M/s Edulink Private Limited , Bangalore V. Income Tax Officer Ward-2(1)(4), Bangalore

ITA 618/BANG/2019

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 8208 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-07-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2015-2016
• Appeal Filed On: 29-03-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: H. PADAMCHAND KHINCHA
• Keywords: Fair market value; Capital receipt
• Section: 68; 56; 143(3); 201; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P. BOAZ , ACCOUNTANT MEMBER I TA NO. 618/BANG/2019 ASSESSMENT YEAR : 2015 - 16 M/S. EDULINK PRIVATE LIMITED, NO.41/1, HAL AIRPORT ROAD, MURUGESHPALYA, BANGALORE 560 017. PAN: AABCE 4871B VS. THE INCOME TAX OFFICER, WARD 2(1)(4), BANGALORE. APP EL L ANT RESPONDENT APP ELL ANT BY : SHRI H. PADAMCHAND KHINCHA, CA RE SPONDENT BY : SHRI VIKAS SURYAVAMSHI, ADDL.CIT(DR)(ITAT), B ENGALURU. DATE OF HEARING : 02. 0 7 .2019 DATE OF PRONOUNCEMENT : . 0 7 . 201 9 O R D E R PER N V VASUDEVAN, VICE PRESIDENT THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE OR DER DATE 26.03.2019 OF THE CIT(APPEALS), BENGALURU-2, BENGAL URU RELATING TO ASSESSMENT YEAR 2015-16. 2. THE ONLY ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL IS WITH REGARD TO THE CORRECTNESS OF AN ADDITION OF RS.5,09 ,04,876 MADE BY THE ASSESSING OFFICER (AO). 3. THE AFORESAID ADDITION WAS MADE BY THE AO UNDER THE FOLLOWING FACTS AND CIRCUMSTANCES. THE ASSESSEE IS A COMPANY ENGAGED IN THE ITA NO. 618/BANG/2019 PAGE 2 OF 9 BUSINESS OF COMMERCIAL TRAINING OF COMPUTER GAMING, ART AND ANIMATION. IN THE COURSE OF ASSESSMENT PROCEEDINGS U/S. 143(3) OF THE INCOME-TAX ACT, 1961 [THE ACT] FOR THE AY 2015-16, THE AO NOTICED FROM THE AUDITED FINANCIALS OF THE ASSESSEE THAT ASSESSEE HAS SHOWN A SUM OF RS.5,09,04,876 UNDER THE HEAD OTHER CURRENT LIABIL ITY SHARE APPLICATION MONEY RECEIVED (AMOUNT RECEIVED IN EXCESS OF AUTHOR IZED CAPITAL NOTE 1.1). IN THE NOTES TO THE ACCOUNTS IN NOTE 1.11, IT WAS MENTIONED AS FOLLOWS:- 1.11 SHARE APPLICATION MONEY RECEIVED TOWARDS ALL OTMENT OF SHARES HAS BEEN CATEGORIZED UNDER OTHER CURRENT LIA BILITIES PENDING INCREASE IN THE AUTHORIZED SHARE CAPITAL. 