2025 (4) TMI 1261 - AT - Income Tax

Disallowance u/s 28(iv) towards share application money - CIT(A) (NFAC) deleted the additions - as submitted though the share premium was received in the F.Y. 2011-12 2012-13 no shares were allotted against them as late as March 2021 - CIT(A) deleted addition - HELD THAT - Assessee had received share application money from its existing shareholders. In this respect provisions of section 68 were not urged upon by the AO. Thus accepting the identity and creditworthiness of the investors and genuineness of the transaction addition made by the ld. AO is by way of invoking provisions of section 28(iv) to bring this amount to tax under the head profit and gains business or profession on account of assessee receiving benefit or perquisite. The most clinching fact for the assessee is that it has ultimately issued the shares and allotted the same to the respective investors which is not in dispute. This fact establishes that impugned transaction is on capital account and thus the receipt in the hands of the assessee is a capital receipt not liable to be taxed under the provisions of section 28(iv). No reason to interfere with the findings arrived at by the ld. CIT(A) deleting the addition made u/s 28(iv) by the ld. AO. Accordingly ground raised by the Revenue in this respect is dismissed.

Summary

The core legal issue considered by the Tribunal is whether the share application money of Rs. 10,17,05,000/- received by the assessee company, but not allotted as shares until several years later, can be treated as business income under section 28(iv) of the Income-tax Act, 1961, or whether it is a capital receipt not liable to tax under that provision.

Related to this primary issue, the Tribunal also examined whether the delay in allotment of shares affects the nature of the receipt, and whether the identity and genuineness of the investors impact the taxability of such share application money.

Further, the Tribunal considered the applicability and interpretation of section 28(iv) of the Income-tax Act, which taxes the value of any benefit or perquisite arising from business or profession, and whether it extends to share application money received pending allotment.

Another ancillary issue was the relevance of the provisions of section 68 (which deals with unexplained cash credits) and whether the Assessing Officer was justified in not invoking it, instead relying on section 28(iv) to add the share application money to the income.

Lastly, the Tribunal reviewed the precedents and legal principles governing the distinction between capital receipts and revenue receipts, particularly in the context of share capital and share application money.

Issue-wise Detailed Analysis:

Issue 1: Whether share application money pending allotment can be treated as business income under section 28(iv) of the Income-tax Act

Legal Framework and Precedents: Section 28(iv) of the Income-tax Act taxes "the value of any benefit or perquisite convertible into money or not arising from business or the exercise of a profession." The legal principle distinguishing capital receipts from revenue receipts is well established, wherein capital receipts are generally not taxable as business income unless specifically included under the Act.

Several precedents were relied upon by the assessee, including the decision of the ITAT Nagpur in DCIT v. Inex Infotech Pvt. Ltd., which held that share capital and share application money received by a company are capital receipts and not income under section 28(iv). The Hon'ble Bombay High Court in PCIT v. Apeak Infotech upheld this view, ruling that amounts received towards share capital cannot be treated as income.

The Hon'ble Supreme Court decision in G.S. Homes and Hotel Pvt. Ltd. further clarified that share capital received from shareholders is not business income and should not be taxed under section 28(iv).

Court's Interpretation and Reasoning: The Tribunal emphasized that section 28(iv) applies only to benefits or perquisites arising from business or profession and not to capital receipts. The Tribunal reiterated that the burden lies on the Revenue to prove that the receipt is revenue in nature. It was noted that share capital, share application money, and share premium are inherently capital receipts, as recognized by accounting principles and the Companies Act, which require separate disclosure of such amounts in the balance sheet.

Key Evidence and Findings: The assessee provided confirmations from investors, their balance sheets, and Income Tax Returns to establish the identity and creditworthiness of the parties who paid the share application money. The assessee also furnished audited financial statements showing the share application money as a capital item consistently over the years. Importantly, the shares were eventually issued and allotted in the financial year 2020-21, and documentary evidence including share certificates and stamp duty payment was submitted.

