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Tax Publishers Usekiwi Infolabs (P) Ltd. v. ITO [ITA No. 8339/Del/2019, dt. 7-12-2020] : 2020 TaxPub(DT) 5311 (Del-Trib) Receipt of unusually large share premium on preference shares in a start-up entity -- Additions under section 68 *Facts:* Assessee was a start-up and was in receipt of large share premium on compulsorily convertible preference shares (CCPS). The equity share capital of the company was 10000 shares of Rs. 10 each = Rs. 100,000. They issued preference shares 20,000 CCPS of Rs. 10 each at a premium of Rs. 827-50 to a non-resident Mauritian investor called K Start LLC, Mauritius. Thus the total consideration for the issue of CC Preference shares amounted to Rs. 16,750,000. It was the case of the revenue that the said company cannot command so large a valuation even as a start up and that on investigation from the Foreign tax research office details of this K Start LLC its bank account etc. were obtained which revealed that there were just two transactions a receipt of money from one Kalari capital and an investment of money into the assessee. The assessing officer suspecting this, sustained additions of the entire amount of Rs. 16.75 million under section 68 alleging that the assessee has simply only shown the identity of the investor but not their capability to invest such large sums. On appeal, Commissioner (Appeals) sustained the addition. On higher appeal -- Held in favour of the assessee that the investment into K Start LLC was thru a PE investor called Kalari capital and thus their capacity to invest such large sums was proved as they were a reputed angel investor in many other start-ups a well. What is interesting to note is that the assessee's counter that receipt of share premium from a non-resident cannot be taxed under section 56(2)(viib). The ITAT did remark in para no. 19 that nothing prevents assessing officer to make an addition under section 68 if the capacity to invest is not proved. No doubt section 56(2)(viib) cannot fasten additions of share premium in case of receipt of share premium money is from a non-resident for the said assessment year. In this case the genuineness overran the needs of section 68 so no additions could be sustained.

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Usekiwi Infolabs (P) Ltd. v. ITO [ITA No. 8339/Del/2019, dt. 7-12-2020] : 2020 TaxPub(DT) 5311 (Del-Trib)

Receipt of unusually large share premium on preference shares in a start-up entity -- Additions under section 68

Facts:

Assessee was a start-up and was in receipt of large share premium on compulsorily convertible preference shares (CCPS). The equity share capital of the company was 10000 shares of Rs. 10 each = Rs. 100,000. They issued preference shares 20,000 CCPS of Rs. 10 each at a premium of Rs. 827-50 to a non-resident Mauritian investor called K Start LLC, Mauritius. Thus the total consideration for the issue of CC Preference shares amounted to Rs. 16,750,000. It was the case of the revenue that the said company cannot command so large a valuation even as a start up and that on investigation from the Foreign tax research office details of this K Start LLC its bank account etc. were obtained which revealed that there were just two transactions a receipt of money from one Kalari capital and an investment of money into the assessee. The assessing officer suspecting this, sustained additions of the entire amount of Rs. 16.75 million under section 68 alleging that the assessee has simply only shown the identity of the investor but not their capability to invest such large sums. On appeal, Commissioner (Appeals) sustained the addition. On higher appeal --

Held in favour of the assessee that the investment into K Start LLC was thru a PE investor called Kalari capital and thus their capacity to invest such large sums was proved as they were a reputed angel investor in many other start-ups a well. What is interesting to note is that the assessee's counter that receipt of share premium from a non-resident cannot be taxed under section 56(2)(viib). The ITAT did remark in para no. 19 that nothing prevents assessing officer to make an addition under section 68 if the capacity to invest is not proved. No doubt section 56(2)(viib) cannot fasten additions of share premium in case of receipt of share premium money is from a non-resident for the said assessment year. In this case the genuineness overran the needs of section 68 so no additions could be sustained.