2020 (8) TMI 143 - AT - Income Tax

Addition u/s 56(1) - also alternatively u/s 68 - share premium receipts - whether CIT(A) erred in considering the share premium as a genuine transaction by treating the Discounted Cash Flow Method valuation at ₹ 230.40 and ₹ 2,457.12 for Equity Shares and Compulsory Convertible Preference Shares of ₹ 10/- respectively as correct? - HELD THAT - AO assessed the share premium received as income from other sources by holding that this is nothing but profits received by the assessee. Alternatively, the Ld. AO has also recorded findings in the reassessment order that said receipt can also taxed as unexplained cash credit in the books of the assessee company. The Ld.CIT(A) has passed a very reasoned and speaking order justifying the deletion of additions by dealing with all the issues as raised by the revenue including the provisions of section 78 of the Companies Act . Therefore we do not find any infirmity or defect legal or otherwise in the order of the Ld.CIT(A) and hence the conclusion drawn by the Ld.CIT(A) is affirmed by dismissing the ground No.1 raised by the revenue. Addition on account of consultancy fees - A.O. without appreciating the accounting system came to a conclusion that since the invoice has been raised irrespective of time period and usage of software, the full amount needs to be accounted as income for appellant company and thereby made an addition shown as Current Liability in the appellant s books - HELD THAT - The assessee has accounted for one time Activation Fees and Customization Fees as current year s Income and 15 days Contract Income for use of software as the fees of the appellant company based on the accrual system of accounting. On the other hand the Assessing Officer went on the basis of Invoices raised during the year and as such treated the same as Income of the Appellant Company for current Assessment Year without understanding the concept of accrual basis and he simply made an addition based on the Invoices raised. The ld. CIT(A) also confirmed the addition citing the reasons that agreements were not before the authorities below by ignoring the facts of the case. Hence the issue is restored to the AO for limited purpose of examining whether accounted for in the next year or not and if offered to tax the addition is to be deleted . The AO is directed accordingly. The ground is allowed for statistical purpose. Nature of expenditure - addition towards Professional Fees and treating the same as Capital Expenditure - HELD THAT - Legal and Professional charges paid by the appellant company does not directly or indirectly pertain to the Product development cost nor does it give the benefit of enduring nature but it s a normal routine business expenditure incurred by the appellant company. CIT(A) has given a finding that the said expenses included legal consultancy, vetting charges for documents , architect fee and compliance related fee. In our opinion the conclusion of ld. CIT(A) upholding the order of AO that these were capital in nature appears to be wrong and contrary to the findings recorded in the appellate order and hence cannot be sustained. Assessee has filed the break-up of Legal Fees paid to various Professionals have been provided. After perusing all these details and nature of these expenses , we are of the opinion that these are revenue in nature and have to be allowed as deduction. - Decided in favour of assessee.

Issues Involved:
1. Taxability of Share Premium under Section 56(1) and Section 68 of the Income Tax Act, 1961.
2. Validity of the Assessment Order based on Time-Barred Provisions.
3. Addition of Consultancy Fees as Income.
4. Treatment of Professional Fees as Capital Expenditure.

Issue-wise Detailed Analysis:

1. Taxability of Share Premium under Section 56(1) and Section 68:
The Revenue challenged the CIT(A)'s order that the share premium of ?2,49,89,038 was not taxable under sections 56(1) and 68 of the IT Act. The AO observed that the assessee issued shares at a premium and questioned the genuineness of the transaction. The AO added the share premium as income from other sources under section 56(1) and alternatively under section 68 as unexplained cash credit.

The CIT(A) found merit in the assessee's argument that nothing adverse was found against them by the tax authorities in Mauritius and the UK. The CIT(A) also noted that the AO's findings lacked material evidence and that the discrepancies in dates did not warrant additions under sections 56 or 68. The CIT(A) emphasized that the provisions of section 56(2)(viib) were not applicable for AY 2012-13, as they were introduced from AY 2013-14 onwards. The CIT(A) held that the assessee satisfactorily established the identity, genuineness, and creditworthiness of the investor, and the share premium was not taxable as income.

The ITAT upheld the CIT(A)'s order, affirming that the share premium received was not taxable under sections 56(1) and 68, as the assessee provided sufficient documentation and evidence to support the genuineness of the transactions.

2. Validity of the Assessment Order based on Time-Barred Provisions:
The assessee contended that the assessment order passed on 10/11/2015 was time-barred. However, this ground was not pressed by the Revenue during the hearing, and the ITAT dismissed it as not pressed.

3. Addition of Consultancy Fees as Income:
The AO added ?1,58,333 as consultancy fees, arguing that the entire invoice amount of ?3,80,000 should be accounted as income for the year. The assessee contended that only ?2,21,668 was accrued for the year based on the contract terms with Angel Broking Ltd.

The CIT(A) dismissed the assessee's appeal, noting that no contract was provided to substantiate the claim. The ITAT directed the AO to examine whether the income was accounted for in the next year and, if so, to delete the addition of ?1,58,333.

4. Treatment of Professional Fees as Capital Expenditure:
The AO capitalized the professional fees of ?6,48,859, considering them part of the product development cost. The assessee argued that these fees were routine business expenses and should be treated as revenue expenditure.

The CIT(A) upheld the AO's decision, but the ITAT found that the legal and professional charges were not directly related to product development and were routine business expenses. The ITAT allowed the deduction of these expenses as revenue expenditure.

Conclusion:
The ITAT dismissed the Revenue's appeal, affirming the CIT(A)'s order on the taxability of share premium and the treatment of professional fees. The cross-objections of the assessee were partly allowed for statistical purposes, with directions to the AO to re-examine the addition of consultancy fees.

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