2016 (8) TMI 375 - AT - Income Tax

Share premium received - treating the receipt as a business receipt and thereby confirming the addition of share premium u/s. 56(1) of the Act to its total income - Held that - While dealing with the assessment or appeals, under the provisions of the Income tax Act, the basic principle every officer of the department has to remember that he is the representing the Sovereign and his duty is to collect Due taxes only. For determining the Due taxes they should avoid bringing farfetched fancies and ideas. In the case under consideration they have done the same. Without understanding the basic philosophy of income they have referred to the provisions of CA, so that the amount in question can be taxed at any cost. It is not a fair or judicious approach to deal with the Subjects of the State. Even if the assessee had violated the provisions of CA, it will be penalised by the provisions of that Act. But, it would never turn a capital receipt in to revenue receipt or visa-versa. Neither the AO nor the FAA has proved that the share premium money was utilised by it for running its day today business. The assessee had proved that the opening and the closing balance of the share premium money account was same for the year under consideration. We find that the factual position assailed by the assessee was not proved incorrect by both the authorities. If there was no difference in the balances how the conclusion was drawn that the share premium money was utilised for business purposes and not preserved for the purposes for which it was collected. Without any evidence both the authorities held that the assessee had used the money for purposes other than the purposes for which it was collected. Therefore, in our opinion there was no foundation of the building that was built by them. We are not in position to validate such a classical factual blunder. Section 100 of the CA deals with reduction of share capital. In short, the stand taken by the FAA is not endorsable either legally nor factually. - Decided in favour of assessee.

Summary

Issues:
1. Tax treatment of share premium received by the assessee.
2. Compliance with provisions of the Companies Act regarding share premium utilization.

Analysis:

Issue 1: Tax treatment of share premium received by the assessee
The Assessing Officer (AO) treated the share premium received by the assessee as a business receipt and added it to the total income under section 56(1) of the Income Tax Act. The AO relied on various judicial decisions to support the addition, stating that the share premium was a device to avoid tax and that the assessee had used the premium for day-to-day business activities, violating section 78 of the Companies Act. The AO concluded that the share premium had lost its character and became a trading receipt, thus subject to taxation under the head income from other sources.

The First Appellate Authority (FAA) considered the arguments of the assessee, who contended that the share premium was a capital receipt and should not be taxed under the head income from other sources. The FAA deleted the addition made by the AO principally based on the judgment in the case of Vodafone India Services Pvt. Ltd. The FAA, however, found that the assessee had not complied with the statutory requirements of the Companies Act regarding the utilization of share premium, leading to the share premium losing its character and being treated as a trading receipt. The FAA upheld the addition made by the AO.

Upon further appeal, the ITAT disagreed with the FAA's approach, stating that the taxability of an amount should be decided within the Income Tax Act itself and not based on violations of other statutes like the Companies Act. The ITAT also noted that the factual position presented by the assessee regarding the utilization of share premium was not disproved by the authorities. The ITAT reversed the FAA's order and decided in favor of the assessee, allowing the appeal.

Issue 2: Compliance with provisions of the Companies Act regarding share premium utilization
The FAA held that the assessee had not complied with the provisions of section 78(2) of the Companies Act, as it did not demonstrate how the share premium was utilized as per the requirements of the Act. The FAA concluded that the share premium had lost its character and become a trading receipt, upholding the addition made by the AO. However, the ITAT found that the FAA's stand was not legally or factually endorsable, as there was no evidence to prove that the share premium was used for purposes other than intended. The ITAT reversed the FAA's decision, stating that the facts and circumstances did not support the treatment of share premium as a trading receipt.

In conclusion, the ITAT allowed the appeal filed by the assessee, emphasizing that the taxability of an amount should be determined within the provisions of the Income Tax Act and not based on violations of other statutes like the Companies Act. The ITAT found no basis to tax the share premium as income from other sources and reversed the FAA's decision.