2020 (5) TMI 409 - AT - Income Tax

Addition u/s 68 - Disallowance of share premium on the grounds that the assessee has not filed the valuation report pertaining to the value of the land for which share premium @ ₹ 90 /- per share has been received - HELD THAT - Premium paid by the share holders is not without a proper reasons. The company is in possession of the land and also going ahead with development of residential complex which are reasons sufficient for payment of the premium. We are unable to concur with the finding of the Ao that the worth of the assessee at the time of issue of shares was negative - AO has ignored the fact on record that the assessee has purchased land at the cost of ₹ 3.19 crores at Village Khirki Daula which adequately supports the share premium raised by the assessee. There is no iota of evidence about the concealment or plough back of undisclosed income to the assessee - AO has not disputed the identity, genuineness and creditworthiness of the share holders. Hence, the invocation of the provisions of Section 68 for the simple reason of non filing the valuation report by the assessee and by not referring the cost of the land to the DVO, and without bringing any material on record to fulfill the criteria of Section 68, cannot be justified in this case.- Decided against revenue. Addition u/s 2( 22)(e) - Deemend dividend addition - substantial interest or not - HELD THAT - As per the provisions of the Act it needs to meet the conditions in the instant case that Sh. Allimudin should have been a share holder in the companies paying the amount and also he should have been having a substantial interest in the assessee company. Section 2(32 ) refers to person who has a substantial interest in the company in relation to a company means a person who is the beneficial owner of the shares not being shares entitled to a fixed rate of dividend whether with are without a right to participate in profits carrying not less than 25 % of voting power. In order to tax the receipt, it has to be proved that the amounts received has been utilized by the assessee company could have been distributed as dividend by the lending company. We find that this is not the fact in the case of the instant assessee. Coupled with this fact, since, it has been proved that the advances are given for the business purpose, we hold that the provisions of Section 2(22)(e) of the Act are not attracted in the case of the assessee. - Decided against revenue.

Summary

Issues:
1. Disallowance of share capital loss under section 68 of the Act.
2. Disregarding the valuation of premium of shares.
3. Addition under section 2(22)(e) of the Act.

Issue 1: Disallowance of share capital loss under section 68 of the Act:
The Assessing Officer disallowed the share premium stating that the company lacked assets to justify the premium value of shares. The company failed to provide a valuation report to support the share premium. However, the CIT (A) deleted the addition, emphasizing the proven identity, creditworthiness, and genuineness of the transaction. The Tribunal found that the share premium was justified as the company had purchased land and initiated a construction project, supporting the premium value. The Tribunal disagreed with the AO's negative assessment of the company's worth, highlighting the land purchase as evidence. The Tribunal concluded that there was no evidence of income concealment or non-genuine transactions, thus dismissing the AO's disallowance under section 68 of the Act.

Issue 2: Disregarding the valuation of premium of shares:
The AO raised concerns regarding the share premium valuation without a valuation report and the company's negative worth. The CIT (A) supported the company's position, emphasizing commercial justifications for the premium. The Tribunal analyzed the situation, noting the lack of evidence for income concealment and the proven identities of the shareholders. The Tribunal highlighted the business purpose behind the share premium and the absence of criteria fulfillment for invoking section 68. Consequently, the Tribunal dismissed the AO's disallowance, affirming the legitimacy of the share premium valuation.

Issue 3: Addition under section 2(22)(e) of the Act:
The AO added amounts received from related companies against land purchase and construction as income under section 2(22)(e). The CIT (A) reversed this addition, citing commercial considerations for the advances. The Tribunal examined the provisions of section 2(22)(e) and the substantial interest of a common director in the companies involved. It was established that the advances were for business purposes and not for dividend distribution, thus not attracting section 2(22)(e). The Tribunal upheld the CIT (A)'s decision, dismissing the revenue's appeal.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the CIT (A)'s decisions regarding the disallowance of share capital loss under section 68 and the addition under section 2(22)(e) of the Act. The Tribunal emphasized the legitimacy of the share premium valuation and the commercial nature of the advances, leading to the dismissal of the revenue's claims.