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Principal Commissioner of Income-tax v. Apeak Infotech

Income Tax Appellate Tribunal

Jun 8, 2017

Judgment

Subsequent
References

CaseIQ

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Judgment Summary

Factual and Procedural Background

This set of six appeals was filed by the Revenue under section 260A of the Income-tax Act, 1961, challenging a common order dated November 25, 2016 of the Income-tax Appellate Tribunal (the Tribunal). The Tribunal had dismissed the Revenue's appeals in respect of six respondent-assessees for assessment year 2012-13. The common legal question in all six matters was whether amounts received as share premium on issuance of shares by the respondent companies could be taxed as "profits and gains of business" under section 28(iv) of the Act.

Procedurally: during the relevant previous year (for AY 2012-13), the respondent-assessees issued shares at a premium. The Assessing Officer (AO) disallowed the respondents' contention that the share premium was a capital receipt and, in five matters by order dated March 18, 2015 and in one matter dated March 20, 2015 under section 143(3), added the share premium to taxable income as business income under section 28(iv). The respondent-assessees appealed to the Commissioner of Income-tax (Appeals) (CIT(A)), who by six orders dated March 15, 2016 allowed the appeals, holding that section 28(iv) did not apply and that section 68 was not invokable on the factual material. The Revenue then appealed to the Tribunal, which dismissed the Revenue's appeals. The present appeals by the Revenue are against the Tribunal's common order.

Legal Issues Presented

Whether the Tribunal was correct to uphold the CIT(A)'s decision that share premium received by the assessee-company cannot be taxed under section 68 of the Act, despite the ratio in Major Metals Ltd. v. Union of India (as relied upon by the Revenue).
Whether the Tribunal and the CIT(A) were correct in deleting the addition made by the Assessing Officer by holding that the share premium receipt is capital in nature and therefore not taxable as business income under section 28(iv) of the Act.

Arguments of the Parties

Appellant (Revenue) — Primary Contentions as Recorded

The Revenue urged that the share premium received by the respondent companies should be brought to tax as income — specifically invoking section 28(iv) and, in their pleadings, relying on the ratio in Major Metals Ltd. v. Union of India to support invoking section 68.
The Revenue contended that the Tribunal erred in not taxing the share premium as business income and sought to rely upon Major Metals (and possibly other authorities) to support the view that such receipts can be brought to tax under section 68.
It is recorded that although numerous questions of law were mentioned in the appeals, counsel for the Revenue ultimately urged only the two questions reproduced above (Questions A and B). Counsel also accepted that the question regarding applicability of section 68 was not pressed before the Tribunal.

Respondent-Assessees — Positions as Recorded

The respondent-assessees maintained that the amounts received as share premium were capital receipts and not income. They led evidence before the AO concerning identity and capacity of investors, PAN details, balance-sheets/IT returns, bank statements, board resolutions authorising investments, and the investors' confirmation of transactions.
On appeal, the CIT(A) accepted that the receipts were capital in nature and held that section 28(iv) did not apply (citing Mahindra & Mahindra Ltd. v. CIT), and also concluded that section 68 did not apply given the documentary and testimonial evidence of identity and genuineness.

Assessing Officer and Tribunal Positions (as Recorded)

