Premium is abnormally high as per test of human probabilities is not sufficient for its taxation

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Premium is abnormally high as per test of human probabilities is not sufficient for its taxation

Premium is abnormally high as per test of human probabilities is not sufficient for its taxation

An important judgement was delivered by Hyderabad ITAT which held that the fact that the premium is abnormally high as per test of human probabilities is not sufficient for its taxation 

AO is duty bound has to lift the corporate veil & determine whether any benefit is passed on to the shareholders/directors as such.

Directions is given to AO to establish whether assessee company was used as a vehicle to pass on the benefit to shareholders/directors .

The case will be very useful where high premium received is brought to tax net in the hands of the number of companies.

IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH “B”, HYDERABAD

BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER

ITA Nos. 696 & 697/Hyd/2014
Assessment Year: 2009-10 & 2010-11

Bharathi Cement Corporation vs. Asst. Commissioner of
Pvt. Ltd., Hyderabad. Income-tax, Circle – 2(3),
Hyderabad.
PAN – AADCR 3079 G

(Appellant) (Respondent)

Assessee by : Shri Nageswar Rao
Revenue by : Smt. M. Kiranmayee

Date of hearing 08/06/2018
Date of pronouncement 10/08/2018

O RDE R

PER S. RIFAUR RAHMAN, A.M.:

Both these appeals filed by the assessee are directed against
the orders, both, dated 25/02/2014 of CIT(A) – III, Hyderabad for AYs
2009-10 & 2010-11.

2. Briefly the facts as taken from AY 2009-10 are, assessee is a
company engaged in the business of manufacture and sale of cement
under the name Bharathi Cement. It filed its return of income f or the
AY 2009-10 on 30/09/2009 declaring total income of Rs.2,91,01,250/ -.

2.1 During this AY, assessee has offered income of Rs.
2,91,01,250/- as ‘income from other sources’ on account of interest
earned on fixed deposits and it did not commence its bus iness during
this AY, hence, there is no income form the head ‘income from
business or profession’.

2.2 During the assessment proceedings, AO noted that assessee
was incorporated in the year 1999 as the company with limited
liability and initially it is registered as Raghuram Cements. The name
of the company was changed to the present name in August’2008.
The assessee has its manufacturing unit established at Nallalingayapalli Village, Kamalapuram Mandal, Kadapa District, A.P. with a licensed capacity of 5 million tonnes per annum. The details of shareholders and directors of the company are as under:

Sri YS Jagan Mohan Reddy 66.43% equity
M/s Silicon Builders (P) Ltd. 33.15% equity
(company owned and controlled by Shri YS Jagan Mohan
Reddy)

Directors

S/Shri YS Jagan Mohan Reddy
Harish C Kamarthy
J Jagan Mohan Reddy
Ravinder Reddy
V.R. Vasudevan

2.3 During the current AY, the assessee issued 0% convertible
preferential shares with a face value of Rs. 10/ – per share and a
premium of Rs. 1,440/- per share in a private placement to the
following investors as detailed below:
Name and No. of Rate at Amount of Share Share Total
postal shares wh ich share premium allotted on inv estment
address of allotted allotted capital money (Rs.)
the allotted
shareholde r (Rs.)
Dalmia 1,37,93 0 1,450 13,79,300 19,86,10,200 20,00,00,000
cements Ltd.,
Ne w Delhi
India 2,09,14 7 1,450 20,91,470 30,11,71,680 705 30,32,63,855
Cements
Ltd., Chenn ai
Suguni 1,37,93 1 1,450 13,79,310 19,86,20,640 50 20,00,00,000
Constructions
Pv t. Ltd., Hyd
(compan y
belon ging to
Sri
Nimmgadd a
Prasad
Total 4,85,00 8 4,350 48,50,080 69,84,02,520 755 70,32,63,855
3
ITA Nos. 696 & 697/Hyd/14
Bharathi Cement Corporation Pvt. Ltd.

