2018 (11) TMI 1416 - AT - Income Tax

Unexplained cash credit u/s 68 - share premium receipts - Held that - The assessee filed sufficient evidences viz, return of income, share allotment, annual return, details including name, address and PAN of the shareholder which are not negated by the AO. AO in the present case has himself assessed the preference shareholder for the assessment year under consideration and after scrutiny has passed the order u/s 143(3) around the same date and has neither made any addition nor made any adverse remarks. AO has not questioned the preference share capital to the extent of the face value but has only questioned the share premium. By this action of the AO himself, the nature of transaction as that of preference share allotment is proved beyond doubt and merely because he feels that the share premium is high the genuineness of the transaction cannot be doubted for the purpose of section 68 of the Act. As evident from a parallel amendment in section 56(2) which brings in its ambit so much of the share premium as charged by a company, not being a company in which the public are substantially interested, as it exceeds the fair market value of the shares. If one accepts the Ld CIT-DR s contentions that section 68 of the Act can he applied where the transaction is proved to be that of a share allotment that here the valuation for charging premium is not justified, it will make the provisions of section 56(2)(viib) redundant and nugatory. This cannot be the intention of the Legislature especially when the amendments in the two sections are brought in at the same time. As explained that it is a settled law that where two views are possible, the view favorable to the assessee should be adopted as held in case of CIT Vs. Vegetable Products Ltd. 1973 (1) TMI 1 - SUPREME COURT . We are of the view that the assessee has discharged its onus by adequately disclosing the transaction in its books of accounts, filing statutory forms as regards allotment of shares, providing name, address and PAN of the shareholders, etc. the assessee has sufficiently discharged the onus cast upon it for the purpose of section 68 and no addition can be made on this account. Hence, we are of the view that the CIT(A) has rightly deleted the addition and we confirm the same. - Decided against revenue. Disallowance of expenses relatable to exempt income made by the AO by invoking the provisions of section 14A of the Act read with Rule 8D - Held that - CIT(A) deleted the disallowance only on the premises that the assessee has not earned any exempt income and hence following the Delhi High court decision in the case of Cheminvest Limited vs. CIT (2015 (9) TMI 238 - DELHI HIGH COURT), deleted the disallowance only on the premises that the assessee has not earned any exempt income and the only grievances of the department is that the provisions of section 14A read with Rule 8D of the Rules are to be applied even where the investment has not yield in exempt income. We find that this legal position is now settled that the provisions of section of 14A of the Act cannot be applied in the absence of any exempt income earned in a particular year by the assessee. CIT(A) has rightly deleted the addition and we confirm the same. Disallowance of expenses being interest under section 36(1)(iii) - diversion of interest bearing funds as interest free advances to Nariman Infrastructure LLP wherein the assessee company has 50% of stake through its 100% subsidiary of Piramal Commercial Estates LLP and there is commercial expediency in the transaction for advancing this interest free loan - Held that - The advance of interest free loan have been made only for the purposes of assessee s business and according to its corporate strategy. We find that the assessee is engaged in the business of real estate and its development. For this purpose it has this amount of ₹ 0.83 crores to Nariman Infrastructure LLP as it has a stake of 50% in Nariman Infrastructure LLP through its 100% subsidiary Piramal Commercial Estates LLP. CIT(A) has clearly observed that this transaction is on account of principle of commercial expediency, which was never contested by Revenue. Hence, we confirm the order of CIT(A) and dismiss this issue of Revenue s appeal.

Summary

Issues Involved
1. Deletion of addition made by AO under section 68 of the Income Tax Act, 1961, regarding unexplained share premium.
2. Deletion of disallowance of expenses related to exempt income under section 14A of the Income Tax Act, 1961.
3. Deletion of disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act, 1961, on account of diversion of interest-bearing funds as interest-free advances.

Detailed Analysis

1. Deletion of Addition Made by AO Under Section 68 Regarding Unexplained Share Premium
The primary issue was whether the CIT(A) was correct in deleting the addition of ?598,44,01,500/- made by the AO under section 68 of the Income Tax Act, 1961, on account of unexplained share premium. The AO had added the share premium to the income of the assessee on the grounds that the assessee company could not justify the substantial premium charged and failed to prove the nature and sources of credit.

The CIT(A) deleted the addition, noting that the assessee had adequately demonstrated the identity and creditworthiness of the share applicant, as well as the genuineness of the transaction. The CIT(A) observed that the share applicant, PEPL, was a group company, and all necessary documentation, including PAN, return of income, and financial statements, had been provided. The CIT(A) also noted that the AO had scrutinized PEPL's return for the same assessment year without making any adverse additions.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the identity, creditworthiness, and genuineness of the transaction were established beyond doubt. The Tribunal also referred to judicial precedents, including the Supreme Court's decisions in CIT v. Allahabad Bank Ltd. and CIT v. Standard Vacuum Oil Co., which held that share premium is not chargeable to tax as it is not in the nature of a revenue receipt. The Tribunal concluded that the addition under section 68 could not be sustained.

2. Deletion of Disallowance of Expenses Related to Exempt Income Under Section 14A
The second issue was the deletion of the disallowance of ?33,22,52,153/- made by the AO under section 14A read with Rule 8D of the Income Tax Rules, 1962. The AO had disallowed the expenses on the grounds that they were related to exempt income, even though the assessee had not earned any exempt income during the relevant assessment year.

The CIT(A) deleted the disallowance, relying on the Delhi High Court's decision in Cheminvest Limited v. CIT, which held that the provisions of section 14A do not apply in the absence of any exempt income. The Tribunal upheld the CIT(A)'s decision, citing the Bombay High Court's decision in Pr. CIT v. Ballarpur Industries Limited, which affirmed that section 14A cannot be invoked when no exempt income is earned during the year.

3. Deletion of Disallowance of Interest Expenses Under Section 36(1)(iii)
The third issue was the deletion of the disallowance of ?9,13,000/- made by the AO under section 36(1)(iii) on account of diversion of interest-bearing funds as interest-free advances to Nariman Infrastructure LLP. The AO had disallowed the interest expenses, arguing that the funds were diverted without any commercial expediency.

The CIT(A) allowed the assessee's claim, noting that the interest-free advances were made for business purposes and according to the corporate strategy. The CIT(A) observed that the assessee had a 50% stake in Nariman Infrastructure LLP through its 100% subsidiary, Piramal Commercial Estates LLP, and the transaction was driven by commercial expediency. The Tribunal upheld the CIT(A)'s decision, agreeing that the interest-free advances were made for business purposes and dismissing the Revenue's appeal on this issue.

Conclusion
In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all three issues. The Tribunal confirmed that the addition under section 68 regarding unexplained share premium was not justified, the disallowance under section 14A was not applicable in the absence of exempt income, and the disallowance of interest expenses under section 36(1)(iii) was not warranted due to the commercial expediency of the transaction.