TaxTMI 
TaxTMI 
2018 (12) TMI 1316
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....allowance u/s 41(l).of IT Act Rs. 90,18,520/- acvance/dr balance of creditors of capital nature, and addition of capital expenditures pending for capitalization of Rs. 4,83,44,824/- 4. By the impugned order CIT(A) deleted the addition made u/s.68 after observing as under:- "4.3.1. I have considered the stand of the AO as well as the facts of the case, documents produced before me and arguments advanced by Ld. AR. The appellant, during impugned year, had received the share application money from understated parties :- a) M/s. Hilton Finance Ltd Rs.3,09,36,000/- b) M/s, Kunja Finlease Pvt Ltd Rs.13,03,67,800/- c) M/s. Shinning Merchants Pvt Ltd Rs.4,61,94,200/- d) -- M/s. Hotel Padmini Palace Pvt Ltd Rs.10,60,00,000/- - Rs.31,34,98,000/- During the appellant proceedings, the AO was provided with the details and documents filed by the AR and were required to give comments. The AO, in Remand Report/ had summarized the finding of his predecessor and justified the addition on account of share application money at para 6.1 of the Remand Report reproduced as under :- "(1) Addition on account of Share....
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.... In Remand Report, AO stated that the additional evidence under Rule 46A be rejected for the reason that the appellant was provided adequate opportunity to substantiate and prove the genuineness of share application money received during the year. However, it is observed that AO, in Remand Report, had accepted that the documents relied during appellate proceeding are available on assessment record. The AO in Remand Report dated 24/09/2015 accepted the fact that majority details had already been considered in the assessment proceedings and relevant finding of AO stated in para 5 of Remand Report is as under :- "however, it is noticed that the assesses has submitted majority of the details, which have now been filed as additional evidences before your goodself and the same have already been considered in the assessment proceedings." Further Addl. CIT vide letter dated 12/10/2015 forwarding the AO's Remand Report ' had also accepted that the details filed before this office are been filed before the AO which were considered by him during assessment proceeding and such are not required to be treated as additional evidence. The relevant portion of Addl. CIT....
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....ssment order u/s.l43(3) had been passed in the case of share applicants named M/s. Shinning Merchants Pvt. Ltd and M/s. Hotel Padmini Palace Pvt., then correspondingly the transaction cannot be held as non-genuine in case of the appellant. The appellant had discharged its onus to prove the transaction. The AO had not brought any contrary documentary evidence on record to disprove the transaction and involvement of unaccounted money belonging to the appellant. It is observed that AO did not issue the notice u/s.133(6) to share applicants or to the banker of the share applicants to verify the source of funds, In any case, the appellant is not required to prove the source of source of funds. On perusal of the bank statements of share applicants, it is observed that there are no cash deposits -corresponding to cheques issued towards share application money. Even in remand report, the AO had not brought any contrary material to disprove the transaction and had not found any fault in the documents furnished by the appellant. The AO, in remand report, had merely .summarised the finding of his predecessor as stated in assessment order. The appellant had reasonably discharged its onus to pr....
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....pplicable from A.Y.2013-14 and does not apply to the year relevant to A, Y.2012-13. The said view had been adopted in 2 jurisdictional Murnbai ITAT decisions in the cases of M/s Gagandeep Infrastructure Pvt. Ltd (ITA- 5784/Mum/2011) and M/s Green Infra Ltd. vs. ITO (38 Taxmann 253 Mum-ITAT) wherein it is held that it is the prerogative of the board of directors of the company to decide the share premium and it is the wisdom of the share holders whether they want to subscribe to such heavy share premium. 4.3.3. Before proceeding further, it will be worthwhile to examine whether amount of share premium can be treated as capital receipt or revenue receipt, In this regard, it may be stated that various Courts have held such receipt as capital receipt. I. Issue as to whether share premium be treated as capital receipt or revenue receipt: A.I. Submissions as regards treatment of share premium based on the commercial accounting principles: A question arises as to whether 'share premium' be treated as capital receipt or revenue receipt. The expression "share premium" is not defined anywhere under the Income-tax Act, 1961. In the followin....
