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The Assessing Officer (AO) made additions under Section 56(1) of the Income Tax Act by treating the share capital and share premium received by the assessee companies as income. However, the CIT(A) held that Section 56(1) deals with taxing income and not capital receipts like share capital and share premium. The CIT(A) observed that the provisions of Section 56(2)(viib), which deems certain share premium amounts as income, were introduced with effect from April 1, 2013, and cannot be applied retrospectively to the assessment years under consideration.
The ITAT concurred with the CIT(A)'s findings and held that share premium received cannot be considered as income for the years under consideration by invoking Section 56(1). The ITAT relied on the CBDT Circular No. 3/2012 dated June 12, 2012, which clarified that the provisions of Section 56(2)(viib) would be applicable from Assessment Year 2013-14 onwards. The ITAT also referred to the decision of the Bombay High Court in the case of Vodafone India Services Pvt. Ltd. v. UOI, which held that share premium is a capital receipt and does not give rise to income.
The CIT(A) issued a show-cause notice to the assessee to consider taxing the share capital under Section 68 of the Income Tax Act. However, the CIT(A) ultimately held that the identity, creditworthiness, and genuineness of the transactions could not be doubted, and hence, the addition under Section 68 could not be upheld. The CIT(A) sustained a partial addition on account of cash/demand drafts deposited at the fourth channel of source/stage, based on the investigation wing's inquiries.
The ITAT observed that Section 68 does not empower the CIT(A) to make additions, as the power lies with the Assessing Officer. The ITAT relied on various decisions of the Rajasthan High Court and other High Courts, which held that an assessee cannot be asked to explain the source of the source, and the burden is on the Revenue to establish a nexus between the assessee and the source of funds.
The ITAT also noted that the assessee had requested an opportunity to cross-examine certain persons whose statements were relied upon by the Revenue, but the CIT(A) had denied the same. Relying on the decision in the case of Prateek Kothari, the ITAT held that materials gathered and statements recorded behind the assessee's back cannot be used without providing an opportunity for cross-examination.
Consequently, the ITAT deleted the partial addition sustained by the CIT(A) under Section 68, observing that the Revenue is free to initiate proceedings against the concerns that received the cash/demand draft deposits.
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