2019 (3) TMI 686 - AT - Income Tax

Addition on account of transfer of shares to group companies - Gift u/s 47(iii) - corporate transfer of shares by way of gift - revenue contended that the gain is taxable under the head income from other sources - assessee is contending that (i) the transaction is not colourable device, (ii) the selling price cannot be replaced by the market value and (iii) the sale of shares without price is a gift and not transfer u/s, 47(iii) - CIT(A) held that this was not a gift since the assessee had not ticked the option of gift provided in the slip instead had mentioned it was a case of transfer of off market inter se transfer between promoters - HELD THAT - We observe that income from other sources is the last and residual head of income. A source of income which does not specifically fall under any one of the other four heads of income (viz, Salaries, Income from House Property, Profit and Gains of business or profession, or capital gain) is to be computed and brought to charge under section 56 under the head Income from Other sources .It can be said that the residuary head of income can be resorted to only if none of the specific head is applicable to the income in question and that it comes into the operation only if the preceding heads are excluded. Thus, it can be said that the residuary head of income can be invoked only if all the following conditions are satisfied. The benefit accrued to the Assessee in present case is in the capital field and can be brought to tax only under the head capital gain. Accordingly, the provisions of section 56(1) cannot be resorted to. After going through the entire order of the Assessing Officer wherein the Assessing Officer alleged that the assessee has adopted a colourable device, however, not a single instance has been brought on record by the department of any tax evasion. We direct the Assessing Officer to consider shares of WWIL transferred to ECRPL No. 1,03,31,658 and to ECRPL No. 1,28,26,555 as a gift, therefore, not liable to tax. In respect of shares transferred to EBPL, the sale consideration is not to be replaced by the market price but at the price on which these have been transferred. Similarly in respect of shares of DTIL transferred to PFT 2100 shares and DMNDVPL 3050 shares the same to be treated as a gift not liable to tax. In sum and substance only transaction of transfer of shares of Dist TV No. 10,32,125/- to ECRPL are liable to tax under the head capital gains amounting to ₹ 2,80,23,486/-. Disallowance of interest u/s 36(1)(iii) - HELD THAT - All the facts and circumstances clearly indicate that the advances were under commercial expediency. The Hon ble Bombay High Court in the case of PCIT v. Sesa Resources 2017 (9) TMI 126 - BOMBAY HIGH COURT has held that where assessee company borrowed funds and advanced same to its sister concern, since amount was neither a donation nor loan was given to an individual or to a director for his personal use, same would be presumed to be advanced for commercial expediency, thus no disallowance could be made U/s 36(l)(iii) of the Act. Tribunal in assessee s own case for the A.Y. 2008-09 and 2009-10 had set aside the issue for fresh adjudication, however, during the year under consideration, all the facts are on record. Considering all the facts and circumstances of the case during the A.Y. 2012-13 under consideration as discussed above, we hold that the investment was made as a commercial expediency. Accordingly, we direct the Assessing Officer to delete the disallowance of interest. Disallowance of interest u/s 14A read with Rule 8D - Non adjudication of additional claim for deletion of suo-moto disallowance under section 14A read with Rule 8D - HELD THAT - The Hon ble Bombay High Court in the case of PCIT v. Rivian International P. Ltd. 2017 (12) TMI 811 - BOMBAY HIGH COURT has also held that if the assessee during the relevant year has not earned any tax-free income, the corresponding expenditure incurred cannot be taken into consideration for disallowance. In view of the above discussions we direct the Assessing Officer to delete the disallowance. Disallowance of share premium as unexplained cash credit u/s 68 - income from other sources - HELD THAT - Since all the funds have been remitted through a proper banking channel duly recorded in the books of account and financials of the Company, there cannot be any doubt on the genuineness of the transaction. A copy of the bank statement of the Assessee was submitted to establish the same. The Assessee even submitted the relevant board resolution, register of members and Form 2 filed with the ROC intimating allotment of preference shares. In fact, the monies received towards share capital has been accepted by the AO and it is only the money received toward share premium which is in dispute. In view of the above, the nature and source of ₹ 35 crores received stands explained and no addition under section 68 of the Act is called for. Section 56(2)(viib) of the Act which seeks to tax amount received in excess of fair market value of shares only applies from Assessment Year 2013-14. Hence, Section 56(2)(viib) of the Act cannot be resorted to in the instant assessment year 2012-13 under consideration. Therefore, share premium is not chargeable to tax. Even if the share premium is excessive, the same cannot be taxed under the provisions of section 68 during the A.Y. 2012-13 under consideration, since the nature and source of the same stands fully explained. This contention is duly supported by the decision of the Mumbai Tribunal in the case of DCIT v. Varsity Education Management Pvt. Ltd 2018 (10) TMI 1438 - ITAT MUMBAI . Addition made on account of share premium received by the assessee to be deleted - Decided in favour of assessee