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....emium be treated as "reserves and surplus. A question arises as to where these "share capital" as also the "share premium" is statutorily required to be reflected in the books of accounts of a company. Section 209(3)(b) of the Companies Act, 1956 ("the 1956 Act") provides that every company is required to maintain his books of accounts on accrual basis and according to the double entry system of accounting. Section 211 of the 1956 Act provides for the form and contents of the Balance sheet and Profit & Loss account. Sub-sec (1) of section 211" of the 1956 Act provides that every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall be prepared in accordance with the form set out in part I of Schedule VI of the 1956 Act. As per part I of Schedule VI, subscription received issue of equity share is to be shown under the sub-heading "share capital" and premium on issue of such shares is to be shown under the heading "reserves and surplus" on the liabilities side of the balance sheet. Thus, as per the commercial accounting principle, the issue of equity shares and share premium is required....
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....f Rs. 42.55/- per share. The assessee has contended before the assessing officer that the share premium was arrived at through negotiations by the management with the above investors. The assessing officer held that the share premium was not genuine and it was income from unknown sources which has been disclosed under the head share premium in order to escape tax thereon. As a result, the assessing officer treated the share premium as income of assessee and brought it to tax under head "Income from Other Sources". The Commissioner of Income Tax (Appeals) upheld the action of the assessing officer. On further appeal, the Tribunal treated the share premium as capital receipt. The specific findings of the Tribunal reads as under: "2., We have considered the issue and examined the record. There is no dispute with reference to the fact that assessee allotting the shares v.-ith a premium and the amounts being received by way of share premium being shown in the Balance Sheet as such. There is also no dispute with reference to the fact that the assessee has not commenced the business in the impugned assessment year. It is also a fact that the assessee company got merged with M/s. ....
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....under the head 'income from other sources'. Similar facts existed in tin's case also, as the assessee has not commenced business activity in the impugned assessment: year and the Assessing Officer brought the amount to tax as the income from other sources only, without specifying the section under which the same was considered as income. Therefore, both on facts and on law, the amount of share premium has to be considered as capital receipt, which cannot be brought to tax in the impugned assessment year. Accordingly, the assesses grounds are allowed and the Assessing Officer is directed to delete the addition made in that behalf." In the above decision the assessing officer has invoked section 56(1) of the Act for treating the share premium as income subject to tax under the head "Income from Other Sources", this fact car. be evident from paragraph 22 of the Tribunal's order in PVP's case (supra) wherein the Tribunal has produced the finding of the Commissioner of Income Tax (Appeals) which reads as under: "7.4 I have considered carefully the facts and evidence. Firstly, the appellant has argued that as per section 56(2), the excess share premi....
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....unts were not revenue receipts includible in the total income of the assessee-company. Assuming that the premium was received as consideration for creation of a tenancy, in view of the ITO's finding that the premium was neither an advance rent nor a deposit to be adjusted against future rent, the premium was received on capital account. This was more so in view of s. 78 of the Companies Act-1956, which treated premium as a special class of capital: the distribution of the share premium by way of dividend was not permitted and it is taken out of the category of divisible profits. Section 78 provided for the application of premium issued on shares and premium had to be transferred to a separate account called the share premium account." C. Issue as discussed in the case of Asiatic Oxygen Ltd., The Calcutta Tribunal in the case of Asiatic Oxygen Ltd. Vs. DCIT(49 ITD 355), has held that while dealing with the question as to whether amount received on reissue of forfeited shares credited to share premium account was capital receipt, held that such credit to share premium account be treated as on account of capital account. The facts of this case were as under: Duri....
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....ipt. Section 78 of the Companies Act, show that when shares are issued at a premium the amount of premium should be transferred to an account called the 'share premium account1. Sub-section (2) provides for the manner in which the amount of share premium may be applied. The Second Schedule to the Companies (Surtax) Act, 1964, contains rules for computing the capital of a company for the purposes of surtax. The capital of the company under the said rules consists of the paid-up share capital and the reserves of the company. Explanation 2 to rule 2 of the Second Schedule makes it clear that the share premium account as forming part of the paid-up share capital of the company. Schedule VI to the Companies Act which contains the form of balance sheet in Part I thereof also indicates that the share premium account has to be shown as reserve under the head 'Reserves and surplus1 in the liability side of the balance sheet. Having regard to the aforesaid legal position, it could be said that the share premium amount could not be treated as income of the assessee. It did not arise out of any trading transaction of the assessee. It related to the capital structure of the ass....
