Bigfoot Retail Solution Pvt. Ltd. Vs ACIT (ITAT Delhi)
It is observed that the assessee submitted before the Ld. AO/CIT(A) that all telephones are either installed at office premises or used by officers and the employees of the assessee company and that usage of telephone/internet is done by employees for official purposes only. It was also submitted that the impugned expenses were incurred in the course of business of the assessee company and that it was not in the nature of personal expenditure. We agree with the above contentions of the assessee. The Ld. AO/CIT(A) made the observation that there was twelve times increase in the expenditure as compared to the preceding year which is disproportionate but that alone cannot be the basis of disallowance. Genuineness of the expenditure has not been doubted. Moreover, the increase in revenue from Rs. 1,21,78,271/- in the last year to Rs. 5,64,16,108/- in this year has been overlooked by both Ld. AO and Ld. CIT(A).
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
The appeal by the assessee is directed against the order dated 27.02.2019 of the Ld. Commissioner of Income Tax (Appeals)- 2, New Delhi (“CIT(A)”) pertaining to the assessment year (“AY”) 2015-16.
2. The assessee is a company engaged in the business of providing IT enabled and BPO services. It filed its return for AY 2015-16 on 15.09.2015 declaring loss of Rs. 2,20,29,872/-. The case was selected for scrutiny through CASS. The assessment was completed on 11.09.2017 under section 143(3) of the Income Tax Act, 1961 (“the Act”) on net loss of Rs. 39,03,530/- resulting in addition of Rs. 9,95,086/- under section 56(2)(viib); addition of Rs. 6,82,055/- due to difference in TDS between ITR and 26AS;
security deposit of Rs. 1,53,20,438/- shown by the assessee; company international system expenses of Rs. 8,89,844/- and telephone and internet expenses of Rs. 2,38,919/-. On appeal, the Ld. CIT(A) allowed part relief. The assessee is in further appeal against sustaining the addition of Rs. 9,95,086/- on account of excess share premium received by the assessee; disallowance of Rs. 8,89,844/- being company international system expense and disallowance of Rs. 1,19,460/- out of telephone and internet expenses and all the four grounds of appeal relate thereto.
3. Ground No. 1 is of general nature.
4. Ground No. 2 relates to addition of Rs. 9,95,086/- on account of excess share premium received by the assessee. During assessment proceedings the Ld. AO raised a query in this regard to which the assessee vide letter dated 24.08.2017 replied that:
“1. 3180 shares have been issued to Nirvana Digital Investment Holding Co. Ltd. which is foreign company and the provisions of section 56(2)(viib) are applicable to the shares issued to resident persons only. Since Nirvana Digital Investment Holding Co. Ltd. is a foreign company, therefore, the provisions of see. 56(2)(viib) are not applicable to the shares allotted to this company.
2. 3180 shares were issued to Nirvana Digital India Fund which is a venture capital fund and as per the first proviso to sec. 56(2)(viib) premium received by a venture capita! undertaking from venture capital company or venture capital fund has been excluded from the rigours of sec. 56 (2)(viib). The assessee submitted a letter dated 27.9.2011 addressed-to DGM, Division of Funds to prove that Nirvana Digital India Fund is a venture capital fund, The body of the letter is reproduced as below:
“We, IL&FS Trust Company Ltd, (ITCL) are acting as trustee to the Patni New Age Trust (the trust), a registered Venture Capital Fund with SEB! having Registration no. IN/VCF/11-12-0216.
In capacity as Trustee to the aforesaid Trust, we are submitting a copy of the Private Placement Memorandum of Nirvana Digital India Fund, which is a scheme of Patni New Age Trust, It is clarified that Nirvana Digital India Fund is the first scheme of Patni New Age Trust.”
The Ld. AO observed that it is clear from the above that the Patni New Age Trust is a Venture Capital Fund (“VCF”) but nowhere it has been mentioned that Nirvana Digital India Fund is a VCF. The assessee has not proved that first proviso to section 56(2)(viib) is applicable. According to him the allowable premium as per Rule 11UA is Rs. 10.07 per share whereas the assessee has received premium of Rs. 322.99 per share. He therefore added excess premium of Rs. 9,95,086/- (3180 x 312.99) to the income of the assessee.
4.1 Before the Ld. CIT(A) the assessee contended that as per section 56(2)(viib) of the Act taxability arises when a company receives consideration exceeding fair market value of shares from resident. As per first proviso to section 56(2)(viib), exclusion has been provided where the consideration of shares is received by Venture Capital Undertaking (“VCU”) from Venture Capital Fund or Venture Capital Company. In the case of the assessee, the share premium was received by Venture Capital Undertaking (VCU) i.e. Bigfoot Retail Solutions Pvt. Ltd. from Venture Capital Fund (VCF) i.e. Nirvana Digital India Fund which is first scheme of Patni New Age Trust. Following documents were produced to substantiate that Nirvana Digital India Fund is Venture Capital Fund:
1) Certificate of registration as Venture Capital Fund issued by SEBI vide No. 11-12/0216 in the name of Patni New Age Trust. Nirvana Digital India Fund is a first scheme of Patni New Age Trust.
