2017 (11) TMI 1927 - AT - Income Tax

Addition u/s 56(1) OR 68 - bogus share capital - Share premium received - assets of the assessee company don t commensurate to premium charged - neither any business activity was performed nor any business income has been shown by the assessee - HELD THAT - As decided in own case 2017 (10) TMI 1445 - ITAT JAIPUR 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) . - Decided against revenue. Addition u/s 68 - amount received the amount after deposit in cash/DD in respective bank A/cs - HELD THAT - Not only the identity of the creditor has been proved but from the facts which have been culled out, the assessee has been able to prove the genuineness also. The fact that the explanation furnished by the creditor about the source from where he procured the money to be deposited or advanced to the assessee is not relevant for the purposes of rejecting the explanation furnished by the assessee and make additions of such deposits as income of the assessee from undisclosed sources by invoking section 68 unless it can be shown by the Department that source of such money comes from the assessee himself or such source could be traced to the assessee itself. See KANHAIALAL JANGID VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX 2007 (1) TMI 496 - HIGH COURT OF RAJASTHAN - Also decided in ARAVALI TRADING CO. VERSUS INCOME-TAX OFFICER 2007 (1) TMI 567 - RAJASTHAN HIGH COURT - The assessee having discharged his burden by proving the existence of the depositors and the depositors owing their deposits, he was not further required to prove source of source. - CIT(A) is not justified in confirming the addition - 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 - Decided in favour of assessee.

Issues Involved:

Taxability of share capital and share premium received by the assessee companies under Section 56(1) and Section 68 of the Income Tax Act.

Detailed Analysis:

Section 56(1) Issue:

The Assessing Officer (AO) made additions under Section 56(1) of the Income Tax Act by treating the share capital and share premium received by the assessee companies as income. However, the CIT(A) held that Section 56(1) deals with taxing income and not capital receipts like share capital and share premium. The CIT(A) observed that the provisions of Section 56(2)(viib), which deems certain share premium amounts as income, were introduced with effect from April 1, 2013, and cannot be applied retrospectively to the assessment years under consideration.

The ITAT concurred with the CIT(A)'s findings and held that share premium received cannot be considered as income for the years under consideration by invoking Section 56(1). The ITAT relied on the CBDT Circular No. 3/2012 dated June 12, 2012, which clarified that the provisions of Section 56(2)(viib) would be applicable from Assessment Year 2013-14 onwards. The ITAT also referred to the decision of the Bombay High Court in the case of Vodafone India Services Pvt. Ltd. v. UOI, which held that share premium is a capital receipt and does not give rise to income.

Section 68 Issue:

The CIT(A) issued a show-cause notice to the assessee to consider taxing the share capital under Section 68 of the Income Tax Act. However, the CIT(A) ultimately held that the identity, creditworthiness, and genuineness of the transactions could not be doubted, and hence, the addition under Section 68 could not be upheld. The CIT(A) sustained a partial addition on account of cash/demand drafts deposited at the fourth channel of source/stage, based on the investigation wing's inquiries.

The ITAT observed that Section 68 does not empower the CIT(A) to make additions, as the power lies with the Assessing Officer. The ITAT relied on various decisions of the Rajasthan High Court and other High Courts, which held that an assessee cannot be asked to explain the source of the source, and the burden is on the Revenue to establish a nexus between the assessee and the source of funds.

The ITAT also noted that the assessee had requested an opportunity to cross-examine certain persons whose statements were relied upon by the Revenue, but the CIT(A) had denied the same. Relying on the decision in the case of Prateek Kothari, the ITAT held that materials gathered and statements recorded behind the assessee's back cannot be used without providing an opportunity for cross-examination.

Consequently, the ITAT deleted the partial addition sustained by the CIT(A) under Section 68, observing that the Revenue is free to initiate proceedings against the concerns that received the cash/demand draft deposits.