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....ssee in this case be treated as income subject to tax under the head "Income from other sources" by virtue of section 56(1) of the Act held that share premium cannot be treated as income under section 56(1) of the Act and taxed under the head "Income from other sources". The facts of this case were as under: The assessee company was incorporated on April 3, 2008 and the certificate of registration was issued by the Registrar of Companies, Maharashtra on April 29, 2008. The assessment year involved was assessment year 2009-10. The subscribers to the Memorandum of Association has subscribed to fifty thousand shares for Rs. 10 each. These shares were allotted at par. The company vide its board meeting held on April 14, 2014 resolved to issue 9,79,000 equity shares of the face value of Rs. 10 each at a premium of Rs. 490 per share. The said business plan alongwith the justification for issue of shares at a premium was prepared and presented to subscribers on April 14, 2008. The assessee did not have any investments on the date of proposal to issue shares at a premium, hi other words, the book value of shares of a company was of Rs. 10 per share. The assessee has treated the sh....
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.... and Palkhivala, the Hon'ble Authors while dealing with the question of the taxability of share capital and receipt of premium thereon commented as under: "The issue of shares by a limited company is not a trading transaction at all. Upon an issue of shares, the assets of the company are increased by the amounts obtained from the subscribers. These amounts are obviously not profits or gains of the trade, and they are not liable to be brought into the accounts for incometax. This is so to whether the shares are allotted at par or at premium. The amount of the premium, or the fee charged on the issue of fresh capital is not a trading profit." The House of Lords in England in Lowry (Inspector of Taxes) vs. Consolidated African Selection Trust Ltd. (8 ITR Suppl 88) has dealt with the question of taxability of receipt on account of shares issued at par and at premium. In this case the shares were issued at par by the assessee to its employees. However/ the market value of the shares was higher than the par value at which the shares were issued to the employees. The assessee company claimed that the shares were issued at par to further the business interest and to s....
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....nt cannot be treated as receipt in the normal course of business but be treated as capital receipt. TTie specific finding of Ahemdabad Tribunal reads as under: "In the instant case no security deposit or advance received for performance of the contract was forfeited. In fact, the amount received was against issue of shares and issue of shares is not the business of the assessee. The same cannot be treated as receipt in the normal course of the business of the assessee which is engaged in financing and leasing business. Further, the assessee has also not credited the forfeited amount in its profit & loss account but in contradistinction to that it has credited the same in capital reserve account." Similarly, the Mumbai Tribunal in Prism Cement Ltd. vs. JCIT, Special Range (101 ITD 103) while dealing with the question of treatment of amount forefited on non-receipt of call money held that issue of non-convertible debentures is not business of assessee. Hence, the forfeited amount for non-payment of call money cannot be treated as income of the assessee in this case. IV. Issue with regard to the nature of receipt - Capital vs. Revenue The Rajasthan High Cour....
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.... 1 (CA), 25 TC 353); • CIT v. Om Oils (152 ITR 552); • M.P. Financial Corpnv. CIT (165 ITR 765); and • CIT v. Madras Ind. Inv. Corpn (124 ITR 454, SLP granted 140 ITR St. 1). Where a company's debentures are issued at a discount or are redeemable at a premium, the discount or the premium is on capital account and cannot be brought to charge in the hands of the debenture holder. It is true that a company may be able to obtain subscribers by issuing debentures at par at a high rate of interest, just as well as it can by issuing them at a lower rate of interest below par or with a premium on redemption. But the two methods are essentially different although actuarially their will normally produce the same result. For income-tax purposes, the result is different as the company chooses the one method or the other. The Department is bound by the company's choice and cannot go behind it. The interest on the debentures would always be taxable, but the amount by which the redemption price of debentures exceeds the issue price cannot be brought to tax. It is not income but a capital sum which a company bears in consideration of the risk....
