2019 (6) TMI 340 - AT - Income Tax

Taxability of share premium - company falls under the category of the company in which public are substantially interested - AO invoked Section 56(1) to bring this transaction as income from other sources - this transaction is capital investment and not an income within the meaning of Section 14 - HELD THAT - This head of income consists of two parts i.e. section 56(1) and section 56(2). The first part i.e. sub-section (1) deals with income of every kind, which does not fall in any of the head of income A E and also which is not to be excluded from the total income under this Act. The important thing is, it should fall within the definition of income u/s 2(24). At the same time, sub-section (2) of section 56, deals with specific income which is not income as per section 2(24) but specifically brought under the definition of income by the Legislature. Therefore, the income which cannot be brought to tax u/s 56(2), under specific head, AO cannot bring to tax even u/s 56(1) Assessee has received share premium and AO has mandate to invoke only Section 56(2)(viib) and no other section. This transaction will never fall in any of the heads of income as per Section 14. Therefore, in our considered view, AO is not correct in bringing this capital investment as income of the assessee after satisfying himself that assessee s case does not fall u/s. 56(2)(viib). Therefore, the addition made by AO is deleted. Disallowance u/s 14A - valuation difference of mutual fund - real dividend income - HELD THAT - We notice that assessee made investment in mutual funds and the value as on Balance Sheet date stood at ₹ 25,10,99,520/-. The difference between actual investment and value as on Balance Sheet was declared as dividend income. This is not actual receipt of dividend during this year, it is only difference in valuation of investment. The position will keep changing every year. The same will be recognized in the Profit and Loss A/c. The investment value may increase compared to previous year status or decrease depending upon the performance of the fund. The actual increase in value will be determined only when it is transferred or matured. This income recognised by assessee is not real dividend income and the real dividend income alone is exempt from tax net, not the notional recognition of the income at the Balance Sheet date. The value difference at the time of disposal will be chargeable to tax as Long Term Capital Gain not as dividend income. Therefore, in our view, this recognition of difference in value of investment is not the dividend income and hence, Assessing Officer cannot invoke Section 14A in this transaction. - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of receipt in the nature of share premium under Section 56 of the Income-tax Act, 1961.
2. Disallowance of expenditure under Section 14A of the Income-tax Act, 1961.

Detailed Analysis:

Addition of Receipt in the Nature of Share Premium:
1. Facts and AO's Findings:
- The assessee company, engaged in the business of diabetic clinics, filed its return of income declaring a loss and book profit of ?(-)7,49,45,944/-.
- During scrutiny, the AO noticed that the assessee collected ?70,54,53,000/- towards share premium, with shares issued at a premium of ?990/- and ?1,220/- per share.
- The AO asked the assessee to justify the share premium with evidence, specifically requesting a valuation report as per Rule 11UA.
- The assessee submitted a valuation report by BSR and Associates, stating the valuation was for regulatory purposes and not binding for commercial transactions.
- The AO concluded that the valuation report was not in accordance with Rule 11UA and determined the fair market value of shares, leading to an addition of ?58,42,01,700/- as excess share premium under Section 56 of the Act.

2. CIT(A)'s Findings:
- The CIT(A) upheld the AO's addition, noting discrepancies in the valuation and the lack of a due diligence report from the assessee.
- The CIT(A) emphasized that the assessee did not accept the valuation under Rule 11UA or the DCF method, thus justifying the AO's addition.

3. Assessee's Arguments:
- The assessee argued that it is a company in which the public is substantially interested, and hence, Section 56(2)(viib) is not applicable.
- It contended that the share premium is a capital investment and not income, citing various judicial precedents.

4. Tribunal's Decision:
- The Tribunal noted that the assessee is a step-down subsidiary of Apollo Hospitals Enterprises Ltd., a listed company, and thus falls under the category of companies in which the public is substantially interested.
- The Tribunal held that the AO could only invoke Section 56(2)(viib) and not Section 56(1) for taxing share premium.
- Since the AO acknowledged that Section 56(2)(viib) was not applicable, the addition under Section 56(1) was deleted.

Disallowance of Expenditure under Section 14A:
1. Facts and AO's Findings:
- The AO noticed that the assessee earned exempt income of ?10,99,520/- and disallowed expenditure under Section 14A by applying Rule 8D, resulting in a disallowance of ?6,27,749/-.

2. CIT(A)'s Findings:
- The CIT(A) upheld the AO's disallowance under Section 14A.

3. Assessee's Arguments:
- The assessee argued that no expenditure was incurred to earn the exempt income and that the investment yield was included under the head "income from business and profession."

4. Tribunal's Decision:
- The Tribunal observed that the difference in the value of mutual fund investments was not actual receipt of dividend income but a notional recognition of income.
- It held that the notional recognition of income at the Balance Sheet date is not dividend income and thus, Section 14A could not be invoked.
- The disallowance under Section 14A was deleted.

Conclusion:
- The appeal of the assessee was allowed, with the Tribunal deleting the addition of ?58,42,01,700/- under Section 56 and the disallowance of ?6,27,749/- under Section 14A.