GREEN INFRA LTD, NEW DELHI V. ITO 1(1)(4), MUMBAI

ITA 7762/MUM/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 70683 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 30-07-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 28-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ABHA KALA CHANDA
• Keywords: Business income; Depreciation; Share purchase agreement; Fair market value; Corroborative evidences; Valuation report; Capital receipt; Capital expenditure
• Section: 234B; 133(6); 37(1); 68; 56

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL G B ENCH, MUMBAI . , !'# $ $ $ $ , %& '()* , %+ ,- % # BEFORE SHRI D.MANMOHAN,VICE PRESIDENT AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ./ I.T.A. NO.7762/MUM/2012 ( . . . . / ASSESSMENT YEAR : 2009-2010 M/S. GREEN INFRA LTD., 2 ND FLOOR, NBCC PLAZA, TOWER NO. 2, SECTOR V, PUSHP VIHAR, SAKET, NEW DELHI -110 017 THE ITO -1(1)-4, AAYAKAR BHAVAN, MUMBAI-400 020 -/ %+ ./ 0 ./PAN/GIR NO. : AADCG 1063D ( /1 /APPELLANT ) .. ( 23/1 / RESPONDENT ) /1 4 % / APPELLANT BY : ` SHRI PORUS KAKA 23/1 5 4 % /RESPONDENT BY : MS. ABHA KALA CHANDA 5 6+ / DATE OF HEARING :31.07.2013 7. 5 6+ / DATE OF PRONOUNCEMENT : 23.08.2013 ,%8 / O R D E R PER N.K. BILLAIYA, AM: WITH THIS APPEAL THE ASSESSEE HAS CHALLENGED THE C ORRECTNESS OF THE ORDER OF THE LD. CIT(A)-1, MUMBAI DT.19.11.2012 PE RTAINING TO A.Y. 2009-2010. 2. THE ASSESSEE HAS RAISED 7 SUBSTANTIVE GROUNDS OF APPEAL. GROUND NO. 1 IS GENERAL IN NATURE AND COVERS THE ENTIRE AD DITION SUSTAINED BY THE LD. CIT(A). 3. THE SPECIFIC GROUNDS ARE GROUND NO. 2&3 WHICH RE LATE TO THE TREATMENT OF SHARE PREMIUM OF RS. 47,97,10,000/- ON THE ISSUE OF EQUITY ITA NO.7762/MUM/2012 2 SHARES TO THE SHAREHOLDERS , AS THE INCOME OF THE ASSESSEE. THE ASSESSEE IS FURTHER AGGRIEVED BY THE ACTION OF THE REVENUE A UTHORITIES FOR TREATING THE TRANSACTION BETWEEN THE ASSESSEE AND THE INVEST ORS AS SHAM ON THE GROUND THAT IT LACKS COMMERCIAL SUBSTANCE. 4. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PRO CEEDINGS ON SCRUTINIZING THE BALANCE SHEET OF THE ASSESSEE AS O N 31.3.2009, THE ASSESSING OFFICER OBSERVED THAT AN AMOUNT OF RS. 47 ,97,10,000/- IS FOUND CREDITED UNDER THE HEAD SHARE PREMIUM ACCOUNT. THE AO FURTHER OBSERVED THAT THE ASSESSEE WAS INCORPORATED ON 3.4. 2008 AND HAS COLLECTED THE SHARE PREMIUM OF RS. 47,97,10,000/- ON ALLOTMEN T OF SHARES OF FACE VALUE OF RS. 10/- EACH AT A PREMIUM OF RS. 490/- PE R SHARE. THE ASSESSEE WAS ASKED TO FURNISH COMPLETE DETAILS AND EXPLANATI ONS VIDE LETTER DT. 17.11.2011, WHICH WAS DULY SERVED ON THE ASSESSEE O N 21.11.2011. THE QUESTIONNAIRE ISSUED BY THE AO IS AS UNDER: SHOWCAUSE NOTICE DATED 17.11.2011: YOU ARE HEREBY REQUIRED TO FURNISH IN WRITING AND V ERIFIED IN PRESCRIBED MANNER, THE INFORMATION AND EXPLANATIONS CALLED FOR ON THE POINTS AND/OR MATTERS SPECIFIED BELOW. IN CASE OF INCREASE IN SHARE CAPITAL AND RECEIPT OF SHARE/SECURITIES PREMIUM PLEASE FURNISH FOLLOWING DETAILS: A. JUSTIFICATION FOR PREMIUM CHARGED O)HE SHARES ISSUED WITH SPECIFIC REFERENCE TO THE BASIS OF VALUATION AND METHOD AP PLIED WITH SUPPORTING DOCUMENTARY EVIDENCES. B. COPIES OF THE MINUTES RECORDED OF THE BOARD MEET ING HELD FOR INCREASING OF THE SHARE CAPITAL AND DETERMINATION AND CHARGING OF THE PREMIUM WITH NAMES AND ADDRESSES OF ALL THE DIRECTORS AND SHARE HOLDER S OF YOUR COMPANY WHO ATTENDED THE BOARD MEETING, C. DOCUMENTARY AND SUPPORTING EVIDENCES WITH DETAIL ED NOTE ON THE FACTORS CONSIDERED FOR ALLOTTING SHARES AT A PREMIUM. ITA NO.7762/MUM/2012 3 D. COPIES OF THE SHARE APPLICATION FORM SUBMITTED, OR OFFER LETTERS RECEIVED IF ANY, E. COPIES OF THE SHARE CERTIFICATES/COUNTERFOILS WI TH CERTIFICATE NUMBERS AND DISTINCTIVE NUMBERS OF SUCH SHARES. F. NAME AND ADDRESS OF THE SHARE REGISTRAR OF YOUR COMPANY. G. PROOF OF STAMP DUTY OR SHARE ISSUE EXPENSES INCU RRED , H. PLEASE STATE WHETHER ANY OF THE DIRECTORS OR THE IR RELATIVES ARE IN ANY WAY RELATED TO THE DIRECTORS OF THE COMPANY TO WHOM SHA RES WERE ALLOTTED. IF SO PLEASE SPECIFY SUCH RELATIONSHIP. I. FURNISH COPY OF TRANSACTION OVERVIEW, PROPOSED B USINESS PLAN, FINANCIAL OVERVIEW PREPARED OR SUBMITTED FOR FUND RAISING THR OUGH EQUITY ROUTE AND PRESENTED TO POTENTIAL INVESTORS IN THE YOUR COMPAN Y. ALSO FURNISH ACTUAL ACHIEVEMENTS IN THOSE AREAS AS AT 31.03.2009, 31.03 .2010 & 31.03.2011 ALONG WITH YOUR BALANCE SHEET, PROFIT AND LOSS ACCOUNT ET C., IF ANY. 2. IT IS OBSERVED FROM THE LEDGER OF THE SHARE CAPI TAL AND SHARE PREMIUM RECEIVED, YOU HAVE CHARGED PREMIUM AT RS.490/- PE R SHARE. PLEASE RECONCILE THE GROSS AMOUNT OF SHARE PREMIUM RECEIVED WIT T E AMOUNTS SHOWN IN YOUR BALANCE SHEET. 3. IN CASE IF YOU FAIL TO PROVE THE GENUINENESS, PU RPOSE AND JUSTIFICATION FOR CHARGING THE PREMIUM IN EXCESS OF ANY JUSTIFIABLE A MOUNTS SHOULD NOT BE TREATED AS YOUR INCOME U/S.56(1) AND TAXED UNDER TH E HEAD INCOME FROM OTHER SOURCES. THE ASSESSEE HAS, BEEN ASKED TO FURNISH DETAILS AND EXPLANATIONS ON OR BEFORE 24.11.2011. 