4. THE BREAK-UP OF THE SHARE APPLICATION MONEY RECE IVED BY THE ASSESSEE, THE FINANCIAL YEARS IN WHICH THEY WERE RE CEIVED ARE REFLECTED IN THE OTHER CURRENT LIABILITIES WERE AS FOLLOWS:- FINANCIAL YEAR AMOUNT RECEIVED (RS.) REMARKS 2006 - 07 36,16,000 2007 - 08 1,98,11,127 BY 04/0 1/2008 CROSSED AUTHORIZED SHARE CAPITAL LIMITS OF RS.1.30 CRORE (RS.1,04,27,127/ - RECEIVED IN EXCESS) 2008 - 09 1,74,20,589 IN EXCESS OF AUTHORIZED SHARE CAPITAL 2012 - 13 12,30,000 IN EXCESS OF AUTHORIZED SHARE CAPITAL 2013 - 14 50,00,000 IN EXCESS OF AUTHOR IZED SHARE CAPITAL 2014 - 15 35,00,000 IN EXCESS OF AUTHORIZED SHARE CAPITAL 5. THE INDIVIDUALS WHO PROVIDED SHARE APPLICATION M ONEY WERE ALL NON- RESIDENTS AND THIS FACT IS NOT DISPUTED. THE DETAI LS OF PERSONS WHO CONTRIBUTED TO THE SHARE APPLICATION MONEY AND THEI R STATUS IS AS FOLLOWS:- ITA NO. 618/BANG/2019 PAGE 3 OF 9 SL. NO. NAME OF THE SHAREHOLDERS STATUS (FOREIGN/ NRI) AMOUNT PAID (RS.) % OF SHARE PAN STATUS 1 ALI SAID ALI AL URAMI FOREIGN 4,00,000 5% NO PAN 2 DR. ABDULLAH SAIF AHMED AL SABAHI FOREIGN 1,68,87,750 30% NO PAN 3 DR . M SHAREEF FOREIGN 18,047 NO PAN 4 LEFEER MUHAMED FOREIGN 2,43,88,000 35% AGEPR1378 N 5 SHATOON ENTERPRISES FOREIGN 88,83,919 NO PAN 6. THE QUERY OF THE AO WAS TWO-FOLD: (I) HOW THE A SSESSEE RECEIVED SHARE APPLICATION MONEY IN EXCESS OF AUTHORIZED SHA RE CAPITAL OF ASSESSEE; & (II) RECEIPT OF SHARE APPLICATION MONEY IS LIABLE TO BE TAXED AS INCOME FROM OTHER SOURCES U/S. 56(2)(VIIB) OF THE ACT. TH E PROVISIONS OF SEC.56(2)(VIIB) OF THE ACT, READS AS FOLLOWS:- INCOME FROM OTHER SOURCES. 56. (1) INCOME OF EVERY KIND WHICH IS NOT TO BE EXC LUDED FROM THE TOTAL INCOME UNDER THIS ACT SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD 'INCOME FROM OTHER SOURCES', IF IT I S NOT CHARGEABLE TO INCOME-TAX UNDER ANY OF THE HEADS SPE CIFIED IN SECTION 14, ITEMS A TO E. (2) IN PARTICULAR, AND WITHOUT PREJUDICE TO THE GEN ERALITY OF THE PROVISIONS OF SUB-SECTION (1), THE FOLLOWING INCOME S, SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD 'INCOME FRO M OTHER SOURCES', NAMELY : (I) . . (VIIB) WHERE A COMPANY, NOT BEING A COMPANY IN WHI CH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, RECEIVES, IN A NY PREVIOUS YEAR, FROM ANY PERSON BEING A RESIDENT, ANY CONSIDERATION FOR ISSUE OF SHARES THAT EXCEEDS THE FACE VALUE OF SUCH SHARES, THE AGGREGATE ITA NO. 618/BANG/2019 PAGE 4 OF 9 CONSIDERATION RECEIVED FOR SUCH SHARES AS EXCEEDS T HE FAIR MARKET VALUE OF THE SHARES: PROVIDED THAT THIS CLAUSE SHALL NOT APPLY WHERE THE CONSIDERATION FOR ISSUE OF SHARES IS RECEIVED (I) BY A VENTURE CAPITAL UNDERTAKING FROM A VENTUR E CAPITAL COMPANY OR A VENTURE CAPITAL FUND; OR (II) BY A COMPANY FROM A CLASS OR CLASSES OF PERSO NS AS MAY BE NOTIFIED BY THE CENTRAL GOVERNMENT IN THIS BEHALF. EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, (A) THE FAIR MARKET VALUE OF THE SHARES SHALL