Case Law Details

Case Name : M/s. Subhalakshmi Vanijya Pvt. Ltd. Vs CIT (ITAT Kolkata)
Appeal Number : ITA No. 1104/KOL/2014
Date of Judgement/Order : 30/07/2015
Related Assessment Year : 2009-10
Courts : All ITAT (5316) ITAT Kolkata (418)

Issue of Share at Premium- CIT can revise order u/s 147 by invoking provision of section 263- ITAT Kolkata

Brief of the case:

In these cases there are 18 different assessees who filed appeal before ITAT aggrieved from the order u/s 263 passed by CITs. In original proceedings AO passed orders with nominal additions after investigation by way of summoning various subscribers to share capital of assessee companies. Subsequently, CIT issued notice u/s 263 and found assessment order erroneous and prejudicial to the interest of the revenue. In order to decide the appeals on merits, ITAT examined two broader questions : –

A) Whether the provisions of section 68 can be attracted if share capital with premium is not properly explained by the assessee company?; and

B) Whether the failure of the AO to give a logical conclusion to the enquiry conducted by him gives power to the CIT to revise such assessment order?

ITAT considered the facts and submissions of the assessee and held that the proceedings u/s. 263 of the Act to revise the order passed by the AO u/s. 147 of the Act, are valid and cannot held to be without jurisdiction.

Facts of the case:

  • ITAT found that in all cases 0f 18 different assessee the facts of the case are similar.
  • The facts of M/s Subhlakshmi Vanijya Pvt. Ltd. are that assessee filed its return declaring total income of Rs.1,478/- which was processed u/s 143(1). Subsequently assessee submitted a letter before AO and offered an amount of Rs. 18,449/- for taxation.
  • The AO issued notice u/s 148 and completed the assessment.
  • The AO observed that during the course of reassessment proceedings that the assessee issued fresh share capital of Rs.14,71,800/- on premium of Rs.7,21,18,200/-.
  • Notices u/s 133(6) were issued to eight subscribers to the share capital out of total 21 subscribers. Replies to such notices were received confirming subscription to the equity share capital of the assessee company at premium.
  • After considering the replies of the assessee AO finalized assessment on 29,530/- which include addition of Rs.18,449/- offered by assessee and Rs. 9,600/- on account of preliminary expenses.
  • The CIT after perusing the assessment record, observed that the issue of share capital with huge share premium, was not properly examined by the AO inasmuch as notices were issued u/s 133(6) to only eight subscribers against the total number of 21 subscribers of the assessee company.
  • CIT further noticed that replies in response to notices u/s 133(6) were received in the office of the AO, which appeared to have been prepared by a single person as these were more or less in the same format and language.
  • In this backdrop of the facts, it was opined that the entire exercise of filing confirmations was stage-managed by a single person or a group of persons to complete the formalities of filing confirmations.
  • CIT accordingly directed AO to make a fresh assessment after proper examination of share premium. CIT observed that the AO ought to have conducted thorough enquiry into at least 2-3 layers to reach the source or the real investor.
  • Issue of a share with a face value of Rs.10/- by the assessee company at a premium of Rs.490/- per share required thorough examination by the AO.
  • In case of an another assessee assessment was repened by means of notice u/s 148. During the course of assessment proceedings, it was noticed by the AO that this company had issued shares with face value of Rs.10 at a premium of Rs.190.
  • Notices u/s 133(6) were issued to some of the subscribers. Replies were received. No further inquiries on the question of issue of share capital at premium were conducted.
  • Assessment was finalized on the total income of Rs.20,447 making certain disallowances.
  • The CIT set aside the assessment order on more or less the same reasoning as given in the case of M/s Subhlakshmi Vanijya Pvt. Ltd. (supra) and directed the AO to reframe the assessment fresh on the lines as directed by him in the case of M/s Subhlakshmi Vanijya Pvt. Ltd. (supra).
  • All other assessee companies also issued shares at a huge premium (ranging from Rs.90 to Rs.490 per share having face value of Rs.10) and made investments in the shares of other private limited companies at a very high price. In all these cases, returns were filed with meager income.
  • Some of the assessee took plea of improper or non-service of notice u/s 263 and prayed for quash of order u/s 263 and while in one case it was contended that no proceeding was initiated u/s 263 after the initiation of search.