5. THE ASSESSEE FILED A DETAILED REPLY VIDE LETTER DT. 5.12.2011 AND EXPLAINED THE BASIS AND JUSTIFICATION FOR PREMIUM C HARGED ON THE SHARES ISSUED. IT WAS FURTHER EXPLAINED THAT THE ISSUANCE OF SHARES AT PREMIUM WAS A COMMERCIAL DECISION WHICH DOES NOT REQUIRE AN Y JUSTIFICATION UNDER ANY LAW FOR THE TIME BEING IN FORCE. IT WAS FURTHER EXPLAINED THAT THE SUBSCRIBERS TO THE MEMORANDUM OF ASSOCIATION HAVE S UBSCRIBED TO 50,000 EQUITY SHARES OF RS. 10/- EACH AMOUNTING TO RS. 5, 00,000/-. THESE SHARES ITA NO.7762/MUM/2012 4 WERE ALLOTTED AT PAR AND ALL THE REMAINING SHARES W ERE ALLOTTED AT A PREMIUM. THE COMPANIES ACT, 1956 DOES NOT SPECIFY THE PRICE AT WHICH SHARES ARE TO BE ISSUED. IT DOES NOT LIMIT THE PRE MIUM AT WHICH SHARES ARE TO BE ISSUED. IT WAS CONTENDED THAT THE PREMIUM IS A CAPITAL RECEIPT WHICH HAS TO BE DEALT WITH IN ACCORDANCE WITH SEC. 78 OF THE COMPANIES ACT, 1956 AND OTHER RELATED PROVISIONS. TO SUBSTANTIATE , THE ASSESSEE FILED THE INTERNAL VALUATION REPORT WHICH WAS OBTAINED PRIOR TO THE ISSUANCE OF EQUITY SHARES ON PREMIUM. THE ASSESSEE ALSO FILED ALL THE NECESSARY DOCUMENTS RELATING TO THE DETERMINATION AND CHARGIN G OF PREMIUM WITH NAMES AND ADDRESSES OF ALL THE DIRECTORS AND SHARE HOLDERS OF THE ASSESSEE COMPANY AND ALSO ENCLOSED THE COPY OF MINUTES OF TH E BOARD MEETING HELD ON APRIL 14, 2008 TO APPROVE THE ISSUE OF SHAR E CAPITAL AND TO APPROVE THE ISSUE OF EQUITY SHARES AT A PREMIUM. . 5.1. ON THE POINT RAISED BY THE AO AS TO WHY SUCH RECEIPTS RECEIVED IN EXCESS OF ANY JUSTIFIABLE AMOUNTS SHOULD NOT BE TRE ATED AS INCOME U/S. 56(1) AND TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES , THE ASSESSEE STRONGLY CONTENDED THAT THE COMPANY IS NOT REQUIRED TO PROVE THE GENUINENESS, PURPOSE OR JUSTIFICATION FOR CHARGING A PREMIUM ON SHARES. EVEN OTHERWISE THE SHARE PREMIUM RECEIVED BY THE CO MPANY CANNOT BE TAXED U/S. 56(1) OF THE ACT. IT WAS EXPLAINED THAT THE SHARE PREMIUM BY ITS VERY NATURE IS A CAPITAL RECEIPT AND IS NOT INC OME IN ITS ORDINARY SENSE. 5.2. DURING THE COURSE OF THE ASSESSMENT PROCEEDING S, THE AO SOUGHT DETAILS AND INFORMATION U/S. 133(6) OF THE ACT FROM THE SUBSCRIBERS TO THE SHARE CAPITAL AND SHARE PREMIUM ACCOUNT. THE NECES SARY DETAILS AND EXPLANATIONS WERE RECEIVED AND WERE DULY PLACED ON RECORD. AFTER CONSIDERING THE ENTIRE SUBMISSIONS AND THE DOCUMENT S FILED BY THE ASSESSEE IN RESPONSE TO THE SPECIFIC QUERIES RAISED BY THE AO, THE AO WAS ITA NO.7762/MUM/2012 5 OF THE FIRM BELIEF THAT THE PREMIUM CHARGED ON ALLO TMENT OF SHARES IS NOT JUSTIFIED. THE AO WAS OF THE OPINION THAT THESE FU NDS WERE INTRODUCED BY THE ASSESSEE THROUGH SHARE HOLDERS UNDER THE GUISE OF THE PREMIUM. THE AO QUESTIONED THE AUTHENTICITY OF THE REPORT DT. 14 .4.2008. THE AO WAS OF THE FIRM BELIEF THAT THERE IS NO INDICATION OR EVIDENCE AS TO HOW THE ESTIMATES OR PROJECTIONS ARE MADE IN ARRIVING AT TH E PROJECTED FIGURES FOR PROFITS BEFORE THE TAX, TERMINAL VALUE AND EQUITY VALUE OF THE SHARES, EBIDTA. ACCORDING TO THE AO, THESE VALUES ADOPTED ARE NOWHERE NEAR TO THE ACTUALS AND ACHIEVEMENTS AS ON DATE. AS SUC H THERE IS NO RATIONALE BEHIND THE FIGURES ADOPTED IN THIS VALUATION OTHER THAN THE REASONS BEST KNOWN TO THE ASSESSEE. THE AO FURTHER OBSERVED THA T THE COMPANY HAD A PAID UP SHARE CAPITAL OF RS. 5,00,000/- ON THE DATE OF INCORPORATION. THE CERTIFICATE OF REGISTRATION ISSUED BY THE REGISTRAR OF COMPANIES ON 29.4.2008 AND THE BUSINESS PLAN VALUATION AND JUSTI FICATION FOR ISSUE OF SHARES AT A PREMIUM WAS PREPARED AND SUBMITTED TO T HE SUBSCRIBERS ON 14.4.2008. THERE ARE NO RESERVES AND SURPLUS AS ON THESE DATES AVAILABLE WITH THE COMPANY. THE BOOK VALUE PER SHARE OF THE COMPANY IS AT RS. 10/- PER SHARE COULD NOT JUSTIFY CHARGING OF ANY PR EMIUM ON SHARES. 5.3. THE AO FURTHER OBSERVED THAT THE ASSESSEE DOES NOT HAVE ANY HIDDEN ASSETS IN THE FORM OF PATENTS, COPY RIGHTS, INTELLECTUAL PROPERTY RIGHTS OR EVEN INVESTMENTS ETC BELONGING TO THE COM PANY BASED ON WHICH THE ASSESSEE WOULD BE LIKELY TO SUBSTANTIALLY ENHAN CE ITS PROFITS, WHICH MAY HAVE A BEARING ON THE PREMIUM TO BE CHARGED ON ALLOTMENT OF THE FRESH SHARES. THERE AFTER , THE AO WENT ON TO DISC USS THE METHODS WHICH ARE COMMONLY USED FOR VALUATION OF SHARES. THE AO WAS OF THE FIRM BELIEF THAT THE ASSESSEE HAS AVOIDED TO REPLY TO SP ECIFIC QUERY WITH REGARD TO BASIS OF VALUATION OF SHARES AND DETERMINATION O F PREMIUM THEREON. THE ASSESSEE HAS ONLY PLACED RELIANCE ON UNAUTHENTI CATED POWER SECTOR ITA NO.7762/MUM/2012 6 REPORT AND ADOPTED THE DISCOUNTED CASH FLOW METHOD IN VALUATION WHICH IN ITSELF IS UNREALISTIC AND PURELY BASED ON VAGUE PROJECTIONS WITHOUT ANY SUPPORTING EVIDENCE. THE AO CONTINUED STATING THAT THE ASSESSEE IS A NEW COMPANY AND YET TO COMMENCE ITS BUSINESS OPERATIONS , THEREFORE NO WEIGHTAGE CAN BE ASCRIBED TO ITS PAST RECORD. TO TE ST THE CREDIBILITY OF THE VALUATION, THE AO WENT ON TO VERIFY THE FUTURE RESU LTS OF THE ASSESSEE COMPANY WITH REFERENCE TO THE RETURN OF INCOME FILE D FOR A.Y. 2009-10, 2010-11 & 2011-12. THE COMPARATIVE FIGURES ARE AS