2.4 AO observed that the above investment made by the investors
are not technical investments rather in an arrangement between the
investors and directors of the assessee company in order to pass on
the funds through the assessee, this is a method adopted by t he
directors to pass on the contracts and other facilities to the
beneficiaries i.e. investors as directors were influential persons in
the, then, State Govt of A.P. To investigate the above investments,
AO issued summons u/s 133(1) to the above investors and the senior
officers of the company appeared before the AO and recorded the
statement. However, none of them agreed that they have invested
under any sort of influence. AO brought on record various incidences
in which the above investors have benef itted from the State Govt.
policies and treated the above receipt of share premium by the
assessee as income of the assessee u/s 28(iv) of the Act.

3. Aggrieved by the above order of AO, the assessee preferred an
appeal before the CIT(A).

4. During the course of appeal proceedings, the assessee filed
additional evidence and the CIT(A) sent the same to the AO for a
remand report. AO along with remand report , also submitted
additional information which was collected by him subsequent to
passing of the assessment order, which is related to subsequent
findings in search operation in the case of Dalmia Bharat Enterprises
on 21/01/2012. Assessee was given a copy of such information and
also assessee was asked to submit its argument on all the issues
before the AO, so that a comprehensive remand report can be
submitted by the AO. Accordingly, AO submitted remand report.

5. Ld. CIT(A) issued a notice of enhancement to the assessee on
31/01/2014 to show cause as to why the entire receipt from the three
investors amounting Rs. 70.32 crores not to be assessed under the
head ‘income from other sources’. Assessee filed its objections before the CIT(A) and first objection of the assessee was that information
submitted by the AO during the appeal proc eedings was nothing but
additional evidence and as per Rule 46A, only assessee can file
additional evidence and not the AO. On this issue, ld. CIT(A) relying
on the decision in the case of Goel Die Cast Ltd., [2008] 297 ITR 72
(P&H) observed that the CIT(A) is bestowed with powers which are
co-terminus with that of the AO and during the course of appeal
proceedings, CIT can call for information or take cognizance of any
information presented before him even if it is from the AO. He
observed that information supplied by the AO was collected during the
search proceedings in the case of Dalmia Bharat Enterprises and
information was also collected by AO during other assessments and
penalty proceedings in the case of group companies belong to the
assessee and accordingly, dismissed the argument of the assessee
on this count and justified the information submitted by the AO to be
used against assessee.

5.1 On the main issue, i.e. addition on account of share premium
collected by the assessee, assessee has filed th e following
arguments before the CIT(A):

“• The appellant has received money in the form of investments
in preference shares from reputed companies. Their sources
are not in doubt and they have fully confirmed all the
investments. Therefore, section 68 cannot be invoked.

• With regard to section 28 of the income tax act, the appellant
argued that the amount of share premium cannot be treated as
a perquisite under the aforementioned section.

• There is also no applicability of section 56 of the Income Tax
Act in the current year as the section is applicable from the
assessment year 2013-14.

• With regard to the amount of premium, the appellant states
that it is the prerogative of the investor as to what he deems to
be the amount he would like to pay for certain investments. The
appellant has also relied upon the ruling of the honourable ITAT
Mumbai in the case of Green Infra Ltd ITA 7762/2012/Mum.

• Further, it was stated that it is an un -controverted fact that all
the investors have confirmed the investment including the price
at which it was made. It’s also argued that just because an
investor has purchased a controlling stake in another company
and not done so in the case of the appellant, it does not lead to
any conclusion that it was not logical to do so.

• Even if the Nimmagadda group may have been involved in
routing unaccounted money, that can merely lead to taxation of
such money in their hands.

• Further if any investments are considered to be irretrievable
payments, then it is for the assessing officer to apply section 4 1
or any other applicable provision to that investor and not to the
appellant.

* The assessee also argued that there was no doubt about the
fact that the investment in shares inclusive of share premium
was a capital investment and accordingly it could no t be
brought to tax as a revenue receipt.

5.2 After considering the submissions of the assessee and the
information available before him, the CIT(A) confirmed the additions
made by the AO by appraising further evidence before him. He
brought on record, certain schemes and benefits allotted by the Govt.
of AP to the investors like permission for industrial water supply to
the India Cements Ltd., environmental clearances and clearance of
change of land use to subsidiary companies of Dalmia Cements Ltd.
and issue of licence for land for ports and giving clearance for various
plots of land owned by Nimmagadda Group and their relatives.

