2020 (1) TMI 455 - AT - Income Tax

Disallowance u/s 14A - HELD THAT - It is not in dispute that the assessee had not derived any exempt income during the year. Hence in our considered opinion the provisions of Sec. 14A of the Act cannot be made applicable. This issue is now very well settled by the decision of Hon ble Supreme Court in the case of Maxopp Investments 2018 (3) TMI 805 - SUPREME COURT . Accordingly the ground No.1 raised by the revenue is dismissed. Tax avoidance Tax evasion or Tax planning - Addition of share premium and share capital added u/s 56(1) - shares issued to foreign investors which were converted - HELD THAT - When there are material evidences to substantiate that the shares were issued to foreign investors and the conversion of the share was in accordance with the terms of issue of the preference shares appropriately justified with the fair valuation there is no case treating such an issue/conversion as a means of tax avoidance. In the present case we find that the assessee has converted/issued shares to the foreign investors at a premium. There is no question of any transfer or any assets or any income therefrom on which the transferor has the right to reassume power over the income or assets. In any case the provisions of Sec. 61 to 63 of the Act is not applicable in the hands of the transferor and the assessee herein is the recipient of the funds from the foreign investor and accordingly it is only transferee. Hence the provisions of Sec. 61 to 63 of the Act does not come into operation at all. The amounts received on issue of share capital including the premium is undoubtedly on capital account. Share premium have been made taxable by a legal fiction under Section 56(2)(viib) of the Act and the same is enumerated as Income in Section 2(24)(xvi) of the Act. However what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received on application of ALP. Therefore absent express legislation no amount received accrued or arising on capital account transaction can be subjected to tax as Income. We find considerable substance in the Petitioner s case that neither the capital receipts received by the Petitioner on issue of equity shares to its holding company a non-resident entity nor the alleged short-fall between the so called fair market price of its equity shares and the issue price of the equity shares can be considered as income within the meaning of the expression as defined under the Act. We hold that there is absolutely no case for making any addition u/s 56(1) of the Act. Disallowance of interest u/s 36(1)(iii) in respect of interest free advances given to certain subsidiary companies - HELD THAT - It is not in dispute that the monies were advanced by the assessee company to its subsidiary companies free of interest. We find that the Ld. A.O had disallowed the interest paid on borrowed funds u/s 36(1)(iii) of the Act on a proportionate basis of advancing of monies to its subsidiaries The aforesaid submissions made by the assessee were not controverted by the revenue before us. Hence the interest free advances made to subsidiaries by the assessee were purely out of commercial expediency and once the commercial expediency is proved then there cannot be any disallowance of interest u/s 36(1)(iii) of the Act. But we find that the Ld. CIT(A) despite the fact of commercial expediency being proved by the assessee had recorded a categorical finding that the disallowance of interest need to be restricted only to Rs. 34, 24, 711/- based on the availability of own funds with the assessee company. Accordingly the Ld. CIT(A) had restricted the disallowance of interest to Rs. 3424711 against which action we are informed that assessee had not preferred an appeal before us. This is a case where no disallowance of interest need to be made in view of proving of commercial expediency beyond doubt but since the assessee has not preferred an appeal before us against the restriction of disallowance of interest to Rs. 34, 24, 711/- by the Ld. CIT(A) we do not deem it fit and appropriate to interfere in the said order of the Ld. CIT(A). - Decide against revenue

Summary

Issues Involved:
1. Deletion of disallowance made under Section 14A of the Income Tax Act.
2. Deletion of addition of share premium and share capital under Section 56(1) of the Income Tax Act.
3. Restriction of disallowance of interest under Section 36(1)(iii) of the Income Tax Act.

Detailed Analysis:

1. Deletion of Disallowance under Section 14A:
The first issue was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the disallowance made under Section 14A of the Income Tax Act. The Tribunal noted that the assessee had not derived any exempt income during the year. Citing the Supreme Court decision in Maxopp Investments (402 ITR 640), it was concluded that the provisions of Section 14A could not be applied. Consequently, the ground raised by the revenue was dismissed.

2. Deletion of Addition of Share Premium and Share Capital under Section 56(1):
The second issue pertained to the addition of share premium and share capital under Section 56(1) of the Income Tax Act. The assessee, engaged in import and wholesale trading in branded readymade garments, had created several subsidiaries. The Assessing Officer (AO) had added the share premium and share capital received by the assessee to its income, alleging it was not justified given the company's losses and lack of future prospects.

The CIT(A) deleted the addition, noting that:
- The share premium was divided into two parts: conversion of preference shares and fresh issue of equity shares.
- No fresh funds were introduced into the company’s books during the conversion of preference shares.
- The premium on fresh issue of equity shares was justified based on fair valuation and future business prospects.

The Tribunal upheld the CIT(A)’s decision, emphasizing:
- The investments were made by foreign investors through normal banking channels and complied with Reserve Bank of India (RBI) regulations.
- The share premium was not taxable under Section 56(1) as it was a capital receipt, supported by the Bombay High Court decisions in Vodafone India Services Pvt. Ltd. and Rockstar Real Estate Pvt. Ltd.
- The AO’s reliance on the McDowell case was misplaced as it did not apply to the facts of this case.

3. Restriction of Disallowance of Interest under Section 36(1)(iii):
For the assessment year 2012-13, the AO had disallowed interest paid on borrowed funds proportionate to interest-free advances given to certain subsidiaries. The CIT(A) restricted this disallowance to Rs. 34,24,711 based on the availability of own funds with the assessee. The Tribunal noted that the advances were made out of commercial expediency, and once such expediency is proved, no disallowance of interest is warranted under Section 36(1)(iii). However, since the assessee had not appealed against the CIT(A)’s restriction of disallowance, the Tribunal did not interfere with the CIT(A)’s order.

Conclusion:
The Tribunal dismissed all the appeals filed by the revenue, upholding the CIT(A)’s decisions on all issues. The Tribunal’s detailed analysis reaffirmed that the share premium and share capital received by the assessee were justified and not taxable under Section 56(1), and the interest disallowance was appropriately restricted by the CIT(A).