2018 (10) TMI 1095 - AT - Income Tax

Additions u/s 56(2)(viib) - income from other sources - receipt of share application money - amount received from one shareholder - benefit passed on to other shareholder - transactions involving family arrangement with respect to transfer of shares - lifting of corporate veil - Held that - In the case of the assessee company also the corporate veil is required to be lifted and thereafter the transaction has to be viewed in the light of the relevant provisions of the Act. Provisions of Section 56(2)(viib) of the Act, cannot be invoked in the case of the assessee company because by virtue of cash being brought into the assessee company by Mrs. Sasikala Raghupathy for allotment of equity shares with unrealistic premium the benefit has only passed on to her daughter Mrs. Vani Raghupathy and there is no scope in the Act to tax when cash or asset is transferred by a mother to her daughter. Hence we hereby direct the Ld.AO to delete the addition made by invoking the provisions of Section 56(2)(viib) of the Act in the case of the assessee company. - Decided in favour of assessee.

Issues Involved:
1. Whether the addition of ?23,31,68,600/- as 'income from other sources' under Section 56(2)(viib) of the Income Tax Act was justified.
2. Whether the share premium received by the assessee company was liable for taxation under Section 56(2)(viib) of the Act.
3. Whether the relationship between the shareholders (mother and daughter) affects the applicability of Section 56(2)(viib).

Issue-wise Detailed Analysis:

1. Addition of ?23,31,68,600/- as 'Income from Other Sources':
The primary issue is whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the addition made by the Assessing Officer (AO) of ?23,31,68,600/- towards 'income from other sources' under Section 56(2)(viib) of the Income Tax Act. The AO observed that the assessee company issued 10,100 equity shares at a premium of ?23,086/- per share to an existing shareholder, Mrs. Sasikala Raghupathy. The AO opined that the assessee company received an excess price/share premium over the face value of shares, leading to the addition under Section 56(2)(viib).

2. Share Premium and Taxation under Section 56(2)(viib):
The CIT(A) upheld the AO's decision, noting that the purchase of property by the assessee company occurred after the share allotment, making the share premium received liable for taxation under Section 56(2)(viib). The CIT(A) emphasized that the section's wording is absolute and does not provide exceptions other than those specified. The assessee's argument that the share premium was justified due to the acquisition of land was rejected, as the valuation methods prescribed under Rule 11 UA were not followed. The CIT(A) concluded that the entire share premium was excessive and taxable.

3. Relationship between Shareholders and Applicability of Section 56(2)(viib):
The assessee argued that Section 56(2)(viib) was introduced to curb unaccounted money and tax avoidance involving unconnected parties. In this case, the funds were brought in by Mrs. Sasikala Raghupathy, a shareholder closely related to the other shareholder, her daughter. The CIT(A) rejected this argument, stating that the exclusion of 'relatives' from taxation applies only under Sections 56(2)(v), 56(2)(vi), and 56(2)(vii), not under Section 56(2)(viib). The CIT(A) also dismissed the plea to limit the share premium taxation to 25% of the total premium received, as the section does not provide for such limitations.

Tribunal's Analysis and Conclusion:
The Tribunal found merit in the assessee's submissions. It noted that the Finance Minister's speech introducing Section 56(2)(viib) aimed to deter the generation and use of unaccounted money. In this case, the funds brought in by Mrs. Sasikala Raghupathy were genuine and not disputed. The Tribunal emphasized that the benefit of the share premium passed only to her daughter, and there was no scope for unaccounted money. The Tribunal further highlighted that if the mother had gifted the money to the daughter, who then invested it in the company, Section 56(2)(viib) would not apply. The Tribunal concluded that the provisions of Section 56(2)(viib) should be interpreted harmoniously, considering the intent behind their introduction.

Final Judgment:
The Tribunal directed the AO to delete the addition made under Section 56(2)(viib) of the Act, as the benefit of the share premium passed only from mother to daughter, and there was no scope for taxing such transactions under the Act. The appeal of the assessee was allowed.

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