UNDER: A.Y TOTAL TURNOVER ACHIEVED NET PROFIT SHOWN EPS 2009-10 7806814 (-)17427088 (45.85) 2010-11 22827505 (-)29765661 (9.22) 2011-12 92058801 (-)13993736 (0.25) 5.4. TAKING A LEAF OUT OF THE AFOREMENTIONED FIGURE S THE AO WAS OF THE OPINION THAT THE PREMIUM CHARGED BY THE ASSESSEE IS UNSCIENTIFIC AND UNJUSTIFIED. CONSIDERING ALL THESE DEFECTS/LACUNAS , THE AO WENT ON TO DISREGARD THE JUSTIFICATION OF SHARE PREMIUM AMOUNT ING TO RS. 490/- PER SHARE. THE AO FURTHER OBSERVED THAT THE ALLEGED SH ARE PREMIUM COLLECTED IS NOT UTILIZED FOR THE PURPOSE AND OBJECTIVES AND THE SAME WAS COLLECTED WITHOUT FOLLOWING THE CONDITIONS SPECIFIED UNDER TH E COMPANIES ACT, 1956. THE AO NOTICED THAT OUT OF THE TOTAL RECEIPT S OF RS. 47,97,10,000/- AN AMOUNT OF RS. 45,36,95,212/- HAS BEEN INVESTED I N THE UNITS OF IDFC MUTUAL FUND AND THE BALANCE AMOUNTS WERE UTILIZED F OR INVESTMENTS IN SHARES OF SUBSIDIARY COMPANIES, BANK FDRS, ADVANCE S TO SUBSIDIARIES ETC. THE AO FURTHER QUESTIONED THE INVESTMENTS MADE BY I DFC TRUSTEE CO. LTD. I.E. IDFC INFRASTRUCTURE FUND-2, IDFC PRIVATE EQUITY FUND-II WHICH ACCORDING TO THE AO ARE IN VIOLATION OF PROVI SIONS OF SEBI (MUTUAL FUND) REGULATIONS ACT, 1993 AND 1996, QUESTIONING T HE VALIDITY OF ITA NO.7762/MUM/2012 7 CHARGING OF SHARE PREMIUM AND MAKING A FIRM BELIEF THAT THE ASSESSEE HAS ENTERED INTO A SHAM TRANSACTION. 5.5. THE AO FURTHER DISCUSSED THE OBSERVATIONS OF V ARIOUS HIGHER JUDICIAL FORUMS REGARDING COLORABLE DEVICES USED FO R THE PURPOSE OF TAX EVASION AND IN PARTICULAR THE DECISION OF THE HONB LE SUPREME COURT IN THE CASE OF MCDOWELL AND CO. LTD. (1985) 154 ITR 14 8. INVOKING THE PROVISIONS OF SEC. 56(1) OF THE ACT, THE AO WAS OF THE FIRM BELIEF THAT THE ALLEGED SHARE PREMIUM SO RECEIVED IS TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. FOR THIS PROPOSITION, THE AO RELIED UPON THE DECISION OF RAJASTHAN HIGH COURT IN THE CASE OF CIT VS RAMDEO SAMADHI (1986) 160 ITR 179, ALLAHABAD HIGH COURT IN THE CASE OF C IT VS SMT. SHANTI MEATTLE 90 ITR 385 AND MADRAS HIGH COURT IN THE CAS E OF CIT VS K. THANGAMANI 309 ITR 15 AND FINALLY CONCLUDED THAT TH E MATTER OF TAXABILITY CANNOT BE DECIDED ON THE BASIS OF THE EN TRIES WHICH THE ASSESSEE MAY CHOOSE TO MAKE IN ITS ACCOUNT BUT HAS TO BE DEC IDED IN ACCORDANCE WITH THE PROVISIONS OF LAW RELYING UPON THE DECISIO N OF THE BOMBAY HIGH COURT IN THE CASE OF CIT VS MOGUL LINE LTD. 46 ITR 590. 6. AGGRIEVED BY THIS ADDITION MADE BY THE AO, THE A SSESSEE STRONGLY AGITATED THE MATTER BEFORE THE LD. CIT(A) BUT WITHO UT ANY SUCCESS. 6.1. BEFORE THE LD. CIT(A), THE ASSESSEE STRONGLY C ONTENDED THAT SHARE PREMIUM OF RS. 47,97,10,000/- CANNOT BE TAXED U/S. 56 OF THE ACT AS IT IS A CAPITAL RECEIPT. IT WAS EXPLAINED THAT THE AO HAS PROCEEDED UNDER A WRONG NOTION THAT IDFC INFRASTRUCTURE FUND-2 IS A M UTUAL FUND REGISTERED WITH SEBI WHEREAS THE CORRECT FACT IS TH AT IDFC INFRASTRUCTURE FUND-2 IS A VENTURE CAPITAL FUND. AFTER CONSIDERIN G ALL THE FACTS AND SUBMISSIONS AND THE REMAND REPORT OF THE AO, THE LD . CIT(A) CAME TO THE ITA NO.7762/MUM/2012 8 CONCLUSION THAT THE ASSESSEE HAS FAILED TO SUBSTANT IATE THE GENUINENESS OF SHARE PREMIUM AND SEC,. 56(1) IS WIDE ENOUGH TO CO VER ALL THE CASES OF RESIDUARY NATURE NOT FALLING U/S. 4 & 5 OF THE ACT. THE LD. CIT(A) WAS ALSO NOT CONVINCED WITH THE FACT THAT THE PREMIUM I S RECEIVED AT THE STAGE OF INITIAL OFFER ITSELF AND CANNOT BE ACCEPTED AS GENUINE. FURTHER, THE ASSESSEE HAS FAILED TO UTILIZE THE SHARE PREMIUM RE CEIVED AS PER THE PROVISIONS OF SEC. 78 OF THE COMPANIES ACT. THE LD . CIT(A) ALSO SHOWED HIS DISCONTENTMENT REGARDING VALUATION OF SHARE PREMIUM. LD. CIT(A) WAS OF THE OPINION THAT NO COMPLETE EVIDENCE WAS FILED BY THE ASSESSEE SO FAR AS GROWTH AND PROFITABILITY WAS CO NCERNED. THE LD. CIT(A) FINALLY CONCLUDED THAT THE GENUINENESS OF SH ARE PREMIUM IS NOT ESTABLISHED BY THE ASSESSEE. THE PURPOSE AND CONDI TIONS SPECIFIED U/S. 78 OF THE COMPANIES ACT HAVE BEEN VIOLATED BY THE ASSE SSEE THEREBY THE NATURE OF THE TRANSACTION LOST THE CHARACTER OF CAP ITAL RECEIPT AND WAS RIGHTLY HELD AS RESIDUARY RECEIPT AND WAS OF THE FIRM BELIEF THAT THE SHARE PREMIUM HAS BEEN RIGHTLY BROUGHT TO TAX AS INCOME U /S. 56(1) IN THE LIGHT OF THE CLEAR VIOLATION OF SEC. 78 OF THE COMPANIES ACT AND CONFIRMED THE ADDITION OF RS. 47,97,10,000/-. 7. AGGRIEVED BY THIS FINDING OF THE LD. CIT(A), THE ASSESSEE IS BEFORE US. 8. THE LD. SENIOR COUNSEL EXPLAINED THE CAPITAL STR UCTURE AND THE SUBSCRIBERS TO THE CAPITAL OF THE ASSESSEE COMPANY. IT WAS EXPLAINED THAT M/S. IDFC LTD WAS SET UP IN THE YEAR 1997 ON THE RE COMMENDATION OF A COMMITTEE SET UP BY GOVERNMENT TO ANALYSE THE NEED FOR FINANCIAL INTERMEDIARIES FOR INFRASTRUCTURE. IDFC ALTERNATIV ES LTD. IS A WHOLLY- OWNED SUBSIDIARY OF IDFC LTD., AND IS ENGAGED IN TH E BUSINESS OF MANAGING VENTURE CAPITAL FUNDS, ONE OF WHICH IS IDF C INFRASTRUCTURE ITA NO.7762/MUM/2012 9 FUND-2 WHICH IS A VENTURE CAPITAL FUND REGISTERED WITH THE SEBI. IDFC PRIVATE EQUITY FUND-II IS A SUCCESSOR FUND OF IDFC INFRASTRUCTURE FUND WHICH IS ALSO A SEBI REGISTERED VENTURE CAPITAL FUN D. THE LD. COUNSEL FOR THE ASSESSEE STATED THAT IDFC INFRASTRUCTURE FUND W AS PROPOSED BY THE HONOURABLE FINANCE MINISTER IN HIS BUDGET SPEECH FO R THE YEAR 2002-03. IDFC PRIVATE EQUITY FUND-II IS HOLDING 98% SHARES I N THE ASSESSEE COMPANY. 