2018 (8) TMI 203 - HC - Income Tax

Funds received in the form of share premium - AO taxed the amounts so received under Section 56(2)(viib) - section 68 applicability - Held that - Any premium received by a Company on sale of shares, in excess of its face value; if the Company is not one in which the public has substantial interest, would be treated as income from other sources, as seen from Section 56(2)(viib) of the Act, which we do not think can be controlled by the provisions of Section 68 of the Act. Section 68 on the other hand, as substituted with the provisos, treats any credit in the books of accounts, even by way of allotment of shares; for which no satisfactory explanation is offered, to be liable to income-tax. Clause (viib) of Section 56(2) is triggered at the stage of computation of income itself when the share application money received, from a resident, by a Company, in which the public are not substantially interested; is above the face value. Then the aggregate consideration received for the shares as exceeds the fair market value will be included as income from other sources. When the resident investor is not able to explain the nature and source for the credit seen in the books of accounts of the Company or the explanation offered is not satisfactory then the entire credit would be charged to income tax for that previous year. That is the entire amounts credited in the books of accounts, styled as, for allotment of shares or application money, including the fair market value determined will be charged to tax. However if an explanation is offered and if it is satisfactory in the case of a Company in which the public are not substantially interested, then the charge to tax will only be to that portion exceeding the fair market value determined; which anyway has to occur under Section 56(2)(viib). If Section 68 is applicable, and the proviso is not satisfied, then the entire amounts credited to the books would be treated as income. If satisfactory explanation is offered as to the source, then the premium paid as revealed from the books will be brought to tax as income from other sources. The contentions raised are to be negatived.

Summary

Issues:
1. Interpretation of notice under Section 143(2) of the Income Tax Act.
2. Applicability of Section 68 of the Income Tax Act.
3. Relationship between Section 68 and Section 56(2)(viib) of the Income Tax Act.
4. Judicial authority to bypass statutory remedies and approach the High Court under Article 226.

Interpretation of Notice under Section 143(2):
The appellant challenged a notice under Section 143(2) of the Income Tax Act, arguing that it was only related to the source of funds received, which had been disclosed. However, the High Court found that the notice had two parts: one regarding the source of funds and the other about whether the amounts were correctly offered for tax. The attempt to tax the premium received was found to be valid under the second part of the notice.

Applicability of Section 68:
Section 68 of the Income Tax Act deals with unexplained credits in the books of an assessee. The proviso to Section 68, inserted in 2013, states that for companies not substantially interested by the public, any explanation for credits like share application money must be satisfactory to avoid being charged to income tax. If the explanation is not satisfactory, the entire sum credited can be taxed as income.

Relationship between Section 68 and Section 56(2)(viib):
Section 56(2)(viib) deals with the treatment of premium received by a company on the sale of shares above face value. The court clarified that Section 68 and Section 56(2)(viib) operate differently. While Section 68 deals with unexplained credits in general, Section 56(2)(viib) specifically addresses the treatment of premium received on shares. If an explanation is unsatisfactory under Section 68, the entire amount credited is taxed, but under Section 56(2)(viib), only the excess over fair market value is taxed if no satisfactory explanation is provided.

Judicial Authority to Bypass Statutory Remedies:
The High Court emphasized the importance of respecting the hierarchy of courts and adjudicatory authorities. It noted that challenging an order under Article 226 should not bypass statutory remedies. The appellant's attempt to seek a fresh consideration by the appellate authority after challenging the order on jurisdiction grounds was deemed an abuse of process. The High Court dismissed the appeal, directing the parties to bear their respective costs and allowing the appellant to approach the appellate authority only on the quantum issue.