The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has granted relief to Cleartrip holding that the proviso to Section 68 of the Income Tax Act would not be applicable to non-resident investors.
Cleartrip Private Limited was a company engaged in the business of travel agencies and providing travel related services through its Web portal to various customers. It was a wholly owned subsidiary of Cleartrip Inc., Mauritius. Cleartrip Inc., Mauritius was a wholly owned subsidiary of Cleartrip Inc., Cayman Island. Several individuals and private equity funds have invested in Cleartrip Inc. Cayman Island.
Assessee filed its return of income at a loss. The Assessing Officer picked up the return of income for scrutiny and found that the assessee had received a sum as share premium from Cleartrip Inc., Mauritius. The assessee had issued equity shares. The allotment was made to the holding company namely Cleartrip Inc., Mauritius
The Assessing Officer found that the above share consideration had come from Cleartrip IncMauritius, which in turn received the same from Cleartrip, Cayman Island, in which the funds were flowing from the private equity investors from the USA. The Assessing Officer also noted that the assessee company was constantly incurring losses and therefore, ordinary business prudent suggested that none would invest in a company after paying a premium.
He noted that assessee was making constant losses, which were increasing. He noted that the original valuation report was a cryptic two-page report and it did not state the basis of projected figures. As the assessee constantly made losses in increasing trend, the premium per share was not justified. He rejected the same. He also rejected the contention of the assessee that the proviso to Section 68 of the Income-tax Act, 1961 not apply to non-resident investors.
He further held that proviso to Section 56(2) (viib), was also applicable, as assessee had failed to give any justification for the huge premium. Accordingly, the addition was made under Section 68 of the Income Tax Act.
Fereshte D. Sethna, on behalf of the assessee submitted that identical issue arose in case of the assessee for A.Y. 2012-13, 2013-14 and 2015-16 where the addition was deleted. The assessee had proved identity, creditworthiness of the investor holding company and genuineness of the transaction of the share issue to its holding company. Further, the addition was made by disregarding all the evidences placed before the Assessing Officer. He also submitted that the provisions of Section 56 (2) and 68 of Income Tax Act not applicable to a non-resident shareholder.
Manish Sareen, on behalf of the revenue submitted that the money had been routed through Private equity funds in Cayman Island Company, from Cayman Island Company to the Mauritius Company and there from, assessee had received the huge share capital. As the assessee was constantly making losses no prudent person would invest in such loss-making company at premium.
He further submitted that the cash credit was required to be tested every year on the principle of identity, creditworthiness and genuineness of the transaction. He therefore submitted that the assessee had failed to show the same for this year. Therefore, the CIT (A) had clearly erred in deleting the addition based on earlier year’s decision.
The two-member Bench of Prashant Maharishi, (Accountant Member) and Sandeep Singh Karhail, (Judicial Member) observed that it was correctly stated that though the identity of assessee decided in earlier years could be accepted but how the creditworthiness of the investor and genuineness of transaction needs to be tested with respect to each transaction independently.
The Bench dismissed the appeal filed by the revenue holding that the assessee fairly showed their identification, creditworthiness, and the sincerity of the move. An investor who was not a resident was not covered by Section 68 of Income Tax Act. Even in the absence of other evidence, the assessee had independently demonstrated the type and source of the funds held by the non-resident 100% holding company investor.
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