); 48; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL“A” BENCH, MUMBAIBEFORE SHRI C.N. PRASAD, JUDICIAL MEMBER ANDSHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBERITA no.2212/Mum./2019(Assessment Year : 2014–15)ARM Infra & Utilities Pvt. Ltd.18thFloor, A–Wing, Marathon FuturexN.M. Joshi Marg, Lower ParelMumbai 400 013 PAN – AALCA8247K................ Appellantv/sPr. Commissioner of Income TaxRange-6, Mumbai................ RespondentAssessee by : Shri P.J. Pardiwala a/wShri Jay Bhansali andShri Jeet KamdarRevenue by : Shri Rajiv HaritDate of Hearing – 24.09.2021Date of Order –12/11/2021O R D E RPER S. RIFAUR RAHMAN, A.M.The present appeal has been filed by the assessee challengingthe impugned order dated 27.03.2019, passed under section 263 ofthe Income Tax Act, 1961 (for short"the Act") by the learned PrincipalCommissioner of Income Tax–6, Mumbai, for the A.Y. 2014–15.2.The assessee has filed this appeal on the following grounds ofappeal:–2Arm Infra & Utilities Pvt. Ltd.“1. On the facts and circumstances of the case and in law, thePrincipal Commissioner Income-tax - 6, Mumbai ("the Pr.CIT")erred in assuming jurisdiction under section 263 and holding theassessment order, under section 143(3) of the Income-tax Act,1961 ("hereinafter referred to as "the Act") dated 15.12.2016(hereinafter referred to as "the assessment order"), as erroneousand prejudicial to the interest of the revenue. The reasons givenby him for doing so are wrong, contrary to the facts of the caseand against the provisions of law;2. The Pr. CIT failed to appreciate that the Assessing Officer afterdue application of mind as regards the nature & source andjustification for valuation relating to receipt of monies amountingto Rs.673 crores against issuance of Compulsorily ConvertibleDebentures (hereinafter referred to as "CC1amed the assessmentorder without making any addition on the said count;3. The Pr, CIT failed to appreciate that, where two views arepossible and the Assessing Officer, after conduct of due enquiry,has taken one view with which the Pr. CIT does not agree, theassessment order cannot be treated as erroneous and prejudicialto the interest of the revenue;4. Assuming without admitting that the present case was a caseof inadequate enquiry, the Pr. CIT failed to appreciate that thepower of revision envisaged under section 263 of the Act and theExplanation 2 thereto can be exercised only where no enquiry asrequired under the law is done and that it is not open to invokethe said provisions in cases of inadequate enquiry;5. The Pr. CIT erred in holding that the receipt of securitiespremium of Rs. 605.70 crores is taxable under the provisions ofsection 56(2)(viib) for reasons which are wrong, contrary to factsand provisions in law. The conclusion drawn is based on incorrectappreciation of facts and circumstances in law.”3.The brief facts of the case are, the assessee filed its return ofincome for assessment year 2014–15 on 25.09.2014, declaring totalloss of ₹ 3,84,344/–. The case was selected for scrutiny and notice under section 143(2) and 142(1) of the Income Tax Act, 1961 (inshort“the Act”) were issued and served on the assessee. Based on the3Arm Infra & Utilities Pvt. Ltd.information collected during the assessment proceedings, theassessment under section 143(3) of the Act was completed on15.12.2016, assessing the returned loss at ₹ 3,84,344/–. On a perusal of the records, the learned Principal Commissioner of Income Tax–6,Mumbai, observed that the company is incorporated on 11.06.2013,i.e., during current assessment year. The object of the business is toconstruct, maintain, develop or control building, factories, highways,railways, bridges etc. the Ld. Pr. CIT observed that income tax returnof income filed by the assessee does not show any business activitiesbeing carried out. The Ld. Pr. CIT from the record observed that theassessee company had issued share capital of ₹ 5 lakhs and no share premium was charged on the shares. The assessee company issuedand allotted zero percent compulsory convertible debentures (CCDs) of` 673,00,000, at a face value of ₹ 10 each at a premium of ₹ 90 per CCD to Edisons Utility Works Pvt. Ltd. He observed that the assesseereceived securities premium of ₹ 605.70 crore on CCD equivalent to issue of shares for ₹ 67.30 crore. The assessee has shown ₹ 67.30 crore as long-term borrowings and ₹ 605.70 crore is credited to securities premium under reserves and surplus. From the notes to theBalance Sheet, he observed that during the year Edisons Utility WorksPvt. Ltd. had transferred the CCDs worth of ₹ 67 crore carrying zero percent interest thereon to Essel Landmark Pvt. Ltd. on 19.03.2014and received total amount of ₹ 67.3 crore. According to the Ld. Pr. CIT 4Arm Infra & Utilities Pvt. Ltd.the Assessing Officer has not examined the valuation of such hugeshare premium received during the year, now the Assessing Officerhas called for the valuation report of the share, debenture deed. Basedon the above observation he issued notice under section 263 of the Acton 28.02.2019 with the observation that the Assessing Officer hasfailed to carry out proper investigation of the premium money as wellas the debentures/shares. In response, the assessee filed submissiondated 11.03.2019 that during the course of assessment proceedingsthe Assessing Officer sought various details, information andexplanation through various notices issued under section 142(1) of theAct and to which assessee has filed detailed explanation, replies andinformation.4.The Ld. Pr. CIT in his order observed that the assessee is aPrivate Limited Company and issued compulsory convertible debenturewhich is equal to issue of equity shares to Edisons Utility WorksPvt. Ltd., Group Company by charging premium amount which iscredited to general reserve account. If the securities premium is debt,he observed that should be reported and classified as loan andadvances in the Balance Sheet, which was not done in this case. Eventhere is no explanation from the company as to why the securitypremium money was taken to its reserves and surplus if it wassomebody else money further observed that as per the debenture5Arm Infra & Utilities Pvt. Ltd.certificate