Contention of the revenue:

  • The AO was found to have not cross-examined the subscribers nor recorded statement of any of the directors of the assessee or subscriber companies.
  • The assessee’s balance sheet reflected investments of Rs.8.80 crore in shares of some other relatively new private limited companies at much higher price than their real worth.
  • The AO failed to carry out proper investigation of the matter. AO failed to took note of a racket under which a large number of companies were floated in identical manner apparently showing to have introduced share capital at a huge premium by rotating the unaccounted money.
  • These cases form part of large number of cases in which share capital is shown to have been introduced by rotating the unaccounted money through various companies or entities. Such introduction of share capital was shown in large number of cases on the basis of dummy companies, which were created solely for the purpose of building up share capital. All these are a planned process of different assessees companies to convert black money into white. The entire level was processed into three levels.
  • In the first level, Company ‘A’ is incorporated on papers, which does not carry out any substantial business activity. Suppose, this company issues ten shares to another dummy company, say X with face value of Rs.1/- at a premium of Rs.49, raising its share capital to Rs.500/-. The sum of Rs.500/- standing on the liability side of the balance sheet of company A is equalized with Investment in shares of Company ‘B’, which is again a paper company, at a much higher price than its real worth. Company ‘B’, in turn, gets Rs.500/- and invests the same in the shares of another dummy private limited company ‘C’, again at a huge undeserving market price. This process goes on as the same amount of Rs.500 is rotated through various dummy companies eventually showing their capital and share premium at Rs.500/- represented by investment in shares of other dummy companies by equal amount of Rs.500/- subject to the deduction of certain expenses incurred or some petty income earned.
  • In the second level, a person, say Mr. Y, intending to convert his black money into white enters into a deal with company X, who is shareholder of company ‘A’. Company X sells its shares of Company A with the purchase price of Rs.500 at its real worth, say, Rs.6 per share. Mr. Y purchasing shares of company A for apparent consideration of Rs.6, pays Rs.494/- in cash and, thus, acquires all the shares of Company ‘A’ with apparent investment of Rs.6/- and real investment of Rs.500/-. Mr. Y retains these shares for a period exceeding one year.
  • In the third level, the operators who have created this web of dummy companies assist Mr. Y in selling the shares of company ‘A’ at Rs.500/- through fictious transactions entered into with Mr. Z. Mr. Y realizes Rs.500/- in cash and brings this amount into circulation. Profit of Rs.494/- [Rs.500(sales price) minus Rs.6(apparent purchase price)] earned by Mr. Y is not chargeable to tax in terms of section 10(38) as it arises from the transfer of a long-term capital asset, being an equity share in a company’. That is how, Mr. Y converts Rs. 494/- from black to white. The shares of company ‘A’ are sold through operators to Mr. Z, who is interested in purchasing share loss. Mr. Z treats the shares of company A either as his stock in trade or Investment, depending upon his requirement. If these shares purchased other appeals of different assessees 16 for an apparent consideration of Rs.500 are held by Mr. Z as stock in trade, then at the end of the year, he will value such stock in trade at market price, say at Rs.10. By doing so, he will show a loss of Rs.490 from the valuation of shares, which will be adjusted against his normal business income to this extent. If Mr. Z treats these shares as Investment, then the operator will help him in selling the shares at their market price of Rs.10. Loss from the sale of Investment, being loss under the head `Capital gain’, will be set off against any other capital gain genuinely earned by Mr. Z. This is the entire mechanism by which Mr. Y, who purchased the shares of Company A has succeeded in converting his black money of Rs. 494 into white. In the same manner, Mr. Y1 and Mr. Y2 etc. convert their black money of Rs.494 into white by purchasing the shares of Company B and Company C etc. The end result is achieved by operators by routing the transactions of shares through several layers of companies, thereby giving colour of genuineness, which in reality is nothing but a camouflage.
  • In the instant appeals, we are concerned with the first level in which share worth Rs.10/- are issued for Rs.500/- and the assessee has also made investment in the shares of other paper companies at huge price, not in conformity with its market worth, and such companies are not carrying on any worthwhile business activity.
  • There are hundreds of appeals having identical issue are pending before Kolkata bench of tribunal.
  • Relying on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Electro House 82 ITR 824(SC), it was contended that the law does not require notice u/s 263 to be served at all.

