Section 68 not applies to Swapping of shares

ITO Vs Saffron Comtrade Pvt. Ltd. (ITAT Kolkata)

The issue under consideration is that Whether the ld. CIT(A) was correct in deleting the addition made u/s 68?

The company decided to raise its capital by issue of 15325 equity shares by issue of shares of Rs. 10/- each at a premium price of Rs. 1990/- each. The share subscribing company, namely, M/s Jyotika Commercial Pvt. Ltd, who agreed to subscribe 15325 shares of Rs. 10/- each at a premium of Rs. 1990/- each. As per terms of agreement the assessee company agreed to allot 15325 shares of Rs. 10/- with premium of Rs.1990/- each to Jyotika commercial Pvt. Ltd. against handing over its investments in other companies. The assessee also filed copy of agreement with Jyotika Commercial Pvt Ltd for transfer of its share holdings in three other companies as the consideration for allotment of 15325 shares.

At the outset itself, ld Counsel for the assessee submitted before us that section 68 of the Act is not applicable on the facts of the assessee’s case, since no money transaction took place between assessee and share subscribing companies. It is a simple case of shares being allotted in lieu of shares held by the share subscribers. That is, it is just swapping of shares, i.e. shares are exchanged from another shares, therefore, section 68 does not attract in the assessee’s case under consideration.

Considering the above facts and circumstances of the case and respectfully following the aforesaid judicial precedents relied upon hereinabove, ITAT hold that the ld. AO had erroneously invoked the provisions of section 68 of the Act to the facts of the instant case, which, in our considered opinion, are not at all applicable herein. This is a simple case of acquiring shares of certain companies from certain shareholders without paying any cash consideration and instead the consideration was settled through issuance of shares to the respective parties. That is, section 68 of I.T. Act, 1961 does not apply to cases of purchase of share assets and allotment of shares by the appellant when purchase and allotment are under a barter That being so, ITAT decline to interfere in the order passed by the ld CIT(A), his order on this issue is hereby upheld and grounds of appeal raised by the Revenue is dismissed.

FULL TEXT OF THE ITAT JUDGEMENT

The captioned appeal filed by the Revenue, pertaining to assessment year 2012-13, is directed against the order passed by the Commissioner of Income Tax (Appeal)-4, Kolkata, which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (in short the ‘Act’) dated 23/03/2015.

2. Grounds of appeal raised by the Revenue are as follows:

1. Whether the ld. CIT(A) was correct in deleting the addition made u/s 68 of the Act by following the decision of the Hon ’ble Apex Court in the case of CIT vs Lovely Exports P Ltd. and ignoring the decision of Hon ’ble Delhi High Court in the case of CIT vs. Nova Promoters & Finlease P ltd. (2012) 18 Taxmann.com 217 (Del) despite the fact that the facts of the case were similar to the facts the case decided by the Hon ’ble Delhi High Court?

2. Whether the ld. CIT(A) was correct in rejecting the findings of the A.O. that the assessee–company has purposefully failed to discharge its onus of proving the genuineness of transactions and identity and creditworthiness of the subscribers and in not looking into the circumstances as to whether the shares of the company really command astronomically high premium and in relying upon the submission of the assessee-company despite the fact that the onus of proving the genuineness of share application money was lying on the assessee company which remained un-discharge and which was essential condition set by the Apex Court and also by the Hon ’ble High Court in the case of CIT vs. Roseberry Mercantile P Ltd. ?

3. Whether the ld. CIT(A) was correct in not looking into the surrounding circumstances which warrant that the assessee company could not have been able to raise the share capital with unusually high premium with despite the fact that the book value of such shares was negligible?

4. That the appellant craves to add, delete or modify any of the grounds of appeal before or at the time of hearing.

3. At the outset itself, ld Counsel for the assessee submitted before us that section 68 of the Act is not applicable on the facts of the assessee`s case, since no money transaction took place between assessee and share subscribing companies. It is a simple case of shares being allotted in lieu of shares held by the share subscribers. That is, it is just swapping of shares, i.e. shares are exchanged from another shares, therefore, section 68 does not attract in the assessee’s case under consideration.