dated 22.07.2013, the total number of debentures being6,73,00,000 having face value of ₹ 10/– each were issued without mentioning therein any amount of premium charged. The total value ofdebenture is ₹ 67.3 crore whereas premium charged and received is ₹ 605.70 crore. The above CCDs are automatically converted toredeemable preference shares in the ratio of 1:1 at the end of the 7thyear from the date of allotment of CCD. He observed that it is knownas preference share, more commonly referred to as preferred stock,are shares of a company’s stock with dividends that are paid toshareholders before common stock dividends are issued. Thus,preference shares are also like equity shares or on the shares withcertain benefits of receiving the dividend on profit before equityshareholders. Section 56 (2)(viib) of the Act stipulates rule 11UA ofthe Income Tax Rules, 1962, for determination of market value of theshares, which include both equity and preference shares. According tothe Ld. Pr. CIT, the assessee has failed to justify the share premiumreceived and thus infringed the aforementioned section of the Act.Further, the Ld. Pr. CIT observed that the CCD can be treated as debtsas long as investors earn interest on the CCD. The conversion here iscompulsory and the investor is earning zero percent interest on theCCD, therefore, it should be treated as share. The fully convertibledebentures are added to the equity capital of the company onconversion of shares. In this case, the assessee has added the amount6Arm Infra & Utilities Pvt. Ltd.to the reserves and surplus instead of loan and advances in theBalance Sheet as convertible debentures, issued by the assessee areto be fully converted into preference shares on allotment or after acertain period and the money received by the assessee is in the formof share application money, as it will never be repaid to thesubscribers thereof. Thus, the money received becomes the part of thefunds of the company in the form of equity and company is gaining anadvantage.5.With the above observations, the Ld. Pr. CIT issued revisednotice under section 263 of the Act on 19.03.2019, and observed inthe notice that as seen from the record for assessment year 2014–15,since the debenture carries zero percent interest and premium hasbeen received, which does not need to be repaid, hence, the samerepresents income which is to be taxed in the year of receipt itself. Inresponse, the assessee submitted its submission vide letter dated26.03.2019 stating that in the earlier notice under section 263 of theAct, the Ld. Pr. CIT had proposed to revise the assessment orderalleging to be erroneous and prejudicial to the interests of Revenue fornon-enquiry into the premium received on issue of compulsoryconvertible debentures. Further it submitted as below:–“1. The assessee is incorporated on 11.062013 i.e. FY 2013-14relevant to AY 2014-15. It is engaged in the business to construct,maintain develop or control any buildings, factories, highways, railways,7Arm Infra & Utilities Pvt. Ltd.bridges etc. and other building for housing work and otherwiseassists to any infrastructure related projects. The assesseehad c-filed its return of income for the assessment year2014-15, declaring total income at Rs. 3,84,3441-) as pernormal provisions of the Act and Rs. (4,40,6871-) as bookprofit u/s 115J of the Act on 25.09.2014.2. During the year, the assessee issued and allotted 6,73,00,000 0%CCDs of fact value Rs. 10/- each at a premium of Rs. 90 per CD toEdisons Utility Works Private Limited vide its board resolutionpassed at the meeting of board of directors on 22.07.2013, The saidamount received on issue of CCDs is utilized for purchase of equityshares of Essel Publishers Private Limited of even amount (i.e. 67.30croi-e shares at Rs. 10 per share).3. The terms of the CCDs are as under:–CCD s shall carry a zero coupon rate–CCDs shall automatically be converted to RedeemablePreference Shares in the ratio of 1:1 at the end of 7thyearfrom the date of allotmentofCDs.–Converted Redeemable Preference Shares shall be redeemedat the end of 81h year from the date of conversion of C6Ds ata premium of Re. 150 per share.–The CCD's are filly transferrable.4. The case of the assessee was selected for scrutiny assessmentunder ASS for reason of "Large receipt of share premium," and'Low income in comparison to high investment in unlisted equitiesduring the ygr" and consequently, notice u/s 143(2) dated04.09.2015 was duly issued and served upon the assessee.During the course of assessment proceedings, the AO issued andserved upon the assessee. During the course of assessmentproceedings, the AO has sought various details, information andexplanation through various notice u/s 142(1) of the Act videdated 17.06.2016, 16.08.2016, 08.09,2016, 20.10.2016 and09.11.2016 from time to time and through order sheet noting, towhich the assessee filed detailed replies, information andexplanationvideletterdated22.06.2016,24.08.2016,23.11.2016, 29.11.2016 and 14.12.2016. The same is mentionedbelow in short for your ready reference:Vide notice dated 17.06.2016, the AO has sought various detailsincluding the Audited financial statement of the assessee companyfor the year ended 31.03.2014. In response to this, the assesseesubmitted vide letter dated 22.06.2016 a copy of financialstatement which disclosed the fact that the assessee has issued0% CODs of Rs. 10 at premium of Rs.90 and purchased 67.30crore equity shares of Essel Publishers Private Limited at Note 138Arm Infra & Utilities Pvt. Ltd.and 14 respectively.Thereafter, three similar notices dated 08,09.2016, 20.10.2016and 09.11.2016 were received wherein the AO has sought detailsof unsecured loans and receipt of share premium.”6.After considering the submissions of the assessee, the Ld. Pr. CITfound not acceptable with the observation that the assessee hadneither furnished debenture deed & share valuation report nor theAssessing Officer has called for. He observed that the total number ofCCD issued was 6,73,00,000 instead of share, issued on 22.07.2013 toEdisons Utility Works Pvt. Ltd. at a face value of ₹ 10/– each. The premium was charged at ₹ 90/– per debenture/share and thereby the assessee