2021 (4) TMI 1024 - AT - Income Tax

Tribunal rejects Revenue's appeal, upholds CIT(A) decision on non-applicability of Income Tax Act Section 68

The Tribunal upheld the CIT(A)'s decision, ruling that Section 68 of the Income Tax Act was not applicable as no actual money was received in the issuance ... Addition u/s 68 - share capital of the assessee company was increased to ₹ 20,00,00,000/- with no satisfactory explanation with regard to settled accounting practices - HELD THAT:- 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. Moreover, in the balance sheet of the assessee company in the schedule to share capital, it is very clearly mentioned by way of note that the fresh share capital was raised during the year for consideration other than cash. Hence we hold that provision of section 68 of the Act are not applicable in the instant case and accordingly the entire addition deserves to be deleted which has rightly been done by the ld. CIT(A) which does not require any interference. Accordingly, grounds raised by the revenue are dismissed Issues Involved:1. Deletion of addition of Rs. 20,00,00,000 under Section 68 of the Income Tax Act.2. Applicability of Section 68 in the context of share capital issued against goodwill.3. Validity of the valuation and creation of goodwill.4. Allegation of use of colorable devices for tax evasion.Detailed Analysis:1. Deletion of Addition of Rs. 20,00,00,000 under Section 68:The Revenue challenged the deletion of an addition of Rs. 20 crores by the CIT(A), which was initially added by the AO under Section 68 of the Income Tax Act. The AO observed that the assessee company had increased its share capital by Rs. 20 crores by issuing shares to Shri Surinder Kumar Kaushik against goodwill without any monetary consideration. The AO questioned the genuineness of the transaction and the valuation of goodwill, leading to the addition under Section 68.2. Applicability of Section 68 in the Context of Share Capital Issued Against Goodwill:The CIT(A) concluded that Section 68, which deals with unexplained cash credits, was not applicable since there was no actual receipt of money. Instead, the transaction involved the issuance of shares against goodwill, which did not constitute a cash credit. The CIT(A) emphasized that the provision of Section 68 applies when there is an actual receipt of money, which was not the case here. The Tribunal upheld this view, referencing various judicial precedents where it was held that Section 68 applies only when there is an actual receipt of money.3. Validity of the Valuation and Creation of Goodwill:The CIT(A) and the Tribunal examined whether the creation of Rs. 20 crores of goodwill was justified. The assessee argued that the shares were issued to acknowledge the efforts of Shri Surinder Kumar Kaushik in procuring an aviation license, which was a significant contribution to the company. The CIT(A) found that the creation of goodwill was a business decision and within the company's discretion, supported by relevant documentation such as board resolutions and ROC filings. The Tribunal agreed, noting that the valuation of goodwill and the issuance of shares were legitimate business decisions and not subject to Section 68.4. Allegation of Use of Colorable Devices for Tax Evasion:The AO alleged that the transaction was a colorable device to evade taxes, referencing the McDowell case. However, the CIT(A) and the Tribunal found no evidence of tax evasion. The Tribunal noted that the transaction did not involve any actual movement of money and was fully disclosed in the books of accounts. The Tribunal also pointed out that any tax implications would arise in the hands of the shareholder receiving the shares, not the company issuing them.Conclusion:The Tribunal upheld the CIT(A)'s order, concluding that Section 68 was not applicable as there was no actual receipt of money. The creation and valuation of goodwill were legitimate business decisions, and there was no evidence of tax evasion. The Tribunal directed that any tax implications should be considered in the hands of the shareholder, not the company. The appeal by the Revenue was dismissed, and the cross-objection by the assessee was deemed infructuous.