4. Brief facts qua the issue are that during the year under consideration, the company decided to raise its capital by issue of 15325 equity shares by issue of shares of Rs. 10/- each at a premium price of Rs. 1990/- each. The share subscribing company, namely, M/s Jyotika Commercial Pvt. Ltd, who agreed to subscribe 15325 shares of Rs. 10/- each at a premium of Rs. 1990/- each. As per terms of agreement the assessee company agreed to allot 15325 shares of Rs. 10/- with premium of Rs.1990/- each to Jyotika commercial Pvt. Ltd. against handing over its investments in other companies as detailed below: –

The assessee also filed copy of agreement with Jyotika Commercial Pvt Ltd for transfer of its share holdings in three other companies as the consideration for allotment of 15325 shares.

5. We have heard both the parties and perused the material available on record, we note that only the issue involved is whether the share application money with share premium aggregating to Rs.3,06,50,000/- against transfer of allotment of subscriber’s investment in three other companies invite the mischief of the provisions of section. 68 of the Act or not. We note that during the year the assessee company raised Share Capital of Rs. 1,53,250/- against issue of equity share of 15325 shares @ Rs. 10/- each at a premium of Rs. 1990/- each against handing over of investments in three other companies of the share applicant. Therefore, total share capital raised amounts to Rs. 3,06,50,000/-.

We note that section 68 of the Act is not applicable on the facts of the case, since no money transaction took place between assessee and share subscribing companies. It is a simple case of shares being allotted in lieu of shares held by the share subscribers. Therefore, we note that it is just swapping of shares, i.e. one share is exchanged from another share and therefore section 68 does not attract in the assessee’s case under consideration. For that we rely on the judgment of the Coordinate Bench in the case of M/s Anand Enterprises Ltd. in I.T.A. No. 1614/Kol/2016, order dated 26.09.20 18 wherein it was held as follows:

4. We have heard the rival submissions. At the outset, we find that the assessee had not raised any share capital by receipt of cash consideration in the instant case. The shares were issued for consideration other than cash in lieu of assessee company making investment in shares in some other company. Effectively, the assessee purchased certain shares from the aforesaid six shareholders and instead of paying cash to them, the assessee company issued shares in its own company to those shareholders. Hence the assessee had made investments in shares of another company for which consideration was settled through issuance of its shares to those shareholders. Now the crucial point is whether the provisions of section 68 could be invoked in the instant case for making investment towards share capital. There was no receipt of any sum as provided u/s 68 of the Act in the instant case. It would be pertinent here to refer to the decision of Hon ’ble Supreme Court in the case of Shri H.H. Rama Varma vs. CIT reported in 187 ITR 308 (SC) wherein it was held that ‘any sum’ means ‘sum of money’. We find that ld. CIT(A) had deleted the addition by observing as under:

“6. On consideration of the AR’s submission, especially the portion reproduced above, it is seen that section 68 of I.T. Act, 1961 does not apply to cases of purchase of share assets and allotment of shares by the appellant when purchase and allotment are under a barter system. The AO has not refuted the appellant’s claim that shares were allotted in exchange for acquisition of shares by the appellant from the companies which surrendered such shares to the appellant. Though as per the AO to apply section 68 to make the said addition in the appellant’s hand. Transactions purportedly executed by entry operators involve multiple layers and other complexities, introducing delays in introduction of unaccounted cash/money and multiple players being incorporated entities. Measures taken by the AO in the course of the assessment proceeding falls much short of what is required to be done in such case laws, which have evolved on this issue, call for concerted actions on the part of the AO pinpointing utilization of unexplained/unaccounted/untaxed money and the players and the beneficiaries effectively using the web like scheme to plunder black money. For example introduction and use of black money in the present case may be at a different point of time and in different hands. The AO’s action in the present case cannot be upheld in law. I, therefore, delete the additions and grounds of appeal Nos. 3 & 4 are allowed.”

