2018 (8) TMI 1193 - AT - Income Tax

Nature of income received in the name of share premiums - lifting of corporate veil - AO taxed the same business income - CIT(A) taxed the same as income from other sources - These shares were issued with huge share premium and share premiums were determined without any basis - Held that - The arrangement and circumstances leading to issue and allotment of shares may draw some doubts that certain benefits may have passed on to the directors. But the question is whether the directors/shareholders have really benefited with this arrangement and the assessee company was used as arrangement to pass on the benefit. AO has invoked section 28(iv) to convert the capital receipt as revenue. This section refers to any benefit/perquisite arising from business or exercise of a profession. This capital receipt is not generated in the business whereas ld. CIT(A) confirmed the capital receipt as income from other sources without establishing that this is income of the assessee when the assessee has not even commenced the business. The alleged receipt is the benefit intended to pass on to the director/shareholdes of the company. We noticed that this capital investment was received by the assessee as 0% convertible preferential shares. No doubt there is no immediate outflow to the company in terms of dividend but it is convertible in the near future as equity share capital. The AO/CIT(A) have restricted themselves by stopping the investigation based on circumstantial evidence and applying test of human probabilities. In order to lift the corporate veil for the purpose of determining whether any benefit is passed on to the shareholders/directors, they have to bring on record proper evidence/cogent material. We direct the AO to redo the assessment keeping in mind that no doubt the assessee has received this capital receipt and what circumstances which lead to investment is not important but whether the assessee company was used as a vehicle to pass on the benefit to shareholders/directors. Decided in favor of assessee for statistical purposes.

Issues Involved:
1. Taxability of share premium received by the assessee.
2. Applicability of Section 28(iv) and Section 56 of the Income Tax Act.
3. Genuineness of the transactions and lifting of the corporate veil.
4. Classification of the receipt as capital or revenue.

Issue-wise Detailed Analysis:

1. Taxability of Share Premium Received by the Assessee:
The assessee, a company engaged in the manufacture and sale of cement, issued 0% convertible preference shares at a significant premium to three investors. The Assessing Officer (AO) treated the share premium as income under Section 28(iv) of the Income Tax Act, contending that the investments were not genuine and were part of an arrangement to pass on benefits to the investors due to the political influence of the company's directors. The CIT(A) enhanced the assessment, treating the entire receipt as "income from other sources" under Section 56, citing the benefits received by the investors from the Andhra Pradesh government.

2. Applicability of Section 28(iv) and Section 56 of the Income Tax Act:
The AO invoked Section 28(iv), which pertains to benefits or perquisites arising from business or profession, to convert the capital receipt into revenue. The CIT(A) confirmed the addition under Section 56, which deals with income from other sources. The assessee argued that Section 56 was not applicable for the assessment year in question and that the share premium could not be treated as a perquisite under Section 28(iv). The Tribunal noted that the AO and CIT(A) failed to establish that the receipt was income of the assessee, especially since the business had not commenced.

3. Genuineness of the Transactions and Lifting of the Corporate Veil:
The AO and CIT(A) questioned the genuineness of the transactions, citing the timing of the investments and the lack of due diligence by the investors. They argued that the investments were quid-pro-quo arrangements for benefits received from the state government. The Tribunal, however, emphasized that the investments were made legally within the provisions of the Companies Act and that the revenue authorities had not provided concrete evidence to prove that the company was used to pass on benefits to the directors. The Tribunal directed the AO to verify whether any benefits were passed on to the shareholders/directors through other means and to base the assessment on factual evidence rather than circumstantial evidence or human probabilities.

4. Classification of the Receipt as Capital or Revenue:
The Tribunal observed that the share premium received by the assessee was treated as part of the capital reserve within the company, as per the Companies Act. The Tribunal noted that the AO and CIT(A) had not adequately demonstrated that the receipt was revenue in nature. The Tribunal highlighted that the share premium was a capital receipt and could not be taxed as revenue under the applicable provisions of the Income Tax Act for the assessment years in question. The Tribunal remitted the issue back to the AO for re-verification, instructing the AO to examine the company's cash flow management and to ensure that the assessment was based on factual evidence of benefits passed to the shareholders/directors.

Conclusion:
The Tribunal allowed the appeals of the assessee for statistical purposes, directing the AO to re-examine the transactions and verify the cash flow management of the company for both assessment years 2009-10 and 2010-11. The Tribunal emphasized the need for concrete evidence to establish any benefit passed to the shareholders/directors and instructed the AO to avoid relying on circumstantial evidence or human probabilities.

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