2020 (1) TMI 852 - AT - Income Tax

Unexplained cash credits u/s 68 - assessee s finances and operations do not justify the share premium, but the entire share premium raised has been diverted in paying off long term loan of the assessee - lifting of corporate veil - contention of the assessee that the issue of compliance of Section 78 of the Companies Act, 1956 or diversion of share premium cannot be considered - HELD THAT - The assessee-company, having raised share premium, has diverted the same in paying off long term loans. The mandate of the decision DURGA PRASAD MORE 1971 (8) TMI 17 - SUPREME COURT is duly applicable. Hence the submission of the learned counsel of the assessee that utilisation of share premium amount in paying off loans is irrelevant is not legally sustainable. It is also settled law that substance prevails over form. It is undisputed that share premium amount has been actually utilised for paying off loan. Furthermore, we note that the transaction is between group concerns. Assessee submitted that these concerns belong to a reputed group and they are not fly by night operators. This makes it amply clear that for paying off the loan of the assessee-company, a group company has accommodated by introducing money in the form of share premium. In substance, it is not at all share premium. It is, in fact, a misuse of the corporate veil. Assessee-company has no obligation to pay back the amount received as share premium in any event. However, we also find that in this regard learned counsel of the assessee has made various submissions which interest of justice demands that this aspect of adjudication needs to be remitted to the file of the Assessing Officer. The Assessing Officer shall examine this aspect in view of our observation and the Hon'ble Apex Court s decisions referred above. The Assessing Officer shall also consider the submissions of the learned counsel for the assessee and give the assessee proper opportunity of being heard. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Addition of ?3,42,00,000 on account of share capital and premium as unexplained cash credits under Section 68 of the Income Tax Act.
2. Addition of ?34,600 on account of stamp duty paid on allotment of shares.
3. Confirmation of interest under Section 234B of the Income Tax Act, 1961.

Detailed Analysis:

1. Addition of ?3,42,00,000 on account of share capital and premium as unexplained cash credits under Section 68 of the Income Tax Act:

The Assessing Officer (AO) noted that the assessee-company issued 85,500 shares at a face value of ?10 and a premium of ?390, totaling ?3,42,00,000. The AO questioned the credibility of this transaction, highlighting the company’s poor earnings per share (EPS) of ?1.37 and the use of the funds to reduce long-term borrowings. The AO found the Discounted Cash Flow method used for valuation unrealistic and considered the share premium unjustified due to the company's negative net worth and loan liability. The AO treated the share premium as unexplained cash credit under Section 68, citing various judicial pronouncements, including the Supreme Court's decision in CIT vs Durga Prasad More.

The CIT(A) upheld the AO's decision, emphasizing the lack of business activities, assets, and stock in the company. The CIT(A) reiterated reliance on the Kolkata Tribunal's decision in Bisakha Sales Pvt. Ltd. and the Supreme Court's decision in Durga Prasad More, treating the share premium as unexplained credit under Section 68.

The Tribunal, after hearing both parties, noted that the authorities below relied on the decision in Bisakha Sales Pvt. Ltd., which dealt with the applicability of Section 78(2) of the Companies Act, 1956. The Tribunal observed that the entire share premium was used to pay off long-term loans, making the transaction a colorable device. The Tribunal emphasized that the substance of the transaction, rather than its form, should prevail. The Tribunal remitted the matter back to the AO for re-examination, considering the assessee's submissions and the Supreme Court's decisions.

2. Addition of ?34,600 on account of stamp duty paid on allotment of shares:

The AO disallowed the stamp duty expense of ?34,600, treating it as a capital expense in connection with the increase in authorized share capital. This decision was based on the Supreme Court's ruling in M/s. Brookbond India Ltd. vs CIT. The CIT(A) confirmed this disallowance, and the Tribunal did not find any reason to interfere with this decision.

3. Confirmation of interest under Section 234B of the Income Tax Act, 1961:

The appeal did not extensively discuss the confirmation of interest under Section 234B. However, the Tribunal allowed the appeal for statistical purposes, implying that this issue might be reconsidered during the re-examination by the AO.

Conclusion:

The Tribunal remitted the matter to the AO for re-examination, considering the assessee's submissions and relevant Supreme Court decisions. The appeal was allowed for statistical purposes, with specific instructions for the AO to provide the assessee with a proper opportunity to be heard. The Tribunal also clarified that certain case laws cited by the assessee were not applicable to the specific facts of the case.