Contention of the assessee:

  • AO is not empowered to examine any aspect of the issue of share capital with premium in the hands of a company. Relying on the judgment of the Hon’ble Supreme Court in the case of CIT vs. Lovely Exports Pvt. Ltd. (2008) 216 CTR 195(SC), he vehemently argued that no addition can be made in the hands of a company for unexplained or improperly explained issue of share capital.
  • If the share transactions are not genuine, then, the addition can be made u/s 69 in the hands of such shareholders and not u/s 68 in the assessment of the company.
  • The Finance Act, 2012 has inserted a proviso to section 68 w.e.f. 1.4.2013, which only permits the AO to make addition u/s 68 if the assessee company fails to offer an explanation to the satisfaction of the AO in respect of receipt of share capital with premium.
  • With the insertion of the proviso to section 68, the legislature has also brought in an amendment to section 56(2)(viib) inserted w.e.f. 1.4.2013 providing that where a company, not being a company in which the public are substantially interested, 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”.
  • Excess share premium can be charged to tax as income from other sources and the AO is entitled to make addition u/s 68 in respect of unsatisfactory explanation given for the receipt of share capital with premium only from the A.Y. 2013-14.
  • The hands of the AO are tied in AY 2009-10 either to examine the genuineness of share capital with premium in the hands of the company or to tax the excess share premium. It was stated that once the question of issue of shares cannot be examined in the hands of the assessee company, there can be no rationale in the ld. CIT directing the AO to examine the genuineness of share capital in proceedings pursuant to section 263.
  • Hon’ble Bombay High Court in case of Vodafone India Services Pvt. Ltd. Vs. Addl. CIT (2014) 368 ITR 1 (Bom) decided that share premium can under no circumstances be construed as a revenue receipt chargeable to tax.
  • During the course of proceedings u/s 147, thoroughly examined the question of issue of share capital at premium. Not only notices u/s 133(6) were issued to majority of the subscribers, but such notices were also properly responded giving complete details of their identity with PANs etc., and also the sources of investment, being copies of bank accounts from which the monies were invested by them in the assessee company’s share capital.
  • Relying on section 142(1) and 143(2) of the Act, it was stated that it is within the province of the AO to decide that which points he wants to take up for enquiry and to what extent and, as such, the CIT cannot interfere with the same. It was contended that once an enquiry is conducted by the AO, even if inadequate, that precludes the CIT from taking recourse to revision u/s 263.

Held by ITAT:

  • Assessee (Subhlakshmi Vanijya Pvt. Ltd.) issued shares with face value of Rs.10 at a premium of Rs.490/- per share. In this process, the increase in the paid up share capital by a sum of Rs.14,71,800/- was coupled with increase in share premium amounting to Rs.7.21 crore. Its balance sheet depicted investment of Rs.8.80 crore which was also represented by shares of some other private companies at a huge price with trivial backgrounds.
  • On the question of attractibility of section 68 tribunal held that there various judicial pronouncement by Apex Court and various high court which held that it is explicit that the onus u/s 68 can be said to have been discharged only when the assessee proves identity and capacity of the creditor along with the genuineness of transaction to the satisfaction of the AO. All the three constituents (Identity, Genuineness & Creditworthiness) are required to be cumulatively satisfied. If one or more of them is absent, then the AO can lawfully make addition.
  • Assessee cannot take advantage of the decision of Lovely Exports (Supra) in support of his argument that a company issuing shares is not required to discharge the burden cast u/s 68 in respect of share capital and it is relevant to mention that the Hon’ble jurisdictional High Court has recently in the case of CIT Vs. Maithan International (2015) 277 CTR 65 (Cal) dealt with Lovely Exports and also reproduced the relevant part of the Lovely Exports in para 25 of its judgment, reading as under : –

“This reasoning must apply a fortiori to large scale subscriptions to the shares of a public company where the latter may have no material other than the application forms and bank transaction details to give some indication of the identity of these subscribers. It may not apply in circumstances where the shares are allotted directly by the Company/assessee or to creditors of the assessee. This is why this Court has adopted a very strict approach to the burden being laid almost entirely on an assessee which receives a gift.”

