2018 (8) TMI 866 - HC - Income Tax

Additions u/s 68 - allotment of share capital - It is stated that when liability has been created equal to amount of assets transferred and shares allotted in settlement of this liability, there can be no addition under Section 68 of the said Act as unexplained cash credit - tribunal further held that, value of shares allotted to individuals would amount to unexplained cash credit - Held that - Additions confirmed by the tribunal deleted - Decided in favor of assessee.

Summary

Issues:
1. Valuation of shares allotted in settlement of pre-existing liability.
2. Treatment of shares allotted to individuals as unexplained cash credit.

Analysis:

Issue 1: Valuation of shares allotted in settlement of pre-existing liability
The appellant, a company engaged in the business of Wind Electric Generators, filed its income tax return for the assessment year 2012-13, declaring income of ?40,46,570. The appellant had introduced share capital and share premium, with a significant amount shown as share premium in the balance sheet. The appellant had received funds from M/s.Shriram Auto Finance, which were later assigned to the appellant. Subsequently, shares were allotted to settle the liability. The Assessing Officer added the share premium and share capital as unexplained cash credits under Section 68 of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) upheld this addition, stating that the appellant failed to prove the genuineness and creditworthiness of the entries in its books. However, the Tribunal held that the shares were allotted to reduce tax liability, treating the entries as income and dismissing the appeal. The appellant contended that the shares were allotted in settlement of a pre-existing liability, not as unexplained cash credit. Citing legal precedents, the court found that the transaction did not involve cash and the source of credit was explainable, thus setting aside the addition under Section 68.

Issue 2: Treatment of shares allotted to individuals as unexplained cash credit
The appellant argued that since no cash was involved in the allotment of shares, Section 68 of the Income Tax Act, treating it as unexplained cash credit, was not applicable. The appellant emphasized that the identity of the shareholders and the company's liability to them were established, making the allotment legitimate. Legal precedents were cited to support this argument, where even if the subscribers to increased share capital were not genuine, the amount could not be regarded as undisclosed income of the company. The court found in favor of the appellant on this issue, distinguishing the case from others where cash credits towards share capital were only book adjustments without actual receipts. The court allowed the appeal, setting aside the Tribunal's order and the additions under Section 68 of the Income Tax Act. The questions of law were answered against the Revenue, and no costs were awarded.

In conclusion, the court ruled in favor of the appellant, highlighting that the shares were allotted in settlement of a pre-existing liability and not as unexplained cash credit. The court emphasized the explainability of the transaction and established the legitimacy of the allotment, setting aside the additions made under Section 68 of the Income Tax Act.