BE T HE VALUE (I) AS MAY BE DETERMINED IN ACCORDANCE WITH SUCH M ETHOD AS MAY BE PRESCRIBED; OR (II) AS MAY BE SUBSTANTIATED BY THE COMPANY TO THE SATISFACTION OF THE ASSESSING OFFICER, BASED ON THE VALUE, ON THE D ATE OF ISSUE OF SHARES, OF ITS ASSETS, INCLUDING INTANGIBLE ASSE TS BEING GOODWILL, KNOW-HOW, PATENTS, COPYRIGHTS, TRADEMARKS , LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMME RCIAL RIGHTS OF SIMILAR NATURE, WHICHEVER IS HIGHER; (B) 'VENTURE CAPITAL COMPANY', 'VENTURE CAPITAL FU ND' AND 'VENTURE CAPITAL UNDERTAKING' SHALL HAVE THE MEANIN GS RESPECTIVELY ASSIGNED TO THEM IN CLAUSE (A), CLAUSE (B) AND CLAUSE (C) OF EXPLANATION TO CLAUSE (23FB) OF SECTION 10; 7. IN REPLY TO THE AFORESAID QUERY OF AO, THE ASSES SEE POINTED OUT THAT (I) THE PROVISIONS OF SECTION 56(2)(VIIB) APPLIES O NLY TO ISSUE OF SHARES. SINCE THE ASSESSEE HAS RECEIVED ONLY SHARE APPLICATION MONEY, THOSE PROVISIONS ARE NOT ATTRACT ED; (II) THE AFORESAID PROVISIONS ARE APPLICABLE ONLY W HEN SHARES ARE ISSUED FOR A CONSIDERATION WHICH EXCEEDS FACE V ALUE IN SUCH SHARES. SINCE THERE WAS NO PREMIUM CHARGED BY THE ITA NO. 618/BANG/2019 PAGE 5 OF 9 ASSESSEE, THERE IS NO QUESTION OF INVOKING THE AFOR ESAID PROVISIONS; AND (III) THE AFORESAID PROVISIONS ARE APPLICABLE ONLY FOR RECEIPT OF CONSIDERATION FOR ISSUE OF SHARES BY A PERSON, WHO IS A RESIDENT AND SINCE THE PERSONS FROM WHOM THE ASSESS EE RECEIVED SHARE APPLICATION MONEY WERE NON-RESIDENTS , THE AFORESAID PROVISIONS ARE NOT APPLICABLE. 8. THE ASSESSEE SUBMITTED THAT THE FACT THAT SHARE APPLICATION MONEY RECEIVED EXCEEDS THE AUTHORIZED SHARE CAPITAL OF AS SESSEE WILL HAVE NO EFFECT ON THE GENUINENESS OF TRANSACTION AS IT WAS ONLY LACK OF AWARENESS THAT THE ASSESSEE RECEIVED SHARE APPLICATION MONEY BEYOND AUTHORIZED SHARE CAPITAL. THE ASSESSEE ALSO SUBMITTED THAT IT WOULD TAKE NECESSARY STEPS TO INCREASE ITS AUTHORIZED SHARE CAPITAL. TH E ASSESSEE GAVE DETAILS OF THE FOREIGN INWARD REMITTANCE CERTIFICATES (FIRC S) EVIDENCING RECEIPT OF SHARE APPLICATION MONEY FROM NON-RESIDENTS THROUGH INWARD REMITTANCES FROM OUTSIDE INDIA. THE ASSESSEE SUBMITTED THAT EV EN THE PROVISIONS OF SECTION 68 OF THE ACT CANNOT BE APPLIED BY THE AO B ECAUSE THE ASSESSEE HAS ESTABLISHED THE IDENTITY OF THE SHARE APPLICANT S, THEIR CREDITWORTHINESS AND GENUINENESS OF THE TRANSACTION. 