company has received total premium money of ₹ 605.70 crore. As per the financial statement ended with 31.03.2014, thevaluation of per share is in negative (–₹ 8.81/–). Thus, the fair market value of shares is ₹ (–)8.81/– whereas premium is charged at ₹ 90/– per debenture/share. Hence, the premium in excess of the fair marketvalue is to be treated as income as per section 56(2)(viib) of the Act.Further, he observed that CCD includes premium amount which is nolonger payable by the assessee, the money changes its characterwhen such amount becomes the assessee’s own money as theassessee itself has treated and accounted it as its own money andcredited to Reserves and Surplus of Balance Sheet as at 31.03.2014.It is like taxing the liability which is no longer payable resulting in a9Arm Infra & Utilities Pvt. Ltd.definite business surplus and thereby the assessee company hasbecome richer by the amount of premium. He observed that if theCCDs are to be converted to redeemable preference shares after theend of 7thyear from the date of allotment of CCD and the convertedredeemable preference shares to be redeemed after eight years fromthe date of conversion of CCDs at a premium of ₹ 150 per share. The Assessing Officer not verified the receipt of share premium during thesaid financial year made the assessment order erroneous andprejudicial to the interests of the Revenue. Further, he observed thatthe assessment was made without application of mind in allperspective and there is consequential loss of revenue, it is clear fromthe above discussions that proper enquiry was not made by theAssessing Officer and non-enquiry by the Assessing Officer is a goodground for initiating proceedings under section 263 of the Act. Also,the assessee has failed to avail the opportunities provided to explainits contention and provide the required details. The Assessing Officerhas accepted the valuation of share premium received, withoutcarrying out any enquiry regarding them. Based on the aboveobservations, the Ld. Pr. CIT was of the opinion that the assessmentorder is erroneous to the extent of non-verification of share premiumreceived by the assessee. Accordingly, he directed the AssessingOfficer to verify the valuation of the share premium received duringthe year by passing the order of fresh by giving an opportunity to the10Arm Infra & Utilities Pvt. Ltd.assessee and, therefore, he set aside the order passed under section143(3) of the Act for assessment year 2014–15.7.Aggrieved, the assessee is in appeal before us.8.Before us, the Ld. AR argued in detail and submitted writtensubmission, which for the sake of clarity, is reproduced below:–“2.1.1. At outset, it is submitted that the case of the assessee wasselected for scrutiny assessment under CASS for reason of "Largereceipt of share premium" and "Low income in comparison to highinvestment in unlisted equities during the year" as is evident fromshow-cause notice under section 263 of the Act of the Pr.CIT (Pg54 of the Paper Book) and revised show cause notice undersection 263 of the Act.2.1.2. In the course of assessment proceedings, in response tospecific queries / details required by the AO, the assesseesubmitted following details: (a) financial statement whichdisclosed the fact that the assessee has issued 0% CCDs of Rs. 10at premium of Rs. 90 and purchased 67.30 crore equity shares ofEssel Publishers Private Limited at Note 13 and 14 respectively (b)Details of issue of CCD along with copy of debenture certificate(c) Return of Income, financials, relevant extract of bankstatement of Edison evidencing the nature and source of moniesreceived by the assessee towards CCD5. (d) Extract of bankstatement of the assessee highlighting relevant transactionsshowing receipt of money towards CCDs from Edison to prove thegenuineness of the transaction. (e) Board Resolution for issuanceof CCDs. (f) The source of sources of monies received towardsCCDs was from Essel Corporate Resources Pvt. Ltd. and JayneerCapital Pvt. Ltd. Their return of income, financials and relevantextract of bank statements were provided to establish thegenuineness of source of source. (g) Submitted justification ofpremium on CCD5 whereby the assessee, inter alia, specificallymentioned that the amount received by it on issue of CCD5 withpremium is actually loan, which is to be repaid with interest in theform of a premium. Hence, the assessee is paying more than theamount received on issue of CCD5.2.1.3. After perusing and considering the aforesaid explanationsof the assessee, the AO completed the assessment vide orderdated 15.12.2016 under section 143(3) of the Act without making11Arm Infra & Utilities Pvt. Ltd.any addition / disallowance.2.1.4. In view of the above, the Appellant submits that the AO hasmade full enquiry into the issue of CCD5 including receipt ofpremium and after applying his mind, passed the assessmentorder under section 143(3) of the Act. Therefore, the Appellantsubmits that the assumption of jurisdiction under section 263 bythe Pr. CIT is bad in law. Reliance is placed on the variousdecisions.2.2. On the merits of the issue, the appellant submits that theimpugned order passed by the PUT is not sustainable and, on thevery least, the issues is debatable and, hence, the PCIT had nojurisdiction under section 263 of the Act-Applicability of section 56(2)(viib) of the Act -2.2.1. The Appellant submits that the provision of section56(2)(viib) of the Act apply to case of issue of shares and not to acase of issue of debentures even if they are subsequentlyconvertible into shares. In view of the aforesaid principle,provisions of section 56(2)(viib) cannot be applied in the yearunder consideration of issue of debentures. Reliance is placed onthe following decisions:CIT Vs. Havells India Ltd. (352 ITR 376) (Delhi)CIT Vs. Secure Meters Ltd. (321 ITR 611) (Raj.)Pr. CIT Vs. Reliance Natural Resource Ltd. (111taxmann.com413) (Born.)2.2.2. The legislature has consciously used the term "shares" inthe section as opposed to "securities". Debentures althoughconvertible, are "securities" as defined in Securities Contracts(Regulations) Act, 1956 cited at the time of hearing which makesit clear that the term "shares" and "securities" connote differentmeaning. Where the legislature intended a particular section toapply to both shares and securities they have made it clear byincorporating in the section both the terms "shares" and"securities". For example, (a) in section 56(2)(vii)(c), the word"property" defined in Explanation to the said section includes bothshares and securities. (b) Conversion of debentures into shareswas treated as transfer for the purposes of capital gain but forSection 47(x) which exempts such conversion from capital gainswhich makes it clear that "shares" and "debentures" are distinct.Therefore, only "shares" are covered within the provisions ofsection 56(2)(viib) and other securities such as "debentures" areoutside the ambit and scope of section 56(2)(viib) of the Act.12Arm Infra & Utilities Pvt. Ltd.2.2.3. Notwithstanding the fact that provision of section56(2)(viib) is inapplicable to the assessee, the assessee hasjustified the premium vide letter dated 29.11.2016 (Pg 41-56 ofthe Paper Book) in the course of assessment proceedings. Theassessee has issued CCDs at Rs. 100/- each, and allotted 6.73crore CCDs of Rs. 10/- at a premium of Rs. 90 each on22.07.2013 to the Edison. Further, the CCD5 are convertible intoredeemable preference shares which are to be redeemed at apremium of Rs. 150 per share. Hence, the valuation is justified asone has to see the redemption value to determine as to whetherthe receipt of the premium was justified in the first place.2.2.4. Once, it is found that the provisions of section 56(2)(viib)cannot be applied, the receipt of share premium being a capitalreceipt cannot be taxed. [Refer: The decision of the Hon'bleBombay High Court in the case of Vodafone India Services P. Ltd.Vs. UOI (368 ITR 1) and Pr. CIT Vs. Apeak Infotech (397 ITR 148)cited at the time of hearing wherein it has been held that receiptof share premium is a capital receipt and not chargeable to tax.2.2.5. Further, the Appellant further submits that Departmentcannot re-characterize the transaction relating to issue ofdebentures to issue of equity shares in the absence of anyenabling provisions in the Act. [Refer: DIT Vs. Besix Kier DabholSA (26taxmann.com169)(Bom.)].. W.e.f. AY 2018-19, under theChapter X-A (GAAR), the department can re- characterize atransaction under specified circumstances. Since, in the presentcase, we are concerned with AY 2014-15, the provisions of thissection are not applicable.2.2.6. Therefore, the Appellant submits that on the issue ofapplicability of section 56(2)(viib) of the Act is concerned theimpugned order of the PCIT is clearly unsustainable in law,nevertheless, the AO has adopted one of the permissible views.3. Rebuttal to findings of the Pr.CIT3.1 In para 4.3. of the order of the Pr.CIT, it is alleged that theassessee company has neither furnished Debenture Deed andShare Valuation Report nor has the AO called for it. The Pr.CIThas further alleged that the premium is in excess of the bookvalue of the assessee company.Reply: The Appellant submits that in terms of section 117A of theCompanies Act, 1956 (Pg 133 of Paper Book-11), only secureddebentures require a debenture trust deed and therefore, thequestion of there being a trust deed in the instant case ofunsecured debentures does not arise. Further, since the present13Arm Infra & Utilities Pvt. Ltd.case is a case of issue of debentures, there is no requirement ofobtaining a share valuation report. The premium has already beenjustified vide letter dated 29.11.2016 (Pg 41-56 of the PaperBook) submitted in the course of assessment proceedings. Thecomparison made by the PCIT with respect to the book value ofthe assessee is completely unjustified since the same is a methodof valuing equity shares and not debenture / preference shares,particularly, when the CCDs are convertible into preference sharesand not equity shares. The debentures or preference shares arevalued inter alia on the basis of the redemption value of thesecurity and on such basis, the premium of Rs. 90 for the issue ofdebenture was certainly justified.3.2. In Para 4.4. of the order of the Pr.CIT, it is alleged that thepremium on issue of CCDs is no longer payable by the assesseecompany and that the AO has not verified the receipt of sharepremium.Reply: The assessee has issued CCD5 at Rs. 100/- each, andallotted 6.73 crore CCDs of Rs. 10/- at a premium of Rs. 90 eachon 22.07.2013 to the Edison. The CCD5 are convertible intoredeemable preference shares at the end of 7 years which are tobe redeemed at a premium of Rs. 150 per share after another 8years. The premium on issue of debentures has been classifiedunder the head "securities premium" in the financial statements inline the section 78 of the Companies Act, 1956 (Pg 132 of thePaper Book-11). In terms of section, the securities premiumwould be utilized in repaying premium on redemption ofpreference shares. Hence, it cannot be said that the premium isnot repayable.3.3. In para 4 of the Show Cause Notice under section 263 of theAct (Pg 81 of the Paper Book), the Pr.CIT has questioned as tohow 0% CCD5 can be issued at a premium rather than a discount.Reply: The Pr. CIT failed to appreciate that the CCDs issued at Rs.100 are convertible into equivalent preference shares which are tobe redeemed at Rs. 160. The interest is embedded in thepremium on redemption of preference shares. Therefore, it is notstrictly a case where no interest is payable on the CCD5.”9.On the other hand, the Ld. DR argued in detail and submittedwritten submission of synopsis which is reproduced below:–14Arm Infra & Utilities Pvt. Ltd.DebenturesIssued toEdison UtilityWorks Pvt. Ltd.[PB 16]6,73, 00,000 in no.Face Value Rs. 10Premium Rs. 90 On22. 07. 2013Money Borrowed fromi.Jayneer Capital Pvt.Ltd.ii.Esssel CorporateResources Pvt. Ltd.(Group Companies)[PB41]Total Amount Rs.673,00,00,000[PB 12/16/23]Redeemable @ Rs.10 Preference Share[PB 16]Transferred to EsselLandmarks Pvt. Ltd.[PB 12]On 19.03. 2014For Rs. 67,30,00,000[Para 2.1 CIT]PurchasedShare inEsselPublishers Pvt.Ltd. .(SubsidiaryCompany)67,30,00,000 FaceValue Rs. 1 PremiumRs. 