Conversion of unsecured loan of wife against allotment of share in joint names upheld

Conversion of unsecured loan of wife against allotment of share in joint names in closely held company upheld

The ITAT in a recent judgment held that AO was wrong in not accepting conversion of unsecured loan of director against allotment of share in joint names of husband and wife in a closely held company.

ABCAUS Case Law Citation:
ABCAUS 3950 (2024) (04) ITAT

Important Case Laws relied upon:
Shendra Advisory Services P Ltd Vs DCIT (2024) 157 taxmann.com 557 (Bom)

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming of the addition towards share application money.

The appellant assessee was a private limited company wherein family members were Directors/shareholders. Wife of one of the shareholders had given unsecured loan of Rs. 45.00 lacs to the assessee company.

The said unsecured loan, on the request of her was treated as share application in the name of her husband, who was also a director in the company. Subsequently the assessee company allotted shares to the husband/director of the company and filed the required resolution/form with RoC.

During the assessment proceeding, the Assessing Officer (AO) noted that assessee company has issued 150000 shares to the said director/husband. The share of face value of Rs. 10/- was issued at the premium of Rs. 20/- per shares.

On perusal of bank account of the said director, there was no such entry in the bank statement. On finding such discrepancies, the assessing officer issued show cause notice to the assessee.

In reply to the show cause notice the assessee submitted that the share application money had been paid / adjusted against the credit balance of his wife, thus, no such entry was reflected in the bank account of the director. The shares were issued jointly to the husband and wife.

The reply of assessee was not accepted by assessing officer by taking view that the story of assessee was afterthought and no evidence was furnished by the assessee.

The CIT(A) confirmed the action of the assessing officer by holding that register of Member with Registrar of Company reflected the name of Director only and not of his wife. The name of wife was shown as MD-Director.

The Tribunal observed that there was no dispute about the Directors, their identity. The Assessing Officer made addition on the ground that the share application money was routed through the account of wife.

On a specific query from the Tribunal, the company produced the resolution passed by it for converting the loan of wife against the allotment of impugned share in name of her husband.

The Tribunal opined that even, for the sake of consideration if there was any violation of provisions of Companies Act, the Hon’ble High Court held that Income-tax Act does not stipulate that non-compliance of any provision of other Act would result in turning a capital receipt into a revenue receipt.

The Tribunal opined that the action of assessing officer was not justified in taxing the conversion of unsecured loan of one of the director against the allotment of share in the joint names of directors, who were husband and wife in a closely held company.

Accordingly, the assessing officer was directed to delete the entire addition and the ground of appeal raised by the assessee was allowed

Download Full Judgment ABCAUS 3950 (2024) (04) ITAT Click Here >>

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