4.1. We find that the Hon’ble Allahabad High Court in the case of CIT vs. Sohanlal Sin ghania reported in 235 ITR 616 (All) had held in the context of allowability of donation as deduction u/s 80G of the Act that the expression ‘any sum paid’ used in the said section denotes ‘ sum of money paid’. Hence if certain shares were donated by a person, then the same would not fall eligible for deduction u/s 80G of the Act. We also find that the Hon ’ble Jurisdictional High Court in the case of Jatia Investment Company (Co.) vs. CIT reported in 206 ITR 718 (Cal) also supports the case of the assessee herein, wherein it was held as under:

“It is finally emphasised by learned counsel for the assessee that the ultimate result is that the firm becomes a debtor to GB and Co. and the three non-financial companies of the group got discharged. Learned counsel also emphasised that, at the worst, it can be said that the assessee-firm has received valuable assets being the said shares of the equivalent value of the debt taken over by it from the companies, i.e., Rs. 11.20 lakhs.

Therefore, the question of cash credit does not come in, there being no actual passing or receipt of cash. In other words, the transactions are mere book entries. It was contended that the fact that the entries passed through the cash book could not detract from or efface the essential nature of the entries. It was also urged that the entries were passed through the cash book so that the repayment of loans by the said three companies could be established before the Reserve Bank of India. But, according to Shri Bajoria, that does not mean that it amounts to an artifice employed to deceive any authorities, because the transactions showing the amount as received in cash and paid away spontaneously and simultaneously were not actual but only notional. He, however, stated that, as far as the question of section 68 is concerned, the nature of the transactions and the entries clearly show that no cash, in fact, flowed. It was further stressed that the transactions are above board. No outsider is involved. The entries were made in the books of the concerns of the same group. The shares in question were also of the companies of the group. There was no attempt at hiding the transactions. Nor is it the case of any of the parties to the transaction that there was any passing of cash. Every party unequivocally stated that the transactions were carried into effect merely by way of adjustments of the said loans and the share transfers.

Shri A. C. Moitra, the learned advocate for the Revenue, reiterated the grounds on which the Tribunal has affirmed the addition of the amount of Rs. 11.20 lakhs as unexplained cash credit. He particularly emphasised that the assessee ‘s contention that the entries are only adjustment entries is not acceptable, because the adjustment entries are not made through the cash book. It is an accepted principle of accounting that book adjustments and the entries in effecting them are made by journal entries and not cash entries. He urged that the purported motive of the entries being the reduction of loans of the three limited companies does not explain the whole matter, because the entries are cash entries. The fact remains that, at every stage, the parties showed the payments and receipts of cash even when there was no cash available for such entries. This quite justifies the addition as sustained by the Tribunal.

We have perused the assessment order carefully. We find that cash did not pass at any stage though entries were made in the cash book showing payments and receipts ; but since the entries made a complete round, no passing of cash was necessary for the purpose of making the entries. That there was no passing of cash is also admitted by the Income- tax Officer himself. We have already extracted the observation of the Income-tax Officer in paragraph 14 of his assessment order. The Income- tax Officer has clearly opined that all the respective parties did not receive cash nor did pay cash as none had any cash for the purpose. The only point in the assessment order is that the entries not involving the passing of cash should not have found a place in the cash book, but in the ledger account through journal entries. There is another self-contradiction in the Income-tax Officer’s finding that, if there was no real cash entry on the credit side of the cash book, but merely a notional or fictitious cash entry, as admitted by him, there is no real credit of cash to its cash book ; the question of inclusion of the amount of the entry as unexplained cash credit cannot arise.

One of the grounds of the Tribunal for disbelieving the assessee ‘s case is that the adjustment entries were made by notional cash entries with a view to bringing down the debt-and­capital ratio, i.e., that while being discharged of the debt the said companies also jettisoned their assets, i.e., the shares held by them of equivalent sum without achieving the avowed purpose. Here the Tribunal certainly misdirected itself. The ratio to be reduced is of the loan in relation to the share capital and the reserves. Jettisoning the shares had the desired effect of reducing the borrowed capital.

Again, as regards the Tribunal’s refusal to take notice of the directions of the Reserve Bank, it is not correct for the Tribunal to hold that the said document was a new evidence in the true sense of the term. The assessee has been consistently pleading before the lower authorities that the entries had to be made in order to bring the companies in conformity with the said direction. Moreover, the direction of the Reserve Bank is a public document within the meaning of section 74 of the Evidence Act, 1872. Documents of a public nature and public authority are generally admissible in evidence subject to the mode of proving them as laid down in sections 76 and 78 of the Evidence Act.

