2017 (11) TMI 2062 - AT - Income Tax

Revenue's appeal dismissed for share premium addition under section 56(1) before AY 2013-14 due to non-retrospective application

The ITAT Jaipur dismissed the Revenue's appeal regarding addition under section 56(1) for share premium, holding that provisions of section 56(2)(viib) ... Addition u/s 56(1) - assets of the assessee company don’t commensurate to premium charged and neither any business activity was performed nor any business income has been shown by the assessee - Applicability of Section 68 - CIT(A) deleted addition - HELD THAT:- It is pertinent to mention that the similar issue has been dealt with and decided by this Bench of ITAT [2017 (10) TMI 1445 - ITAT JAIPUR] in the case of ACIT, Central Circle-2, Jaipur vs Motisons Buildtech Pvt. Ltd as held To tax the income under the Act, it must come under the definition of income as provided u/s 2(24) of the I.T. Act, 1961. There were amendments in sec 2(24) of the Act and in section 56(2) of the Act w.e.f. 01-04-2013 are not applicable to A.Y. under consideration. By these amended provisions, any consideration received for issue of shares that exceeds the face market value of such shares the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be taxable as per clause (viib) of sub-section 2 of section 56 of the Act. The CBDT vide Circular No. 3 of 2012 dated 12-06-2012 has also mentioned that provision of section 56(2)(viib) will be applicable for A.Y. 2013-14. The provisions of sec 56(2)(viib) of Income-tax Act, 1961 are applicable w.e.f. 1st April, 2013 and will accordingly apply in relation to Assessment Year 2013-14 and subsequent Assessment Years. The income as mentioned in section 56(2)(viib) is included in definition of section 2(24) of the Act w.e.f. 01-04-2013. Therefore, the provisions of these sections cannot be made applicable prior to that A.Y. 2013-14. It is pertinent to note that the ld. CIT (A) had issued the show cause notice to the assessee to tax the share capital under section 68 of the I.T. Act, 1961 as against section 56(1) applied by the AO. However, he had not made any addition under section 68 of the Act. Revenue has not preferred appeal against this findings the ld. CIT(A). It is also pertinent to note that AO has made whole addition by invoking section 56 of the Act, hence the amended provision w.e.f. 01-04-2013 are applicable only on shares premium received on fair market value. In view of these facts, it is clear that share premium received cannot be considered as income for the year under consideration by invoking provisions of section 56(1) of the Act. Therefore, in our considered view, the ld. CIT (A) has rightly deleted the addition - Thus the Revenue’s appeal is dismissed. Unexplained cash deposits - HELD THAT:- All the share capital/share application was received through a/c payee cheques and verifiable from bank statement of assessee as well as bank statement of the party. The onus u/s 68 of the assessee is to prove the identity, capacity and genuineness of the transactions has been discharged. Section 68 of the Act does not empower the ld. CIT (A) to make addition under this Act. Thus the addition u/s 68 can only be made by the Assessing Officer - CIT (A) is not the Assessing Officer as per Income-Tax Act. Therefore, the ld. CIT (A) does not have any legal sanction to make the addition u/s 68 of the Act. CIT (A) in his order had clearly held that the identity, creditworthiness and genuineness of transactions of these companies cannot be held doubtful and addition by applying the provision of sec 68 cannot be upheld. CIT (A) has sustained the addition without specifying any provision of Income tax Act. No such addition can be sustained without invoking the relevant provisions of the Act. Moreover, the addition has been sustained in the hands of that assessee where cash /DD was deposited at 4th Channel. Hon'ble Rajasthan High Court and other Hon'ble Courts held that assessee cannot be asked to explain the source of the source. Addition u/s 56(1) - Scope of amended law - Assessment Year 2013-14 - HELD THAT:- Rule 11UA (2) of Income Tax Rules, 1962 provides the method of calculation of fair market value of unquoted shares in term of explanation (a) (i) to section 56(2)(viib). In the assessee’s case, the company has issued 1,10,250/- equity shares at the premium of Rs. 390/-per share. In view of the amended provisions of section 56(2)(viib) of Income Tax Act, the AO should have calculated the fair market value of the shares as mentioned in explanation (a) of section 56(viib) of the Act and excess amount of fair market value of the shares received if any could have been taxed u/s 56(2) of Income Tax Act. However, the AO has not done any exercise in this regard and the entire amount received against share capital during this year amounting to Rs. 4,41,00,000/- was taxed u/s 56(1) of Income Tax Act. For the year under consideration, the amended law is applicable. The share premium/ capital received in excess of fair market value of the shares shall be taxed. The ld. CIT (A) deleted the addition. However, in the interest of equity and justice, the AO is directed to calculate the fair market value of the share in accordance with the provisions of section 56(2)(viib) of I.Tax Act and if the amount received against share capital during the year is found in excess of fair market value of shares, then the addition to that extent the excess of fair market value of shares shall be made in the hands of the assessee company. Thus the appeal of the Revenue is allowed for Statistical purposes. Here are the key points from the legal judgment:Issues Involved:1. Taxability of share premium received by the assessee companies under section 56(1) and 56(2)(viib) of the Income Tax Act.2. Addition made by the Assessing Officer (AO) treating share premium as unexplained cash credits under section 68.3. Opportunity of cross-examination not provided to assessee regarding statements recorded by the Investigation Wing.Analysis and Findings:1. For AY 2009-10 and 2011-12, the entire addition made by the AO under section 56(1) was deleted as the amended provisions of section 56(2)(viib) were not applicable for those years.2. For AY 2012-13, out of the total addition of Rs. 42,07,29,600 made by the AO under section 56(1), Rs. 5,94,47,727 was sustained by the CIT(A) on account of cash/DD deposited at the 4th stage/channel as per investigation wing inquiries. The remaining addition was deleted.3. For AY 2013-14, out of the addition of Rs. 4,41,00,000 made by the AO under section 56(1), Rs. 3,90,50,000 was deleted by the CIT(A). An addition of Rs. 50,50,000 was sustained on account of cash/DD deposited at the 4th stage.4. The ITAT held that for AY 2013-14, the AO should have calculated the fair market value of shares as per section 56(2)(viib) and taxed only the excess premium received, if any. The matter was restored to the AO for this limited purpose.5. Regarding addition sustained by CIT(A) for cash/DD deposited at 4th stage, the ITAT held that the assessee cannot be asked to explain the source of source. Statements recorded by the Investigation Wing behind the back of the assessee cannot be used without giving opportunity of cross-examination.6. The ITAT allowed the appeals of the assessee for statistical purposes on the limited issue of addition sustained by CIT(A) for cash/DD deposited at 4th stage.In summary, the entire addition made by the AO under section 56(1) was set aside and the matter was restored to the AO to calculate fair market value and tax excess premium, if any, as per section 56(2)(viib) for AY 2013-14. The additions sustained by CIT(A) for cash/DD at 4th stage were deleted.