5.3 By relying on the above incidences of benefits passed on to the
investors in the assessee company, the CIT(A) opined tha t the
investors received huge benefits and largesse from the Govt. of AP
during the period of making investment. He further opined that there
is unmistakable connection between huge concessions received by
the three investors from the Govt. of AP and the investments in
preferential share capital in the assessee company and, therefore, it
is clear from the substantial evidence and documentary evidence uncovered during the search proceedings, referred to that
concessions and so-called investments are not co-incidental, but,
they are definitely part and parcel of one integrated plan for quid -pro-
quo. Further, he made comparison with the investments made in the
assessee company and the shares available in the market of the
same cement industry and brought out f ollowing points before
adjudicating the issue and the same are as under:

• The three companies i.e. M/s Dalmia Cements Ltd, MIs India
Cement Ltd and M/s Suguni Constructions Private limited
together invested Rs. 70,32,63,855/- were allotted 0%
convertible preference shares at a total price of Rs. 1,450/- per
share i.e. at a premium of Rs. 1,440/- per share.

• In other words, by spending far more than t he existing capital
of the appellant company, the so-called investors obtained only
4,85,008 shares i.e. 0.43% of shareholding in the a ssessee
company.

• They also obtained 0% voting power because preference
shares do not carry any voting power.

• The so-called investors also ensured that they would never
get any return on their investment because the shares were 0%
preference shares.

• Not only that, if and when the appellant company became
profitable, these three investor companies would not gain an y
return because dividend would be given only to the equity
shareholders.

• Further, the investor companies had provided 99.4% of their
money to the appellant as premium i.e. this amount would never
be counted whenever any return was to be given and the
amount would never be returned back to’ these investors.

. Normally, investments are made at a premium when it is
understood after due diligence that the future returns would be
such that in spite of the premium the return would add wealth in
real terms to the investor.

• There is no evidence of any due diligence having been
conducted by the three investing companies.
7
ITA Nos. 696 & 697/Hyd/14
Bharathi Cement Corporation Pvt. Ltd.

• In the current case, the investments were abinitio dead
because there was never any hope of any return on them and
neither there was any possibility of the original investment
being returned back.

• In the report sent by the assessing officer dated 14/06/2013,
the details of the average share price of the top seven cement
company in the country is compared. This chart is reproduced
below:-

S.No. Name of th e Share prices of the Cement companies during the Sales
company relev ant period of inv estment turnov er
May/June July 2008 August Nov ember duri ng
2008 2008 2008 2008 -09
in
Crores.
1 ACC 628.00 533.60 626.00 405.00 7474.15
2 Ultra Tech Cement 627.00 535.00 635.00 318.00 6436.96
3 Ambuj a Cements 81.90 82.00 81.00 56.50 7100.00
4 Birla Ceme nts 180.00 161.00 187.00 94.00 2057.89
5 JK Cements 139.00 125.00 131.00 50.00 1502.46
6 KCP Cements 32.80 26.00 30.18 13.25 405.26
7 Madras Ceme nts 121.25 125.00 133.20 69.25 2538.50
8 India Cements 121.25 125.00 133.20 69.25 2538.50
Ltd.

5.4 The CIT(A) adjudicated the issue by observing as under:

“6.15 In the present circumstances, the situation and conditions
warrant that the test of human probability be applied and the
real should be unearthed from the cloak of the apparent. As
discussed in detail supra, the entire set of transactions smacks
of non-genuineness and is absolutely contrary to normal human
behaviour, especially in case of thre e companies.

6.16 From above it is clear that the entire amounts received in
the form of preference share payments as well as the “premium”
are in the nature of income. They are not exempt under any
section of the Income Tax Act. Thereafter, it is seen that the
fact that these transactions have been classified as “Preference
Shares” and “Premium” does not mean that these receipts are
in the form of a Capital receipt. The entire classification is done
with a motive for tax evasion. As has already been discussed in
detail, the entire amount has been paid as a quid pro quo for
the favours which the assessee has has obtained for these
persons from the Andhra ‘Pradesh Government. No equity of
the assessee company has been given to these people and they
have not received any rights on the income or assets and have
0% voting rights. The entire money has been given and
forgotten. By no stretch of imagination can such transact ions be
classified as genuine investment in equity as the equity
structure of the appellant remains unchanged. Therefore the
amounts received by the appellant are in the nature of a Revenue Receipt, to be classified as Income of the year. Since
the income is not in the nature of a business or salary or capital
gains, it has to be classified in the resultant category of
“Income from other sources”.