In our view, the effect and import of the transactions is that the assessee took over the liability of the aforesaid non-financial companies to GB and Co. in exchange for the shares as aforesaid.

In the premises, we answer all the questions, in the affirmative and in favour of the assessee and against the Revenue.”

4.2. It would be pertinent to note that in the instant case, the ld. AO had not doubted the investment made in shares by the assessee company. There is no dispute raised by the ld. AO with regard to number of shares; value thereon invested by the assessee company. We also find that the Co-ordinate Bench decision of Pune Tribunal in the case of Kantilal and Bros. vs. ACIT reported in 52 ITD 412 (Pune Trib.) also supports the case of the assessee.

4.3. In view of the aforesaid observations, in the facts and circumstances of the case and respectfully following the aforesaid judicial precedents relied upon hereinabove, we hold that the ld. AO had erroneously invoked the provisions of section 68 of the Act to the facts of the instant case, which, in our considered opinion, are not at all applicable herein. This is a simple case of acquiring shares of certain companies from certain shareholders without paying any cash consideration and instead the consideration was settled through issuance of shares to the respective parties. Moreover, in the balance sheet of the assessee company in the schedule to share capital, it is very clearly mentioned by way of note that the fresh share capital was raised during the year for consideration other than cash. Hence we hold that provision of section 68 of the Act are not applicable in the instant case and accordingly the entire addition deserves to be deleted which has rightly been done by the ld. CIT(A) which does not require any interference. Accordingly, grounds raised by the revenue are dismissed.

6. Our view is also fortified by the judgment of another Co-ordinate Bench of ITAT, Kolkata’ s decision in the case of M/s Sunglow Dealcom pvt. Ltd. in I.T.A. No. 2178/Kol/2016, order dated 16.11.2018 wherein it was held as follows:

“ 3. We have heard rival contentions. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, we hold as follows:-

4. The undisputed fact in this case is that the allotment of shares were for consideration other than by way of cash. The four companies which applied for allotment of shares, have sold their investment to the assessee company and the assessee company, has as consideration for the purchase of those shares had allotted shares at a premium. It is a case of swapping of shares. The shares were allotted for consideration other than cash. The question is whether under these facts and circumstances Section 68 of the Act, would be attracted.

4.1. The ld. D/R, submits that the premium is not justified and that the ld. CIT(A) was wrong in holding that the assessee has proved the identity, creditworthiness and genuineness of the transaction. He relied on the order of the Assessing Officer. In reply the ld. Counsel for the assessee, submits that each of the above companies have filed replies before the Assessing Officer to the notice issued u/s 133(6) of the Act. He further pointed out that the ld. CIT(A) called for a remand report the Assessing Officer had not disputed the identity, creditworthiness of the share subscribers as well as the genuineness of the transactions. He relied on the order of the ld. CIT(A).

4.2. The undisputed fact is that shares were issued at a premium, as consideration for the purchase of shares from the share applicant companies. This issue is squarely covered by the decision of the Kolkata ‘C’ Bench of the Tribunal in the case of ITO vs. M/s. Anand Enterprises Ltd., ITA No. 1614/Kol/2016 & C. O. No.56/Kol/2016; dt. 26/09/2018, wherein under identical circumstances, at para 4.3. it was held as follows:-

“4.3. In view of the aforesaid observations, in the facts and circumstances of the case and respectfully following the aforesaid judicial precedents relied upon hereinabove, we hold that the Id. AO had erroneously invoked the provisions of section 68 of the Act to the facts of the instant case, which, in our considered opinion, are not at all applicable herein. This is a simple case of acquiring shares of certain companies from certain shareholders without paying any cash consideration and instead the consideration was settled through issuance of shares to the respective parties. Moreover, in the balance sheet of the assessee company in the schedule to share capital, it is very clearly mentioned by way of note that the fresh share capital was raised during the year for consideration other than cash. Hence we hold that provision of section 68 of the Act are notapplicable in the instant case and accordingly the entire addition deserves to be deleted which has rightly been done by the Id. CIT(A) which does not require any interference. Accordingly, grounds raised by the revenue are dismissed.”