8.1. THE LD. SENIOR COUNSEL FURTHER DREW OUR ATTENT ION TO THE BOARD OF DIRECTORS OF ASSESSEE COMPANY AND STATED THAT ALMOS T ALL THE DIRECTORS ARE RELATED WITH IDFC GROUP. DRAWING OUR ATTENTION TO THE CHART WHICH IS EXHIBITED AT PAGE-7 OF THE ASSESSMENT ORDER, THE LD . COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE INITIAL SUBSCRIPTION ON MEMORANDUM OF ASSOCIATION CAME FROM IDFC PRIVATE EQUITY FUND-II B Y WHICH IT WAS ALLOTTED 50,000 EQUITY SHARES AT FACE VALUE OF RS. 10/- EACH WHICH BECAME PART OF EQUITY SHARES CAPITAL AT RS.5,00,000/-. TH EREAFTER ON TWO OCCASIONS, SUBSEQUENT CAPITAL INFUSION WERE MADE , ON 31.8.2008 IDFC PE FUND-II WERE ALLOTTED 79,000 EQUITY SHARES OF FA CE VALUE OF RS. 10/- AT A PREMIUM OF RS. 490/- PER SHARE TOTALING TO RS. 3. 95 CRORES AND ON THE SAME DATE EMERGENT VENTURE PVT. LTD., WERE ALLOTTED 10,000 EQUITY SHARES OF FACE VALUE OF RS. 10/- AT A PREMIUM OF RS. 490/- PER SHARE TOTALING TO RS. 50 LAKHS. FURTHER, CAPITAL INFUSION WAS MADE O N 20.12.2008 WHEN IDFC PE FUND-II WAS ALLOTTED 8,90,000 EQUITY SHARES OF FACE VALUE OF RS. 10/- EACH AT A PREMIUM OF RS. 490/- PER SHARE TOTAL ING TO RS. 44.50 CRORES. THUS THE TOTAL SHARE PREMIUM RECEIVED BY WAY OF THE SE ALLOTMENTS WAS AT RS. 47,97,10,000/-. 8.2. IT IS THE SAY OF THE LD. SENIOR COUNSEL THAT T HE VALUATION OF SHARE PREMIUM IS NOT WITHOUT ANY BASIS. DRAWING OUR ATTE NTION TO PAGE-31 OF THE PAPER BOOK, THE LD. COUNSEL POINTED OUT THAT TH E BOARD OF DIRECTORS ITA NO.7762/MUM/2012 10 HAVE RECEIVED AN INTERNAL REPORT ON VALUATION OF SH ARES OF THE ASSESSEE COMPANY. THE LD. COUNSEL FURTHER EXPLAINED THAT TH E VALUATION HAS BEEN DONE ON DISCOUNTED CASH FLOW METHOD. DRAWING OUT A TTENTION TO THE NOTIFICATION ISSUED BY THE CBDT ON 29.11.2012 AT PA GES 353 TO 356 OF THE PAPER BOOK, THE LD. COUNSEL SUBMITTED THAT THE CBDT HAS APPROVED VIDE THIS NOTIFICATION THAT THE FAIR MARKET VALUE O F THE UNQUOTED EQUITY SHARES DETERMINED BY A MERCHANT BANKER OR AN ACCOUN TANT CAN BE AS PER THE DISCOUNTED FREE CASH FLOW METHOD. THE LD. COUN SEL FURTHER SUBMITTED THAT THE ALLEGATIONS OF THE REVENUE AUTHO RITIES THAT THE VALUATION OF THE SHARE PREMIUM IS ABSURD AND WITHOU T ANY BASIS ARE INCORRECT. 8.3. IT IS THE SAY OF THE LD. COUNSEL THAT THE SHA RE PREMIUM IS TO BE DECIDED BY THE BOARD OF DIRECTORS AND THERE IS NO P ROHIBITION UNDER THE COMPANIES ACT SO FAR AS THE AMOUNT OF PREMIUM IS CO NCERNED. THE LD. COUNSEL FURTHER STATED THAT THE ACTION OF THE REVEN UE AUTHORITIES TO TAX THE SHARE PREMIUM U/S. 56(1) OF THE ACT IS AGAINST THE LAW AS IT HAS BEEN HELD BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS ALLAHABAD BANK LTD. 73 ITR 745 THAT THE SHARE PREMIUM RECEIVED ON THE ISSUE OF SHARES HAS TO BE INCLUDED IN THE PAID UP CAPITAL IRRESPECT IVE OF WHETHER THE SHARE PREMIUM HAS BEEN MAINTAINED IN A SEPARATE ACCOUNT A PART FROM THE RESERVE. DRAWING SUPPORT FROM THIS DECISION OF THE HONBLE SUPREME COURT, THE LD. SENIOR COUNSEL SUBMITTED THAT BEING A CAPITAL RECEIPT, THE SAME CANNOT BE TAXED AS A REVENUE RECEIPT U/S. 56(1 ) OF THE ACT. 8.4. THE LD. COUNSEL FURTHER DREW SUPPORT FROM THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS STANDAR D VACCUM OIL CO. 59 ITR 685 WHEREIN IT HAS BEEN HELD THAT PREMIUM RE ALIZED FROM THE ISSUE OF ITS SHARES REPRESENTS RESERVES NOT ALLOWED IN CO MPUTING THE PROFITS OF THE COMPANY FOR THE PURPOSE OF INDIAN INCOME TAX AC T, 1922. TO FURTHER ITA NO.7762/MUM/2012 11 SUBSTANTIATE ITS CLAIM, THE LD. COUNSEL RELIED UPON THE DECISION OF DELHI HIGH COURT IN THE CASE OF ACIT VS OM OILS AND OIL SEEDS LTD. 152 ITR 552 AND CIT VS KRISHNARAM BALDEO BANK (P) LTD. 144 ITR 600. THE LD. SENIOR COUNSEL FURTHER DREW OUR ATTENTION B ACK TO SHARE HOLDING PATTERN OF THE ASSESSEE COMPANY AND SUBMITTED THAT THE SHARE HOLDERS ARE UNDER DIRECT CONTROL OF THE GOVERNMENT OF INDIA AS GOVT. OF INDIA IS HOLDING AROUND 18% OF SHARES IN IDFC LTD., AND THE MAIN CONTRIBUTORS TO THE IDFC PE FUND-2 ARE LIC, UNION BANK OF INDIA, OR IENTAL BANK OF COMMERCE, INDIAN OVERSEAS BANK AND CANARA BANK. TH EREFORE, IT CANNOT BE , BY ANY STRETCH OF IMAGINATION ,SAID THAT THE TRANSACTIONS ARE BOGUS AND HAVE BEEN DONE WITH SOME ULTERIOR MOTIVE . REBUTTING THE ALLEGATION THAT THE SHARE PREMIUM AMOUNT HAS NOT BE EN UTILIZED FOR THE PURPOSE FOR WHICH IT HAS BEEN RECEIVED , THE LD. CO UNSEL FOR THE ASSESSEE STATED THAT THIS IS INCORRECT AND FALSE ALLEGATION BY THE REVENUE AUTHORITIES AS THE ASSESSEE COMPANY HAS SET UP THREE SUBSIDIARI ES AND HAS INVESTED FUNDS IN THESE THREE SUBSIDIARIES WHICH HAVE BEEN F LOATED AS SPECIAL PURPOSE VEHICLE TO SET UP BALANCE FOR GENERATING WIND ENERGY. 