2) Letter filed by IL&FS Trust Company Ltd. (Trustee to Patni New Age Trust) with SEBI.
3) Copy of Income Tax return filed by Nirvana Digital India Fund for AY 2015-16 showing that it is registered with No. INVCF 11-12/0216 and claimed exemption under section 10(23FB) of the Act.
4) The financial statement of Nirvana Digital India Fund for the year ended March 2015.
It was contended on the basis of above evidence that Nirvana Digital Fund qualified as Venture Capital Fund, and as per first proviso to section 56(2)(viib) exclusion is provided to Venture Capital Funds, the impugned addition made by the Ld. AO is not correct.
4.2 The contentions of the assessee were not acceptable to the Ld. CIT(A). According to him, the share floating company has to be a Venture Capital Undertaking (VCU) and the purchaser company has to be a VCF. The assessee is not a VCU. It has only received consideration from a VCF. Since the assessee is not a VCU it is not covered by first proviso to section 56(2)(viib) of the Act. Relying on Kerala High Court decision in Sunrise Academy of Medical Specialties (I) (P) Ltd., the Ld. CIT(A) confirmed the impugned addition.
4.3 Aggrieved, the assessee is in appeal before the Tribunal.
4.4 The Ld. AR submitted that the investor in this case was an unconnected party at the point of time when the shares in question were issued. The issue of shares at the same premium i.e. Rs. 322.99 was accepted in the case of Nirvana Digital Holding Co. Ltd. , a foreign company which apparently did not attract the provisions of section 56(2)(viib) of the Act. It was further submitted that the assessee was a “Venture Capital Undertaking” as defined in clause (n) of definitions clause of the (Venture Capital Funds) Regulations, 1996 issued by SEBI. It was emphasized that the Ld. CIT(A) has held the investor to be a Venture Capital Fund, the requirements of the first proviso to section 56(2)(viib) stood satisfied. Hence, the assessee was entitled to be excluded from the applicability of section 56(2)(viib) of the Act.
4.5 The Ld. DR relied on the order of the Ld. AO/CIT(A).
4.6 We have given our careful thought to the rival contentions and perused the material on record. Section 56(2)(viib) inserted by the Finance Act, 2012 w.e.f 01.04.2013 provides that where a closely held company receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income tax under the head “Income from other sources”. However, this provision shall not apply where the consideration for issue of shares is received by a Venture Capital Undertaking from a Venture Capital Company or a Venture Capital Fund. Explanation (b) there-under provides that “Venture Capital Company”, “Venture Capital Fund” and “Venture Capital Undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10.
4.6.1 Clause (a) of Explanation to section 10(23FB) defines “Venture Capital Company” to mean a company which has been granted a certificate of registration, before the 21st day of May, 2012, as a Venture Capital Fund and is regulated under SEBI (Venture Capital Funds) Regulations, 1996 made under the SEBI Act, 1992.
4.6.2 Clause (b) of Explanation to section 10(23FB) defines “Venture Capital Fund” to mean a fund operating under a trust deed registered under the provisions of the Registration Act, 1908 which has been granted a certificate of registration, before the 21st day of May, 2012, as a Venture Capital Fund and is regulated under the Venture Capital Funds Regulations.
4.6.3 Clause (c) of Explanation to section 10(23FB) defines “Venture Capital Undertaking” to mean a Venture Capital Undertaking as defined in clause (n) of Regulation 2 of the Venture Capital Funds Regulations.
4.6.4 Clause (n) of Regulation 2 of the Venture Capital Funds Regulations defines “Venture Capital Undertaking” to mean a domestic company –
(i) whose shares are not listed on a recognized stock exchange in India;
(ii) which is engaged in the business for providing services, production or manufacture of article or things or does not include such activities or sectors which are specified in the negative list by the Board with the approval of the Central Government by notification in the Official Gazette in this behalf.
4.6.5 The negative list as per the Third Schedule of SEBI (Venture Capital Funds) Regulations, 1996 comprises of non-banking financial services with certain exclusions stated therein, gold financing with certain exclusions stated therein, activities not permitted under Industrial Policy of Govt. of India and any other activities which may be specified by the Board in consultation with Govt. of India from time to time.
5. The issue for consideration before us is whether or not the case of the assessee is covered by the exception to clause (viib) of sub-section (2) of section 56 of the Act.
5.1 The assessee vide letter dated 24.08.2017 to the Ld. AO submitted that the assessee received share premium from the following parties :-