6.17 The assessee has also argued during appeal proceedings
that if at all the additions are to be made, they should be in the
hands of Mr. Jagan Mohan Reddy, in his personal capacity and
not in the hands of the assessee company. This argument is not
valid because the entire payments are received in the hands of
the assessee.

6.18 Given the above facts and circumstances and applying
the test of human probabilities, I hold that the entire amount of
70,32,63,855/- received by the assessee from the three
companies referred to supra was in the nature of “Income from
Other Sources” to be assessed as such u/s 56 of t he Income
Tax Act. The addition made by the assessing officer on account
of only the share premium is enhanced as such. ”

6. Aggrieved by the order of CIT(A), the assessee is in appeal
before us raising the following grounds of appeal:
” 1. The Learned Commissioner of Income -tax (Appeals)-III,
Hyderabad (“Ld. CIT-A”) has erred in law as well as on facts
while:

a. Confirming addition of Rs.69,84,11,520/- towards share
premium on shares allotted in Assessment Year (“AY”) 2009 -10
u/s 56 of the Income Tax Act, 1961 (“the Act”);

b. Enhancing income by Rs.48,52,335/ – u/s 56 of the Act
towards face value of the shares allotted in that year.

2. The order of the Ld. CIT-A is based on surmises, conjectures
and presumptions and does not take int o consideration
extensive evidence and material

3. The impugned order selectively relies on incomplete
investigations which have not reached finality and reaches
incorrect, unsubstantiated and unlawful conclusions.

4. The impugned order is completely erroneous on facts and in
law including pages 31 to 34 of the same., is a bundle of
contradictions and several inconsist ent, contradictory and
unsubstantiated reasons are cited and the entire decision in
making process is completely vitiated . The conclusions
reached are incorrect and deserve to be set aside / quashed

5. The Ld. CIT-A has neither properly appreciated nor set out
any reason as to why the judgments cited by the assessee were
not applicable to the matter under appeal and has further
placed reliance on judgments whose facts are clearly
distinguishable from those of the Appellant. Further the
conclusions reached are contrary to decisions of Hon’ble
Court(s) and law.

6. The Ld. CIT-A has wrongly applied section 56 to a
transaction that is capital in nature.

7. The impugned order ignores the findings of the AO,
approbates and reprobates while enhancing the income without
citing any valid reasons.

The above grounds are independent and without prejudice to
each other. The Appellant craves leave to add to, alter,
supplement, amend, vary, withdraw or otherwise modify the
grounds mentioned hereinabove at or before the time of
hearing.”

7. Ld. AR of the assessee submitted written submissions, which
are as under:
“Company is not business of providing any type of services and
is engaged in manufacturing and sale of cement. Assessee
company has a distinct legal entity from its
shareholders/promoters.

Representatives from investor companies were examined on
oath and have confirmed making the investment at premium.
Complete details and confirmation of transaction available and
are not contradicted in any why that shares were acquired at a
premium as continues to be reflected in books of accounts of
Appellant Company.

Quantity of Share premium on shares of private company are
not regulated by law and is based on commercial negotiations.
Reference to facts noted at para 40 in recent decision in
Flipkart India ITA 202 /Bang/2018 shows that premium is based
on perception and business expectations of investors and in
present case the investors were admittedly experienced and
knowledgeable managements of listed/ reputed companies.

Share premium money received is fully accounted and
continues to remain in the company to date fully compliant with
section 78 of companies Act. Allegations that the same could be
towards services by promoters are totally baseless and not
supported by any material. Amount of share premium is permitted to be negotiated between investor and company and
there are no restrictions on the quantum. Subsequent
investment in April 2010 made by PARFICM (overseas third
party investor) which has brought in huge premium amount Rs.
1440 CRORES out of Rs. 1780 crores appearing as on date in
the share premium account, was also negotiated and clearly
and undoubtedly much more than share premium determined as
per prescribed methods.