  • The amendment to section 68 by insertion of proviso is clarificatory and hence retrospective. The plea taken by assessee on this prospect is rejected being devoid of any merit. The essence of this amendment is that a closely held company is required to satisfy the AO about the share capital etc. issued by it, in the absence of which, an addition u/s 68 can be made in the hands of the company.
  • There is no good reason to find out any parallel between the amendments made to section 68 and section 56(2)(viib) except for the fact that these provisions have been added by the Finance Act, 2012.
  • When source of such share premium in the hands of a shareholder is properly explained to the satisfaction of the AO, that the provisions of section 56(2)(viib) gets triggered.
  • Amendment to section 56(2)(viib) is prospective, but to section 68 is retrospective. In such positionthe assessee is always obliged to prove the receipt of share capital with premium etc. to the satisfaction of the AO, failure of which calls for addition u/s 68.
  • The investigation made by AO is improper and resulting in drawing incorrect assumption of facts, makes the orders erroneous and prejudicial to the interests of the revenue. The action was supported by the ratio laid down in the case of Maithan International (Supra).
  • The operation of sections 142(1)/143(2) comes to an end when an assessment is completed after examining such point or matters which the AO feels to inquire before finalizing the assessment. It is only thereafter that the revisional powers of the CIT u/s 263 can come into play for ascertaining if the AO examined all the relevant points, which ought to have been examined.
  • It is obvious that the extent of enquiry conducted by the AO, being as good as no enquiry, is sufficient in itself to empower the CIT for invoking his jurisdiction u/s 263. Under such circumstances, we cannot cast an impossible burden on the CIT to show the positive leakage of income in concrete terms, when he has simply set aside the assessment order and restored this aspect of the assessment to the file of AO for making a proper enquiry and then deciding.
  • Where the AO fails to conduct an enquiry or proper enquiry, which is called for in the given circumstances, the CIT is empowered to set aside the assessment order by treating it as erroneous and prejudicial to the interests of the revenue. In such circumstances, it is not further required on the part of the CIT to expressly show where the assessment order went wrong.
  • The very fact that no enquiry was conducted or no proper enquiry was conducted in the required circumstances, is sufficient in itself to invoke the provisions of section 263.
  • Replies were sent by the assesses when the CIT had given last opportunities and such opportunities were not availed by them. That apart, not giving a proper opportunity of hearing or any improper service can be no reason for declaring the order u/s 263 void ab initio. The Hon’ble Supreme Court in several judgments including Guduthur Brothers Vs. ITO (1960) 40 ITR 298 (SC), CIT Vs. Jai Prakash Singh (1996) 219 ITR 737 (SC) and Kapurchand Shreemal Vs. CIT (1981) 131 ITR 451 (SC) has held that lack of opportunity is simply an irregularity which does not render the order passed a nullity. In our considered opinion, it is at best an irregularity which will not affect the jurisdiction of the CIT u/s. 263.

Comments by Author:

Hon’ble ITAT while dismissing the appeals filed by various assessees against impugned orders u/s 263 answered and discussed five facts:

i) the enquiry conducted by the AO in such cases can’t be construed as a proper enquiry;

ii) CIT u/s 263 can set aside the assessment order and direct the AO to conduct a thorough enquiry, notwithstanding the jurisdiction of the AO in making enquiries on the issues or matters as he considers fit in terms of section 142(1) and 143(2) of the Act, which is relevant only up to the completion of assessment ;

iii) Inadequate inquiry conducted by the AO in the given circumstances is as good as no enquiry and as such the CIT was empowered to revise the assessment order ;

iv) The order of the CIT is not based on irrelevant considerations and further in the present circumstances, he was not obliged to positively indicate the deficiencies in the assessment order on merits on the question of issue of share capital at a huge premium ;

v) The AO in the given circumstances can’t be said to have taken a possible view as the revision is sought to be done on the premise that the AO did not make enquiry thereby rendering the assessment order erroneous and prejudicial to the interest of the revenue on that score itself.

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Category : Income Tax (27898)
Type : Featured (4025) Judiciary (12073)
Tags : ITAT Judgments (5498) Jagjeet Singh (141) section 147 (454) section 263 (114) Section 68 (223) share capital (39)

0 responses to “Issue of Share at Premium- Modus Operandi of Conversion of Black Money into White”

  1. rkd says:

    VERY INFORMATIVE AND VERY GOOD ANALYSIS,BUT IN KOLKATA WHERE PROFESSIONAL OPPORTUNITIES ARE RARE BECAUSE OF NO INDUSTRIAL OR OTHER DEVELOPMENT,PROFESSIONALS RESORT TO SUCH PRACTICES AND FACTS ARE KNOWN TO ALL,AS ALL OFFICERS/CLERKS ETC ARE HAND IN GLOVE WITH THE OPERATORS AND KNOW THE PRICE FOR SUCH DEEDS WOULD BE PAID BY THE IGNORANT ASSESSEES.HOPE PROFESSIONALS WOLUD LEARN A LESSON FROM THIS DECISION.

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