9. THE AO, HOWEVER, WAS OF THE VIEW THAT THE ACT OF RECEIVING SHARE APPLICATION MONEY IN EXCESS OF AUTHORIZED SHARE CAP ITAL OF ASSESSEE WAS NOT IN ACCORDANCE WITH LAW AND THEREFORE MONEY RECE IVED CANNOT BE CONSIDERED AS TOWARDS SHARE APPLICATION MONEY. THE AO THEREFORE TREATED THE MONEY RECEIVED FROM NON-RESIDENTS AS INCOME OF THE ASSESSEE. HE ULTIMATELY BROUGHT THE SUM OF RS.5,09,04,876 TO TA X UNDER THE HEAD INCOME FROM OTHER SOURCES FOR THE FOLLOWING REASO NS:- CONCLUSION: 11.1. CONSIDERING THE FOLLOWING FACT THAT: ITA NO. 618/BANG/2019 PAGE 6 OF 9 11.1.1. HUGE AMOUNT IS RECEIVED TOTALLY AMOUNTING TO RS.5.09 CRORE IS RECEIVED BY THE ASSESSEE COMPANY SINCE FINANCIAL YEAR 2007-08. 11.1.2. THE AMOUNT RECEIVED CROSSED THE LIMITS OF A UTHORIZED SHARE CAPITAL ON 04/01/2008. 11.1.3. NO EVIDENCE IS PRODUCED THAT THE MONEY IS K EPT SEPARATELY IN BANK ACCOUNT. 11.1.4. THE ENTIRE MONEY IS UTILIZED IN THE BUSINES S. 11.1.5. NO EFFORT IS MADE TO INCREASE THE AUTHORIZE D SHARE CAPITAL TILL THE DATE OF THIS ASSESSMENT ORDER. 11.2. FURTHER, THE ONLY REASON QUOTED BY THE ASSESS EE FOR NOT INCREASING THE AUTHORIZED SHARE CAPITAL AND ALLOTME NT OF SHARES IS 'THE LACK OF AWARENESS WHICH WOULD BE RECTIFIED IN THE DUE COURSE BY THE COMPANY' IS NOT ACCEPTABLE FROM A COR PORATE ENTITY MORE PARTICULARLY WHEN THE DEFAULT IS FOR 10 YEARS. 11.3. THE AR'S SUBMISSION THAT THE MONEY RECEIVED I S TOWARDS 'EQUITY CONTRIBUTION' IS NOT ACCEPTABLE AS THE ASSE SSEE COMPANY IS NOT AUTHORIZED TO RECEIVE THE SAME AS 'CAPITAL'. FO R THE SAME REASON IT CANNOT TREATED AS CAPITAL RECEIPT. AS SUC H THE MONEY RECEIVED IN EXCESS OF AUTHORIZED SHARE CAPITAL CANN OT BE TERMED AS RECEIVED FOR 'EQUITY CONTRIBUTION'. THE AR'S SUB MISSION IS CLEARLY AN AFTERTHOUGHT AND DOESN'T HOLD WATER. 11.4. IN VIEW OF THE ABOVE, THE MONEY RECEIVED AND CLAIMED AS IN EXCESS OF AUTHORIZED SHARE CAPITAL CAN ONLY FALL UNDER THE HEAD 'INCOME FROM OTHER SOURCES' UNDER THE INCOME T AX ACT, 1961. HENCE, AN AMOUNT OF RS. RS.5,09,04,876/- IS T REATED AS 'INCOME FROM OTHER SOURCES' AND IS ADDED TO THE RET URNED INCOME. ADD: RS.5,09,04,876/- 10. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) CON FIRMED THE ACTION OF THE AO. THE CIT(A) DID NOT ADDRESS THE CONTENTI ON OF ASSESSEE AS WERE ITA NO. 618/BANG/2019 PAGE 7 OF 9 PUT FORTH BEFORE THE AO. AGGRIEVED, THE ASSESSEE I S IN APPEAL BEFORE THE TRIBUNAL. 11. