Section 68 applicability to share premium or share application money upheld. Section is widely worded to include capital account receipts-Calcutta High Court
ABCAUS Case Law Citation:
ABCAUS 1173 (2017) (03) HC
Substantial Question of Law:
Whether in the facts and circumstances of the case and in law, the learned Tribunal erred in holding that the proviso to Section 68 inserted by the Finance Act, 2012 with effect from April 1, 2013 would be applicable to Assessment Year 2008-09?
Assessment Year : 2008-09 2009-10
Date/Month of Pronouncement: March, 2017
Important Case Laws Cited/relied upon:
Rajmandir Estates Private Limited Vs. Principal Commissioner of Income Tax
Brief Facts of the Case:
The present judgment was delivered by the Hon’ble High Court by disposing off ten appeals involving identical questions of law for adjudication and the factual basis of these appeals were broadly similar.
The assessee company of the leading case had issued share capital at premium. Shares were issued by the said company at face value of Rs.10/- at a premium of Rs.190/- per share. The total share premium collected was Rs.4.76 crores.
The Commissioner of Income Tax (CIT), invoking his power under Section 263 of the Income Tax Act, 1961 (‘the Act’) issued a show cause notice which inter alia stated that on perusal of the assessment records it was found that requisite inquiries were not conducted regarding the issue as to what prompted the subscribers to the shares to pay such substantial premium on shares of a little known company having no or insignificant business activities. It was also observed that it was apparent that the order was passed without application of mind. The show cause notice also stated that proper inquiry was not conducted regarding the identity and creditworthiness of the shareholders. It was stated that the order was passed mechanically which was liable to turn the assessment erroneous and cause prejudice to the interest of revenue. In view of these facts, the assessee was asked to explain as to why the assessment should not be set aside u/s.263.
The stand of the assessee before the CIT was that the Assessing Officer (‘AO’) had conducted proper inquiry regarding the identity and creditworthiness of the shareholders and their confirmation letters along with PAN Cards, copies of the bank statements and balance sheets of the subscribing companies had also been furnished. Thus No further inquiry ought to have been directed.
The Commissioner, however, passed the order giving a finding that the AO had not pursued the inquiries to their logical end and had made an order prejudicial to the interest of the Revenue CIT set aside the assessment and directed the AO to carry out through & detailed enquiries.
On appeal, ITAT upheld the order of CIT.
Contentions of the Appellant assessee(s):
Main thrust of the appellant’s case was that the provisions of Section 68 of the Act as amended by the Finance Act, 2012, with effect from 1st April, 2013 could not be given retrospective operation and if that position of law was accepted, then it was not open to the CIT to direct an enquiry to ascertain the source and genuineness of the sums being projected by the appellants as capital receipts.
Thus, it was contended that the finding of the Tribunal that Section 68 of the Act, as amended, has retrospective operation be rejected.
Observations made by the High Court:
The Hon’ble High Court observed that in a judgment delivered in the case of Rajmandir Estates which considered the unamended provision of Section 68 of the Act, a Coordinate Bench of the Court dealt with an identical issue and observed as under:
“We are unable to accept the submission that any further investigation is futile because the money was received on capital account. The Special Bench in the case of Sophia Finance Ltd. (supra) opined that “the use of the words “any sum found credited in the books” in Section 68 indicates that the said section is very widely worded and an Income-tax Officer is not precluded from making an enquiry as to the true nature and source thereof even if the same is credited as receipt of share application money. Mere fact that the payment was received by cheque or that the applicants were companies, borne on the file of Registrar of Companies were held to be neutral facts and did not prove that the transaction was genuine as was held in the case of CIT –Vs– Nova Promoters and Finlease (P) Ltd. (supra). Similar views were expressed by this Court in the case of CIT –Vs– Precision Finance Pvt. Ltd. (supra). We need not decide in this case as to whether the proviso to Section 68 of the Income Tax Act is retrospective in nature. To that extent the question is kept open. We may however point out that the Special Bench of Delhi High Court in the case of Sophia Finance Ltd. (supra) held that “the ITO may even be justified in trying to ascertain the source of depositor”. Therefore, the submission that the source of source is not a relevant enquiry does not appear to be correct. We find no substance in the submission that the exercise of power under Section 263 by the Commissioner was an act of reactivating stale issues.”
It was also noted that the Hon’ble Supreme Court had dismissed the petition for special leave to appeal (SLP) against the judgment of the High Court in Rajmandir Estates.
It was observed that the Coordinate Bench did not consider it necessary to examine the question of retroactivity of the provision of section 68. The Coordinate Bench found the order of the CIT was valid in examining the order applying the unamended provision of Section 68 of the Act only. The Hon’ble Court did not find any other distinguishing element in these appeals which would require addressing the question as to whether the amendment to Section 68 of the Act was retrospective in operation or not.
Appeals were dismissed holding that there was no substantial question of law involved in them.