The Assessing Officer treated the share premium as income under section 28(iv) on the ground that the assessees did not have significant business at the time to warrant receipt of share premium, and thus made additions in the assessment orders.
The CIT(A) reversed the AO and allowed the appeals, holding the receipts were capital in nature and that section 68 was not invocable on the facts.
The Tribunal upheld the CIT(A)'s view: it held that section 28(iv) applies only to amounts received as income and not to capital receipts; it followed this court's decision in Vodafone India Services (P.) Ltd. and the apex court decision in G. S. Homes & Hotels (P.) Ltd.; it also referred to an unreported decision (Idea Cellular Ltd.) to the effect that benefits received on capital account cannot be taxed under section 28(iv).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Major Metals Ltd. v. Union of India [2013] 359 ITR 450 (Bom)	Upheld invocation of section 68 by the Settlement Commission on facts where subscribers were found not creditworthy.	The court distinguished Major Metals on facts: in Major Metals the Settlement Commission found subscribers not creditworthy, whereas in the present matters shareholders had given statements on oath and were not found to be unidentifiable or bogus; thus Major Metals did not entitle the Revenue to succeed on these facts.
Mahindra & Mahindra Ltd. v. CIT [2003] 128 Taxman 394/261 ITR 501 (Bom)	Interpretation that section 28(iv) deals with benefits other than cash or money arising out of business.	The CIT(A) relied on Mahindra & Mahindra to hold that section 28(iv) would not apply to the share premium because that provision concerns benefits arising out of business and not capital receipts.
Vodafone India Services (P.) Ltd. v. Union of India [2015] 228 Taxman 50/[2014] 368 ITR 1 (Bom)	Held that amounts received on share capital including premium are on capital account in absence of express legislation to the contrary.	The Tribunal followed Vodafone to conclude that share premium is a capital receipt and cannot be taxed as income under section 28(iv) for the subject assessment year.
G. S. Homes & Hotels (P.) Ltd. v. Dy. CIT [2016] 242 Taxman 58/387 ITR 126	The Supreme Court reversed a High Court decision that had treated receipts on account of shares as business income.	The Tribunal relied on this apex court decision to support the proposition that receipts on issue of shares (including premium) are capital receipts and not taxable as business income.
Idea Cellular Ltd. v. Union of India [2013] (unreported, referred)	Observed that any benefit received on capital account cannot be subject matter of Income-tax under section 28(iv).	The Tribunal cited this unreported observation to reinforce that capital receipts are not taxable as income under section 28(iv).
CIT v. Tata Chemicals Ltd. [2002] 122 Taxman 643/256 ITR 395 (Bom)	In an appeal under section 260A, the High Court can decide only questions that have been raised before the Tribunal (even if not determined by it).	The court applied Tata Chemicals to refuse to entertain Question A (relating to invoking section 68) because the Revenue did not raise that question before the Tribunal.
CIT v. Gagandeep Infrastructure (P.) Ltd. [2017] 247 Taxman 245/394 ITR 680 (Bom)	Held that the proviso to section 68 introduced with effect from April 1, 2013 will not have retrospective effect and is effective only from assessment year 2013-14.	The court cited Gagandeep Infrastructure to support the conclusion that amendments to section 68 (and related amendments) post-dating the relevant previous year cannot be invoked for AY 2012-13.

Court's Reasoning and Analysis

The court considered the two framed questions sequentially and applied procedural and substantive principles strictly in accordance with the record.

Question A (Applicability of section 68 to bring share premium to tax)

The court observed that the issue of invoking section 68 of the Act to tax share premium was not pressed by the Revenue before the Tribunal; the only issue before the Tribunal was taxation under section 28(iv). The court therefore applied the principle in CIT v. Tata Chemicals Ltd. that, in appeals under section 260A, the High Court can only decide questions that had been raised before the Tribunal (even if the Tribunal did not decide them). Consequently, the court declined to entertain Question A.
On the merits the court additionally noted that the amendment to section 68 (addition of a proviso) took effect from April 1, 2013 and hence was not applicable to AY 2012-13. As to the pre-amendment section 68, the court pointed out that respondents had led evidence about the identity and genuineness of the investors before the AO, and the AO had not invoked section 68. The CIT(A) had examined the facts and found that section 68 could not be invoked. The court observed that Major Metals was decided on its particular facts where the Settlement Commission found subscribers not creditworthy — facts absent in the present case.
On this basis and by reliance on Tata Chemicals, the court did not entertain Question A.