9 [PB13]Merged with Zee MediaCorporation Pvt. Ltd.on 02.05.2014Receives 2 shares for every11 shares of Rs. 1 each2.CIT has invoked Section 263 of the Act for the reasons:[Para 2.1 CIT]AO hasi.not examined the valuation of Share Premiumii.not called for valuation report / share debenture deediii.not verified the Source of funds / Capacity of the Investors.The assessee has failed to justify the share premium received.i.AO has not examined the valuation of Share PremiumA.AO issues Questionnaire to the assessee on 17.06.2016 :Questionnaire issued without any application of mindThis is the first year of incorporation of the assessee company,the questionnaire calls for Mast five years assessment details)[Query 9, Page 2 of Assessee's Paper Book (APB for short)]II. AO issues another Questionnaire on 08.09.2016 :a.___Questionnaire issued again without any application of mindThe AO has called for details related to Share Premium receivedvide Query 2,2, [APB Page 17] whereas the Note 13 |APB Page15Arm Infra & Utilities Pvt. Ltd.16] forming part of Balance sheet states that the Company hasissued Debentures of Rs. 10 each at a premium of Rs. 90 each.No specific query raised as regards the premium on debentures.Calls for details of Share Application Money Query 2.9 [APB Page17] whereas the assessee has not received any share applicationmoney during the year.b. General Query raised for justification of Premium Charged[Query 2.2.5 APB Page 17]Assessee submits reply vide letter dated 23.09.2016, offers nojustification for premium charged [APB Page 20] exceptsubmitting Debenture Certificate [APB Page 23] and Resolutionpassed by the Board of Directors of the Assessee Company [APBPage 39].Assessee submits another reply vide letter dated 29.11.2016,offers no justification for premium charged [APB Page 41] and tothe contrary claims that "premium is actually loan, which is to berepaid by the assessee with interest in the form of premium."[It validates the observation of the CIT(A) that "If the securitiespremium is debt, then it should be reported and classified as Laonand Advances in the Balance Sheet" | Para 4 ]ii.AO has not called for valuation report share debenturedeedA. Assessee company was incorporated on 11.06.2013 [APB Page6|, i.e. it is first year of its businessB. Assessee company has not carried out any business activityduring the year [APB Page 6], Even the funds raised by theassessee by issue of Debenture were not applied for purpose ofbusiness.C. Net worth of the company was at best Rs. 5 lac and it hasissued Debenture worth Rs. 67.30 Cr. on 22.07.2013 [PB 12 / 16/23] with no corresponding assets, and with no correspondingassets further received premium of Rs. 605.70 Cr. whichaccording to assesse is "actually Uun, which is to be repaid by theassessee with interest" [APB Page 42]Thus,the assessee has failed to justify the share premiumreceived with supporting evidence.16Arm Infra & Utilities Pvt. Ltd.iii.AO has not verified the Source of funds / Capacity of theInvestors.A. The assessee has placed on record Acknowledgement of returnfiled by the allottee M/s Edison Utility Works Pvt. Ltd. alongwithBalance sheet and Profit and Loss account without any enclosures.B.Bank statement of Edison Utility Works Pvt. Ltd. is not onrecord.C. Ledger. Accounts of Edison Utility Works Pvt. Ltd. are from thebooks of accounts of Group companies, and not from the books ofaccounts of Edison Utility Works Pvt. Ltdi.Jayneer Capital Pvt. Ltd.ii.Esssel Corporate Resources Pvt, Ltd.D.Edison Utility Works Pvt. Ltd. has all the elements of shellcompany:Reserves and Surplus have suddenly turned positive i.e. Rs.30,15,92,961 on 31.03.2014 from negative of (-) Rs. 3,28,39,314as on 31.03 2013 even though total revenue received during theyear is Rs. 13,56,056.The revenue and the expenditure do not match at all.LIABILITIESAmount (in Rs.)ASSETSAmount (in Rs.)Non CurrentInvestments677,76,95,830Long termBorrowings905,65,00,000Long term Loansand Advances146,53,00,000Short TermBorrowings676,18,90,000Short Term Loansand Advances855,17,71,136Finance Cost30,60,81,878Revenue13,56,056Lending for an interest & 0% without any security is notsomething which people d_o for rank outsiders.The level of turnover and the expenditure incurred onachieving such high turnover do not match at all. The operationalexpenditure are Rs. 9,30,2 53 on 31.03.2014 vis-a-vis Rs. NIL Lason 31.03 2013.A shell entity is generally an entity without any significanttrading, manufacturing or service activity, or with high volume low17Arm Infra & Utilities Pvt. Ltd.margin transactions- to give it colour of a normal business entity,used as a vehicle for various financial manoeuvres.The operations carried out by these entities, are only tofacilitate financial manoeuvring tor the benefit of its clients, or,with that predominant underlying objective, to give the colour ofgenuineness to these entities.Pavankumar M. Sanghvi v, ITO [2017] 165 1TD 260 (Ahmedabad- Trib.) confirmed in [20181 404 ITR 601 (Gujarat) affirmed in[2018] 97 taxmann.com 398 (SC) (SLP Dismissed)E.There is no presumption that merely because the payment ismade by cheque, it is a genuine transaction:C1T vs. P. Mohanakaia & Ors. (2007) 2911TR 278 (SupremeCourt)"The transactions though apparent were held to be not real one.May be the money came by way of bank cheques and paidthrough the process of banking transaction but that itself is of noconsequence."Naresh K. Pahuja vs. ITAT: (2015) 375 ITR 526 (Bombay)"mere routing of a gift through a banking channel would not byitself establish that the gift is genuine and the genuineness ornon-genuineness of the gift would have to be established by otherevidence."CIT & Ors. vs. Saravana Constructions (P.) Ltd. [2012] 72DTR 258 (Karnataka)"there is no presumption that merely because .the payment ismade by cheque, it is a genuine transaction,"CIT vs. Maithan International (2015] 56taxmann.com 283(Calcutta):"mere examination the pass book or the bank statement or theletter of confirmation or the balance sheet of the lender was notenough."3.Reason [CIT Page 4]:The assessee has credited the premium to General Reserve, theDebenture Holder cannot claim the money.Schedule I to Debenture Certificate :Transferability Restricted:It is subject to approval of the Board of Directors ofAssessee CompanyAssessee exercise full