Summary

Issues Involved:
1. Addition on account of transfer of shares.
2. Disallowance of interest under Section 36(1)(iii) of the Income-tax Act.
3. Disallowance under Section 14A read with Rule 8D of the Income-tax Rules.
4. Addition under Section 68 of the Income-tax Act.
5. Deletion of disallowance made by AO under Section 14A read with Rule 8D.

Detailed Analysis:

1. Addition on account of transfer of shares:
The assessee transferred shares to group companies, some at cost and others without consideration, claiming it as a gift. The AO treated these transactions as a colorable device to evade taxes and taxed the resultant profit under "income from other sources" by substituting the market value for the sale consideration. The CIT(A) upheld the AO's view but taxed the profit under "capital gain" instead. The tribunal noted that the assessee's transactions were part of internal restructuring and not a colorable device. It held that the market value could not be substituted for the sale consideration as there was no provision in the Act for such substitution. The tribunal also recognized the transfer of shares without consideration as a gift, exempt under Section 47(iii) of the Act, and directed the AO to treat the transactions accordingly.

2. Disallowance of interest under Section 36(1)(iii) of the Income-tax Act:
The AO disallowed interest expenses related to advances given to group concerns, asserting no commercial expediency. The tribunal found that the advances were made for strategic investments and commercial purposes, such as acquiring controlling interests and supporting group ventures. It cited the Bombay High Court's decision in PCIT v. Sesa Resources to support the view that advances to group concerns for commercial purposes do not warrant disallowance of interest. Consequently, the tribunal directed the AO to delete the disallowance of interest.

3. Disallowance under Section 14A read with Rule 8D of the Income-tax Rules:
The AO made a disallowance under Section 14A read with Rule 8D, despite the assessee not earning any exempt income during the year. The tribunal referred to the Delhi High Court's decision in Cheminvest Ltd. v. CIT, which held that Section 14A does not apply if no exempt income is received or receivable during the relevant year. The tribunal directed the deletion of the disallowance under Section 14A read with Rule 8D.

4. Addition under Section 68 of the Income-tax Act:
The AO treated the share premium received by the assessee as unexplained cash credit under Section 68. The tribunal noted that the assessee had provided sufficient documentary evidence to establish the identity, creditworthiness, and genuineness of the transaction. It emphasized that the share premium is a capital receipt and not taxable under the Act, supported by the Bombay High Court's decision in Vodafone India Service (P) Ltd. The tribunal directed the deletion of the addition made under Section 68.

5. Deletion of disallowance made by AO under Section 14A read with Rule 8D:
For the assessment year 2013-14, the AO made a disallowance under Section 14A read with Rule 8D, despite the assessee not earning any exempt income. The CIT(A) deleted the disallowance, and the tribunal upheld this decision, reiterating the principle that Section 14A does not apply in the absence of exempt income, as established in Cheminvest Ltd. v. CIT and PCIT v. Rivian International P. Ltd.

Conclusion:
The tribunal's judgment addressed the issues comprehensively, emphasizing the principles of commercial expediency, the non-applicability of Section 14A in the absence of exempt income, and the proper treatment of share premium as a capital receipt. The tribunal directed appropriate deletions and adjustments, ensuring adherence to the provisions of the Income-tax Act and relevant judicial precedents.