The Mumbai bench of the Income Tax Appellate Tribunal has ruled that premium earned on allotment of preference shares by a loss-making entity cannot be taxed. The tribunal said the valuation of shares is not relevant for determining the genuineness of the transaction.
The assessee company Piramal Realty Pvt. Ltd is engaged in the business of real estate and real estate development and incidental services. The AO during the course of assessment proceedings notice from the balance sheet of the assessee for the year under consideration as on 31.03.2012 that the authorized share capital has group up from ₹ 1 lacs to 150 lacs. He also observed that the paid up share capital has gone up from ₹ 1 lacs to 150 lacs. He noticed from the balance sheet that during the year under consideration the assessee has issued 59,850 cumulative compulsory convertible preferential shares (CCPS) of ₹ 10 each to Piramal Estates Private Ltd. (PEPL) for consideration of ₹ 5,98,500 and also charged share premium for the same at ₹ 99,990/- i.e. ₹ 598,44,01,500/-. The AO noted that the assessee company is incorporated only on 14.12.2010 with a share capital of ₹ 1 lacs and it has incurred loss of ₹ 7,59,747/- during the assessment year 2011-12. He also noted that during the year under consideration, the assessee suffered a loss of ₹ 29,11,50,443/- and as a result of the same earning per share is negative. Accordingly, the AO required the assessee to justify such a huge premium of ₹ 99,990/-. According to AO, the assessee is unable to prove the nature and sources of credit as per in the books of account in term of section 68 of the Act and hence, he treated the share premium as unexplained under section 68 of the Act.
The Tribunal bench comprising of Judicial Member Mahavir Singh and Accountant Member N.K Pradhan observed that, “we are of the view that valuation is not relevant for determining genuineness of the transaction for the purpose of section 68 of the Act. We are of the view that CIT(A) has rightly deleted the addition on account of the share premium relying on the decision of Hon’ble Jurisdictional tribunal in case of Green Infra Ltd. Vs. ITO (2013) 145 ITR 240. It is a settled position that what is apparent is real unless proved otherwise. It is a settled legal position that “apparent is real” and the onus to prove that the apparent is not the real is on the party who claims it to be so as held by Hon’ble Supreme Court in case of CIT Vs. Daulat Ram Rawatmull (1973) 87 ITR 349”.
While dismissing the revenue’s appeal, the Tribunal also said that, “the overwhelming evidence proves that the ‘nature’ of receipt is share premium. The audited accounts of both parties, the statutory since it was the department which claimed that the share premium is not in fact so, despite the statutory forms viz. Form 2 for return of allotment and Form 20B for annual return filed with the ROC all show the ‘nature’ as share premium. If the Department wants to contend that what is apparent is not real, it is the onus of the department to prove that it was Assessee’s own money which was routed through a third party. Only then can the provisions of section 68 of the Act be invoked”.
“We have considered the issue and find that this section does not cover Section 68 of the Income Tax Act. Thus, the Legislature does not envisage any sort of valuation for the purpose of section 68 of the Act. Indeed, valuation of preference shares is a completely different exercise as compared to valuation of equity shares. The AO makes the mention of the reserves and loss while challenging the charge of share premium on preference shares. “Reserves” could be relevant for valuing equity shares. They are not relevant for valuing preference shares. Preference shareholders get priority over the equity shareholders in terms of payment of dividend and during winding up. They get only a fixed rate of dividend. The redemption amount depends on the terms of issue. The conversion depends on the terms of issue. The terms of issue are relevant for valuing preference shares. Even the present Rule 11UA of the Income Tax Rules 1962 are applicable only to section 56(2) of the Act, requires valuation of preference shares by the merchant bankers. The AO has not even attempted to do any sort of valuation of preference shares. His addition is based entirely on conjectures and surmises. It is a settled Iaw that the assessment cannot he made on mere suspicion, conjectures and surmises”, the Tribunal also added.
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