2017 (3) TMI 820 - AT - Income Tax

Addition on account of advance against share capital received in FY 2003-04 - Held that - The facts are undisputed that the assessee had received the impugned amount on account of share application money which has been written-back as the shares were not allotted. This issue is no more res-integra as Hon ble Bombay High Court in the cases of Softworks Computers Pvt Ltd (2013 (1) TMI 89 - BOMBAY HIGH COURT ) wherein it is held that the amount received on account of share capital can neither be treated as taxable either u/s 41(1) or u/s 28(iv) if the same is written-back in the books of account. It is further noted that similar view has been taken by Hon ble Madras High Court in the case of Skraemeco Regent Ltd (2010 (11) TMI 43 - Madras High Court ) wherein detailed discussion was made on section 28(iv) as well as section 41(1) and it was held that amount received for the purpose of acquiring capital asset did not constitute trading liability, and therefore, the same was not taxable u/s 41(1) or section 28(iv) of the Act. - Decided against revenue

Summary

Issues Involved:

1. Whether the addition of ?4,50,00,000 on account of advance against share capital received in FY 2003-04 is justified.
2. Whether the addition of ?13,50,00,000 on account of cessation of loan liability as business income u/s 28(iv) of the Act is justified.
3. Whether the claim that the business was never set up is justified.

Detailed Analysis:

Issue 1: Addition of ?4,50,00,000 as Income

The Revenue challenged the deletion of ?4,50,00,000 added by the AO as income. The assessee received this amount in FY 2003-04 as an advance against share capital, which was later written back and transferred to the capital reserve. The AO treated this amount as income for the year under consideration, citing it as business income under Section 28(iv) of the Income Tax Act.

The assessee argued that the amount was a capital receipt and not taxable. It was received as an advance for equity shares, which were not issued due to differences. The amount was transferred to the capital reserve, and the assessee cited various judgments to support that such capital receipts are not taxable.

The CIT(A) agreed with the assessee, stating that the amount received as an advance against equity shares is a capital receipt and not taxable as business income. The CIT(A) relied on several judgments, including those from the Mumbai and Delhi Tribunals, which supported the non-taxability of such amounts as income.

The Tribunal upheld the CIT(A)'s decision, noting that the amount received for share capital cannot be treated as income under Sections 41(1) or 28(iv) of the Act. The Tribunal emphasized that the legal position must prevail, and mere admission or offer by the assessee or its director does not change the nature of the receipt.

Issue 2: Addition of ?13,50,00,000 as Business Income

In the case of Tranquil Homes & Holdings Pvt Ltd, the Revenue challenged the deletion of ?13,50,00,000 added by the AO as business income under Section 28(iv) of the Act. The AO treated this amount as income, citing it as cessation of loan liability.

The assessee argued that the amount was related to share capital and not a loan. The CIT(A) accepted the assessee's claim, stating that the business was never set up, and the amount was indeed related to share capital.

The Tribunal noted that the facts and issues in this case were identical to those in the Nalwa Chrome Pvt Ltd case. The Tribunal upheld the CIT(A)'s decision, following the same reasoning and legal principles applied in the Nalwa Chrome Pvt Ltd case. The Tribunal dismissed the Revenue's appeal, confirming that the amount related to share capital and not taxable as business income.

Issue 3: Claim that Business was Never Set Up

The Revenue also challenged the CIT(A)'s acceptance of the assessee's claim that the business was never set up. The CIT(A) found that the amount in question was related to share capital and not a loan, and the business was indeed never set up.

The Tribunal upheld the CIT(A)'s decision, noting that the evidence supported the assessee's claim. The Tribunal dismissed the Revenue's appeal, confirming that the amount was related to share capital and not taxable as business income.

Conclusion:

The Tribunal dismissed both appeals filed by the Revenue, upholding the CIT(A)'s decisions that the amounts in question were capital receipts related to share capital and not taxable as business income under Sections 41(1) or 28(iv) of the Income Tax Act. The Tribunal emphasized the importance of legal principles and the nature of receipts in determining taxability, irrespective of admissions or offers made by the assessee.