2019 (4) TMI 1422 - AT - Income Tax

Tribunal affirms CIT(A)'s deletions under Income Tax Act, emphasizing genuineness & compliance. Revenue appeal dismissed.

The Tribunal upheld the CIT(A)'s deletions of additions made by the AO under various sections of the Income Tax Act, emphasizing the genuineness and ... Unexplained credit u/s. 68 - introduction of share application money and share premium - provisions of section 56(2) (viib) application for making addition even u/s 68 - HELD THAT:- In the given facts and circumstances of the case records, documentary evidences, arguments of both the sides clearly established that this transaction carried out by assessee receiving share application money party seems to be genuine and explained. AO has not carried out any further inquiry except the fact recorded that there is no authorized share capital to that extent and moreover, AO also noted that there is unjustifiable amount of share premium and hence, entire transactions is not genuine. We have noted that for the purpose of section 68 of the Act, three requirements are required to be fulfilled which is the genuineness of transaction, source of money i.e. creditworthiness of the party and identity of the party. According to us, the assessee has fulfilled all the three ingredients of section 68. Share premium can only be added under section 56(2)(vii)(b) which was inserted by the Finance Act, 2013 with effect from 01.04.2013 i.e. for and from the AY 2013-14. We will dealt with the case laws in the next part of this order which was cited before us by both the sides. When shares are issued at premium, number of shares and authorized capital increase lesser in comparison of capital raised by way of capital and premium. These provisions are deeming provisions as otherwise share premium and capital is a capital receipt which cannot be taxed as income. However, w.e.f A. Y. 2013-14 for closely held companies share premium or share capital is deemed to be normal income if shares are issued exceeding fair market value of shares. But, in any case the amendment will apply for and from AY 2013-14 and not to earlier Assessment Year because the amendment is prospective and not retrospective. Hence, on the issue of share premium, the provisions of section 56(2) (viib) cannot be applied for making addition even under section 68. In the present case, the overwhelming evidence proves that the 'nature' of receipt is share premium and share application money. The audited accounts of both parties, the statutory since it was the department which claimed that the share premium is not in fact so, despite the statutory forms viz. Form 2 for return of allotment and Form 20B for annual return filed with the ROC all show the 'nature' as share premium. If the Department wants to contend that what is apparent is not real, it is the onus of the department to prove that it was Assessee's own money which was routed through a third party. Only then can the provisions of section 68 be invoked AO makes the mention of the reserves and loss while challenging the charge of share premium on preference shares - “Reserves” could be relevant for valuing equity shares. They are not relevant for valuing preference shares. Preference shareholders get priority over the equity shareholders in terms of payment of dividend and during winding up. They get only a fixed rate of dividend. The redemption amount depends on the terms of issue. The conversion depends on the terms of issue. The terms of issue are relevant for valuing preference shares. Even the present Rule 11UA of the Income Tax Rules 1962 are applicable only to section 56(2) of the Act, requires valuation of preference shares by the merchant bankers. AO has not even attempted to do any sort of valuation of preference shares. His addition is based entirely on conjectures and surmises. It is settled law that the assessment cannot he made on mere suspicion, conjectures and surmises. Assessee has discharged its onus by adequately disclosing the transaction in its books of accounts, filing statutory forms as regards allotment of shares, providing name, address and PAN of the shareholders, etc. the assessee has sufficiently discharged the onus cast upon it for the purpose of section 68 and no addition can be made on this account. CIT(A) has rightly deleted the addition and we confirm the same. These two common issues of Revenue’s appeal are dismissed. Addition under section 56(2)(viia) - HELD THAT:- We have gone through the findings of CIT(A) and noted that the entire reserves and surplus appearing in the balance sheet as on 1.4.2010 are only on account of the grant received from the Government of India and not on the basis of any business profit earned by the company. In these circumstances, in my view, there can be no inference that the shares of VITPL have been acquired by the assessee at a price which is less than its fair market value. Hence, we find no reason to reverse the findings of CIT(A) and accordingly, the same is upheld. Addition of interest of bank fixed deposits netting of against closing work in progress account - HELD THAT:- The CIT(A) allowed the claim of assessee by observing that the assessee company has earned this