Yizumi Precision Machinery (India) Private Limited Vs ACIT (ITAT Ahmedabad)
ITAT Ahmedabad held that the assessee has discharged the onus cast under section 68 of the Act with respect to receipt of share application money. Accordingly, addition under section 68 of the Income Tax Act not sustained.
Facts- The assessee company is subsidiary of M/s Guandong Yuzumi Precision Machinery Ltd Co of China in which 10% shares also held by a person of Indian resident namely Shri Ramesh Vardhan. AO invoked the provisions of section 68 of the Income Tax Act for the credit of share application money received from Shri Ramesh Vardhan for Rs. 1,23,39,500. AO further found that the assessee was required to furnish ITR and computation of income for last 3 years, but the assessee only furnishes ITR for 2 years whereas no detail was furnished regarding genuineness of transaction.
But the assessee only furnishes ITR for 2 years whereas no detail was furnished regarding genuineness of transaction. The AO accordingly held that the assessee failed to discharge the onus cast under section 68 of the Act.
AO as per direction of DRP treated the partial amount of 68,83,170/- as unexplained credit under section 68 of the Act against which the assessee is in appeal before us.
Conclusion- In our considered opinion the assessee company has duly explained the sources of fund in the hand of Shri Ramesh Vardhan. The revenue authority also accepted the partial amount but not accepted source of the other amount only based on surmises and conjecture.
Thus, in view of the above we hold that the assessee has discharged the onus cast under section 68 of the Act with respect to receipt of share application money from Shri Ramesh Vardhan. Therefore, we hereby direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is hereby allowed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned DRP-2, dated 30/05/2022 Mumbai, arising in the matter of assessment order passed under s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2018-2019.
2. The assessee has raised the following grounds of appeal:
1. The Learned ACIT has erred in law and on fact of the case by upholding that the transaction in respect of the share premium is unexplained and has made addition of Rs. 68,83.170/- under section 68 of the Income Tax Act 1961 treating the genuine share premium as Unexplained Share Premium.
2. The Learned ACIT has erroneously added the Transfer Pricing Adjustment amounting to Rs.1,05,96,120 even though the transaction are at arm’s length price only.
3. Learned AO has erred in law and on facts in not properly appreciating and considering various submissions, evidence and supporting documents placed on record during the course of the assessment proceedings and not properly appreciating various facts and law in its proper perspective.
4. Your Appellant reserves the right to add, alter, amend and withdraw any of the above grounds of appeal.
3. The facts in brief are that the assessee company is subsidiary of M/s Guandong Yuzumi Precision Machinery Ltd Co of China in which 10% shares also held by a person of Indian resident namely Shri Ramesh Vardhan. The assessee in the year under consideration issued 1,39,034 fresh shares at a face value of Rs. 100/- and premium of Rs. 400/- per share to M/s Guandong Yuzumi Precision Machinery Ltd Co of China (1,14,355 shares) and Shri Ramesh Vardhan(24,679 shares). The income tax return of the assessee for the year under consideration was selected for limited scrutiny under CASS on account of large volume of Share Premium in the light of section 56(2)(viib) of the Act vide notice dated 22-092019.
3.1 The AO during the assessment proceeding refer the case of the assessee company to TPO under section 92CA of the Act for determination of ALP of International transaction. The TPO in his order made upward TP adjustment of Rs. 1,05,96,120/- on account of purchase of goods/spares from its AE.
3.2 Meanwhile, the AO also invoked the provisions of section 68 of the Act for the credit of share application money received from Shri Ramesh Vardhan for Rs. 1,23,39,500/- (24,679 shares X Rs. 500/- per share) only. The AO found that the assessee was required to furnish ITR and computation of income for last 3 years as well proof of genuineness of transaction. But the assessee only furnishes ITR for 2 years whereas no detail was furnished regarding genuineness of transaction. The AO accordingly held that the assessee failed to discharge the onus cast under section 68 of the Act.
3.3 In view of the above, the AO made draft assessment under section 144C of the Act wherein he made addition of Rs. 1,23,39,500/- under section 68 of the Act and addition of Rs. 1,05,96,120/- being TP adjustment as per the order of the TPO.
4. Against the draft assessment order, the assessee filed objection before the learned DRP and made the following submission.
a) Regarding addition under section 68 of the Act
The assessee before the learned DRP submitted that Shri Ramesh Vardhan is an existing shares holder to whom fresh shares were issue during the year under consideration. Shir Ramesh Vradhan is high income individual declaring average annual income for last 4 years over Rs. 64 Lakh and in the year under consideration declared income of Rs. 1,01,08,046/- only. Shri Remesh Vardhan made investment in the shares out of the fund from opening bank balance, salary income, redemption of mutual fund and temporary loan from friends and relative. The amount of share application money was received through banking channel which can be verified from the bank account of the company and corresponding entry in the bank account of Shri Ramesh Vardhan. The assessee in support of its contention submitted a chart representing the amount credited in the bank of the Shri Ramesh Vardhan and sources of such credit.
b) Regarding TP adjustments:
(i) The assessee before the learned DRP submitted that its return was selected under limited scrutiny to verify the large volume of share premium in the light of the provision of section 56(2)(vii) of the Act or any other relevant section. Thus, the issue of verifying transfer pricing report was outside the purview of the purpose of limited scrutiny. The action of the AO making reference to TPO under section 92CA of the Act is amounting to extension of the scope of limited scrutiny which has been prohibited by the CBDT unless limited scrutiny is converted into complete scrutiny with previous approval of competent authority and after giving opportunity of being heard to the assessee to that effect.
(ii) The notice for initiating assessment proceedings clearly states that issue of the share premium is to be verified in view of applicability of provisions of section 56(2)(vii) of the Act and other relevant provision of the Act. Thus, the return was selected only to verify the issue of fresh shares issued at premium which has been allotted to its AE and local existing share holder. The phrase “any other relevant section” cannot be read as applicability of TP provision requiring necessary verification. The provision of section 92 of the Act which is charging section for transfer pricing clearly used the phrase “any income arises from an international transaction”. The transaction of issuing fresh share to an international AE is not in the nature of income as defined under section 2(24) r.w.s. 56(2)(vii) of the Act. As such, the TPO also worked out ALP at Rs. 5,71,77,900.00 about issue of shares to its holding company but not made any adjustment holding the same that it is not the income of assessee.
4.1 The learned DRP after considering the submission of the AO confirmed the TP adjustment on purchase of goods/spares whereas provided relief for addition made under section 68 of the Act on account of receipt of share application money and premium thereon. The relevant direction of the learned DRP reads as under:
a) Regarding addition under section 68 of the Act
5.3.17 However, we are also of the view that the entire amount of Rs.1,23,39,500/- contributed by Sh ramesh varadan (Rs.24,67,900/- as share capital and Rs.98,71,600/- as share premium) towards the allotment of 24,679 equity shares cannot be trated as unexplained. Therefore, keeping in view the facts and circumstances of the case, as discussed in earlier part of this order, it is our view in that the brought forward balance of Rs.10,43,192.53 and Rs.2,28,407.21 as on 01.04.2017, as appearing in the bank statements of the assessee with ICICI Bank can be considered as explained for the purpose of investment in equity shares issued to Sh Ramesh vardan.
5.3.17 further, the amount credited to the bank account of Sh Ramesh Varadan towards Commission income of Rs.5,96,166/- and salary received from the for the purpose of investment in equity shares issued.