control over transfer of Debentures.One debenture of Rs. 10 convertibles into one PreferenceShare of Rs. 10/- only.Allottee has no control over premium of Rs. 90 paid perCCD.18Arm Infra & Utilities Pvt. Ltd.Term for Redemption of share at a premium of Rs. ISO/-NOT communicated to allottee [ APBPage39].4.Reason [CIT Page 4] :To avoid the provision of section 56(2)(viib) of the Income-taxAct,1961, the instrument has been called as CCD instead of equityshare.In case there is an arrangement, the substance of the transactionhave to be deciphered, rather than form [CIT Page 5]Debenture represents debt of the Company [CIT Page 4].The debenture holder gets interest. In the instant case, theinvestor is not earning any interest. Therefore, it should betreated as share.oMoney received by assessee is in form of share applicationmoney [CIT Page 4| as debentures are fully convertible intopreference share after 7 years of date of allotment.Debenture is issued at a discount in order to compensate forthe interest payable upfront.[CITPage6]In the instant case, Debenture carries 0% interest andpremium has been received, whichis not to be repaid, the same represents income which is to betaxed in the year of receipt itself [CITPage7]5. As regards plea that share premium not taxable as incomebecause the money was received on capital account, similaradditions have been confirmed in the case of closely heldcompany by the Hon'ble Bombay High Court in the case ofKonark Structural Engineering (P.) Ltd. v. Dy. C1T 9(2)[2018] 90 taxmann.com 56 (Bombay) SLP Dismissed/Rejected in[2018] 96 taxmann.com 255 (SC)/[2018] 257 Taxman 262 (SC)andRoyal Rich Developers (P.) Ltd. v. Pr C1T [2019] 108taxmann.com 382 (Bombay).This plea is also rejected in Rajmandir Estates (P.) Ltd. v. PrincipalCommissioner of income-tax, Kolkata-IIl [2016] 386 ITR 162(Calcutta)/ [2016] 70 taxmann.com 124 (Calcutta) affirmed in[2017] 77 taxmann.com 285 (SC).Further also, similar additions have been confirmed in by theHon'ble Apex Court in the case of Pr C1T (Central)-l v. NRA Iron &Steel (P.) Ltd. [2019] 103 taxmann.com 48 (SC/[2019] 412 ITR161 (SC).19Arm Infra & Utilities Pvt. Ltd.6. Similar actions u/s 263 have been affirmed in :Rajmandir Estates (P.) Ltd. v. Principal Commissioner ofIncome-tax, Kolkata-IIl [2016] 386 ITR 162 (Calcutta)/ [2016] 70taxmann.com 124 (Calcutta) affirmed in [2017] 77 taxmann.com285 (SC) rejecting the plea "that any further investigation is futilebecause the money was received on capital account" [Para 29]Subhlakshmi Vanijya (P.) Ltd. v. Commissioner of Income-tax-t, Kolkata 12015] 155 ITD 171 (Kolkata - Trib.)S. Manickavasagam v. Income-tax Officer, Ward-1, Salem|2010] 123 ITD 235 (Chennai) -Agro Portfolio (P.) Ltd. v. Income Tax Officer, Ward 1 (4),New Delhi ; [2018] 171 ITD 74 (Delhi-Trib.)”10.In rebuttal, the Ld AR submitted as below:–“4. RebuttaltoContentionsoftheId.DepartmentalRepresentative4.1. The impugned order has questioned the genuineness of thetransaction as well as applicability of section 68 of the ActReply: At outset, we submit that the Pr.CIT has not raised anyquestion of the genuineness of the transaction and has onlyalleged that the AO has not enquired into the issue of sharepremium [Refer Para 6 at Pg 11 of his order]. Therefore, it is notopen the Department to go beyond the order of the Pr.CIT andnow question the genuineness of the transaction when the samehas not been questioned by the Pr.CIT. [Refer Para 13 of thedecision of the Hon'ble Punjab & Haryana High Court in the caseof CIT Vs. Jagadhri Electric Supply& Industrial Co. (140 ITR 490)cited at the time of hearing.Without prejudice to the above, we submit the nature and sourceof the credit stands explained in the course of assessmentproceedings to the satisfaction of the AO on the followingestablished parameters of identity of subscriber, creditworthinessof subscribed and genuineness of transaction from the variousdetails filed in the course of assessment proceedings summarizedat para 2.1.2. at Pg 1-2 of this submission4.2. The premium is not justifiedReply: Refer Para 2.2.3 at Pg 2-3 of this submission4.3. Edison is shell company and has transferred the CCDs at a20Arm Infra & Utilities Pvt. Ltd.loss which has not been disclosed in its booksReply: In the instant case, we are concerned with the assessmentof ARM Infra & Utilities Private Limited and not with the case ofthe subscriber to CCDs, Edison. Nevertheless, the assessee in thecourse of assessment proceedings has provided the relevantdetails for explaining the identity & creditworthiness of thesubscriber and relevant extract of bank statement of thecompany. It has transferred CCD5 of the assessee weretransferred by Edison to Essel Landmark Private Limited at costand not at a loss. Hence, there is no question of non-disclosure ofthe loss in the return of income I financials. A copy of the ledgeraccount of the investment in CCD5 of the assessee is the books ofEdison as exhibited at the time of hearing is enclosed herewith asAnnexure A. Edison has been assessed under section 143(3) andfor this very issue has been even reassessed under section 143(3)r.w.s 147.4.4. The DR has relied on various case laws which are factspecific and distinguishable as rebutted at the time of hearing. Wecrave leave to rebut the same in written submission when calledupon.”11.Considered the rival submissions and material on record. Wenoticed that the assessee issued and allotted 6,73,00,000, zeropercent Compulsory Convertible Debentures at a face value of ₹ 10, each with a premium of ₹ 90, per CCD to Edison Utility Works Pvt. Ltd. The above CCDs were issued by passing its board resolution dated22.07.2013. The fund so raised were utilised for the purpose ofinvestment in equity shares of subsidiary company Essel PublishersPvt. Ltd. of even amount. We also noticed that the debenturecertificate as filed before us at Page–23 to 26 of the paper book andthe board resolution, the terms of the CCDs are – (a) it shall carry azero coupon rate; (b) it shall automatically be converted toredeemable preference shares in the ratio of 1:1 at the end of 7thyear21Arm Infra & Utilities Pvt. Ltd.from the date of allotment of CCDs; and (c) the converted