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Case Law Details

Case Name : ITO Vs Gama Entertainment Systems Pvt. Ltd (ITAT Mumbai)
Appeal Number : ITA No. 7175/MUM/2018
Date of Judgement/Order : 10/06/2022
Related Assessment Year : 2012-13

ITO Vs Gama Entertainment Systems Pvt. Ltd (ITAT Mumbai)

Introduction: The case of ITO vs. Gama Entertainment Systems Pvt. Ltd. heard by ITAT Mumbai centers on the application of Section 68 of the Income Tax Act. The crux is whether the share premium received by the company can be considered unexplained credits. This article provides an in-depth analysis of the proceedings and the tribunal’s ruling.

Detailed Analysis: The Assessing Officer (AO) questioned the substantial share premium received by Gama Entertainment, considering the company’s startup nature and consistent losses. However, the AO explicitly acknowledged the legitimacy and source of funds. The company’s formation by IIT graduates and its status as a startup targeting the online gaming sector were key factors.

The Learned Commissioner of Income-Tax (Appeals) [CIT(A)] further supported the decision, referencing the Hon’ble Bombay High Court’s judgment in Major Metal Ltd. vs. UOI. In Major Metal, the addition was sustained due to unproven transaction genuineness and creditor creditworthiness, unlike Gama’s case.

Crucially, the CIT(A) emphasized that if the AO does not doubt the source of funds, Section 68 applicability diminishes. The contention was that any addition for share premium exceeding market value falls under Section 56(2) rather than Section 68.

Judicial precedents, including Nova Promoters & Finlease and Fair Finvest Ltd., were cited, emphasizing the need to consider case-specific facts. The CIT(A) concluded that without doubting the source, the AO lacked justification for a Section 68 addition.

The tribunal upheld the CIT(A)’s reasoned order, reinforcing that when the AO doesn’t question the source, Section 68 applicability diminishes. Share premium exceeding market value falls under Section 56(2), not Section 68. The decision aligned with principles from relevant judgments and emphasized the importance of case-specific evaluations.

Conclusion: In conclusion, the ITAT Mumbai’s ruling in ITO vs. Gama Entertainment provides clarity on Section 68 applicability. The tribunal’s decision underscores that when the source of funds is not doubted, Section 68 additions lack justification. The case-specific evaluation, considering the startup nature and industry dynamics, reinforces the need for a nuanced approach in such matters.

This ruling contributes to the evolving jurisprudence around share premium and unexplained credits, providing valuable insights for taxpayers and practitioners. Understanding the distinctions between Section 68 and Section 56(2) becomes pivotal in navigating the tax implications of share premiums, particularly in the context of startup ventures.

ITAT held that when the source of fund is not doubted by the Assessing Officer then he is not justified in making addition in terms of section 68 of the Act.

ITAT observed that the company has been found by fresh IIT graduates as a startup company looking to the future potential in online gaming business. The Assessing Officer has given categorically finding that the source of fund was not doubted. The Ld. CIT(A) has also considered the decision of the Hon’ble Bombay High Court in the case of Major Metal Ltd. v. UOI WP No. 397 of 2011 wherein the addition was sustained on the ground that genuineness of the transaction was not proved and creditworthiness of the creditor was also not proved whereas, in the present case the Assessing Officer has accepted the nature and source of funds. In our opinion, when the source of fund is not doubted by the Assessing Officer then he is not justified in making addition in terms of section 68 of the Act. Any addition for receipt of share premium having value more than the market value of the shares could be made in terms o f section 56(2) of the Act and not u/s 68 of the Act. The Ld. CIT(A) has passed a reasoned order and we do not find any error in the same. Accordingly, we uphold the same.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal has been preferred by the Revenue against order dated 05.10.2018 passed by the Ld. Commissioner of Income-Tax (Appeals)-7, Mumbai [in short ‘the Ld. CIT(A)’], for assessment year 2012-13 raising following grounds:

i. Whether on the facts, in the circumstances of the case and as per law, the Hon’ble ITAT was justified in directing to delete the addition of Rs.1,99,99,815/- made u/s.68 of the Income-tax Act, 1961, treating the Share Capital & Security Premium’ received by the assessee as unexplained credits’ in the assessment order, without appreciating that the same is covered by the ratio laid down in the judgment of the Bombay High Court in the case of Major Metals Vs. Union of India?

