2016 (10) TMI 920 - AT - Income Tax

Addition u/s 68 - unexplained cash credits - genuineness and creditworthiness of the party giving premium - Held that - Share premium cannot be brought to tax invoking the provisions of Section 68, unless there is a link with either quid pro quo transaction or investing by assessee-company in their accounts so as to receive it back as share capital. No such evidence was brought on record. On the given facts of the case, and on the basis of the confirmation filed by the companies, we cannot hold that this amount can be brought to tax invoking the provisions of Section 68. The genuineness and credit worthiness of those companies is not in dispute. What AO disputed was the amount of premium. Moreover, if the amounts are doubted from those companies, the amount of share capital at ₹ 10 was not doubted. Only amount of premium was doubted. Therefore the companies transactions with assessee are partly accepted as genuine. On facts of the case provisions of Sec. 68 can not be invoked.

Issues Involved:
1. Validity of the addition of ?2,18,50,000/- as income under Section 68 of the Income Tax Act.
2. Justification for issuing shares at a high premium.
3. Determination of the genuineness and creditworthiness of the investing companies.
4. Applicability of Section 68 of the Income Tax Act to share premium received.

Issue-wise Detailed Analysis:

1. Validity of the Addition of ?2,18,50,000/- as Income under Section 68 of the Income Tax Act:
The assessee issued shares with a face value of ?10/- at a premium of ?190/-, resulting in a total share premium of ?2,18,50,000/-. The Assessing Officer (AO) invoked Section 68 of the Income Tax Act, treating the share premium as 'unexplained cash credits' due to doubts about the genuineness and creditworthiness of the investing companies. The AO's decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], who concluded that the share premium was a sham transaction, citing the lack of assessment particulars of the investing companies and referencing several judicial decisions.

2. Justification for Issuing Shares at a High Premium:
The assessee justified the high premium by stating that the company was profitable, had all necessary licenses, and had good future potential and goodwill among investors. The assessee also compared the premium to other companies' shares issued at high premiums during a stock market boom, arguing that the premium was based on future profitability and investor expectations. Despite these justifications, the AO and CIT(A) were not convinced and held the transactions as sham and colorable.

3. Determination of the Genuineness and Creditworthiness of the Investing Companies:
The assessee provided confirmations from the investing companies, which were neither associate companies nor influenced by the assessee's directors. The AO acknowledged the receipt of confirmations but doubted the rationale for the high premium. The CIT(A) noted that the total share capital of the investing companies was only ?11,50,000/-, which was suspect. The CIT(A) concluded that the assessee failed to establish the identity, creditworthiness, and genuineness of the transactions, citing various judicial decisions supporting the need for clear establishment of these elements under Section 68.

4. Applicability of Section 68 of the Income Tax Act to Share Premium Received:
The ITAT considered the rival contentions and noted that the investing companies were assessees on record and confirmed their investments. The ITAT emphasized that the share premium, being a capital receipt, cannot be considered as 'cash credits' in the absence of contrary evidence. The ITAT referred to the case of M/s. Green Infra Ltd., where a similar issue was addressed, and it was held that share premium cannot be taxed under Section 68 if the identity, genuineness, and creditworthiness of the investors are established. The ITAT found that the AO did not conduct sufficient inquiries with the investing companies and relied on presumptions. Consequently, the ITAT held that the orders of the AO and CIT(A) were bad in law and deleted the addition of ?2,18,50,000/-.

Conclusion:
The ITAT concluded that the share premium received by the assessee could not be taxed under Section 68 of the Income Tax Act, as the identity, genuineness, and creditworthiness of the investing companies were established. The appeal of the assessee was allowed, and the addition made by the AO and confirmed by the CIT(A) was deleted.

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