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....type of unjust enrichment or without any justification for receiving so much premium, in the absence of legal provision the capital receipt on premium account cannot be considered as income as made by the Assessing Officer and the Commissioner of Income Tax (Appeals)." A, Issue as regards applicability of section 56(2)(viia) of the Act: The relevant extract of clause (viia) reads as under: "(viia) Where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the first day of Tune, 2010, any property, being shares of a company not being a company in which public are substantially interested..." It provides that where a firm or a company, other than a company in which public are substantially interested, receives in any previous year any shares of a company, other than a company in which public are substantially interested, either without consideration or at a consideration lower than the fair market value then, the differential amount between the fair market value and the amount of consideration paid/ payable by such recipient company shall be....
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.... unconstitutional. The third is wheie the legislation is introduced to overcome a judicial decision: here the power cannot be used to subvert the decision without removing the statutory basis of the decision." The provisions of section 56(2)(viib) have been inserted by the Finance Act, 2012 w.e.f assessment year 2013-14. In this regard, reference is made to paragraph Circular no. 3 of 2012 dated June 12, 2012 (345 ITR (St.) 103, 106) vide which Central Board of Direct Taxes has clarified that the above clause is applicable prospectively from assessment year 2013-14, the relevant paragraphs of the above Circular are reproduced hereunder: "Share premium in excess of fair market value to be treated as income. In the Finance Bill, 2012, it had been proposed [section 56(2), as sub-clause [(viib)] that in case of a company, not being a company in which the public are substantially interested, which receives, in any previous year/ from any person being a resident, any consideration for issue of shares and the consideration received for issue of such shares exceeds the face value of such shares, then the aggregate consideration received for such shares as exceeds....
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....f it changes the law it is not presumed to be retrospective irrespective of the fact that the phrases used are it is declared or for, the removal of doubts." Till assessment year 2013-34 share premium was not subject to tax under any provisions of the Act. However, from assessment year 2013-14 and onwards share premium would be subject to tax in the hands of recipient company subject to fulfilment of-conditions stated in section 56(2)(viib) of the Act. In other words, there is change in law after insertion of clause (viib) to section 56(2) of the Act hence, based on the ratio laid down by the Apex Court in Sedco's case (supra) the provisions of section 56(2)viib) of the Act would apply prospectively i.e. from assessment year 2013-14 and onwards and would not apply retrospectively. Recently, the Hon'ble Supreme Court in Guffic Chem (R) Ltd. vs. CIT (332 ITK 602) while dealing with the question as to whether payment under an negative covenant agreement is capital receipt or revenue receipt held that amendment to section 2S(va) is prospective in nature effective from the assessment year 200304 and onwards and not applicable to earlier assessment years. The Ap....
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.... the above it can be seen that the provisions of section 56(2)(viib) of the Act are prospective on nature and applicable from assessment year 2013-14 and onwards. 4.3.4. Further reference is made and reliance is placed to the various Judicial Pronouncements. These are as under: (i) In the case of M/s. Vodafone India Services Pvt. Ltd vs. Addl. CIT reported in 368 ITR 001/ Hon'ble Bombay High Court decided that:- "The amounts received on issue of share capital including the premium are undoubtedly on capital account Share premium have been made taxable by a legal fiction under Section 56(2)(viib) of the Act and the same is enumerated as Income in Section 2(24)(xvi) of the Act. However, what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital" not received' from 'a" non-resident i.e. premium allegedly not received on application of ALP. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. Court finds considerable substance in th....
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....he same time we cannot ignore the fact that it is a prerogative of the Board of Directors of the company to decide the premium amount and it is the wisdom of the share holders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such huge premium without any bar from any legislated law of the land. The amendment has been brought in the Income Tax Act under the head "Income from other sources" by inserting Clause (viib) to Sec.56 of the Act wherein it has been provided that any consideration for issue of shares, that exceeds the fair value of such shares, the aggregate consideration received for 'such shares as exceeds the fair market value of the shares shall be treated as the income of the assessee but the legislature in its wisdom has made this provision applicable w.e.f.1.4.2013 i.e. on and from A.Y.2013-14. In so far as the year under consideration is consideration is concerned, the transaction has to be considered in the light of the provision of Sec.68 of the Act. There is no dispute that the assessee has given details of names and addresses of the share holders, their PAN Nos, the bank details and the confirmator....
