2020 (8) TMI 756 - AT - Income Tax

Unexplained Share Premium u/s 68 - CIT(A) deleted the said addition - HELD THAT - Hon ble Mumbai High Court had sanctioned the scheme of demerger of investment division of Hemant Tools Pvt. Ltd. with Jayvik Foresight Innovation and Solution Pvt. Ltd. in view of Section 391 to 394 of the Companies Act, 1956. M/s. Hemant Tools Pvt. Ltd. was having reserve and surplus fund and on account of demerger the appellant has shown the receivable from Hemant Tools and received interest thereon which was offered for taxation under the head income from other sources. The assessee has also shown the income from sale of investment as capital gain. Identity and creditworthiness is not doubted. There is nothing on record to which it can be assumed that the own money has been introduced on account of demerger of the investment division of Hemant Tools Pvt. Ltd. The assessee was also receiving the funds continuously from the Hemant Tools. What was not explained by assessee is not on record. The transaction has been properly explained and there is no iota evidence on record to which it can be assumed that the own money has been introduced which liable to be addition u/s 68 Hemant Tools Pvt. Ltd. during the investing activity which was never treated as business activity. The investment was from other sources as well as from capital gain. The investment activity was not liable to be treated as business activity of M/s. Hemant Tools Pvt. Ltd. Accordingly, demerger of the Hemant Tools Pvt. Ltd. with the appellant cannot be held within the provisions of Section 2(19AA). The facts are not distinguishable at this stage. We nowhere found illegality and infirmity and the order passed by the CIT(A) in question. CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, all these issues are decided in favour of the assessee against the revenue.

Issues Involved:
1. Deletion of addition of ?16,50,08,000/- under Section 68 of the Income Tax Act on account of unexplained share premium.
2. Genuineness of the share premium amount and the creditworthiness of the company involved in the demerger.

Issue-wise Detailed Analysis:

Issue 1: Deletion of Addition under Section 68 of the Income Tax Act

The revenue challenged the deletion of ?16,50,08,000/- added under Section 68 of the Income Tax Act by the Assessing Officer (AO) on account of unexplained share premium. The AO contended that the assessee company received continuous funds from Hemant Tools Pvt. Ltd. during the year, implying no actual transfer of assets occurred, thus violating demerger provisions under Section 2(19AA). Consequently, the AO treated the transaction as a share transaction and taxed the share premium.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, stating that the scheme of demerger was sanctioned by the Hon'ble Mumbai High Court under Sections 391 to 394 of the Companies Act, 1956. The CIT(A) observed that Hemant Tools Pvt. Ltd. had substantial reserves and surplus, and the funds received were recorded as receivables, with interest offered for taxation under "income from other sources." The CIT(A) concluded that the identity and creditworthiness of Hemant Tools Pvt. Ltd. were established, and the transaction was genuine.

Upon review, the Appellate Tribunal upheld the CIT(A)'s decision, noting that the demerger was sanctioned by the High Court, and the funds received were properly accounted for. There was no evidence suggesting the introduction of unexplained money into the assessee's business. Thus, the addition under Section 68 was not justified.

Issue 2: Genuineness of Share Premium and Creditworthiness

The revenue argued that the CIT(A) erred in deleting the addition without appreciating that the genuineness of the share premium amount and the creditworthiness of the company were not established. The AO had noted that the demerger was a means to infuse unexplained money into the business, creating an unjustified share premium account.

The CIT(A) found that the investment activity of Hemant Tools Pvt. Ltd. was not separate from its trading activity and was not treated as a business activity. The income from investments was categorized under "other sources" and "capital gains," not business income. Therefore, the demerger did not fall within the purview of Section 2(19AA). The CIT(A) also noted that the AO had complete knowledge of the funds received from Hemant Tools Pvt. Ltd. and did not provide evidence of unexplained money being introduced.

The Tribunal agreed with the CIT(A), emphasizing that the demerger was approved by the High Court, and the transactions were genuine and properly explained. The identity and creditworthiness of Hemant Tools Pvt. Ltd. were not in doubt, and there was no evidence of unexplained money being introduced. Therefore, the deletion of the addition was upheld.

Delay in Pronouncement of Order:

The Tribunal acknowledged the delay in pronouncing the order due to the nationwide lockdown imposed on 24/03/2020 because of the COVID-19 pandemic. The lockdown led to unprecedented disruption of judicial work, and the order could not be pronounced within the usual 90-day period. The Tribunal referred to the decision in DCIT V/s JSW Limited, which allowed the exclusion of the lockdown period for calculating the limitation period for pronouncement of orders. Consequently, the order was pronounced after the reopening of offices.

Conclusion:

The appeal filed by the revenue was dismissed, and the order pronounced in the open court on 24/08/2020 confirmed the CIT(A)'s decision to delete the addition of ?16,50,08,000/- under Section 68 of the Income Tax Act.

← Previous Next →