ii. Whether on the facts, in the circumstances of the case and as per law, the Hon’ble ITAT was justified in directing to delete the addition of Rs.1,99,99,815/- made u/s.68 of the Income-tax Act, 1961, without appreciating that the same is covered by the ratio laid down in the judgment of the Bombay High Court in the case of Major Metals Vs. Union of India wherein the judgment of the Hon’ble Supreme Court in the case of CIT Vs Lovely Exports Pt. Ltd. (2008) 319 ITR 5 (SC) has been duly discussed and distinguished?

iii. Whether on the facts, in the circumstances of the case and as per law, the Hon”ble ITAT was justified in directing to delete the addition of Rs.1,99,99,815/- made u/s.68 of the Income-tax Act, 1961, without appreciating that in the instant case, the amounts which were realized by the assessee claimed to be in the nature of share capital & security premium were not in the context of a public issue of share capital but essentially in the nature of a private placement?

2. Briefly stated, the facts of the case are that the assessee filed its return of income on 30.09.2012 declaring total income ( -) ₹19,27,150/-. This is a company formed by IIT ian i.e. Mr. Puneet Kumar for developing gaming machines as a startup company along with founder of “Indiagames ” Mr. Vishal Gondal i.e. Sweat & Blood Ventures Group. Out of 5000 shares, 4999 equity shares of ₹10/-and one equity share of ₹10/- each were allotted and fully paid to M/s Sweat & Blood Ventures Group and Mr. Puneet Kumar respectively. Thereafter, in view of the prospectus of entering into designing and manufacturing arcade gaming machines, the assessee-company valued its shares at ₹1080.84 as on 31.03.2011. In view of the valuation, the company further invited share capital along with share premium from following entities :

Date No. of Shares applied No.        of shares allotted Name    of   share holder Face value Issue        price with premium Total payment received
15/06/2011 1108 1108 Hope Island Pvt. Ltd. 10 3000.76 33,24,847/-
27/08/2011 559 559 Hope Island Pvt. Ltd. 10 2999.37 16,74,969/-
27/08/2011 4166 4166 GHIOF 10 4166 1,50,00,000/-
Total 1,99,99,816/-

3. The Assessing Officer during scrutiny proceedings asked the assessee to justify the premium charged during the year. According to the Assessing Officer, the assessee -company was a loss making company from the very first year of the operation and such a huge premium was unscientific and unjustified. The Assessing Officer further observed that the share premium collected was parked in the time deposits and was not utilized for business purpose and objects of the share premium received. The Assessing Officer was of the view that accumulated profits of the ass essee -company were brought back in the price of the share premium, therefore, in view of the provision of section 68 of the Income Tax Act, 1961 (in short ‘the Act’), he treated the entire value of the share along with share premium of ₹1,99,99,816/ – as unexplained cash credit u/s 68 of the Act.

4. On further appeal, the Ld. CIT(A) deleted the addition observing that the Assessing Officer has not disputed the source of the funds and only raised doubts on the justification of the share premium.

5. Aggrieved, the Revenue is before the Tribunal raising the grounds as reproduced above.

6. Before us, the assessee has filed a Paper Book containing pages 1 to 224.

7. We have heard rival submissions of the parties and perused the relevant material on record. We find that the Ld. CIT(A) after considering the submissions of the assessee and perusal of the assessment order deleted the additions observing as under:

“4.2 During the course of appellate proceedings, it has been the submission of the assessee that the assessee Company was formed by IITians, Mr. Puneet Kumar and Mr. Vaibhay Goel. The assesse company diluted 28% of stake of company for Rs. 200 lakhs to Non- resident companies. The inward remittance of share capital was reported to the Reserve Bank of India in the appropriate forms. This being first venture of the technocrats / promoters, the question of accumulated black money being brought back to India, does not arise. The money was parked in ICICI bank till the same was utilised towards business and later on the same was used for the business purpose only. It was also submitted by the assessee that in the initial years all start up companies incur heavy losses and the same is funded by investors with issue of shares at premium. In this regard the assessee has cited the examples of some startups like the Ola cabs company’s ANI Technologies Private Limited, Flipkart etc. It was also contended by the assesse that the Parliament consciously has not brought to tax amount received from a non – resident for issue of shares and the capital receipt on account of share premium is not income. Section 68 is not applicable as source of credit is proved and is accepted. It is also contended by the assessee that Section 68 is not applicable as the source of credit is proved and is accepted and the amendment is wef AY 2013 -14 and year under consideration is AY 12 -13.The share application is by Non-resident and section 68 is applicable for resident investor only. Section 56(2Xvib) was not applicable for AY 2012-13 as the said section was introduced w.e.f A.Y 2013-14. Vide notification No. 45 /2016 dated 14.06.2016. The assessee has relied on the case of Nova Promoters & Finlease (P.) Ltd. | 2012 | 206 Taxman 207/19 taxmann.com 217 ( Delhi) and Fair Finvest Ltd | ITA 232 OF 2012 Dated: 22.11.2012 (Delhi).

