2011 (8) TMI 1340 - AT - Income Tax

Summary

Issues Involved:
1. Justification of share premium charged by the assessee.
2. Application of Section 68 of the Income Tax Act, 1961, to the share premium amount.
3. Assessment of the identity, capacity, and genuineness of the shareholders.

Issue-wise Detailed Analysis:

1. Justification of Share Premium Charged:
The primary issue was whether the Commissioner (Appeals) was justified in deleting the addition of Rs. 2,53,35,000 made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961, as unexplained cash credits. The AO had questioned the justification of the share premium charged by the assessee, arguing that the valuation methods used were not appropriate and that the premium was excessive. The AO did not agree with the method of valuation and valuation reports provided by the assessee, which included methods like the discounted cash flow method.

2. Application of Section 68 of the Income Tax Act, 1961, to the Share Premium Amount:
The AO treated the amount of Rs. 2,53,35,000 as unexplained cash credit under Section 68, citing that the excessive share premium was not justified. However, the Commissioner (Appeals) held that the identity, capacity, and genuineness of the transactions were explained and that the AO had accepted a part of the transactions (face value of shares) while treating the premium as unexplained. The Tribunal noted that the AO had no grounds to dispute the valuation done by an expert and that the addition under Section 68 was bad in law. The Tribunal emphasized that the AO cannot impose his decision on the valuation of shares, which is a specialized and technical subject.

3. Assessment of the Identity, Capacity, and Genuineness of the Shareholders:
The Tribunal observed that the assessee had furnished sufficient documentary evidence to establish the identity, capacity, and genuineness of the shareholders. The AO had accepted the identity and genuineness of the shareholders to the extent of the face value of the shares but doubted the premium. The Tribunal held that the AO's action of treating the share premium as unexplained while accepting the share capital was legally incorrect. The Tribunal cited several case laws, including CIT v/s Steller Investment Ltd. and CIT v/s Lovely Exports P. Ltd., to support the view that if the identity of the shareholders is proved, no addition can be made under Section 68.

Conclusion:
The Tribunal upheld the order of the Commissioner (Appeals), stating that the addition of Rs. 2,53,35,000 under Section 68 was not warranted. The Tribunal emphasized that the share premium is a capital receipt and cannot be brought to tax under Section 68. The appeal by the Revenue was dismissed.