2020 (5) TMI 136 - AT - Income Tax

Addition u/s 68 - undisclosed income of the sums received as share premium - HELD THAT - AO has categorically mentioned that there is no doubt about the genuineness of the source of fund. He has accepted the identity, creditworthiness and genuineness of the sources of funds of the share applicants. AO has drawn adverse inference on the ground that the assessee company s performance does not command the justification for share premium. In this regard by referring to the observations about shell companies the AO has contradicted himself by observing that the source of fund is duly explained. It is quite settled that in shell companies there is doubt about the source of funds. As regards the reliance of the AO on the decision of Major Metals 2012 (4) TMI 227 - BOMBAY HIGH COURT is concerned the same was with respect to the order of the settlement commission wherein the veracity of the funds were in doubt and in those circumstances honourable jurisdictional High Court has upheld the order of the settlement commission with regard to the absence of genuineness of the source of share premium. In the present case we note that assessee has duly submitted all the necessary documents for the verification of the identity creditworthiness and genuineness of the share applicants as evident. Examination of justification of share premium is concerned it is noted that the concerned provision in income tax law was brought into statute books in the form of section 56 (2)(vii)(b) . This was with effect from 2013-14. Honourable jurisdictional High Court in the case of M/s. Gangadeep Infrastructure (P) Ltd. 2017 (3) TMI 1263 - BOMBAY HIGH COURT has duly held that the said provision is prospective. In the present case there is no such doubt as the assessing officer has accepted that the sources of funds are duly explained. Further those decisions refer to the absence of the share applicants and/or their director at the given address. There is no such case made out by the AO here. Furthermore some of the cases refer to notices returning unserved, which is not at all the case here. Hence these decisions do not fructify the revenues case in the fact of the present case. The other decisions referred by learned counsel of the assessee duly support the case of the assessee. No infirmity in the order of learned CIT(A). Decided against revenue.

Issues Involved:
1. Obligation of the CIT(A) to conduct proper inquiry.
2. Deletion of unexplained income under Section 68.
3. Proof of identity, creditworthiness, and genuineness of transactions.
4. Nature of share capital/premium as capital receipt.
5. Applicability of Instruction No. 2 of 2015 and relevant case laws.

Issue-wise Detailed Analysis:

1. Obligation of the CIT(A) to Conduct Proper Inquiry:
The Revenue contended that the CIT(A) should have conducted a proper inquiry regarding the genuineness of the transactions of receipt of share capital/share premium, as per the Hon'ble Delhi High Court decision in CIT Vs Jansampark Advertising and Marketing (P) Ltd.

2. Deletion of Unexplained Income under Section 68:
The CIT(A) directed the deletion of the sum brought to tax by the AO as unexplained income under Section 68 of the Income Tax Act, 1961. The AO had added the share premium of ?7,30,78,750 as unexplained income, doubting the justification of the premium charged by the assessee. However, the CIT(A) observed that the AO had accepted the source of funds but questioned the reasonableness of the premium.

3. Proof of Identity, Creditworthiness, and Genuineness of Transactions:
The CIT(A) held that the assessee had proved the identity, creditworthiness, and genuineness of the transactions by submitting PAN, income-tax return acknowledgements, bank statements, and board resolutions. The CIT(A) emphasized that the AO did not bring any evidence to contradict the assessee's explanation.

4. Nature of Share Capital/Premium as Capital Receipt:
The CIT(A) concluded that the receipt of share capital/premium is capital in nature and cannot be brought to tax under Section 68. The CIT(A) relied on the decision of the Hon'ble Bombay High Court in Vodafone India Services Pvt. Ltd. Vs. Union of India & Ors, which held that share premium is a capital account transaction and does not give rise to income.

5. Applicability of Instruction No. 2 of 2015 and Relevant Case Laws:
The CIT(A) referred to CBDT Instruction No. 2/2015, which accepted the Bombay High Court's decision in Vodafone India Services Pvt. Ltd., stating that share premium is a capital account transaction. The CIT(A) also cited various case laws, including Green Infra Ltd. and Pr CIT vs Apeak Infoteck, which supported the view that share premium receipt is capital in nature and not taxable under Section 68.

Judgment Summary:
The ITAT upheld the CIT(A)'s order, dismissing the Revenue's appeal. The ITAT noted that the AO had accepted the identity, creditworthiness, and genuineness of the share applicants but questioned the justification of the share premium. The ITAT emphasized that the relevant provision for examining the justification of share premium, Section 56(2)(viib), was applicable from the assessment year 2013-14 and not for the assessment year 2012-13. The ITAT also referred to the jurisdictional High Court's decisions, which clarified that share premium is a capital receipt and not taxable under Section 68. The ITAT concluded that the AO was not empowered to examine the justification of share premium for the assessment year 2012-13 and upheld the CIT(A)'s deletion of the addition.

Conclusion:
The appeal filed by the Revenue was dismissed, and the order of the CIT(A) was upheld, affirming that the share premium received by the assessee is a capital receipt and not taxable under Section 68 of the Income Tax Act, 1961.

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