2013 (12) TMI 949 - AT - Income Tax

Assessee wins: Share premium not income under Section 56(1); business commencement and interest income upheld

Green Infra Ltd. Versus Income-tax Officer

The ITAT Mumbai ruled in favor of the assessee, rejecting the Revenue's claim that the share premium was income under section 56(1), holding that the ... Treatment of share premium - additions u/s 68 - Issue of shares sham transaction – Interest Income on Fixed Deposits - Held that – No doubt a non-est company or a zero balance company asking for a share premium of ₹ 490/- per share defies all commercial prudence but at the same time we cannot ignore the fact that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the share holders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land. The subscribers to the share capital are all companies - The confirmations of the transactions have been received by the AO by issuing notice u/s. 133(6) - Identity of shareholders has been established beyond all reasonable doubts - The Revenue authorities have not questioned the identity of the share holders - The genuineness of the transaction can also be safely concluded since the entire transaction has been done through the banking channels duly recorded in the books of accounts of the assessee duly reflected in the financial statement of the assessee - Not even a single evidence could be found which could lead to the entire transaction as sham - The share holding pattern also cannot be said to generate any transaction which could be said to be sham - The share holders in all the related transaction under issue are directly or indirectly related to the Government of India - The Revenue authorities have erred in treating the share premium as income of the assessee u/s. 56(1) – The application of funds would be in the subsidiary companies – Decided in favour of assessee. Commencement of business – Held that:- The assessee company received certificate of commencement of business on 29.04.2008 – The main objects of the company shows that one of the main object of the company is that of financing, investing, sourcing, operating, green or clean technology products and services that optimize the use of natural resource or reduce the negative environmental impact - the assessee company has in fact set up three subsidiary private limited companies - One of this subsidiary private limited company has stated generating electricity as per the certificates given by the Tamilnadu State Electricity Board - All the legitimate expenses including depreciation are allowable – Decided in favour of assessee. Interest on fixed deposit – Held that:- The frequency and holding period of purchase of fixed deposits by the assessee shows that the intention of assessee is to earn interest income – Following CIT v. Indo Swiss Jewels Ltd. [2005 (9) TMI 47 - BOMBAY HIGH COURT] - The interest income is to be taxed under the head business income - Decided in favour of assessee. Issues Involved:1. Treatment of Share Premium as Income2. Commencement of Business and Disallowance of Expenses3. Classification of Interest Income on Fixed Deposits4. Levy of Interest under Sections 234B and 234DDetailed Analysis:1. Treatment of Share Premium as Income:The assessee challenged the addition of Rs. 47,97,10,000/- as share premium to its income. The AO scrutinized the balance sheet and questioned the premium charged on shares, suspecting the transaction lacked commercial substance and was a sham. The assessee provided detailed explanations, asserting that share premium is a capital receipt and not taxable under Section 56(1) of the Act. The AO, however, disallowed the justification, citing the lack of hidden assets or substantial business operations and invoked Section 56(1) to tax the premium as income from other sources. The CIT(A) upheld this view, noting the failure to substantiate the genuineness of the share premium and violations of Section 78 of the Companies Act.Upon appeal, the tribunal observed that the premium was subscribed by IDFC PE Fund-II, a venture capital fund with substantial government involvement, thus negating the sham transaction allegation. The tribunal emphasized that share premium is a capital receipt and cannot be taxed as revenue under Section 56(1). The tribunal also considered the provisions of Section 68 and found that the identity, genuineness, and capacity of the subscribers were established. Consequently, the tribunal directed the AO to delete the addition of Rs. 47,97,10,000/-.2. Commencement of Business and Disallowance of Expenses:The AO disallowed expenses of Rs. 2,51,94,611/- and depreciation of Rs. 1,58,640/- on the grounds that the assessee had not commenced its business. The CIT(A) confirmed this view, holding that expenses towards acquisition are capital expenses and not allowable under Section 37(1).The tribunal found that the assessee had commenced business as evidenced by the certificate of commencement dated 29.4.2008 and the setting up of subsidiary companies. The tribunal noted that one subsidiary had started generating electricity, thus establishing the commencement of business. Therefore, the tribunal held that the assessee was eligible for the claimed expenses and depreciation, directing the AO to allow them.3. Classification of Interest Income on Fixed Deposits:The AO classified interest income of Rs. 6,09,802/- from fixed deposits as income from other sources, arguing that the business had not commenced and the funds were parked in FDRs.The tribunal, however, considered the short holding periods of the fixed deposits and concluded that the interest income should be taxed under the head 'business income.' The tribunal drew support from decisions of the jurisdictional High Court, thereby allowing the assessee's claim.4. Levy of Interest under Sections 234B and 234D:The tribunal noted that the levy of interest under Sections 234B and 234D is mandatory and consequential, directing the AO to levy interest as per the provisions of law.Conclusion:The tribunal allowed the appeal filed by the assessee, directing the deletion of the addition of share premium as income, allowing the claimed expenses and depreciation, and classifying the interest income on fixed deposits as business income. The tribunal also directed the AO to levy interest under Sections 234B and 234D as per the law.