Bharati Cement Corporation Limited as legal entity is disti nct
and separate from promoters or shareholders, presumptions
made in impugned order to the contrary are contrary to settled
principles of law, unlawful, factually baseless and invalid. As no
amount of share premium is alleged or even shown to have
been allowed as pass through by the company there is no basis
for suspicions and wild allegations. Without prejudice, even if
lifting of corporate veil is permissible, the consequence would
not lead to taxation of share premium in the hands of Appellant
Company.

Presumptions of some service/benefits being allowed by
government of state of Andhra Pradesh to investor companies,
even if presumed to be true for argument sake cannot justify
taxation of any amount in the hands of Appellant company, as
being a legal entity Appellant Company was neither in business
of providing such services or was actually involved in any way.

As directed during the course of hearing, we have already filed
bank accounts into which the entire share investment including
share premium was received, and how the same was
subsequently invested into fixed assets owned by company (
cash flow statements), details of profits made by investors from
such investment in Appellant Company. Details provided also
establish that the entire sum and even subsequent share
premium amount received from PARFICM remains invested in
Appellant’s business as on date of this hearing.

Ld. AO brought impugned share premium to tax under Section
28 (iv) and section 68 but the Ld. CIT (A) has confirmed that the
same is taxable under section 56. Department is not in appeal
against Ld. CIT (A) order. The subsequent amendment by way
of section 56 2(viib) effective 1.4.2013 i.e., Ay 1314 cannot be
applied for impugned transactions completed during Ay 9 -10
and 10-11. Facts
on record confirm that section 68 and section 28 (iv) have no application at all.

Hon’ble Tribunal’s pointed query to Ld. DR ( at earlier hearings of these appeals) on limb of sections 56, 28 and 2(24) under which share premium of the nature involved in present appeal ITA Nos. 696 & 697/Hyd/14 Bharathi Cement Corporation Pvt. Ltd.

would be taxable did not result in any response, much less reasonable response.

Appellant referred to and relied upon decisions of courts in Larsco entertainment (ITA 249/HYD/2014), Subhlakshmi Vanijya Pvt. Ltd., (ITA 1l04/KOL/2014), Green infra (ITA 7762/MUM/2012), Vodafone decision 3411TR l(at paras 71 and

619) ,26 ITR 736 Dhirajlal Giridharilal and 66 ITR 725 Ramakrishna pillai (SC) ” .

7.1 Referring to the above, the ld. AR submitted that share premium amount received during AY 2009-10 and 2010-11 by the assessee is capital receipt and cannot be taxed as revenue receipt under the provisions of the Act as applicable to extant period. He, therefore, prayed that the additions made to returned income on this count be deleted in toto. He relied on the following cases:

1. Vodafone India Services Pvt. Ltd., [2014] 368 ITR 1 (Bom.)
2. Credit Suisse Business Analysis (India) Pvt. Ltd. Vs. ACIT, ITA No. 993/Mum/2015, order dated 05/08/2016.

8. The ld. DR also filed synopsis of arguments, which are as under:

” 1.NON-GENUINENESS OF THE TRANSACTION:

1. The promoter of the assessee company was having huge political clout during the period relevant for the assessment year, having regard to the fact that his father was the chief minister of the State of Andhra Pradesh.
2 .. The investing Companies viz., MIs. Dalmia cements, MIs. Gilchrist Investments Pvt Ltd., MIs. Alpha Vill as Pvt Ltd. & MIs. Alpha Avenue Pvt Ltd, have obtained huge benefits from the Government of Andhra Pradesh in various forms. As a gratuitous measure, they have remitted huge amounts into the assessee company in which Mr. Y.S. Jagan Mohnan Reddy is the major shareholder. The said remittance was termed as” investment” and were allotted 0% convertible preference shares.
3. All the investors by spending more than the existing capital of the assessee obtained only 0.3% of shareholding in the company. The investors never had any say in the management ITA Nos. 696 & 697/Hyd/14 Bharathi Cement Corporation Pvt. Ltd.
of the affairs of the Company. They did not have voting power and were not entitled to any profits of the assessee.

