2015 (2) TMI 942 - AT - Income Tax

Pre commencement expenditure disallowed - Held that - It is an un-denied fact that the assessee company was incorporated in 2008 and in the interim period the business was dormant but the assessee had advanced its funds to acquired certain real estate for development. To come to a conclusion that expense shall be allowed only when there is corresponding income, is only a wishful thinking by the revenue authorities. The revenue authorities could not at any stage derail the assessee s argument that the business had been set-up. The phrase set-up has been distinguished from the phrase start up by various fora in various judicial decisions. Thus the amount of ₹ 28,89,560/- deserves to be allowed as revenue expense, as the assessee had already undertaken the course of business. - Decided in favour of assessee. General Reserve held as share premium amount by the revenue authorities - whether share premium is an amount which could be brought to tax as canvassed by the revenue authorities or independently, it is an item in the capital field, which otherwise would not be taxable? - Held that - Simply going with the facts of the case, the revenue authorities could not have brought to tax the amount in question, because, the income so disputed never belonged to the assessee, as the assessee did not exist at the time, when the income was actually generated. It changed hands, it went to individual persons, named earlier. The amount actually came into the account books of the assessee as per the order consequential to the scheme approved by the Hon ble Bombay High Court. Undisputedly it was a case of amalgamation, wherein, as seen from the order of Hon ble Bombay High Court, the amounts collected as share premium by those three companies were ordered to be brought into the books of the assessee either as General Reserve or as Goodwill. This amount was shown by the assessee company in the General Reserve. The receipt in the hands of the assessee shown as General reverse could not be brought to tax. This for two reasons (a) the receipt does not carry the character of income under any provision of the Act, and (b) it became a receipt in the hand of the assessee on a specific direction of Hon ble Bombay High Court, relevant portion, as extracted earlier in the order. Thus revenue authorities cannot change the character of receipt from General Reserve to share premium Reserve and tax the same u/s 56(1). - Decided in favour of assessee.

Issues Involved:

1. Disallowance of revenue expenditure of Rs. 28,89,560/- as pre-commencement expenditure.
2. Non-allowance of 20% of the expenditure under Section 35D of the Act.
3. Treatment of general reserve on amalgamation of Rs. 31,61,92,500/- as share premium.
4. Taxability of general reserve of Rs. 31,61,92,500/- as "income from other sources" under Section 56(1) of the Act.

Issue-wise Detailed Analysis:

1. Disallowance of Revenue Expenditure:

The assessee claimed an expenditure of Rs. 28,89,560/- as revenue expenditure. The Assessing Officer (AO) disallowed this, considering it pre-commencement expenditure. The assessee argued that the expenditure was incurred after the business was set up, citing judicial precedents that distinguish between "setting up" and "commencement" of business. The Tribunal, after considering various judicial decisions, concluded that the business was set up and the expenditure should be allowed as revenue expenditure. Therefore, the Tribunal directed the AO to allow the expenditure of Rs. 28,89,560/- as claimed in the books of account.

2. Non-allowance of 20% of the Expenditure under Section 35D:

This issue was raised as an alternative to the first ground. Since the Tribunal allowed the first ground, this ground became infructuous and was rejected.

3. Treatment of General Reserve on Amalgamation:

The assessee declared an amount of Rs. 32,40,89,219/- as General Reserves on Amalgamation, following the scheme approved by the Hon'ble Bombay High Court. The AO treated this as share premium and taxed it as income from other sources under Section 56(1). The assessee argued that the amount was credited to the General Reserve as per the court's directions and should be treated as a capital receipt. The Tribunal noted that share premium is a capital receipt and cannot be taxed as income unless specifically provided by law. The Tribunal also observed that the amount was shown as General Reserve following the High Court's directions and should not be recharacterized by the revenue authorities.

4. Taxability of General Reserve as "Income from Other Sources":

The AO treated the General Reserve as share premium and taxed it under Section 56(1). The Tribunal referred to the decision of the Hon'ble Bombay High Court in Vodafone India Services Pvt. Ltd. vs UOI, which held that share premium is a capital receipt and not taxable as income. The Tribunal concluded that the amount shown as General Reserve could not be brought to tax as it did not bear the character of income. The Tribunal emphasized that the receipt was a result of a court-approved amalgamation scheme and should be treated as a capital receipt.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, directing the AO to allow the expenditure of Rs. 28,89,560/- as revenue expenditure and deleting the addition of Rs. 31,61,92,500/- made under Section 56(1) as income from other sources. The Tribunal's decision was based on the interpretation of judicial precedents and the specific directions of the Hon'ble Bombay High Court regarding the treatment of the amalgamation reserve.

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