Application of Law to Facts: The Tribunal applied the legal principle that share application money is a capital receipt and not income. Since the investors were existing shareholders and the transaction was genuine, the delay in allotment did not convert the capital receipt into business income. The eventual allotment of shares confirmed the capital nature of the receipt. The Tribunal found no justification for invoking section 28(iv) to treat the share application money as business income.

Treatment of Competing Arguments: The Revenue argued that the share premium received in earlier years but not allotted until much later should be treated as income under section 28(iv). However, the Tribunal noted that the Revenue did not challenge the identity or genuineness of the investors nor invoked section 68. The Tribunal found that section 28(iv) is not applicable to capital receipts and rejected the Revenue's contention.

Conclusions: The Tribunal held that the share application money received by the assessee is a capital receipt and not taxable under section 28(iv). The delay in allotment does not alter the nature of the receipt. The addition made by the Assessing Officer was therefore unsustainable and rightly deleted by the CIT(A).

Issue 2: Whether the delay in allotment of shares affects the taxability of share application money

Legal Framework and Precedents: The Companies Act and accounting standards recognize share application money pending allotment as a capital item. The delay in allotment does not convert the capital receipt into revenue unless there is evidence of the receipt being a benefit or perquisite arising from business.

Court's Interpretation and Reasoning: The Tribunal observed that the delay in allotment was due to procedural formalities with the Registrar of Companies and financial difficulties faced by the assessee. The shareholders were aware of the situation and did not seek refund or initiate adverse action. The Tribunal found that such delay did not change the fundamental nature of the receipt as capital.

Key Evidence and Findings: The audited financial statements for multiple years consistently reported the share application money as pending allotment. The eventual issuance of shares in 2020-21, supported by share certificates and stamp duty payment, conclusively demonstrated the capital nature of the receipt.

Application of Law to Facts: The Tribunal applied the principle that the substance of the transaction governs its taxability. The procedural delay did not create a business income scenario. The receipt remained a capital receipt throughout.

Treatment of Competing Arguments: The Revenue did not dispute the genuineness or identity of the investors but relied on section 28(iv) to treat the amount as business income. The Tribunal rejected this approach, emphasizing that the delay alone cannot convert capital receipt into income.

Conclusions: The Tribunal concluded that the delay in allotment of shares does not affect the capital nature of the share application money and hence it is not taxable under section 28(iv).

Issue 3: Whether section 68 could have been invoked and its relevance to the case

Legal Framework: Section 68 deals with unexplained cash credits and allows the Assessing Officer to add unexplained credits to income. It is typically invoked when the identity or genuineness of the investor is doubtful.

Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer did not invoke section 68, implicitly accepting the identity and creditworthiness of the investors. The assessee furnished confirmations, balance sheets, and ITRs of the investors, establishing the genuineness of the transaction.

Application of Law to Facts: Since the identity and genuineness were not disputed and corroborative evidence was furnished, section 68 was not applicable. The Revenue's reliance on section 28(iv) was misplaced.

Conclusions: The Tribunal found no reason to invoke section 68 and upheld the view that the transaction was genuine and capital in nature.

Significant Holdings:

"Section 28(iv) of the Act has no application as it deals with benefit other than cash and money arising out of the business. Share capital and share application money with premium are amounts received on capital account and cannot be treated as income from business or profession."

"The burden is on the Revenue to establish that the receipt is of a revenue nature. Share application money received from existing shareholders, supported by confirmations and financial statements, is a capital receipt."

"Delay in allotment of shares does not convert the capital receipt into business income. The eventual allotment of shares conclusively establishes the capital nature of the receipt."

"In the absence of any dispute on the identity and genuineness of the investors, section 68 is not applicable and the addition under section 28(iv) is unsustainable."

"The amount received on account of share capital including premium are undoubtedly on capital account. Absent express legislation, no amount received on capital account can be subjected to tax as income."

Accordingly, the Tribunal dismissed the Revenue's appeal and upheld the deletion of the addition of Rs. 10,17,05,000/- made under section 28(iv) by the Assessing Officer, confirming that the share application money received pending allotment of shares is a capital receipt not liable to tax under the Income-tax Act.