Share Capital/Premium can not be regarded as undisclosed income u/s 68

Share Capital/Premium can not be regarded as undisclosed income. High Court deleted addition made for share premium u/s 68

ABCAUS Case Law Citation:
ABCAUS 2478 (2018) 08 HC

Important Case Laws Cited/relied upon:
Commissioner of Income Tax v. Electro Polychem Ltd. (2007) 294 ITR 661,
Commissioner of Income Tax v. Steller Investment Ltd. (2001) 251 ITR 263

The instant appeal was filed by the assessee against the order of the Income Tax Appellate Tribunal (Tribunal / ITAT) in upholding the addition confirmed by the Commissioner of Income-tax (Appeals) u/s 68 of the Income Tax Act, 1961 (the Act).

The appellant assessee was a Private Limited Company which during the relevant assessment year had issued share capital at premium. The entire share premium and the paid up value was apparently by book adjustment.

The assessee company had allotted shares at premium to a person to an individual allottee to whom the loan creditor of the company had assigned the loan amount payable by the company. Consequently, in the books of accounts of the appellant assessee, the said amount was shown as due to the said allottee. The appellant, therefore, had allotted its shares to the allottee in settlement of the amount due to loan creditors.

The return filed by the appellant assessee was selected for scrutiny. The Assessing Officer treated share premium and the share capital as unexplained cash credits under Section 68 of the. The AO was of the view that the assignment agreement furnished by the appellant assessee was only a purported agreement without any substance and the transaction was a mere book adjustment.

The appellant assessee appealed to the Commissioner of Income Tax (Appeals) who upheld the addition of share premium and share capital as unexplained cash credit under Section 68 of the said Act and dismissed the appeal of the appellant assessee.

The Appellate Tribunal held that by way of introducing cash credit in the name of share premium and share capital, the appellant assessee attempted to reduce the tax liability. The Tribunal further held that when the Assessing Officer found credit in the books of account and the appellant assessee could not offer any satisfactory explanation, then the entires found in the books have to be treated as income of the appellant assessee and, thus, dismissed the appeal by confirming the orders passed by the authorities below.

Aggrieved by the order of the Tribunal, the assessee filed the instant appeal raising the question whether the learned Tribunal erred in holding that value of shares allotted to individuals would amount to unexplained cash credit?

The assessee argued that when there was no cash involved in the transaction of allotment of shares, provisions of Section 68 of the said Act treating it as unexplained cash credit were not attracted. It was also contended that inasmuch as the source of credit in which shares were allotted was clearly explainable, the same cannot be treated as unexplained cash credit. Moreover, the identity of the share holders and the liability of the company to shareholders has been established and, therefore, the allotment of shares cannot be treated as unexplained cash credit.

The Tribunal observed that the Division Bench of the High Court had held that in case of cash credit of share application money, even if it were to be assumed that the subscribers to the increased share capital were not genuine, the amount of share capital would in no circumstances be regard as undisclosed income of the company.

Also, the Hon’ble Supreme Court held that even if the subscribers to the increased share capital of assessee-company were not genuine, the amount could not be regarded as undisclosed income of the company.

The Tribunal answered the question raised in favour of the assessee and against the Revenue.

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