8.5. TO FURTHER STRENGTHEN HIS SUBMISSION, THE LD. COUNSEL DREW OUR ATTENTION TO THE CERTIFICATE ISSUED BY THE TAMILNAD U ELECTRICITY BOARD EXHIBITED AT PAGES 386 TO 401 OF THE PAPER BOOK. T HE LD. COUNSEL POINTED OUT THAT WITHIN THREE MONTHS FROM THE END O F THE FINANCIAL YEAR I.E. BY JUNE (22.6.2009) ONE OF THE SUBSIDIARY OF THE A SSESSEE COMPANY M/S. GREEN INFRA WIND FARMS LTD. HAS STARTED GENERATING ELECTRICITY AS IS EVIDENCED FROM THE CERTIFICATES ISSUED BY THE TAMIL NADU ELECTRICITY BOARD AT DIFFERENT VILLAGES OF THE STATE. THE LD. SENIOR COUNSEL STRONGLY CONCLUDED THAT THE SHARE PREMIUM RECEIVED BY THE AS SESSEE COMPANY IS A GENUINE TRANSACTION, THE SHARE HOLDER COMPANY AND T HE HOLDING COMPANY ARE HELD BY THE GOVERNMENT OF INDIA, THEREFORE IT C ANNOT BE SAID THAT THE ITA NO.7762/MUM/2012 12 TRANSACTION IS SHAM. THE AO HAS WRONGLY CONCLUDED T HAT IDFC IS A MUTUAL FUND COMPANY WHEREAS THE SAME IS A VENTURE C APITAL FUND REGISTERED WITH SEBI AS PER THE CERTIFICATE EXHIBIT ED AT PAGE-48 OF THE PAPER BOOK ,WHICH CLEARLY CERTIFIES THAT THE IDFC I NFRASTRUCTURE FUND-II IS A VENTURE CAPITAL FUND. THE LD. COUNSEL FOR THE AS SESSEE PLEADED THAT THE ADDITIONS MADE ON ACCOUNT OF SHARE PREMIUM RECEIPT TREATING IT AS A REVENUE RECEIPT IS ERRONEOUS AND BAD IN LAW AND DES ERVES TO BE DELETED. 9. THE LD. DEPARTMENTAL REPRESENTATIVE ALSO FILED A WRITTEN SUBMISSION TO SUPPORT THE FINDINGS OF THE REVENUE A UTHORITIES. IN THE WRITTEN SUBMISSION, THE LD. DR QUESTIONED THE VALUA TION OF SHARE PREMIUM STATING THAT THE PRE-REQUISITE OF THE TRANS ACTION FOR ISSUE OF BONUS OR PREMIUM SHARE IS SUBSTANTIAL INCREASE IN THE WOR TH OF THE COMPANY FROM THE POINT OF DEPARTURE. IT IS MAINLY THE PROF ITABILITY, CREDIBILITY, GOODWILL OF THE CONCERN WHICH CREATES THE OPPORTUNI TY AND REQUIREMENT OF PREMIUM AND ALL THIS IS LACKING IN THE CASE OF THE ASSESSEE. THE LD. DR HAS FURTHER STATED THAT THE ALLEGED PREMIUM ATTACHE D TO THE SHARES HAS NOT BEEN RECEIVED FROM THE OPEN MARKET. IT IS AN ADMITT ED POSITION THAT IT IS A LIMITED GROUP TRANSACTION AND IS NOT ENTERED WITH O PEN AND GENERAL SUBSCRIBERS WHO COULD PAY THE PREMIUM. IT IS THE S AY OF THE LD. DR THAT THE SHARES HAD NO CAPABILITY AND NO INTRINSIC VALUE TO GIVE PRICE TO PREMIUM IN THE INDUSTRIAL , NORMAL AND ACTUAL WORTH OF THE COMPANY. THE LD. DR FURTHER STATED THAT RECEIPTS OF PREMIUM ON T HE SHARES , WHEN THE ACCRETION OF PROFITABILITY, GOODWILL AND OTHER SUCH ELEMENT INCORPORATED IN FORMULAS OF VALUATION FOR REFERENCE ARE ABSENT , I S ACTUALLY AT BEST A RECEIPT IN THE NATURE OF WINDFALL BECAUSE THE OTHER PART OF THE TRANSACTION NORMALLY THE WORTH OF THE COMPANY IS TOTALLY NON-EX ISTENT. THERE IS NO CORRESPONDING ACCRETION TO THE ASSETS /WORTH OF THE COMPANY WHICH COULD JUSTIFY THE ALLEGED PREMIUM RECEIVED ON THE SHARES. THE LD. DR STRONGLY ITA NO.7762/MUM/2012 13 SUBMITTED THAT THERE IS NO MATERIAL BASIS/INGREDIEN TS WHICH COULD JUSTIFY SUCH TRANSACTION IN SUBSTANCE AND ALSO IN LAW. 9.1. DRAWING SUPPORT FROM THE DECISION OF THE HONB LE SUPREME COURT IN THE CASE OF CIT VS DURGA PRASAD MORE 82 ITR 540, THE LD. DR STATED THAT WHEN THE REVENUE HAS REASONS TO BELIEVE THAT T HE APPARENT IS NOT REAL THEN THE TAXING AUTHORITIES ARE ENTITLED TO LOOK IN TO THE SURROUNDING CIRCUMSTANCES TO FIND OUT THE REALITY AND THE MATTE R HAS TO BE CONSIDERED BY APPLYING THE TEST OF HUMAN PROBABILITY. THE LD. DR ALSO DREW SUPPORT FROM THE DECISION OF THE HONBLE SUPREME COURT IN T HE CASE OF SUMATI DAYAL VS CIT 214 ITR 801. THE LD. DR FURTHER DREW SUPPORT FROM THE DECISION IN THE CASE OF SREELEKHA BANERJEE & OTHERS VS CIT WHEREIN THE HONBLE SUPREME COURT HAS HELD THAT IF EXPLANATION IS UNCONVINCING AND ONE WHICH DESERVES TO BE REJECTED, THE DEPARTMENT C AN REJECT AND DRAW THE INFERENCE THAT THE AMOUNT REPRESENTS INCOME EITHER FROM THE SOURCE ALREADY DISCLOSED BY THE ASSESSEE OR FROM SOME UNDI SCLOSED SOURCE. THE LD. DR WENT ON TO RAISE AN ALTOGETHER NEW PLEA THAT SINCE THE NATURE OF TRANSACTION HAS BEEN QUESTIONED BY THE REVENUE AUTH ORITIES, THE SAME SHOULD BE TAXED U/S. 68 OF THE ACT AND FINALLY CONC LUDED THAT THERE IS NO ERROR COMMITTED BY THE LOWER AUTHORITIES AND THE OR DER OF THE LD. CIT(A) DESERVES TO BE CONFIRMED. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CA REFULLY PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIA L EVIDENCES BROUGHT ON RECORD IN THE FORM OF PAPER BOOK. THE ENTIRE DISPU TE REVOLVES AROUND THE CHARGING OF SHARE PREMIUM OF RS. 490/- PER SHARE ON A BOOK VALUE OF RS. 10/- EACH. THIS DISPUTE IS MORE SO BECAUSE OF THE FACT THAT THE ASSESSEE COMPANY WAS INCORPORATED DURING THE YEAR UNDER CONS IDERATION. THEREFORE, ACCORDING TO THE REVENUE AUTHORITIES, IT IS BEYOND ANY LOGICAL ITA NO.7762/MUM/2012 14 REASONING THAT A COMPANY WITH ZERO BALANCE SHEET CO ULD GARNER RS. 490/- PER SHARE PREMIUM FROM ITS SUBSCRIBERS. SUCH TRANS ACTION MAY RAISE EYEBROWS BUT CONSIDERING THE SUBSCRIBERS TO THE ASS ESSEE COMPANY, THE TEST FOR THE GENUINENESS OF THE TRANSACTION GOES IN TO OBLIVION. IT IS AN UNDISPUTED FACT ADMITTED BY THE REVENUE AUTHORITIES THAT 10,19,000 EQUITY SHARES HAS BEEN SUBSCRIBED AND ALLOTTED TO IDFC PE FUND-II WHICH COMPANY IS A FRONT MANAGER OF IDFC LTD., IN WHICH C OMPANY GOVERNMENT OF INDIA IS HOLDING 18% OF SHARES. TH E CONTRIBUTORS TO THE IDFC PE FUND-II WHO IS A SUBSCRIBER TO THE ASSESSEE S SHARE CAPITAL, ARE LIC, UNION OF INDIA, ORIENTAL BANK OF COMMERCE, IND IAN OVERSEAS BANK AND CANARA BANK WHICH ARE ALL PUBLIC SECTOR UNDERTA KINGS. THEREFORE, TO RAISE EYEBROWS TO A TRANSACTION WHERE THERE IS SO M UCH OF INVOLVEMENT OF THE GOVERNMENT DIRECTLY OR INDIRECTLY DOES NOT MAKE ANY SENSE. 