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2024 (2) TMI 891 - HC - Income TaxAddition u/s 68 - Share premium - Transaction in the nature of Capital Account - violation of the provision of Section 78(2) of the Companies Act, 1956 with respect to the utilization of the share premium account - addition of entire share premium received as unexplained cash credit as there was no justification for charging share premium and there was violation of the provisions of Section 78(2) of the Companies Act, 1956. Whether the money received as premium of share issued on account of a capital account transaction can give rise to income? HELD THAT - The charge of tax under the Act is on income. The receipt of share premium on the issue of fresh shares is on capital account and constitutes a capital receipt, which is not chargeable to tax under the Act. There is no provision under the Act to tax the receipt of share premium for the assessment year under consideration. As held in Vodafone India Services (P) Ltd. ( 2014 (10) TMI 278 - BOMBAY HIGH COURT ) the amount received on issue of shares is admittedly a capital account transaction not separately brought within the definition of income during the relevant period. Thus, capital account transaction not falling within the statutory explanation cannot be brought to tax. Share premium received by issuance of shares is on capital account and gives rise to no income. Since the Act does not stipulate that non-compliance of any provision of other Act would result in turning a capital receipt into a revenue receipt, even assuming for the sake of argument that appellant had breached the provisions of Section 78(2) of the Companies Act, 1956, it would not turn the share premium amount received into a revenue receipt. As observed in Credit Suisse Business Analysis (India) (P.) Ltd. ( 2016 (8) TMI 375 - ITAT MUMBAI , for determining the due taxes, AO should avoid bringing far-fetched fancies and ideas. Without understanding the basic philosophy of income they have referred to the provisions of Companies Act, 1956 so that the amount in question can be taxed at any cost. It is not a fair or judicious approach to deal with the subjects of the State. Even if the assessee had violated the provisions of Companies Act, 1956, it will be penalised by the provisions of that Act and it would never turn a capital receipt into revenue receipt or vice versa. There is nothing on record from the balance sheet filed that the share premium amount has been utilized for purposes other than what is prescribed in Section 78(2) of the Companies Act, 1956. Just because the amount has been invested does not mean that the amount has been utilized for purposes other than what is prescribed in Section 78(2) of the Companies Act, 1956. We are satisfied that the closing balance and the opening balance of the share premium money only indicates that there is an increase in the share premium account by way of infusion of funds and not depletion. There is nothing to indicate that the assessee has used the share premium money to invest in shares. The Assessing Officers have failed to understand the difference between utilization of funds and creation of share premium account in the books of accounts for the share premium receipt which was also the case in Finproject India (P.) Ltd. 2018 (5) TMI 502 - ITAT MUMBAI - Decided in favour of assessee.
Issues Involved:
1. Whether the Tribunal erred in setting aside the appeal on the ground that the Assessing Officer should examine the violation of Section 78 of the Companies Act, 1956 regarding the utilization of the share premium account. 2. Whether the Tribunal's order is perverse for being based on extraneous, impermissible, and irrelevant considerations while ignoring relevant material. Summary: Issue 1: Tribunal's Error in Setting Aside the Appeal - The appellant, a joint venture between Indian and foreign promoters, issued shares at different premiums to the promoters, complying with all legal requirements, including FEMA and RBI guidelines. - During the scrutiny assessment for AY 2011-2012, the Assessing Officer treated the share premium received as unexplained cash credit under Section 68 of the Income Tax Act, based on the lack of justification for the premium and alleged violation of Section 78(2) of the Companies Act, 1956. - The CIT(A) upheld this addition, and the ITAT dismissed the appeal, directing the Assessing Officer to examine the alleged violation of Section 78(2). - The High Court found that the share premium received is a capital receipt and not chargeable to tax under the Act, as affirmed in Vodafone India Services (P) Ltd. v. Union of India and subsequent instructions by the CBDT. - The Court emphasized that non-compliance with the Companies Act does not convert a capital receipt into a revenue receipt. The share premium account's balance indicated no depletion, and the premium was not used for unauthorized purposes. Issue 2: Tribunal's Order Based on Extraneous Considerations - The appellant argued that the Tribunal's conclusions were based on surmises and ignored factual aspects and previous assessments where the share premium was accepted as genuine. - The High Court noted that the Tribunal and the lower authorities failed to provide evidence that the share premium was used for purposes other than those prescribed by law. - The Court reiterated that the receipt of share premium is a capital transaction and cannot be treated as income, aligning with the principles established in previous judgments and CBDT instructions. - The reliance on Bharat Fire & General Insurance Ltd. v. Commissioner of Income Tax by the ITAT was deemed misplaced. Conclusion: - The High Court quashed the impugned orders, affirming that the share premium received is a capital receipt and not taxable as income. Both appeals were disposed of accordingly.
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