interest income from deposits placed with IDBI Bank with the object of availing credit facilities for importing BOPP loan equipment and this interest income is inextricable linked or connected to the setting up of the project of BOPP. This interest income has been derived from fixed deposits placed with bank for availing LC margin against importing plant and machinery and therefore the same is squarely covered by the decision of Hon’ble Supreme Court in the cases of CIT vs. Bokaro Steel Ltd. [1998 (12) TMI 4 - SUPREME COURT] and CIT Vs. Karnal Co-operative Sugar Mills Ltd. [1999 (4) TMI 7 - SUPREME COURT] . We find that even now before us, the Revenue could not dislodge the finding of CIT(A) that the interest earned from FDR’s were inextricably linked with setting up of new power plant and therefore interest earned was to be treated as capital receipt. Addition u/s 14A - addition of expenses relatable to exempt income being interest and other charges to bank capitalized in the capital work in progress - computing the book profit under section 115JB - HELD THAT:- AO computed the disallowance of ₹ 1,36,671/- under Rule 8D while computing the book profit under section 115JB of the Act and this issue is now squarely covered by the decision ITAT in the case of ACIT vs. Vireet Investments (P.) Ltd. [2017 (6) TMI 1124 - ITAT DELHI] . Appeal of Revenue is dismissed. Issues Involved:1. Deletion of addition on account of share application money treated as unexplained credit under Section 68 of the Income Tax Act.2. Deletion of addition on account of share premium treated as unexplained credit under Section 68 of the Income Tax Act.3. Deletion of addition under Section 56(2)(viia) of the Income Tax Act.4. Deletion of addition of interest on bank fixed deposit netted off in the Capital Work in Progress (CWIP) account.5. Deletion of addition of expenses relatable to exempt income while computing book profit under Section 115JB of the Income Tax Act.Detailed Analysis:1. Deletion of Addition on Account of Share Application Money:The assessee received share application money of Rs. 4,47,10,385 from Orange Mauritius Investments Ltd. The AO added this amount as unexplained credit under Section 68 of the Act, citing inadequate authorized share capital. The CIT(A) deleted the addition, noting that the assessee had provided comprehensive documentary evidence to establish the nature, genuineness, and source of the transaction. The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee had met the requirements of Section 68 by proving the identity, creditworthiness, and genuineness of the transaction.2. Deletion of Addition on Account of Share Premium:The AO added Rs. 23,47,38,900 as unexplained credit under Section 68, questioning the justification of the share premium charged. The CIT(A) deleted the addition, stating that the assessee had established the identity, financial capacity, and genuineness of the transaction. The Tribunal agreed, noting that the share premium cannot be added under Section 68 and that the provisions of Section 56(2)(viib) were not applicable for the relevant assessment year. The Tribunal cited the decision of the Hon'ble Bombay High Court in the case of CIT vs. Gagandeep Infrastructure (P) Ltd., which held that the amount received on issue of share capital along with the premium is a capital receipt and not in the revenue field.3. Deletion of Addition under Section 56(2)(viia):The AO added Rs. 1,18,67,508 under Section 56(2)(viia), alleging that the shares acquired by the assessee were at a value less than the fair market value. The CIT(A) deleted the addition, noting that the reserves and surplus were due to grants from the Government of India and not business profits. The Tribunal upheld the CIT(A)'s decision, agreeing that the shares were acquired at a fair market value and there was no basis for the addition.4. Deletion of Addition of Interest on Bank Fixed Deposit:The AO added Rs. 48,30,629 as income from other sources, which the assessee had netted off in the CWIP account. The CIT(A) deleted the addition, stating that the interest income was inextricably linked to the setting up of the project and should be treated as a capital receipt. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's decisions in CIT vs. Bokaro Steel Ltd. and CIT vs. Karnal Co-operative Sugar Mills Ltd., which support the capitalization of such interest income.5. Deletion of Addition of Expenses Relatable to Exempt Income:The AO computed a disallowance of Rs. 1,36,671 under Rule 8D while computing book profit under Section 115JB. The CIT(A) deleted the addition, and the Tribunal upheld this decision, referencing the Special Bench decision in ACIT vs. Vireet Investments (P.) Ltd., which held that the computation under clause (f) of Explanation 1 to Section 115JB(2) should be made without resorting to the computation under Section 14A read with Rule 8D.Conclusion:The Tribunal upheld the CIT(A)'s deletions of the additions made by the AO on various accounts, emphasizing the genuineness, identity, and creditworthiness of the transactions, and aligning with judicial precedents that support the assessee's position. The appeal by the Revenue was dismissed.