4. The subject investment was not done upon obtaining any due diligence.

5. The investments made by Nimmagadda group were always in huge profit fetching areas like medical, media & entertainment, hospitality etc., but for the first time invested at a huge rate in a Cement Company as stated above, that too in an inexperienced Company which did not commence its production and also without expecting any earning/profit out of the subject investment.

6. The said investment is unscientific and not based on any due diligence. There was no guarantee assured by the assessee that the investors would get any gain out of their investment.

7. The directors in fact stated before the A O that they had no say in fixation of the price for shares. When the investors never had any say in fixation of price of the share or in the affairs of the company, it is inconceivable that such a giant business group, have invested in the assessee company with no track record. The so-called investment is an arm-twisted investment.

8. Everybody is entitled to arrange their financial transactions in such manner to avoid tax liability or lessen the burden, but the arrangement should be real and genuine and cannot be sham or make belief arrangement.

9. In the facts of the facts of the present case the entire transaction is a bogus transaction smacks of non -genuineness.

5 2. LIFTING OF CORPORATE VEIL:

What is apparent is not real. The AO as well as the CIT(A) gave a categorical finding that what is shown is not real. The amounts have been paid as a quid pro quo for the benefits received by the four investors. The payments are kickbacks. The net worth of the assessee was RS.185 Cr. By investing more than the promoters of the assessee, the investors could get only .03% of shareholding in the assessee company. There is direct nexus between the investments made by the so -called investors and the benefits that they derived from the Government of A.P. The sale of shares of the Company were never offered to general public thus what is apparent is not real. The AO, who is entitled to lift the corporate veil to examine the realities behind the legal facade, did so in the instant case. The entire transaction was pushed as genuine.

3.WHETHER THE RECEIPT IS CAPITAL RECEIPT OR REVENUE RECEIPT:

The definition of income as defined under Sec.2(24) of the Act is an inclusive definition. Any receipt which can be described as income is taxable unless it is exempted under the provisions of the Act.

The finding of the AO as well as the CIT(A) is that the subject investment did not go into capital expansion of the company. The investment did not result in any change in capital or equity structure of the company.

The three investors have come and given their money without expectation of any return out of the said investment and lef t the scene. They never wanted to derive any benefit out of the said investment. There was never any obligation on the part of the assessee to part any of its profits in favour of the investors. The entire receipt is cloaked as “Capital receipt”.

8.1. Referring to the above submissions, the ld. DR submitted that the appeal filed by the assessee is devoid of any merit and liable to be dismissed. He relied on the following cases:

1. CIT Vs. L.N. Dalmia, [1994] 207 ITR 89 (Cal.)
2. Sunil Siddharthbai Vs. CIT, 156 ITR 509 (SC)
3. W orkmen of Associated Rubber Industry ltd., 157 ITR 77 (SC)
4. Juggilal Kamlapat Vs. CIT, 73 ITR 702 (SC)
5. CIT Vs. Durga Prasad More, 82 ITR 540 (SC)

9. Considered the rival submissions and perused t he material on record as well as the decisions cited. We noticed that assessee has issued and allotted shares of 0% convertible preferential shares in private placement to three investors. They are well known companies in the industry. These shares were issued with huge share premium and share premiums were determined without any basis. But all the issue and allotment of shares are within the four corners of law. The AO/CIT(A) has not brought on record any issue s with the issue and allotment of shares since these are issued and allotted as per the companies Act and rules that existed at the time of issue and allotment of shares. The determination of share premium may not be
as per industries norms or investor norms but these were fixed and accepted by the investing parties.

9.1 We further notice that AO/CIT(A) has noted the timing of issue and allotment of shares with such huge share premium which aro used suspicion. Accordingly, AO issued summons to the investors and none of the investors had agreed that these were invested under any influence by the shareholder/directors. AO and CIT(A) has brought on record the incidences and circumstantial events to infer that these are quid-pro-quo arrangements between the investors and director of the company. The arrangement and circumstances leading to issue and allotment of shares may draw some doubts that certain benefits may have passed on to the directors. But the question is whether the directors/shareholders have really benefited with this arrangement and the assessee company was used as arrangement to pass on the benefit. The revenue has to prove that the investors have passed on the benefit to the shareholders/directors through this arrangement by bringing cogent material. But the AO/CIT(A) has brought on record so many incidences and alleged benefits which were enjoyed by the investors from the Govt. of AP. But, what is important is that the funds were invested in the company and the company has demonstrated that it has treated the investment as part of share capital fund and also the share premium as part of capital reserve within the company as per the provisions of Companies Act.

