2019 (8) TMI 1665 - AT - Income Tax

Tribunal upholds decision on share capital raising, Section 68 not applicable

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that Section 68 of the Income Tax Act, 1961 was not applicable as no cash ... Addition u/s 68 - whether the share application money with share premium against transfer of allotment of subscriber's investment in three other companies invite the mischief of the provisions of section. 68 of the Act or not? - HELD THAT:- We note that during the year the assessee company raised Share Capital of ₹ 1,53,250/- against issue of equity share of 15325 shares @ ₹ 10/- each at a premium of ₹ 1990/- each against handing over of investments in three other companies of the share applicant. Therefore, total share capital raised amounts to ₹ 3,06,50,000/-. We note that section 68 of the Act is not applicable on the facts of the case, since no money transaction took place between assessee and share subscribing companies. It is a simple case of shares being allotted in lieu of shares held by the share subscribers. Therefore, we note that it is just swapping of shares, i.e. one share is exchanged from another share and therefore section 68 does not attract in the assessee’s case under consideration. See M/S. SUNGLOW DEALCOM PRIVATE LIMITED. [2018 (11) TMI 1821 - ITAT KOLKATA] and M/S ANAND ENTERPRISES LTD. [2018 (9) TMI 1779 - ITAT KOLKATA. AO had erroneously invoked the provisions of section 68 of the Act to the facts of the instant case, which, in our considered opinion, are not at all applicable herein. This is a simple case of acquiring shares of certain companies from certain shareholders without paying any cash consideration and instead the consideration was settled through issuance of shares to the respective parties. That is, section 68 of I.T. Act, 1961 does not apply to cases of purchase of share assets and allotment of shares by the appellant when purchase and allotment are under a barter system. - Decided against revenue. Issues Involved:1. Applicability of Section 68 of the Income Tax Act, 1961.2. Genuineness of transactions, identity, and creditworthiness of subscribers.3. Validity of share capital raised at a high premium.Issue-wise Detailed Analysis:1. Applicability of Section 68 of the Income Tax Act, 1961:The primary issue was whether the provisions of Section 68 of the Income Tax Act, 1961, were applicable to the case where share capital was raised through the allotment of shares in lieu of other shares, without any cash transactions. The Tribunal noted that Section 68, which deals with unexplained cash credits, was not applicable since no money transaction took place between the assessee and the share subscribing companies. It was a case of swapping of shares, i.e., shares were exchanged for other shares, and therefore, Section 68 did not attract in this case. This conclusion was supported by the judgment of the Coordinate Bench in the case of M/s Anand Enterprises Ltd., where it was held that Section 68 applies to cash transactions and not to barter transactions.2. Genuineness of Transactions, Identity, and Creditworthiness of Subscribers:The Revenue contended that the assessee-company failed to discharge its onus of proving the genuineness of transactions and the identity and creditworthiness of the subscribers. The Tribunal, however, found that the assessee had provided sufficient evidence, including an agreement with Jyotika Commercial Pvt. Ltd., detailing the transfer of shares. The Tribunal also referenced the decision of the Hon’ble Supreme Court in Shri H.H. Rama Varma vs. CIT, which clarified that 'any sum' means 'sum of money,' thereby reinforcing that Section 68 was not applicable in the absence of a cash transaction. The Tribunal concluded that the transactions were genuine and that the assessee had adequately demonstrated the identity and creditworthiness of the subscribers.3. Validity of Share Capital Raised at a High Premium:The Revenue questioned the validity of raising share capital at an unusually high premium, given the negligible book value of the shares. The Tribunal observed that the share premium was justified and supported by the terms of the agreement and the valuation of the shares exchanged. The Tribunal cited several judicial precedents, including the Hon’ble Allahabad High Court in CIT vs. Sohanlal Singhania and the Hon’ble Jurisdictional High Court in Jatia Investment Company vs. CIT, which supported the assessee's position that transactions involving share allotments in exchange for other shares do not attract Section 68. The Tribunal held that the high premium was part of a legitimate transaction and not indicative of any wrongdoing.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that Section 68 was not applicable to the assessee's case. The Tribunal affirmed that the assessee had successfully demonstrated the genuineness of the transactions, the identity, and the creditworthiness of the subscribers, and that the share premium was valid. The appeal of the Revenue was dismissed, and the order was pronounced in court on 28.08.2019.