2025 (3) TMI 997 - AT - Income Tax

Disallowance of interest earned during the set-off of business - Addition under the head Income from other sources concluding interest earned prior to the commencement of the business is taxable as Income from other sources - CIT(A) deleted addition - HELD THAT - We find that there is no case of department as to how disputed interest is not inextricable linked with the setting up of the plant. The nature of deposits have been duly examined in AY2018-19 and found to be inextricable linked with the setting up of the plant. Since the above fund inextricable linked with the setting up of the plant the decision of Bokaro Steels Limited 1998 (12) TMI 4 - SUPREME COURT is clearly applicable in applicant s case and ld. CIT(A) has not erred in relying the same. The grounds have no substance. Disallowance of premium received on the shares issued - AO made addition of book share premium of shares @Rs.2/- as excessive share premium per share due to the reason that identity genuineness and creditworthiness of the investor was not proved - CIT(A) deleted addition - HELD THAT - Conclusion of ld. CIT(A) that the allotment of shares to an existing shareholder cannot be construed to be an investor whose identity and creditworthiness were not proved needs no interference. We find that ld. CIT(A) has also held that during the immediate preceding year the same share premium of Rs. 2/- per share has been received from the said shareholder. It is also observed from the submission of the appellant that the said value of Rs. 12 per share has been arrived by way of DCF method as prescribed by the Reserve Bank of India which is a prescribed method of valuation in the instant case and the AO also has not found fault with the said method of DCF valuation. Thus disallowance made by the AO u/s 56(2)(viib) on the said receipt of the share premium was not sustainable and direction of deletion by ld.CIT(A) needs no interference. Decided against revenue.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment were:

• Whether the interest income of Rs. 94,78,739/- earned by the appellant company during the process of setting up a new business should be taxed under the head 'Income from other sources' or be considered as a capital receipt linked to the setting up of the plant.
• Whether the addition of Rs. 52,00,000/- on account of share premium received by the appellant company was justified, given the lack of KYC documents and bank statements to verify the identity, genuineness, and creditworthiness of the investor.

ISSUE-WISE DETAILED ANALYSIS

Interest Income Classification

• Relevant legal framework and precedents: The Assessing Officer relied on the precedent set by the Supreme Court in Tuticorin Alkalies Chemicals & Fertilizers Ltd. vs. CIT, which held that interest earned prior to the commencement of business is taxable as 'Income from other sources'. Conversely, the appellant cited the Supreme Court's decision in Bongaigaon Refinery & Petrochemicals Ltd. vs. CIT, which classified such interest as capital in nature when linked to the setting up of a plant.
• Court's interpretation and reasoning: The Tribunal found that the interest income was inextricably linked to the setting up of the plant, consistent with the precedent in Bongaigaon Refinery & Petrochemicals Ltd. The Tribunal noted that the funds were raised for business activities and the interest was set off against capital work in progress.
• Key evidence and findings: The appellant demonstrated that the interest income was derived from deposits made with funds raised through share capital and convertible debentures, which were intended for business use.
• Application of law to facts: The Tribunal applied the legal principles from Bongaigaon Refinery & Petrochemicals Ltd. and Bokaro Steel Ltd. vs. CIT, determining that the interest was a capital receipt, not income from other sources.
• Treatment of competing arguments: The Tribunal dismissed the Revenue's reliance on Tuticorin Alkalies, as the interest was linked to the business setup, not merely an independent income stream.
• Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 94,78,739/- as income from other sources, affirming its classification as a capital receipt.

Share Premium Addition

• Relevant legal framework and precedents: Section 68 of the Income Tax Act was invoked by the Assessing Officer, requiring proof of the identity, genuineness, and creditworthiness of the investor.
• Court's interpretation and reasoning: The Tribunal agreed with the CIT(A) that the identity and creditworthiness of the investor, M/s Bluwat AG Switzerland, were established as it was an existing shareholder.
• Key evidence and findings: The appellant provided evidence that the share premium was consistent with previous transactions and was valued using the DCF method, approved by the Reserve Bank of India.
• Application of law to facts: The Tribunal found that the Assessing Officer's concerns were unfounded as the investor's identity and creditworthiness were proven, and the valuation method was not disputed.
• Treatment of competing arguments: The Tribunal dismissed the Revenue's arguments due to the lack of contrary evidence and the consistent application of the DCF valuation method.
• Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 52,00,000/- related to the share premium, finding no grounds for the Revenue's claims.

SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The interest earned out of deposits made by the appellant is actually out of the fund raised by the appellant by way of share capital, which is inextricable linked with the setting up of the plant."
• Core principles established: Interest income linked to the setup of a business is considered capital in nature, not 'Income from other sources'. The identity and creditworthiness of an investor are established if they are an existing shareholder and have previously engaged in similar transactions.
• Final determinations on each issue: The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions to classify the interest income as a capital receipt and to delete the addition related to the share premium.