2019 (10) TMI 1226 - AT - Income Tax

Addition u/s 68 on account of share premium - violation under section 78 of the companies act in this case - HELD THAT - Not only the assessee s financial, do not justify the share premium the assessee has issued the share at premium of ₹ 2,490/- to one party and same shares have been issued without any premium to other party in same period. This certainly add, cogency in the observation of CIT(A) that in substance it is not share premium. We find that by referring to the non-compliance of section 78 of the Companies Act the learned commission of income tax has in substance referred to this aspect. The assessee has been evasive in its reply to the question of compliance of provisions of section 78 of the companies act. The assessee has submitted that this is an aspect which arises post receipt of the money. In other words assessee contends that it is not relevant. - assessee submits that the registrar of company has not passed any order against the assessee in this regard. We find that it is not the case of the assessee that he has submitted a confirmation from the registrar of company that in the facts of the present case there is no violation of provisions of section 78 of the companies act. We further find that in the order of the authorities below it has been mentioned that the provisions of section 78 has not been complied in as much as the share premium received has been used for investment in Future Generali India Insurance Company Ltd., a party which is a 40A(2)(b) company. However the assessee in this regard disputes that there is any violation. In our considered opinion on the facts and circumstances of this case this aspect needs to be remitted to the file of assessing officer. The assessing officer is directed to examine in detail this aspect as to whether there is violation of the companies act with regard to the utilisation of share premium account. Thereafter he shall decide as per law Needless to add the assessee should be granted adequate opportunity of being heard. - Appeals filed by the revenue are allowed for statistical purposes.

Summary

Issues Involved:
1. Addition of share premium under Section 68 of the Income Tax Act, 1961.
2. Application of Section 78 of the Companies Act, 1956.
3. Justification for charging share premium from a non-resident JV promoter and not from resident JV promoters.

Detailed Analysis:

1. Addition of Share Premium under Section 68 of the Income Tax Act, 1961:
The main issue revolves around the addition of ?47,88,27,000 for A.Y. 2011-12 and ?57,69,33,000 for A.Y. 2012-13 under Section 68 of the Income Tax Act, 1961 as unexplained cash credit. The Assessing Officer (AO) observed that the assessee charged a high share premium from a non-resident JV promoter while no premium was charged from resident JV promoters. The AO concluded that the assessee failed to provide a satisfactory explanation for the high share premium and treated the amounts as unexplained cash credits, adding them to the assessee's income.

2. Application of Section 78 of the Companies Act, 1956:
The AO and Commissioner of Income-Tax (Appeals) [CIT(A)] found that the share premium received was used for purchasing investments, which violated Section 78 of the Companies Act, 1956. Section 78 mandates that share premium can only be used for specific purposes such as issuing fully paid bonus shares, writing off preliminary expenses, and other specified uses. The AO held that since the premium was not used for these purposes, it lost its character as a capital receipt and should be treated as revenue receipt.

3. Justification for Charging Share Premium from a Non-Resident JV Promoter and Not from Resident JV Promoters:
The AO questioned the justification for charging a high premium from the non-resident JV promoter while issuing shares to resident JV promoters at face value. The AO noted that the assessee company did not provide any valuation report or satisfactory explanation for this differential treatment. The CIT(A) upheld the AO's view, stating that the differential treatment indicated that the receipt from the non-resident JV promoter was not genuinely on account of share premium.

Judgment Analysis:

1. Addition of Share Premium:
The tribunal noted that the assessee's financials did not justify the high share premium. The assessee's operations were minimal, with a fixed income of ?90,000 and significant losses due to high legal and professional charges. The tribunal observed that charging a high premium without a uniform policy and without justifiable business parameters raised doubts about the genuineness of the share premium.

2. Application of Section 78 of the Companies Act:
The tribunal referred to the Supreme Court's decisions, which held that share premium should be treated as profit unless it adheres to the specific purposes outlined in Section 78. The tribunal emphasized that the assessee failed to demonstrate compliance with Section 78, as the premium was used for investments in a related company, Future Generali India Insurance Co. Ltd., which was not permissible under Section 78.

3. Justification for Charging Share Premium:
The tribunal highlighted that the assessee issued shares at a premium of ?2,490 to the non-resident JV promoter while issuing shares at face value to resident JV promoters. This differential treatment without a valid justification further supported the AO's conclusion that the receipt was not genuinely on account of share premium.

Conclusion:
The tribunal upheld the AO's and CIT(A)'s decision to treat the share premium as unexplained cash credit under Section 68 of the Income Tax Act, 1961. The tribunal directed the AO to re-examine the compliance with Section 78 of the Companies Act, 1956, regarding the utilization of the share premium account. The appeals filed by the revenue were allowed for statistical purposes, and the case was remitted to the AO for further examination.

Order Pronouncement:
The order was pronounced in the court on 17.9.2019.