2014 (11) TMI 479 - AT - Income Tax

Addition u/s 68 - Share capital and share premium received treated as unexplained cash credits Held that - The issue of shares at premium is always a commercial decision which does not require any justification - Further the premium is a capital receipt which has to be dealt with in accordance with Sec. 78 of the Companies Act, 1956 - the company is not required to prove the genuineness, purpose or justification for charging premium of shares, share premium by its very nature in a capital receipts and is not income for its ordinary sense - the assessee had filed all the requisite details/documents which are required to explain credits in the books of accounts by the provisions of Sec. 68 of the Act - The assessee has successfully established the identity of the companies who have purchased shares at a premium - The assessee has also filed bank details to explain the source of the shareholders and the genuineness of the transaction was also established by filing copies of share application forms and Form No. 2 filed with the Registrar of Companies. 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 - the transaction has to be considered in the light of the provisions of Sec. 68 of the Act - the assessee has given details of names and addresses of the shareholders, their PAN Nos, the bank details and the confirmatory letters - the initial burden of proof as rested upon the assessee has been successfully discharged by the assessee - Even if it is held that excess premium has been charged, it does not become income as it is a capital receipt - The receipt is not in the revenue field - if the identity is proved, no addition can be made u/s. 68 of the Act the order of the CIT(A) is upheld Decided against revenue. Restriction of disallowance u/s 14A r.w. section 8D Held that - The AO has followed the decision in the case of GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT - CIT(A) has very correctly upheld the findings of the AO that Rule 8D is applicable during the year under consideration - CIT(A) has restricted the disallowance of expenditure to the extent claimed by the assessee there was no error or infirmity in the findings of the CIT(A) Decided against revenue.

Summary

Issues Involved:

1. Deletion of addition under Section 68 for unexplained cash credits related to share capital and share premium.
2. Disallowance under Section 14A read with Rule 8D for expenses related to earning exempt income.

Detailed Analysis:

1. Deletion of Addition under Section 68:

The Revenue's grievance was whether the CIT(A) erred in deleting the addition of Rs. 7,53,50,000/- under Section 68, treating the share capital and share premium received during the year as unexplained cash credits. The Assessing Officer (AO) had scrutinized the increase in share capital and share premium and found discrepancies, such as all applicant companies operating from the same address and being newly established with their sources of funds from share capital. The AO concluded that the assessee failed to justify the premium charged on shares and treated Rs. 7,53,00,000/- as unexplained cash credit under Section 68.

The CIT(A) observed that the AO did not provide reasons for considering the investment with a premium as non-genuine despite the assessee providing necessary documents like share application forms, bank account details, and balance sheets of shareholders. The CIT(A) held that the genuineness and creditworthiness of the investors were not questioned by the AO and deleted the addition, drawing support from the Supreme Court decision in Lovely Exports Pvt. Ltd.

The Tribunal upheld the CIT(A)'s findings, stating that the issue of shares at a premium is a commercial decision and does not require justification. The Tribunal emphasized that the premium is a capital receipt and not income in the ordinary sense. The assessee had successfully discharged the initial burden of proof by providing details of shareholders, their PAN numbers, bank details, and confirmatory letters. The Tribunal concluded that even if excess premium is charged, it remains a capital receipt and does not become income. Therefore, the addition under Section 68 was not justified.

2. Disallowance under Section 14A read with Rule 8D:

The Revenue also contested the CIT(A)'s decision to restrict the disallowance under Section 14A to Rs. 1,24,191/- against the AO's computation of Rs. 1,88,012/-. The AO had applied Rule 8D and computed the disallowance for expenses attributable to earning exempt income, which was dividend income of Rs. 4,748/- claimed as exempt under Section 10(34). The AO followed the jurisdictional High Court's decision in Godrej & Boyce Mfg. Co. Ltd.

The CIT(A) upheld the AO's application of Rule 8D but restricted the disallowance to the total expenditure claimed by the assessee in the profit and loss account, which was Rs. 1,24,191/-. The Tribunal found no error or infirmity in the CIT(A)'s findings and confirmed the decision, dismissing both the Revenue's appeal and the assessee's cross-objection on this ground.

Conclusion:

The Tribunal dismissed the Revenue's appeal and the assessee's cross-objection. The deletion of the addition under Section 68 was upheld, and the disallowance under Section 14A was restricted to the actual expenditure claimed by the assessee. The Tribunal emphasized that the issue of shares at a premium is a commercial decision and that the premium is a capital receipt, not income. The Tribunal also confirmed the applicability of Rule 8D for the year under consideration but limited the disallowance to the actual expenditure incurred.