2020 (3) TMI 465 - AT - Income Tax

Taxability of proceed of share premium u/s 56(1) - utilization of share premium account for not specified purposes - violation of section 78 of the Companies Act, 1956 - HELD THAT - We find that the provisions of Section 78(2) of the Companies Act, 1956 specifies the manner of utilization of share premium account for specified purposes which are relevant only for compliance with the provisions of the Companies Act, 1956 and have agreed absolutely no relevance for the purpose of Income Tax Act, 1961. In the instant case, there is absolutely no dispute with regard to receipt of share premium by assessee at ₹ 990/- per share was duly justified. There is no dispute that all the necessary documents were duly filed before the AO and all the share subscribers have directly replied to the notice issued u/s 133(6) of the Act by Ld. AO. It is not in dispute that the money was received from 10 corporate share holder group companies of the assessee. We find that the Ld. CIT(A) had given categorical finding that the entire transactions cannot be termed as unrealistic and cannot be termed as not genuine. There is absolutely no dispute in the instant case that the amount and share premium account were utilized by assessee for its business purposes. Respectfully following observations and respectfully following the judicial precedent hereinabove we direct the Ld. AO to delete the addition made in sum of ₹ 10,66,23,000/- u/s 56(1) of the Act. Accordingly, the ground nos. 2 3 raised by assessee are allowed.

Issues Involved:
1. Taxability of share premium under Section 56(1) of the Income Tax Act, 1961.
2. Applicability of dividend distribution tax under Section 115O of the Income Tax Act, 1961.
3. Compliance with Section 78(2) of the Companies Act, 1956.

Detailed Analysis:

1. Taxability of Share Premium under Section 56(1) of the Income Tax Act, 1961:
The assessee filed its return of income for the assessment year 2010-11, declaring a total income of ?4,00,190/-. The case was selected for scrutiny, and it was found that the assessee introduced share capital and share premium amounting to ?10,66,23,000/- on allotment of shares with a face value of ?10 each at a premium of ?990 per share. The Assessing Officer (AO) treated the share premium as income chargeable under Section 56(1) of the Income Tax Act, 1961, on the grounds that the valuation was unrealistic, lacked supporting evidence, and the assessee failed to justify the premium charged. The AO also noted that the share premium was not utilized for the specified purposes under Section 78(2) of the Companies Act, 1956.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the addition made under Section 56(1) of the Act, agreeing with the AO that the assessee violated the provisions of Section 78(2) of the Companies Act, 1956. However, the CIT(A) dismissed the AO's action of applying the provisions of Section 2(22)(a) read with Section 115O of the Act, as there was no distribution of assets to the shareholders.

Upon appeal, the Tribunal observed that the receipt of share premium by the assessee could not be termed as income under the Income Tax Act, 1961. It was noted that the share premium was justified, and all necessary documents were filed before the AO. The Tribunal referred to the case of DCIT Vs. Finproject India (P.) Ltd., where it was held that the utilization of share premium for business purposes does not attract the provisions of Section 56(1). Consequently, the Tribunal directed the AO to delete the addition of ?10,66,23,000/- made under Section 56(1) of the Act.

2. Applicability of Dividend Distribution Tax under Section 115O of the Income Tax Act, 1961:
The AO had also levied dividend distribution tax under Section 115O of the Act, considering the share premium as deemed dividend under Section 2(22)(a) due to the alleged violation of Section 78(2) of the Companies Act, 1956. The CIT(A) dismissed this action, stating that there was no distribution of accumulated profits or assets to the shareholders, which is a prerequisite for invoking Section 2(22)(a).

The Tribunal upheld the CIT(A)'s decision, noting that there was no violation of Section 78(2) of the Companies Act, 1956, by the assessee. Therefore, the provisions of Section 115O were not applicable, and the grounds raised by the revenue were dismissed.

3. Compliance with Section 78(2) of the Companies Act, 1956:
The AO contended that the assessee violated Section 78(2) of the Companies Act, 1956, by not utilizing the share premium for specified purposes. The CIT(A) and the Tribunal found that the share premium was utilized for business purposes, and there was no violation of Section 78(2). The Tribunal emphasized that compliance with Section 78(2) is relevant for the Companies Act, 1956, and not for the Income Tax Act, 1961.

Conclusion:
The Tribunal concluded that the addition of ?10,66,23,000/- under Section 56(1) was unjustified and directed its deletion. It also upheld the CIT(A)'s decision that the provisions of Section 115O were not applicable, as there was no distribution of assets to the shareholders. The appeals filed by the revenue were dismissed, and the appeal filed by the assessee was partly allowed.

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