redeemablepreference shares shall be redeemed at the end of 8thyear from thedate of conversion of CCDs at a premium of ₹ 150 per share. The above terms of issue and redemption is not the bone of contentionbefore us since it is also confirmed by the Ld. Pr. CIT in his order.12.The issue before us is, the assessment under section 143(3) wascompleted vide dated 15.12.2016 after considering varioussubmissions in connection with the issue of CCDs by the AssessingOfficer. The Ld. Pr. CIT after verification of the above assessmentorder invoked the provisions of section 263 and assumed thejurisdiction. We also noticed that the assessment was selected forscrutiny under CASS for the reason”Large share premium receivedand low income in comparison to high loan/advances/investment inshares/investment in unlisted equities during the year”. In response tothe notices issued by the Assessing Officer, the assessee has filedvarious information like details of issue of CCD, return of income,financial statements of Edison Utility Works Pvt. Ltd., bank statementsof the assessee as well as Edison, board resolution for issue of CCD,details of money received of source of source toward CCD from EsselCorporate Resources Pvt. Ltd. and Jayneer Capital Pvt. Ltd., the returnof income, financials and bank statements and also submittedjustification of premium on CCD. The assessment was completed by22Arm Infra & Utilities Pvt. Ltd.the Assessing Officer by considering the above submissions, however,passed a non–speaking assessment order.13.Before us, the Ld. AR submitted that the assessee submitted allthe information before the Assessing Officer and the Assessing Officermade full enquiry into the issue of CCDs including receipt of premiumand after applying his mind completed the assessment under section143(3) of the Act. Therefore, he submitted that the assumption ofjurisdiction under section 263 by the learned Principle CIT is bad inlaw. On the other hand, the Ld DR argued that the Assessing Officerhas not examined the valuation of share premium and the AssessingOfficer had in fact called for the details related to share premiumreceived, but he has not considered Note–13 forming part of theBalance Sheet which states that company has issued debentures onlyat ₹ 10 per share. He submitted that the Assessing Officer raised the issues without any application of mind. He further submitted that inreply to the general query raised by the Assessing Officer, theassessee offered no justification for premium charged exceptsubmitting debenture certificates and board resolution. He submittedthat in another reply, the assessee offered no justification for premiumcharged and makes contrary claim that premium is actually loan whichis to be repaid by the assessee with interest in the form of premium.He supported the findings of the Ld. Pr. CIT that if the securities23Arm Infra & Utilities Pvt. Ltd.premium is debt, then it should be reported and classified as loans andadvances in the Balance Sheet. He also submitted that AssessingOfficer has not called for valuation report as well as share debenturedeeds which are necessary documents to verify the genuineness of thetransaction which the Assessing Officer has failed and he supportedthe findings of the Ld. Pr. CIT by relying on case law which are in linewith the presumptions that the CCDs are in the form of equity.However, the case law relied by Ld DR is distinguishable on facts.14.After considering the submissions, we noticed that the Ld. Pr. CITtreated the transactions entered by the assessee as subscription ofshares instead of subscription of debentures. We observed that thecorporate arranges funds for its requirement through variousinstruments like equity shares, preference shares with variouscombinations of conversion and percentage of dividend, debentureswith various combinations of conversion as well as percentage ofinterest and other similar bonds for its financial requirements. In thepresent case, the funds were arranged from internal sources within thegroup concerns. The assessee company through its Board passed aresolution to arrange funds by issue of compulsory convertibledebentures with zero percent interest payout with premium. It is alsoimportant to notice that these debentures were issued at privateplacement and subscribed by Edison Utility Works Pvt. Ltd. which is a24Arm Infra & Utilities Pvt. Ltd.group concern and the monies borrowed by Edison Utility from JayneerCapital Pvt. Ltd. and Essel Corporate Resources Pvt. Ltd., again theseare group companies. These CCDs were issued with the promise ofcompulsory conversion after end of 7thyear with equal redeemablepreference shares and these redeemable preference shares will beredeemed at the end of 8thyear. The Ld. Pr. CIT termed the abovetransactions as deemed subscription of shares instead of debentures.We are aware that corporate generate funds by adopting hybridinstruments which suits their requirements. In the given case, theboard selected the instrument so that up to seven years, the fundsarranged will have no burden on the company and will remaininstrument of debt. From 8th year onwards, it will be converted intopreference shares with no commitment on dividends and at the end ofthe 15th year, converted CCDs will be redeemed at a premium of ₹ 150 per share. This hybrid instrument will have no burden on the companyuntil the 15thyear and at the end of the 15thyear, the company willrepay to the subscribers of the debt instrument at a premium. Theburden of premium will be a liability on the company. We observedthat the Ld. Pr. CIT considered the premium received at the issue ofdebt instrument as free money available to the company consideringthe fact that the assessee has declared the same under the headreserves and surplus as security premium. We do not agree with theabove observation of the Ld. Pr. CIT and even though the assessee25Arm Infra & Utilities Pvt. Ltd.discloses the above premium under the head reserves and surplus butas per the promise given in Board resolution clearly indicate that it isin fact a liability on the company until the 15thyear and at the end of15thyear, these hybrid instrument has to be redeemed at the premiumof ₹ 150 per