10.1. NO DOUBT A NON-EST COMPANY OR A ZERO BALANCE COMPANY ASKING FOR A SHARE PREMIUM OF RS. 490/- PER SHARE DEFIES ALL C OMMERCIAL PRUDENCE BUT AT THE SAME TIME WE CANNOT IGNORE THE FACT THAT IT IS A PREROGATIVE OF THE BOARD OF DIRECTORS OF A COMPANY TO DECIDE THE P REMIUM AMOUNT AND IT IS THE WISDOM OF THE SHARE HOLDERS WHETHER THEY WAN T TO SUBSCRIBE TO SUCH A HEAVY PREMIUM. THE REVENUE AUTHORITIES CANNOT QU ESTION THE CHARGING OF SUCH OF HUGE PREMIUM WITHOUT ANY BAR FROM ANY LE GISLATED LAW OF THE LAND. DETAILS OF SUBSCRIBERS WERE BEFORE THE REVE NUE AUTHORITIES. THE AO HAS ALSO CONFIRMED THE TRANSACTION FROM THE SUBS CRIBERS BY ISSUING NOTICE U/S. 133(6) OF THE ACT. THE BOARD OF DIRECT ORS CONTAINS PERSONS WHO ARE ASSOCIATED WITH IDFC GROUP OF COMPANIES, T HEREFORE THEIR INTEGRITY AND CREDIBILITY CANNOT BE DOUBTED. THE E NTIRE GRIEVANCE OF THE REVENUE REVOLVES AROUND THE CHARGING OF SUCH OF HUG E PREMIUM SO MUCH SO THAT THE REVENUE AUTHORITIES DID NOT EVEN BLINK THEIR EYES IN INVOKING PROVISIONS OF SEC. 56(1) OF THE ACT. ITA NO.7762/MUM/2012 15 10.2. LET US CONSIDER THE PROVISIONS OF SEC. 56(1) OF THE ACT: 56.1. INCOME FROM OTHER SOURCES INCOME OF EVERY KIND WHICH IS NOT TO BE EXCLUDED FR OM THE TOTAL INCOME UNDER THIS ACT SHALL BE CHARGEABL E TO INCOME-TAX UNDER THE HEAD INCOME FROM OTHER SOURCES, IF IT IS NOT CHARGEABLE TO INCOME-TAX UND ER ANY OF THE HEADS SPECIFIED IN SECTION 14, ITEMS A T O E. 10.3. A SIMPLE READING OF THIS SECTION SHOW THAT IN COME OF EVERY KIND WHICH IS NOT TO BE EXCLUDED FROM THE TOTAL INCOME S HALL BE CHARGEABLE TO INCOME TAX. THE EMPHASIS IS ON THAT INCOME OF EVERY KIND , THEREFORE, TO TAX ANY AMOUNT UNDER THIS SECTION, IT MUST HAVE SOME CHARACTER OF INCOME. IT IS A SETTLED PROPOSITION OF LAW THAT CAPITAL RECEIPTS , UNLESS SPECIFICALLY TAXED UNDER ANY PROVISIONS OF THE ACT , ARE EXCLUDED FROM INCOME. THE HONBLE SUPREME COURT HAS LAID DOWN TH E RATIO THAT SHARE PREMIUM REALIZED FROM THE ISSUE OF SHARES IS OF CAP ITAL IN NATURE AND FORMS PART OF THE SHARE CAPITAL OF THE COMPANY AND THEREFORE CANNOT BE TAXED AS A REVENUE RECEIPT. IT IS ALSO A SETTLED P ROPOSITION OF LAW THAT ANY EXPENDITURE INCURRED FOR THE EXPANSION OF THE C APITAL BASE OF A COMPANY IS TO BE TREATED AS A CAPITAL EXPENDITURE A S HAS BEEN HELD BY THE HONBLE SUPREME COURT IN THE CASE OF PUNJAB STATE I NDUSTRIAL CORPORATION LTD. VS CIT 225 ITR 792 AND IN THE CASE OF BROOKE B OND INDIA LTD. VS CIT. THUS THE EXPENDITURE AND THE RECEIPTS DIRECTL Y RELATING TO THE SHARE CAPITAL OF A COMPANY ARE OF CAPITAL IN NATURE AND THEREFORE CANNOT BE TAXED U/S. 56(1) OF THE ACT. THE ASSESSEE SUCCEEDS AND REVENUE FAILS ON THIS ACCOUNT. 11. THE LD. DEPARTMENTAL REPRESENTATIVE HAS RAISED AN ALTOGETHER PLEA BY STATING THAT THE NATURE OF THE TRANSACTION SHOUL D ALSO BE JUDGED WITHIN ITA NO.7762/MUM/2012 16 THE PARAMETERS OF THE SEC. 68 OF THE ACT. THE COUNS EL FOR THE ASSESSEE STRONGLY OBJECTED TO THIS BUT IN THE INTEREST OF JU STICE AND FAIR PLAY, WE ALLOWED THE DR TO RAISE THIS ISSUE. FOR THIS, WE DR AW SUPPORT FROM THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F KAPURCHAND SHRIMAL VS CIT 131 ITR 451, WHEREIN THE HONBLE SU PREME COURT HAS LAID DOWN THE RATIO THAT IT IS WELL KNOWN THAT AN APPELLATE AUTHORITY HAS THE JURISDICTION AS WELL AS THE DUTY TO CORRECT ALL ERR ORS IN THE PROCEEDINGS UNDER APPEAL AND TO ISSUE, IF NECESSARY , APPROPRIATE DIRECTIONS TO THE AUTHORITY AGAINST WHOSE DECISION THE APPEAL IS PREFERRED TO DISPOSE OF THE WHOLE OR ANY PART OF TH E MATTER AFRESH, UNLESS FORBIDDEN FROM DOING SO BY STATUTE. 11.1. CONSIDERING THE SUBMISSIONS OF THE LD. DR IN THE LIGHT OF THE ABOVE RATIO, LET US TEST THE TRANSACTION IN THE LIGHT OF THE PROVISIONS OF SEC. 68 OF THE ACT. AS PER SECTION 68 THE INITIAL ONUS IS UP ON THE ASSESSEE TO ESTABLISH IDENTITY, GENUINENESS OF THE TRANSACTION AND THE CAPACITY OF THE LENDER OR THE DEPOSITOR. THE SUBSCRIBERS TO THE SHA RE CAPITAL ARE ALL COMPANIES. THE CONFIRMATIONS OF THE TRANSACTIONS H AVE BEEN RECEIVED BY THE AO BY ISSUING NOTICE U/S. 133(6) OF THE ACT, TH EREFORE, IDENTITY HAS BEEN ESTABLISHED BEYOND ALL REASONABLE DOUBTS NOR T HE REVENUE AUTHORITIES HAVE QUESTIONED THE IDENTITY OF THE SHA RE HOLDERS. THE GENUINENESS OF THE TRANSACTION CAN ALSO BE SAFELY C ONCLUDED SINCE THE ENTIRE TRANSACTION HAS BEEN DONE THROUGH THE BANKIN G CHANNELS DULY RECORDED IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE D ULY REFLECTED IN THE FINANCIAL STATEMENT OF THE ASSESSEE. THE BANK STAT EMENT IS EXHIBITED AT PAGES 101 AND 102 OF THE PAPER BOOK IN WHICH THE TR ANSACTION RELATING TO THE ALLOTMENT OF SHARES ARE DULY REFLECTED . IN TH E INSTANT CASE, THE CAPACITY OF THE SHARE HOLDERS CANNOT BE DOUBTED AS HAS BEEN POINTED OUT ELSEWHERE IN OUR ORDER THAT 98% OF THE SHARE IS HE LD BY IDFC PRIVATE ITA NO.7762/MUM/2012 17 EQUITY FUND-II WHICH IS A FRONT MANAGER OF IDFC LTD ., AND THE CONTRIBUTORS IN IDFC PRIVATE EQUITY FUND-II ARE LIC , UNION OF INDIA, ORIENTAL BANK OF COMMERCE, INDIAN OVERSEAS BANK AND CANARA BANK WHICH ARE PUBLIC SECTOR UNDERTAKINGS. 