2013 (10) TMI 310 - HC - Income Tax

Receipt to be treated as capital receipt or revenue receipt - Granting reduction of Rs. 3,01,60,000/- made on account of capital receipts from total assessed income of Rs. 3,29,51,982/- - Received the corpus fund from the holding company i.e. Saurashtra Kutch Stock Exchange Ltd. ( SKSE for short) by way of share capital - Such investment was necessary due to directives of SEBI providing that SKSE and its members together shall hold 100% equity shares of the company and that the holding of SKSE should not be less than 51% of the value Held that - Amount was received by way of share capital which was compulsorily required to be invested by SKSE as per the directives of SEBI. Payment was made through cheque - The amount was for the purpose of creating the share capital Amount to be treated as capital receipt Decided against the Revenue.

Summary

Issues:
1. Whether the Appellate Tribunal correctly directed the department to allow registration under section 12A and the benefit of exemption under section 11 of the Act.
2. Whether the Appellate Tribunal was correct in granting a reduction of Rs. 3,01,60,000/- made on account of capital receipts from the total assessed income.

Analysis:
The primary issue in this case revolved around the reduction of Rs. 3,01,60,000/- by the CIT(Appeals) on account of capital receipts out of the total assessed income. The assessee had received a corpus fund from the holding company in the form of share capital, which was explained to be necessary due to SEBI directives. The CIT(Appeals) accepted this explanation, noting that the investment was in the form of share capital and was essential to comply with SEBI directives. The genuineness of the receipt, identity of parties, and paying capacity were established. The CIT(Appeals) concluded that the amount received was capital in nature and not liable to tax, especially since it was not for day-to-day activities but for creating a corpus.

The Tribunal upheld the CIT(Appeals)'s decision, emphasizing that the amount received as share capital was necessitated by SEBI directives for investment by the holding company. The Tribunal noted that the amount was received through a genuine account payee cheque, establishing the authenticity of the transaction. It was further clarified that the amount should be taxed in the hands of the stock exchange and not the assessee, as the purpose of the investment was to create share capital.

Both the CIT(Appeals) and the Tribunal concurred that the amount received was in the form of share capital, as required by SEBI directives. The payment was made through a cheque, and the genuineness, identity of the parties, and paying capacity were duly established. Since the investment was necessary for creating share capital and not for regular income, it was correctly treated as a capital receipt. Consequently, the Tax Appeal was dismissed based on these findings.