Sections 28(iv), 68 – The fact that premium is abnormally high as per test of human probabilities is not sufficient. The AO has to lift the corporate veil and determine whether any benefit is passed on to the shareholders/directors.

9. 
Bharathi Cement Corporation Pvt. Ltd. vs. ACIT (Hyderabad) Members: P. Madhavidevi, JM and S. Rifaur
Rahman, AM ITA Nos.: 696 & 697/Hyd./2014 A.Y.s: 2009-10 and 2010-11 Dated: 10^th August, 2018 Counsel for assessee / revenue: Nageswar Rao
/ M. Kiranmayee

Sections 28(iv), 68 – The fact that premium
is abnormally high as per test of human probabilities is not sufficient.  The AO has to lift the corporate veil and
determine whether any benefit is passed on to the shareholders/directors. 

FACTS

During the previous
year relevant to the assessment year under consideration, the assessee company,
filed its return of income declaring total income of Rs. 2,91,01,250.  This income comprised of interest on fixed
deposits which was offered for taxation under the head `Income from Other
Sources’. The Company had not commenced its business activity of manufacture
and sale of cement at its manufacturing unit in Andhra Pradesh and did not have
any income chargeable under the head `Profits and Gains of Business or Profession’.  

The Assessing
Officer (AO) in the course of assessment proceedings observed that the share
capital of the assessee company was held by Y S Jagmohan Reddy (66.43%) and
Silicon Builders (P.) Ltd. (33.15%), a company was owned and controlled by Y S
Jagmohan Reddy.  The directors of the
Company were Y S Jagohan Reddy; Harish C. Kamarthy,  J Jagan Mohan Reddy, Ravinder Reddy and V. R.
Vasudevan. 

During the
previous year relevant to assessment year 2009-10 the assessee company issued
0% convertible preference shares with a face value of Rs. 10/- per share and a
premium of Rs. 1,440 per share on a private placement to 3 investors viz.
Dalmia Cements Ltd., India Cements Ltd., and Suguni Contructions Pvt. Ltd., a
company belonging to Sri Nimmagadda Prasad. 
The aggregate amount received by the company on account of issue of
share capital was Rs. 70.32 crore comprising of 
Rs. 48.50 lakh towards face value of shares issued and Rs. 69.84 crore
towards the amount of share premium. 

The AO observed
that the investments made by the investors are not technical investments but
are an arrangement between the investors and directors of the assessee company
to pass on the funds through the assessee. 
He held that this was a method adopted by the directors, who were influential
persons in the then State Govt. of A.P., to pass on contracts and other
facilities to the beneficiaries.  To
investigate the investments made by the subscribers, the AO issued summons u/s.
133(1) of the Act to the investors and senior officers attended but none of
them agreed that they had invested under any sort of influence. The AO brought
on record various incidences in which the investors (in the capital of the
company) were benefitted from the State Government policies and he treated the above
receipt of share premium by the assessee as income u/s. 28(iv) of the Act.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who based on appraisal of evidence
on record as also further evidence held that the investments made by the
investors and the benefits and concessions received by them from Government of
A.P. were part and parcel of one integrated plan for quid pro-quo. He
also made comparison with the investments made in assessee company and shares
available in the market of same industry and not only upheld the action of the
AO but also enhanced the total income to make addition even for the face value
of the share capital issued.  However, he
held the amounts to be taxable under the head `Income from Other Sources’.

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD

The Tribunal
observed that the assessee had allotted 0% convertible preference shares on
private placement basis to three investors. 
The investors were well known companies in the industry.  The shares were issued at a huge
premium.  While the premium was
determined without any basis, the issue and allotment was within the four
corners of law.  It noted that the AO /
CIT(A) have not brought on record any issues with the issue and allotment of
shares since the allotment was in accordance with the provisions of the
Companies Act and the Rules as they existed at the time of issue and
allotment.  It observed that while the
determination of premium may not be in accordance with the industry norms, it
was accepted by the investing parties. 

The Tribunal
also observed that the arrangement and the circumstances leading to the issue
and allotment of shares may draw some doubts that certain benefits may have
passed on to the directors but the question is whether the directors/shareholders
have really benefitted with this arrangement and the assessee company was used
as an arrangement to pass on the benefit. 
It held that the revenue has to prove that the investors have passed on the
benefit to the shareholders/directors through this arrangement by bringing
cogent material. The Tribunal held that since the assessee is artificial person
created by the statute, we cannot trespass the legal entity. It cannot (sic
can) be trespassed provided the authority has evidence to prove that this legal
person was used to pass on the benefit to the interested shareholders by
lifting the corporate veil. In this case, no such evidence was brought on
record rather circumstantial evidence and test of human probabilities were
applied to convert the capital transaction, as per Companies Act, into revenue
transaction under the Income-tax Act.

The Tribunal
held that it cannot presume or apply test of human probabilities, it observed
that it is dealing with the business transaction, it has to based on cogent
material.  Considering the whole
situation, the Tribunal observed that the AO/CIT(A) have restricted themselves
tby stopping the investigation based on circumstantial evidence and applying
test of human probabilities.  In order to
lift the corporate veil for the purpose of determining whether any benefit is
passed on to the shareholders/directors, they have to bring on record proper
evidence/cogent material. 

The Tribunal
directed the AO to redo the assessment keeping in mind that no doubt the
assessee has received this capital receipt and what circumstances which lead to
investment is not important but whether the assessee company was used as a
vehicle to pass on the benefit to shareholders/directors.