CCD. That means the subscribers of the debt instrument will redeem ₹ 150 per CCD against the payment of premium ₹ 90 per CCD at the time of investment. Further, we noticed that the Ld. Pr. CITinvoked the provisions of section 56(2)(viib) of the Act in secondnotice issued under section 263 of the Act and directed the AssessingOfficer to complete assessment as per the above section. Heconsidered the hybrid instrument as issue of shares i.e., issue ofequity rather than debt. The basic presumption made by the Ld. Pr.CIT is flaw that he treated the hybrid instrument as issue of equityshares in order to invoke the provisions of section 56(2) of the Act.The tax authorities, in order to invoke the provisions of section 56(2)of the Act, they have to bring on record that consideration wasreceived for issue of shares exceeds the face value of such shares andthe aggregate consideration received for such shares exceeds the fairmarket value. In the given case, in our view, is not an issue of equityshares rather it is issue of debt instrument with the condition ofconversion to redeemable preference shares. We noticed that the Ld.Pr. CIT equated the preference shares with equity shares withreference in distribution of dividends. We do not agree with the26Arm Infra & Utilities Pvt. Ltd.observation that preference shares are nothing but equity shares. Thepreference shares do not carry any right to equity participation /business. It is only a type of capital without participation and having apreferential right over distribution of prescribed dividend anddistribution of capital. Therefore, the preference shares can never beconsidered as equity shares unless it is converted and issued withpromise to convert as equity. Till the preference shares are converted,it can never have the right of equity in the company. In our consideredview, the provisions of section 56(2)(viib) of the Act has no applicationto the hybrid instrument issued by the assessee company, the hybridinstrument are in the nature of debt cum preference shares (which isnot equity shares) is outside the definition of equity shares. We noticethat the Ld. Pr. CIT observed in his order that the assessee hasreceived the premium, which it does not need to pay and it has to betreated as income. We observe that provisions of section 52(2) ofCompanies Act, 2013, allows the companies to utilize the securitiespremium only in the below manner:–“(a) towards the issue of unissued shares of the company to themembers 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 ordiscount allowed on, any issue of shares or debentures of thecompany;27Arm Infra & Utilities Pvt. Ltd.(d) in providing for the premium payable on the redemption ofany redeemable preference shares or of any debentures of thecompany; or(e) for the purchase of its own shares or other securities undersection 68.”15.The above manner of utilization clearly indicates that it is capitalreserve and liability for the company to apply the reserve only in thespecified manner. These reserve even though part of reserves andsurplus, but can never be applied for any other purpose. In the givencase, the assessee has issued promise to the CCD holders to redeemthe preference shares after 15 years with premium of`150 per CCD.Therefore, technically, company can utilize the premium only for theabove purpose. Merely because the assessee issued the CCD, which ishybrid instrument to arrange corporate funding thru group concerns, itdoes not mean that it has indulged in generation of unaccountedmoney. In this case, there is no finding by any authorities that theassessee has indulged in such activities except that they receivedpremium in issue of CCDs and recorded the same under the headReserves and Surplus. As discussed above, the assessee cannot utilizethe premium other than the manner specified in section 52 ofCompanies Act, 2013. There is proper safety and binding specified inthe Companies Act to monitor the funds generated by the companies.The tax authorities should apply the provisions selectively rather than28Arm Infra & Utilities Pvt. Ltd.on general terms without analyzing the real impact on management offunds and taxability.16.As discussed above, in our view, the assessment was selectedunder CASS, main object of verification of issue of debentures onpremium and low income in comparison to high investment in unlistedequities. In relation to above selection of the case, the AssessingOfficer has issued several notices and the assessee has submittedrelevant information as called for. The Ld. Pr. CIT considered theabove verification and the information submitted by the assessee asimproper and non-verification of share premium by the AssessingOfficer to assume jurisdiction under section 263 of the Act. TheExplanation–2 to section 263 of the Act was invoked by the Ld. Pr. CITto come to the conclusion that the assessment order is passed withoutmaking enquiries or verification. After considering the above facts, inour considered view, the Assessing Officer has made enquiries andcarried on with the verification even though passed non-speakingorder. The Explanation–2 to section 263 of the Act can be invoked onlywhen no enquiries or verification is carried on otherwise it cannot beinvoked. In the given case, the Assessing Officer has carried on theenquiries and verification to his satisfaction which may not be to thesatisfaction to the ld. Pr. CIT. Therefore, assumption of jurisdictionfails. We take force in the decision of the Hon'ble Delhi High Court in29Arm Infra & Utilities Pvt. Ltd.CIT v/s Brahma Centre Developments Pvt. Ltd., ITA no.116 of 2021 &ITA no.118 of 2021 (Del.), judgment dated 05.07.2021. Consequently,we set aside the impugned order passed by the learned PCIT byallowing the grounds of appeal raised by the assessee.17.In the result, assessee’s appeal is allowed.Order pronounced in the open court on 12/11/2021Sd/-C.N. PRASADJUDICIAL MEMBERSd/-S. RIFAUR RAHMANACCOUNTANT MEMBERMUMBAI, DATED: 12/11/2021Copy of the order forwarded to:(1)The Assessee;(2)The Revenue;(3)The CIT(A);(4)The CIT, Mumbai City concerned;(5)The DR, ITAT, Mumbai;(6)Guard file.True CopyBy OrderPradeep J. ChowdhurySr. Private SecretaryAssistant RegistrarITAT, Mumbai