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS AS WERE MADE BEFORE THE AO. HE ALSO BROUGHT TO OUR NOTICE THAT IF THE PROVISIONS OF SECTION 68 ARE SOUGHT TO BE APPLIED, THE AO OR THE CIT(A) HAS NOT BROUGHT ON RECORD AS TO WHICH OF THE THREE INGREDIENTS NECE SSARY FOR MAKING THE ADDITION U/S. 68 OF THE ACT WERE PRESENT IN THE CAS E OF ASSESSEE. HIS NEXT SUBMISSION WAS THAT AN ADDITION U/S. 68 CAN BE MADE IN AN ASSESSMENT YEAR RELEVANT TO PREVIOUS YEAR IN WHICH THERE WAS A N ENTRY OF CASH CREDIT. HE POINTED OUT THAT THE UNDISPUTED FACTUAL POSITION IS THAT DURING THE PREVIOUS YEAR RELEVANT TO AY 2015-16, THE ASSESSEE RECEIVED SHARE APPLICATION MONEY ONLY TO THE TUNE OF RS.35 LAKHS A ND THEREFORE ADDITION OF RS.5,09,04,876 MADE BY THE REVENUE AUTHORITIES CANN OT BE SUSTAINED. 12. THE LD. DR RELIED ON THE ORDER OF THE CIT(APPEA LS). 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE DETAILS OF RECEIPT OF SHARE APPLICATION MONEY ON VARIOUS DATES GIVEN IN P AGE 50 OF ASSESSEES PB IS ENCLOSED AS ANNEXURE-I TO THIS ORDER. THE AS SESSEE HAD APPLIED TO THE REGISTRAR OF COMPANIES FOR INCREASE IN AUTHORIZ ED SHARE CAPITAL OF 32,90,000 EQUITY SHARES AND APPLICATION MONEY RECEI VED FROM VARIOUS SHARE APPLICANTS WAS CONVERTED INTO EQUITY SHARES U NDER BOARD RESOLUTION ALLOTTING SHARES TO THE VARIOUS SHARE APPLICANTS DA TED 26.03.2018 AT PAGE 57 OF ASSESSEES PB. WE ARE OF THE VIEW THAT IN TH E LIGHT OF EVIDENCE AVAILABLE ON RECORD, NO CASE HAS BEEN MADE OUT BY T HE REVENUE FOR INVOKING THE PROVISIONS OF SECTION 68 OF THE ACT. 14. AS FAR AS INVOKING THE PROVISIONS OF SECTION 56 (2)(VIIB) IS CONCERNED, AS RIGHTLY CONTENDED BY THE LD. COUNSEL FOR THE ASS ESSEE, THOSE PROVISIONS ARE APPLICABLE ONLY FOR RECEIPT OF CONSIDERATION FO R ISSUE OF SHARES FROM A ITA NO. 618/BANG/2019 PAGE 8 OF 9 RESIDENT AND NOT IN THE CASE OF A NON-RESIDENT. AS WE HAVE ALREADY NOTICED, IN THE PRESENT CASE, THE CONSIDERATION FOR ISSUE OF SHARE APPLICATION MONEY WAS RECEIVED FROM NON-RESIDENTS. SECONDLY, THOSE P ROVISIONS ARE APPLICABLE ONLY WHEN THE SHARES ARE ISSUES OVER AND ABOVE THE FACE VALUE OF SUCH SHARES. ADMITTEDLY, THE SHARES HAVE BEEN S UBSCRIBED AT FACE VALUE AND THERE IS NO PREMIUM WHATSOEVER. IN THE FACTS A ND CIRCUMSTANCES OF THE CASE, WE ARE OF THE VIEW THAT THE AFORESAID PROVISI ONS OF LAW ARE ALSO NOT ATTRACTED. THERE IS NO OTHER BASIS ON WHICH THE AD DITION MADE BY THE AO AND CONFIRMED BY THE CIT(APPEALS) CAN BE SUSTAINED. IN THE CIRCUMSTANCES, WE HOLD THAT THE ADDITION MADE BY TH E AO AND CONFIRMED BY THE CIT(A) IS UNSUSTAINABLE AND THE SAME IS DIRECTE D TO BE DELETED. 15. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 17 TH DAY OF JULY, 2019. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 17 TH JULY, 2019. / D ESAI S MURTHY / COPY TO: 1 . APPELLANT 2 . RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE. ITA NO. 618/BANG/2019 PAGE 9 OF 9 ANNEXURE-I