11.2. NOW THE ONLY POINT OF DISPUTE IS THE NATURE O F TRANSACTION WHICH ACCORDING TO THE REVENUE AUTHORITIES IS BEYOND ANY LOGICAL SENSE AND WHICH IS THE CHARGING OF SHARE PREMIUM AT THE RATE OF RS. 490/- PER SHARE. ACCORDING TO THE REVENUE AUTHORITIES THIS IS A SHAM TRANSACTION . SO FAR TILL NOW, WE HAVE SEEN AND EXAMINED THE SOURCES OF FUNDS. LET US SEE THE APPLICATION OF FUNDS AND WHO ARE THE ULTIMATE BENEF ICIARIES OF THIS SHARE PREMIUM WHICH MAY CLEAR THE CLOUDS OVER THE TRANSAC TION ALLEGED TO BE A SHAM. WE FIND THAT THE ASSESSEE COMPANY HAS INVEST ED FUNDS IN ITS THREE SUBSIDIARY COMPANIES NAMELY (I) GREEN INFRA CORPORA TE WIND LTD. (II) GREEN INFRA WIND ASSETS LTD AND (III) GREEN INFRA W IND FARMS LTD., WHEREIN THE ASSESSEE IS HOLDING 99.88% OF SHARE CAP ITAL WHICH MEANS THAT THE FUNDS HAVE NOT BEEN DIVERTED TO AN OUTSIDER. T HIS CLEARS THE DOUBT ABOUT THE APPLICATION OF FUNDS AND THE CREDIBILITY OF THE COMPANY IN WHOM THE FUNDS HAVE BEEN INVESTED. SINCE THE ASSES SEE ITSELF IS HOLDING 99.88% OF SHARES AND IN TURN THE ASSESSEE COMPANYS 98% OF SHARES ARE HELD BY IDFC PE FUND-II, THIS ENTIRE SHARE HOLDING STRUCTURE CANNOT BE SAID TO GENERATE ANY TRANSACTION WHICH COULD BE SAI D TO BE SHAM. 12. WE HAVE CONSIDERED THE GRIEVANCE OF THE REVENUE FROM ALL POSSIBLE ANGLES AND BY APPLYING THE PROVISIONS OF SEC. 56 OF THE ACT AND AT OUR STAGE WE HAVE GONE TO THE EXTENT OF TESTING THE TRA NSACTION WITHIN THE PARAMETERS OF SECTION 68 OF THE ACT. WE COULD NOT FIND A SINGLE EVIDENCE WHICH COULD LEAD TO THE ENTIRE TRANSACTION AS SHAM. OUR VIEW IS ALSO FORTIFIED BY THE SHARE HOLDING PATTERN AS EXPLAINED TO US AND AS ITA NO.7762/MUM/2012 18 SUBSTANTIATED BY THE MATERIAL EVIDENCE ON RECORD. WE FIND THAT THE SHARE HOLDERS IN ALL THE RELATED TRANSACTION UNDER ISSUE ARE DIRECTLY OR INDIRECTLY RELATED TO THE GOVERNMENT OF INDIA. THEREFORE, CON SIDERING THE ENTIRE ISSUE IN THE LIGHT OF THE MATERIAL EVIDENCE BROUGHT ON RECORD, IN OUR CONSIDERATE VIEW, THE REVENUE AUTHORITIES HAVE ERRE D IN TREATING THE SHARE PREMIUM AS INCOME OF THE ASSESSEE U/S. 56(1) OF THE ACT. IN OUR CONSIDERATE VIEW, FOR THE REASONS DISCUSSED HEREINA BOVE, WE DO NOT FIND IT NECESSARY TO APPLY THE PROVISIONS OF SEC. 68 OF THE ACT. WE, THEREFORE, DIRECT THE AO TO DELETE THE ADDITION OF RS. 47,97,1 0,000/-. GROUND NO. 2 & 3 ARE ACCORDINGLY ALLOWED. 13. GROUND NO. 4 & 5 RELATE TO THE GRIEVANCE OF THE ASSESSEE RELATING TO THE REJECTION OF THE PLEA OF THE ASSESSEE THAT IT H AS COMMENCED BUSINESS AND THEREFORE DISALLOWANCE OF EXPENSES OF RS. 2,51, 94,611/- AND DEPRECIATION OF RS. 1,58,640/- IS UNWARRANTED. 13.1. THE AO HAS DISALLOWED THE EXPENSES CLAIMED BY THE ASSESSEE AND ALSO THE DEPRECIATION ON THE GROUND THAT THE ASSESS EE HAS NOT COMMENCED ITS BUSINESS AND THEREFORE THE EXPENSES ARE OF CAPI TAL IN NATURE. 14. THE LD. CIT(A) CONFIRMED THE VIEW TAKEN BY THE AO HOLDING THAT SINCE THE BUSINESS HAS NOT COMMENCED AND THE ASSET IN QUESTION HAS NOT COME INTO EXISTENCE AND ALSO NOT PUT TO USE, THE AO HAS RIGHTLY HELD THAT ANY EXPENSES TOWARDS SUCH ACQUISITION ARE CAPITAL E XPENSE AND NOT ALLOWABLE U/S. 37(1) OF THE ACT. THE LD. CIT(A) FU RTHER OBSERVED THAT THIS IS ONLY A CONSEQUENTIAL DISALLOWANCE SINCE TH E ASSESSEE HAS NOT COMMENCED ANY BUSINESS ACTIVITY AND THE SAID EXPEN SES ARE NOT INCURRED FOR THE PURPOSE BUSINESS. ITA NO.7762/MUM/2012 19 15. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY OBJEC TED TO THIS ACTION OF THE REVENUE AUTHORITIES AND STATED THAT AS PER THE CERTIFICATE OF COMMENCEMENT OF BUSINESS EXHIBITED AT PAGE-270 OF T HE PAPER BOOK, THE ASSESSEE HAS COMMENCED BUSINESS ON 29.4.2008. THE LD. COUNSEL FURTHER DREW OUR ATTENTION TO THE EXPENSES INCURRED FOR SET TING UP OF THE SUBSIDIARIES, THE DETAILS OF WHICH ARE EXHIBITED AT PAGES 338 TO 344 OF THE PAPER BOOK. 16. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE FINDINGS OF THE LOWER AUTHORITIES. 17. WE HAVE CAREFULLY GONE THROUGH THE ORDERS OF TH E LOWER AUTHORITIES AND THE MATERIAL EVIDENCES BROUGHT TO OUR NOTICE DU RING THE COURSE OF THE ARGUMENT. WE FIND THAT THE REGISTRAR OF COMPANIES HAVE ISSUED CERTIFICATE OF COMMENCEMENT OF BUSINESS ON 29.4.200 8 WHICH IS NOT IN DISPUTE. WE FURTHER FIND THAT THE DETAILS OF ALL TH E EXPENSES HAVE BEEN FURNISHED BEFORE THE AO WHICH WERE INCURRED FOR SET TING UP OF THE SUBSIDIARY COMPANIES. WE HAVE ALSO THE BENEFIT OF GOING THROUGH THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE COMPANY. A PERUSAL OF THE MAIN OBJECTS OF THE COMPANY SHOWS THAT ONE OF THE M AIN OBJECT OF THE COMPANY IS THAT OF FINANCING, INVESTING, SOURCING, OPERATING, GREEN OR CLEAN TECHNOLOGY PRODUCTS AND SERVICES THAT OPTIMIZ E THE USE OF NATURAL RESOURCE OR REDUCE THE NEGATIVE ENVIRONMENTAL IMPA CT OF INFRASTRUCTURE PROJECTS AND/OR RELATED ASSETS. 