4.3 Having considered the assessement order of the A0 and the submissions of the assessee, I lind that during the year 2011 -12, the assessee had allotted 4166 shares at face value of Rs. 3600.58 to GHIOF Mauritius and 1667 shares to Hope Island PTE Ltd. at a face value of Rs. I0 and premium of Rs. 3000.76 for 11O8 shares and a premium of 2996.37 for 559 shares. Despite being given proper opportunity by the AO, the assessee was not able to satisfy the AO as to on what basis such a high premium was paid on the shares when the assessee company was making huge losses. Therefore, the AO has made the additions u/s68 of the Act. However, in his assessment order, the AO has recorded a categorical finding that the source of funds was not doubted. It was not the case of the AO that genuineness of transactions or credit worthiness of the creditors was not proved by the assessee. It was also not the case of the AO that the assessee was not a startup company. It is a common knowledge that most of the start up companies make losses in the beginning but their shares are valued at a very high premium because of their potential to make huge profits in the future. The investors in the case of start up companies like the assessee are guided by the future prospects of projects and their potential to earn high incomes. Merely because the assessee company was a loss making company, its shares could not be sold on premium can not be a ground for making additon w/ s 68 of the Act especially when the payers of the premium are non residents and no doubt has been raised as to the credit worthiness etc. of the creditors.

In the case of Major Metals Ltd. (supra) relied upon by the AO, the amount of share application money which had been received earlier as loan and then converted into share application money was added u/s 68 of the Act by the Settlement Commission, mainly on the ground that genuineness of the transaction was not proved and credit worthiness of the creditors was also not proved. However, in the present appeal, that was not the case of the AO. In fact, the A0 had accepted the source of funds

4.3.1 In the case of Nova Promoters & Finlease (P.) Ltd. | 2012 | 206 Taxman 207/19 taxmann.com 217 ( Delhi », it has been concluded that ratio of a decision is to be understood and appreciated in the background of the facts of that case. Thus, where the complete particulars of the share applicants have been furnished to the A.0. and the .O. has neither conducted any enquiry nor has any material in his possession to show that the particulars furnished by the assessee are false and, therefore, cannot be relied upon, in such a case no addition can be made in the hands of assessee.

Further, the High Court of Delhi in the case of Fair Finvest Ltd (ITA 232 OF 2012 DATED 22.11.2012 ( Delhi), has held that attracting the ratio of Lovely Exports (supra) to all cases of share capital without considering the facts, evidences and materials is not understandable. It seems to be justified, as it is necessary that due regard should be given to the facts and circumstances of each case, which generally differ from case to-case and, thus, no standard rule can be applied to all cases ignoring the facts, evidences and materials that form the very foundation of a case.

4.3.2 In view of the above discussion and judicial precedents, I am of the view that the NO was not justified in making additon u/s 68 of the Act when the AO himself was satisfied as to the source of funds and no doubt had been raised by the NO as to (©) genuineness of transaction ii) identity of the creditors and ill) credit worthiness of the creditors. The addition made by the AO is therefore, deleted.”

7.1 We find that the Assessing Officer has mainly doubted the share premium received by the company. We observed that the company has been found by fresh IIT graduates as a startup company looking to the future potential in online gaming business. The Assessing Officer has given categorically finding that the source of fund was not doubted. The Ld. CIT(A) has also considered the decision of the Hon’ble Bombay High Court in the case of Major Metal Ltd. v. UOI WP No. 397 of 2011 wherein the addition was sustained on the ground that genuineness of the transaction was not proved and creditworthiness of the creditor was also not proved whereas, in the present case the Assessing Officer has accepted the nature and source of funds. In our opinion, when the source of fund is not doubted by the Assessing Officer then he is not justified in making addition in terms of section 68 of the Act. Any addition for receipt of share premium having value more than the market value of the shares could be made in terms o f section 56(2) of the Act and not u/s 68 of the Act. The Ld. CIT(A) has passed a reasoned order and we do not find any error in the same. Accordingly, we uphold the same. The grounds raised by the Revenue are accordingly dismissed.

8. In the result, the appeal filed by the Revenue is dismissed.

Order pronounced in the open Court on 10/06/2022.

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