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....vs. Goa Sponge and Power Ltd reported in Appeal No. 16 of 2012, Hon'ble Bombay High Court decided that: . . "Once the authorities have got all the details/ including the name and addresses of the shareholders, their PAN/GIR number, so also the name of the Bank from which the alleged investors received money as share application, then, it cannot be termed as "bogus". The controversy is covered by .the judgements rendered b y the Hon'ble Supreme Court in the case of Lovely Exports Pvt Ltd, vs. CIT, (2008) 216 CTR (SC) 195, as also by this Court in CTT vs. Creative World Telefilms Ltd, (2011) 333 ITR 100 (Bom)- In such circumstances, we are of the view that the Tribunal's finding that there is no justification in the addition made under Section 68 of the Income Tax Act/1961 neither suffers from any perversity nor gives rise to any substantial question of law. (vi) In the case of CIT vs. Creative World Telefilms Ltd reported in 333 ITR 100. Hon'ble Bombay High Court decided that: , N-"... the Tribunal was pleased to follow die judgment of the apex Court in the case of CIT vs. Lovely Exports (P) Ltd. (2008) 216 CTR (SC) 195 : (2008) 6 DTK (SC) 308 : (2009) 319 I....
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....on can be made on account of share application money once the names of the share applicants are given. In the instant case, identity of these persons are not or doubt and assessment. particulars of "all "the persons "are on record and there is rib material to hold that credit worthiness of these persons are not established. The judgement of Hon'ble Supreme Court in the case of Lovely Export 216 CTR 195 and also the juedgement of Hon'ble Delhi High Court in the case of CIT vs. Value Capital Services Pvt Ltd 307 ITR 334 are relevant on this issue. It was held by Hon'ble Madras High Court in the case of CIT vs. Electro Polychem Ltd. 294 ITR 661 and Hon'ble Allahabad High Court in the case of Jaya Securities Ltd 166 Taxman 7 that no addition can be made on account of share application money even if subscriber to capital are not genuine. The above said judgements were challenged by the Department by way of SLP before Supreme Court of India and SLP has been dismissed by Supreme Court in both the cases. In view of above said facts of case and position of law, I hereby direct the AO to delete the addition of Rs. 69,75,000/-. (x) In the case of CIT v. Vacmet Packagi....
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....nt and also filed documents to prove their investments made in shares of appellant company. The AO had not found any fault in the documents and is not justified in brushing aside the documents filed on record. The AO had not brought any contrary material to disprove the transaction and had not established that the appellant had introduced its unaccounted money in garb of share application. Accordingly, I hold that the addition made in assessment of share application money of Rs. 31,34,98,000/-cannot be sustained and is hereby deleted. I direct AO delete the addition u/s. 68 of Rs. 31,34,98,000/. In the result, these grounds of appellant's appeal are hereby Allowed." 5. Against the above order of CIT(A), Revenue is in further appeal before us. 6. We have considered rival contentions and carefully gone through the orders of the authorities below. 7. We had also gone through the remand report sent by the AO. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us in the context of factual matrix of the case. 8. From the record, w....
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....ew of the documentary evidence furnished which included PAN details, registration certificate, share application forms, board resolution of share applicants, affidavit and confirmation of the share applicants, IT returns, balance sheet and bank statements of share applicants and assessment orders u/s 143(3) in respect of two share applicants. 10. With respect to the credit of M/s. Hotel Padmini Palace Pvt. Ltd., CIT(A) found that assessee had obtained a long term lease from a share applicant named M/s. Hotel Padmini Palace Pvt. Ltd on entering into an agreement on 16/11/2010 on debiting the account of capital work in progress and correspondingly crediting the share application account. The assessee had also furnished the confirmation of account, property card and affidavit of such share applicant confirming the transaction with the assessee. Thus, it was found that assessee had not received any money from M/s. Hotel Padmini Palace Pvt. Ltd., and addition u/s.68 cannot be made and at the utmost capital work in progress could be reduced since there is a nexus of share application with capital work in progress. 11. The CIT(A) has also given due justification for the premium char....