2017 (10) TMI 1445 - AT - Income Tax

Addition u/s 56(1) OR 68 - bogus share capital - Share premium received - scope of amendment to sec 56(2)(viib)and year of application - HELD THAT - The provisions of sec 56(2)(viib) are applicable w.e.f. 1st April, 2013 and will accordingly apply in relation to AY 2013-14 and subsequent Assessment Years. The income as mentioned in section 56(2)(viib) is included in definition of section 2(24) w.e.f. 01-04-2013. Therefore, the provisions of these sections cannot be made applicable prior to that A.Y. 2013-14. It is pertinent to note that the CIT(A) had issued the show cause notice to the assessee to tax the share capital under section 68 of the I.T. Act, 1961 as against section 56(1) applied by the AO. AO has made whole addition by invoking section 56 hence the amended provision w.e.f. 01-04-2013 are applicable only on shares premium received on fair market value. In view of these facts, it is clear that share premium received cannot be considered as income for the year under consideration by invoking provisions of section 56(1) of the Act. Therefore, in our considered view, the ld. CIT(A) has rightly deleted the addition. Disallowance of expenses - assessee has not started the business activity, hence expenses have to be capitalized - HELD THAT - CIT(A) held that the financial expenses, salary expenses, water & electricity expenses, repairs & maintenance expenses were in relation to building which was given on rent. Thus these expenses are direct bearing to the income of the year credited in P & L A/c. It is also noted that during search no incriminating document was found to show the suppression of income or inflation of expenses. In view of the above facts and circumstances of the case, we concur with the findings of the ld. CIT(A) on the issue in question. Thus the solitary ground of the Revenue is dismissed. Addition u/s 68 - non providing opportunity of cross examination of the materials gathered and statement recorded behind the assessee - HELD THAT - As during the course of hearing of appeal before the ld. CIT(A), the assessee had requested for cross examination of Shri Sanbtosh Choubey Shri Ajit Sharma, Shri RajeshKumar Singh and other persons which was denied by the ld. CIT(A). The ITAT Coordinate Bench in the case of Prateek Kothari 2016 (12) TMI 1756 - ITAT JAIPUR has given verdict that without providing opportunity of cross examination of the materials gathered and statement recorded behind the assessee cannot be used. However, we hold that Revenue is free to initiate proceedings in the hands of these concerns who have received the amount after deposit in cash/DD in respective bank A/cs. Thus Ground of the assessee is allowed.

Issues Involved:
1. Validity of assessment under Section 153A.
2. Justification of additions under Section 56(1).
3. Disallowance of expenses due to non-commencement of business activities.
4. Application of Section 68 for share capital received.
5. Cross-examination rights and procedural fairness.

Detailed Analysis:

1. Validity of Assessment under Section 153A:
The Assessee contended that the assessment under Section 153A read with Sections 153B and 143(3) was void ab-initio as the original assessment was not abated. However, this ground was not pressed during the hearing and thus dismissed.

2. Justification of Additions under Section 56(1):
The Revenue challenged the deletion of additions made under Section 56(1), arguing that the assets did not justify the premium charged and no business activity was performed. The Tribunal noted that the share premium is a capital receipt and not taxable under Section 56(1). The Tribunal emphasized that the provisions of Section 56(2)(viib) were applicable from AY 2013-14 and not retrospectively. Thus, the additions under Section 56(1) were rightly deleted by the CIT(A).

3. Disallowance of Expenses Due to Non-Commencement of Business Activities:
For AY 2011-12 and 2013-14, the AO disallowed expenses on the ground that the assessee had not started business activities. The CIT(A) and Tribunal found that the expenses were related to rental income and other incidental expenses, which were allowable. The Tribunal upheld the CIT(A)’s decision to delete the disallowance, noting that the rental income was considered business income and the related expenses were justifiable.

4. Application of Section 68 for Share Capital Received:
The AO did not invoke Section 68, but the CIT(A) considered it. The Tribunal held that the CIT(A) could not invoke Section 68 as it is the jurisdiction of the AO. The Tribunal noted that the identity, creditworthiness, and genuineness of the transactions were established, and the addition of ?82,00,000 sustained by the CIT(A) was not justified. The Tribunal directed the deletion of this addition.

5. Cross-Examination Rights and Procedural Fairness:
The Tribunal emphasized the importance of procedural fairness and the right to cross-examine witnesses. The assessee’s request for cross-examination of individuals whose statements were used against them was denied. The Tribunal cited precedents that the denial of cross-examination violates principles of natural justice and directed that such statements could not be used against the assessee without providing an opportunity for cross-examination.

Conclusion:
The Tribunal dismissed the Revenue’s appeals and allowed the assessee’s appeals, emphasizing the correct application of legal provisions, the importance of procedural fairness, and the proper classification of income and expenses.

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