4.2. The Hon’ble Jurisdictional High Court in the case of Jatia Investment Co .v. Commissioner of Income-tax [1994] 206 ITR 718 (CAL.) held as follows:-

“Section 68 of the Income-tax Act, 1961 – Cash credits – Assessment year 1976- 77 – Partners of assessee-firm were members of one ‘J’ group running several businesses and industries – Accounts of assessee-firm showed that it had borrowed certain amount from GB, a proprietary concern of one of its partners JM, which was invested in purchase of shares – ITO found that GB had no cash balance to advance said amount to assessee – He, thus, concluded that source of funds for purchase of shares by assessee was not explained, and consequently, assessed that amount as income from undisclosed sources – It was contended by assessee that notional cash entries were made to reduce indebtedness of three companies of ‘J’ Group to GB in order to comply with certain directions of RBI – Assessee-firm substituted three companies of ‘J’ Group as debtor to GB – It was further stated that question of cash credit did not arise, there being no actual passing or receipt of cash but transactions were mere book entries – Whether, in aforesaid circumstances, effect and import of transaction was that assessee took over liability of aforesaid three companies to ‘GB’ in exchange for shares and, therefore, amount of loan in question could not be treated as assessee ’s income from undisclosed sources – Held, yes”

4.3. Recently, the Hon ’ble Madras High Court in the case of V. R. Global Energy (P.) Ltd. v. Income-tax Officer, Corporate Ward 3(4), Chennai [2018] 96 taxmann.com 647 (Madras) while dealing with a case where cash credit towards share capital were admittedly, only by way of book adjustments and no actual cash was received towards share subscription money held as follows:-

“25. However, the second question is answered in favour of the assessee and against the Revenue by the judgment of the Division Bench of this Court in Electro Polychem Ltd., (supra) and Steller Investment Ltd., (supra).

26. This case is distinguishable from the case of CIT v. Lovely Export (P.) Ltd. [2008] 216 CTR 195 (SC) in that the transactions were only book transactions, and there was no cash receipt. The decisions in (i) CIT v. Focus Exports (P.) Ltd. [2014] 51 taxmann.com 46/228 Taxman 88 (Delhi) (Mag.); (ii) CIT v. Globus Securities & Finance Pvt. Ltd. [2014] 41 taxmann.com 465/224 Taxman 237 (Delhi); (iii) Onassis Axles (P.) Ltd. v. CIT [2014] 364 ITR 53/224 Taxman 80 (Mag.)/44 taxmann.com 408 (Delhi); (iv) Olwin Tiles India (P.) Ltd. v. Dy. CIT [2016] 382 ITR 291/237 Taxman 342/66 taxmann.com 8 (Guj.); (v) B.R. Petrochem (P.) Ltd. v. ITO [2017] 81 taxmann.com 424 (Mad.); and (vi) Rajmandir Estates (P.) Ltd. v. Pr. CIT [2016] 386 ITR 162/240 Taxman 306/70 taxmann.com 124 (Cal.), cited on behalf of the respondent are distinguishable, in that the cash credits towards share capital were admittedly only by way of book adjustment and not actual receipts which could not be substantiated as receipts towards share subscription money.”

5. Applying the propositions of law laid down in the above cases to the facts of this case, we uphold the order of the ld. First Appellate Authority and dismiss this appeal of the revenue.”

7. Considering the above facts and circumstances of the case and respectfully following the aforesaid judicial precedents relied upon hereinabove, we hold that the ld. AO had erroneously invoked the provisions of section 68 of the Act to the facts of the instant case, which, in our considered opinion, are not at all applicable herein. This is a simple case of acquiring shares of certain companies from certain shareholders without paying any cash consideration and instead the consideration was settled through issuance of shares to the respective parties. That is, section 68 of I.T. Act, 1961 does not apply to cases of purchase of share assets and allotment of shares by the appellant when purchase and allotment are under a barter That being so, we decline to interfere in the order passed by the ld CIT(A), his order on this issue is hereby upheld and grounds of appeal raised by the Revenue is dismissed.

8. In the result, the appeal of the revenue is dismissed.