2015 (10) TMI 2042 - AT - Income Tax

Revision u/s 263 - as per CIT(A) nature of the premium received on share capital was revenue in nature, therefore, chargeable to tax - provisions of Section 78 were applicable to the share premium - whether since the nature of receipt has not been explained, the premium amount credited in the books of account is chargeable to tax u/s.68 of the Act? - Held that - It is the wisdom of person applying for share to determine whether to buy the shares at a premium or not. Revenue cannot stand in the way of person opting to buy share at a premium insofar as sources of funds are not in dispute. Even with respect to requirement of Section 78, the assessee has fulfilled all the prescribed formalities under the Companies Act, 1956 by filing requisite Form No.2 along with Annexures. The Registrar of companies has accepted the issue of shares at premium and no adverse view has been adopted in this regard. Thus, the nature of cash credit was also evident as per the documentary evidence placed on record. So far as nature of receipt on account of share capital and premium thereon is concerned, both are in the nature of capital receipt and not in the nature of income. The CIT has tried to invoke section 68 to see that share premium is income of the assessee with respect to amendment brought by the Finance Act, 2012. However, the amendment in Section 68 was brought by the Finance Act, 2012 w.e.f1-4-2013, therefore, there is no reason to treat the share premium as income during the assessment year 2010-11 under consideration. Thus, CIT was not correct in invoking amended provisions during the year under consideration. AO has called for financial details of the companies and also examined the parties in order to satisfy himself about the genuineness of the transaction and source of money. Thus, after examining the evidences available on record, the AO has accepted the claim of assessee regarding receipt of share capital at premium. The Commissioner has not found any fault with the details and records that the AO has not conducted the proper enquiry. When the entire record was available with the Commissioner, he ought to have given a concluding finding that the view taken by the AO is contrary to the law as well as facts emerging from the records. However, the Commissioner has not given any such finding and restore the matter to the record of the AO which is not permissible as per provisions of Section 263 when the AO has conducted the enquiry and allowed the claim of the assessee on the basis of the examination of the record. We have also found that assessee company has filed bank statement of these companies showing the transaction of payment of share premium. Even as per verdict of the Hon ble Supreme Court in the case of Lovely Exports Pvt. Ltd. 2008 (1) TMI 575 - SUPREME COURT OF INDIA , if the department has any doubt regarding such share capital, the department is at liberty to have investigated/reopened the case of such share applicants. Thus we can conclude that share capital received by the assessee at premium was genuine, not only source of the fund but also genuineness of the transaction was duly established. The share premium so received was capital receipt not liable to tax during the year under consideration. Necessary enquiries with regard to share capital so received was made by the AO. Accordingly, there is no merit in the order passed by the CIT u/s.263 of the I.T.Act. - Decided in favour of assessee.

Issues Involved:
1. Nature of share premium receipt and its taxability.
2. Applicability of Section 68 of the I.T. Act to share premium.
3. Compliance with Section 78 of the Companies Act.
4. Adequacy of the AO's enquiry into the share premium receipt.

Detailed Analysis:

1. Nature of Share Premium Receipt and Its Taxability:
The CIT argued that the share premium received by the assessee is a revenue receipt and thus chargeable to tax. The CIT's reasoning was that the share premium, reflected in the reserves, can be distributed to shareholders as bonus shares under Section 78 of the Companies Act. The assessee countered that the share premium is a capital receipt and not taxable. The tribunal agreed with the assessee, stating that both share capital and share premium are capital receipts and not income, and thus not liable to tax.

2. Applicability of Section 68 of the I.T. Act to Share Premium:
The CIT alternatively argued that the share premium should be taxed under Section 68 of the I.T. Act, as the nature of the receipt was not explained. The assessee contended that Section 68 was amended effective from the assessment year 2013-14, whereas the assessment year in question was 2010-11. The tribunal concurred with the assessee, noting that the amendment could not be applied retrospectively and that the share premium received was not taxable under Section 68 for the year under consideration.

3. Compliance with Section 78 of the Companies Act:
The CIT alleged non-compliance with Section 78 of the Companies Act. The assessee argued that it had complied with all requisite formalities, including filing Form 2 with the Registrar of Companies, which had accepted the filings without objection. The tribunal found that the assessee had indeed complied with the provisions of Section 78, and the share premium was used exclusively for business purposes without any benefit passed to shareholders or outsiders.

4. Adequacy of the AO's Enquiry into the Share Premium Receipt:
The CIT claimed that the AO did not make adequate enquiries regarding the nature of the share premium receipt. The assessee presented evidence that the AO had conducted thorough enquiries, including direct enquiries with shareholders and banks, and had received confirmations and financial details. The tribunal noted that the CIT did not dispute the AO's enquiries or present any incriminating material. The tribunal held that the AO had made necessary enquiries and the CIT's order to set aside the assessment was not justified.

Conclusion:
The tribunal concluded that the share premium received by the assessee was genuine, with the source and genuineness of the transaction duly established. The share premium was a capital receipt and not liable to tax for the assessment year 2010-11. The AO had conducted adequate enquiries, and the CIT's order under Section 263 of the I.T. Act was without merit. Consequently, the appeal of the assessee was allowed.

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