17.1. CONSIDERING THESE MAIN OBJECTS OF THE ASSESS EE COMPANY, WE FIND THAT THE ASSESSEE COMPANY HAS IN FACT SET UP THREE SUBSIDIARY PRIVATE LIMITED COMPANIES NAMELY (I) GREEN INFRA CORPORATE WIND LTD. (II) GREEN INFRA WIND ASSETS LTD AND (III) GREEN INFRA WIND FA RMS LTD. WE ALSO ITA NO.7762/MUM/2012 20 FIND THAT ONE OF THIS SUBSIDIARY PRIVATE LIMITED CO MPANY HAS STATED GENERATING ELECTRICITY AS PER THE CERTIFICATES GIVE N BY THE TAMILNADU STATE ELECTRICITY BOARD WHICH ISSUE HAS BEEN DISCUSSED EL SEWHERE IN OUR RECORD. CONSIDERING ALL THESE FACTS IN TOTALITY, WE HAVE NO HESITATION TO HOLD THAT THE ASSESSEE HAS COMMENCED ITS BUSINESS AND THEREFO RE IS ELIGIBLE FOR ALL THE LEGITIMATE EXPENSES INCLUDING DEPRECIATION. TH E AO IS ACCORDINGLY DIRECTED TO ALLOW THE EXPENSES SO CLAIMED ALONGWITH DEPRECIATION. GROUND NO. 4 & 5 ARE ACCORDINGLY ALLOWED. 18. GROUND NO. 6 RELATES TO THE TREATMENT OF INTERE ST INCOME ON FIXED DEPOSITS WITH THE BANKS AS INCOME UNDER THE HEAD I NCOME FROM OTHER SOURCES. ACCORDING TO THE ASSESSEE, THE SAME IS TO BE TAXED UNDER THE HEAD INCOME FROM PROFITS AND GAINS OF BUSINESS. 18.1. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAS EARNED GROSS INTERES T INCOME ON BANK FIXED DEPOSITS AMOUNTING TO RS. 6,09,802/- WHI CH WAS SHOWN UNDER THE HEAD PROFITS AND GAINS OF BUSINESS. THE AO WAS OF THE FIRM BELIEF THAT SINCE THE ASSESSEE HAS NOT COMMENCED ITS BUSINESS N OR THE BUSINESS OF THE ASSESSEE IS THAT OF MONEY LENDING, AS SUCH, THE ASS ESSEE HAS KEPT THE UNUSED FUNDS IN THE BANK FDR AND EARNED INTEREST IN COME AND ANY INCOME EARNED PRIOR TO THE COMMENCEMENT OF BUSINESS BY PARKING UNUSED FUNDS IN BANK FDRS PAR TAKES THE CHARACTER OF INC OME FROM OTHER SOURCES. 19. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. 20. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE STR ONGLY OBJECTED TO THE ACTIONS OF THE LOWER AUTHORITIES AND STATED THAT TH E ASSESSEE HAS PARKED ITA NO.7762/MUM/2012 21 FUNDS IN FIXED DEPOSITS FOR A VERY SHORT PERIOD OF TIME THEREAFTER THE MONEY HAS BEEN USED FOR SETTING UP THE SUBSIDIARIES . THE LD. COUNSEL DREW OUR ATTENTION TO PAGE-357 OF THE PAPER BOOK SHOWING THE STATEMENT OF FIXED DEPOSITS. IT IS THE SAY OF THE LD. COUNSE L THAT CONSIDERING THE PERIOD OF DEPOSIT, THE INTEREST EARNED ON SUCH DEPO SIT SHOULD BE TAXED UNDER THE HEAD BUSINESS INCOME. 21. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE FINDINGS OF THE LOWER AUTHORITIES. 22. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOW ER AUTHORITIES AND THE MATERIAL EVIDENCE BROUGHT ON RECORD AND AS POIN TED OUT BY THE LD. COUNSEL WHICH IS EXHIBITED AT PAGE-357 OF THE PAPER BOOK. WE FIND THAT FIXED DEPOSIT OF RS. 3.5 CRORES WAS PURCHASED FOR ONLY ONE DAY ON WHICH THE ASSESSEE EARNED INTEREST OF RS. 38,490/-. THE SECOND FIXED DEPOSIT OF RS. 1.50 CRORES WAS PURCHASED ON 18.8.2008 AND ATTA INED MATURITY ON 15.9.2008. MEANING THEREBY, THE PERIOD OF HOLDING IS ONLY 28 DAYS ON WHICH THE ASSESSEE EARNED INTEREST AT RS. 63,114/-. THE THIRD FIXED DEPOSIT OF RS. 2 CRORES WAS PURCHASED ON 18.8.2008 AND ATTA INED MATURITY ON 19.11.2008. MEANING THEREBY THAT IT WAS HELD FOR 9 0 DAYS ON WHICH THE ASSESSEE EARNED INTEREST AT RS. 5,08,197/-. CONSID ERING THE PECULIAR FACTS OF THE CASE, IN THE LIGHT OF THE HOLDING PERIOD, IN OUR CONSIDERATE VIEW, THE INTEREST EARNED IS TO BE TAXED UNDER THE HEAD BUSIN ESS INCOME. FOR THIS WE DRAW SUPPORT FROM THE DECISION OF THE HONBLE JURI SDICTIONAL HIGH COURT IN THE CASE OF CIT VS INDO SWISS JEWELS LTD. 284 IT R 389 AND CIT VS LOK HOLDINGS AND ALSO ANOTHER DECISION OF THE JURIS DICTIONAL HIGH COURT IN THE CASE OF CIT VS PARAMOUNT PREMISES PVT. LTD. GROUND NO. 6 IS ACCORDINGLY ALLOWED. ITA NO.7762/MUM/2012 22 23. GROUND NO. 7 RELATES TO THE LEVY OF INTEREST U/ S. 234B AND 234D OF THE ACT. THE LEVY OF INTEREST IS MANDATORY. IN T HE INSTANT CASE, IT WOULD BE CONSEQUENTIAL, THEREFORE, THE AO IS DIRECTED TO LEVY INTEREST AS PER THE PROVISIONS OF LAW. 24. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23.08.2013 ,%8 5 . +% 9 :, ; 23.8.2013 5 B SD/- SD/- (D. MANMOHAN ) (N. K. BILLAIYA ) !'# /VICE PRESIDENT %+ ,- / ACCOUNTANT MEMBER MUMBAI; :, DATED 23 / 08/2013 . . ./ RJ , SR. PS ,%8 5 26' C%'.6 ,%8 5 26' C%'.6 ,%8 5 26' C%'.6 ,%8 5 26' C%'.6 / COPY OF THE ORDER FORWARDED TO : 1. /1 / THE APPELLANT 2. 23/1 / THE RESPONDENT. 3. D ( ) / THE CIT(A)- 4. D / CIT 5. 'EB 26 , , / DR, ITAT, MUMBAI 6. B F / GUARD FILE. ,%8 ,%8 ,%8 ,%8 / BY ORDER, 3'6 26 //TRUE COPY// ! !! ! / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI ITA NO.7762/MUM/2012 23 FIT FOR PUBLICATION (D. MANMOHAN ) (N.K. BILLAIYA ) V P AM