Since the assessee is artificial person created by the Statute, we cannot trespass the legal entity. It cannot be trespassed provided the authority has evidence to prove that this legal person was used to pass on the benefit to interested shareholders by lifting the corporate veil. In this case, no such evidence was brought on record rather circumstantial evidence and test of human probabilities were applied to convert the capital transaction as per Companies Act into revenue transaction under Income-tax Act.

9.2 We notice that AO has invoked section 28(iv) to convert the capital receipt as revenue. This section refers to any benefit/perquisite arising from business or exercise of a profession. This capital receipt is not generated in the business whereas ld. CIT(A) confirmed the capital receipt as income from other sources without establishing that this is income of the assessee when the assessee has not even commenced the business.

The alleged receipt is the benefit intended to pass on to the director/shareholdes of the company. W e noticed that this capital investment was received by the assessee as 0% convertible preferential shares. No doubt there is no immediate outflow to the company in terms of dividend but it is convertible in the near future as equity share capital.

There are certain aspects of this investment which certainly raises eyebrows as they are not the best of investment decision like: –

i) no participation in the management considering only 0.43% shares were allotted to outsiders ( no controlling interest is compromised)

ii) without yielding the controlling interest, invest ment of such huge share premium

iii) no basis for issuing shares at such huge premium Apart from this aspect, the investment is legal and within the provisions of Companies Act, 1952.

We are not in a position to accept the contention of the ld. AR that the investors have actually earned the profit by investing in the assessee company. We noticed that the shares were allotted with share premium of Rs. 1,440/ – and the same shares were sold at Rs. 671.20. W e have to compare the same shares which were sold and not compared with the portfolio of investment. W e also noticed that in the subsequent submission , AO found that these shares were sold without having any say by the investors.

All the negotiations were made by the directors and the proceeds were also reinvested in the assessee company as loans etc.

9.3 Again, we also cannot presume or apply test of human probabilities, we are dealing with the business transaction, it has to be based on cogent material. Considering the whole situation, in our considered view, the AO/CIT(A) have restricted themselves by stopping the investigation based on circumstantial evidence and applying test of human probabilities. In order to lift the corporate veil for the purpose of determining whether any benefit is passed on to the shareholders/directors, they have to bring on record proper evidence/cogent material.

We direct the AO to redo the assessment keeping in mind that no doubt the assessee has received this capital receipt and what circumstances which lead to investment is not important but whether the assessee company was used as a vehicle to pass on the benefit to shareholders/directors.

In this regard, we direct the AO to make the assessment as below:

a) We noticed that assessee has declared loss in AY 2010-11 as per Income-tax Act, Rs. 189.76 crores and in cash flow, they are declaring decrease in cash from operating activities to the extent of Rs. 71.94 crores. On careful analysis, it can be seen that assessee received through share capital Rs. 181.99 crores and secured borrowings Rs. 334.47 cores but made investment in fixed assets to the extent of Rs. 370.75 crores . The investment in fixed assets are already covered in secured borrowings, the decrease in cash from operation has to be verified properly.

b) He has to verify whether any benefit is passed on to shareholders/directors through other means as the assessee is declaring huge loss in the initial years of operation itself.

Therefore, this issue is remitted back to the AO for re -verification as per above direction and in simple terms, verify all the funds and cash flow management of the company for both AYs 2009-10 & 2010-11.

AO should not resort to rely on circumstantial evidence or on test of human probabilities but on factual evidence of passing of benefit to the shareholders/directors. Hence, grounds of appeal raised by the assessee are allowed for statistical purposes.

10. As the facts and grounds raised in AY 2010-11 are materially identical to AY 2009-10, following the conclusions drawn therein, the grounds raised in this appeal are also treated as allowed for statistical purposes.

11. In the result, both the appeals of the assessee are allowed for statistical purposes.

Pronounced in the open Court on 10 t h August, 2018.

Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated: 10 th August, 2018

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