2021 (10) TMI 723 - AT - Income Tax

Characterization of receipts - nature of receipt - money received by the assessee for issue of shares but the shares could not be issued due to contravention of FEMA guidelines - AO treated the same as gift by the assessee company or in terms of Section 28(iv) r.w.s. 2(24)(ix) - AO had stated that the assessee company had received this gift from its Holding Company - HELD THAT - As specifically clarified by the ld AR that at the time of receipt of monies Alertpay Quebec was not the holding company of the assessee company - on perusal of the Board Resolution dated 21.9.2011 of Alertpay Quebec that the Canadian Company would send fresh money transfer of 153000 Canadian Dollars to the assessee company for purchasing the shares of the assessee company. Obviously this event happened after the receipt of original gift amount of Rs. 3, 46, 33, 388/-. Only pursuant to this acquisition of shares by investing 153000 Canadian Dollars the assessee company became the subsidiary company of Alertpay Quebec and not before that. Hence it could be safely concluded that at the time of receipt of monies originally in the sum of Rs. 3, 46, 33, 388/- which was treated as gift by the assessee company for reasons stated hereinabove Alertpay Quebec was not the Holding Company of assessee company. Hence we hold that the observation made by the ld AO in this regard is factually incorrect. Applicability of provisions of section 28(iv) read with section 2(24)(ix) - In the instant case the amounts have been received by the assessee company which is not covered by the provisions of section 56(2)(vii) - provisions of section 56(2)(viia) of the Act applies only to receipt of shares by a firm or company without consideration or for inadequate consideration. In the instant case the assessee company had only received monies. Hence the said provisions are also not applicable in the instant case. We find that the provisions of section 56(2)(viib) of the Act are applicable only for consideration for issue of shares received by a company from any person who is a resident. Admittedly the monies have been received in the instant case by the assessee company from a non-resident. Hence the provisions of section 56(2)(viib) of the Act are also not applicable in the instant case. With regard to applicability of provisions of section 28(iv) of the Act admittedly the monies were not received by the assessee company in the ordinary course of its business. We further find that in the case of Chetnaben B Seth 1992 (9) TMI 34 - GUJARAT HIGH COURT had held that amount received by an assessee partner of a firm towards valuation of Goodwill and assets of a firm at the time of retirement from the firm does not attract the provisions of section 28(iv) of the Act since the same cannot be perquisite arising from the business and that even otherwise it would not partake the character of income. Hence the provisions of section 28(iv) of the Act cannot be made applicable to the facts of the instant case. Also in the case of G.S.Homes Hotels (P) Ltd 2016 (8) TMI 613 - SC ORDER had categorically held that the amount received on account of share capital ought not to be treated as business income. It is not in dispute that the amounts originally received by the assessee company from the non-resident was only for issuance of share capital. Since the same was not implemented by the assessee company within the prescribed time the assessee company as instructed by the concerned remitter from abroad had chosen to treat the said receipt as gift and accordingly had directly credited the same to reserves and surplus in the balance sheet. Thus we hold that the receipt of monies in the sum cannot be taxed as income in the hands of the assessee company. Accordingly the grounds raised by the assessee in this regard are allowed. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Treatment of money received by the assessee for issue of shares but not issued due to contravention of FEMA guidelines.
2. Whether the money received should be treated as a gift or income under the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Treatment of Money Received for Issue of Shares
The primary issue revolves around whether the money received by the assessee company for the issuance of shares, which could not be issued due to non-compliance with FEMA guidelines, should be treated as a gift or as income. The assessee company initially received funds from Alertpay Inc., Canada, for share capital. However, due to failure in issuing shares within the stipulated six months as per FEMA guidelines, the company considered the funds as a gift from Alertpay Inc., Canada, after consulting with a FEMA consultant. The AO contested this treatment, arguing that the funds should be treated as taxable income under Section 28(iv) read with Section 2(24)(ix) of the Income Tax Act.

Issue 2: Whether the Money Received Should be Treated as a Gift or Income
The assessee argued that the funds were a gift from Alertpay Inc., Canada, and not income. The CIT(A) upheld the AO's decision, stating that the appellant failed to provide sufficient evidence to prove the funds were a gift, such as a gift deed or relevant documentation from Alertpay Inc., Canada, authorizing the gift. The CIT(A) also noted inconsistencies in the appellant's claims, initially stating the funds were received without instructions and later claiming it was share capital from a brother.

Tribunal's Findings:
1. Original Intention and Compliance with FEMA: The Tribunal noted that the original intention of the assessee company was to receive the funds as share capital for issuing shares to the Canadian company. The failure to comply with FEMA regulations led to treating the funds as a gift, which was agreed upon by the remitter.

2. Board Resolutions and Documentation: The Tribunal examined the board resolutions and email communications between the assessee company and Alertpay Inc., Canada, which indicated that the remaining funds, after partial refund, were to be treated as a gift. The Tribunal found that the receipt of funds was not doubted by the revenue at any point.

3. Applicability of Section 28(iv) and Section 56: The Tribunal analyzed the applicability of Section 28(iv) and Section 56 of the Income Tax Act. It concluded that the funds were not received in the ordinary course of business and did not constitute a benefit arising from business operations. Therefore, Section 28(iv) was not applicable. Additionally, the Tribunal found that the provisions of Section 56(1) and Section 56(2)(viia) and (viib) were also not applicable as the funds were received from a non-resident and not for consideration of shares.

4. Judicial Precedents: The Tribunal referred to various judicial precedents, including the Hon'ble Supreme Court's decision in G.S. Homes & Hotels (P) Ltd vs DCIT and the Hon'ble Gujarat High Court's decision in Chetnaben B Seth, which supported the assessee's claim that the receipt of share capital should not be treated as business income.

Conclusion:
The Tribunal concluded that the funds received by the assessee company, initially intended for share capital but later treated as a gift due to non-compliance with FEMA, could not be taxed as income. The Tribunal allowed the appeal in favor of the assessee, holding that the receipt of Rs. 3,46,33,388/- could not be taxed as income under the Income Tax Act.

Order Pronounced on 30/08/2021.