Question B (Whether share premium is capital and not taxable as income under section 28(iv))

The court noted that both the CIT(A) and the Tribunal held that share premium is a capital receipt and not taxable as income under section 28(iv). The Tribunal followed this court's decision in Vodafone India Services (P.) Ltd., which held that amounts received on issue of share capital (including premium) are capital in nature in absence of express legislative provision to tax them as income.
The court observed that the apex court in G. S. Homes & Hotels (P.) Ltd. reversed a decision that had treated receipts on account of shares as business income, supporting the position that such receipts are capital in nature.
The court further noted that statutory changes which would have brought such excess consideration within the definition of income under section 2(24) and the proviso to section 68 were made only with effect from April 1, 2013, and therefore are not applicable to the assessment year in question (2012-13). The court referred to its decision in Gagandeep Infrastructure to the effect that the proviso to section 68 is not retrospective.
Given the binding precedent (Vodafone and G. S. Homes) and the absence of retroactive statutory amendment, the court concluded Question B did not give rise to a substantial question of law warranting interference.

Holding and Implications

Holding: All six appeals are dismissed.

Implications:

Direct effect on the parties: The Tribunal's order dismissing the Revenue's appeals is affirmed; the additions of share premium as business income under section 28(iv) are not sustained. The CIT(A)'s direction that the receipts are capital in nature and not taxable as income for AY 2012-13 stands. The court also recorded "No order as to costs."
Wider legal consequences: The court's decision follows existing decisions of this court and the Supreme Court (specifically Vodafone India Services and G. S. Homes & Hotels) that share premium on issue of shares is a capital receipt in the absence of express legislative provision to tax it as income. The court declined to entertain questions based on post-AY statutory amendments and adhered to the procedural limitation that issues not raised before the Tribunal cannot be raised in an appeal under section 260A (per Tata Chemicals). The opinion does not purport to lay down a new precedent; it applies existing authorities and statutory timelines to the facts before it.

No costs were awarded and no new legal principle was announced beyond application of the cited authorities and procedural constraints.

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JUDGMENT

1. All these six appeals by the Revenue under section 260A of the Income-tax Act, 1961 (the Act) take exception to the common order dated November 25, 2016 passed by the Income-tax Appellate Tribunal (Tribunal). The common impugned order of the Tribunal dismissed the Revenue's appeals in respect of the six respondentâ€"assessees all relating to the assessment year 2012-13. The issue arising in all these appeals are identical, viz., whether the amount received as share premium on issue of share by the respondentâ€"assessees-companies could be taxed as profits and gains of business in the hands of the assessees under section 28(iv) of the Act.

2. Mr. A. J. Bhoot the learned counsel of the Revenue states that the relevant facts and questions arising for our consideration in all these six appeals are identical and be heard together. Therefore they are heard together.

3. Although numerous questions of law has been raised in the six appeals, Mr. A. J. Bhoot learned counsel for the appellant urges only the following questions of law for our consideration in all these appeals.

"A. Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct to uphold the decision on Commissioner of Income-tax (Appeals) that the share premium received by the assessee-company cannot be taxed under section 68 of the Act ignoring the ratio laid down by this court in its decision reported in the case of Major Metals Ltd. v. Union of India [2013] 359 ITR 450 (Bom) ?
B. Whether on the facts and in the circumstances of the case and in law, the Tribunal as well as the Commissioner of Income-tax (Appeals) was right in deleting addition made by the Assessing Officer, by holding that the share premium receipt is capital in nature ?"

4. During the previous year relevant to the subject assessment year 2012-13, all the respondent-assessees had increased their share capital by issuing its shares at a premium. During the course of assessment, the Assessing Officer negatived the respondent-assessees contention that the share premium received by it on issue of shares was a capital receipt and hence could not be taxed as income. The Assessing Officer held that the respondent-assessees did not have any significant business at the time of issue of share capital to warrant receipt of share premium. Thus, the Assessing Officer while passing the assessment order under section 143(3) of the Act in five of the six proceedings, on March 18, 2015 and in one proceeding on March 20, 2015 added the share premium received to its income as profits and gains of business under section 28(iv) of the Act.

5. Being aggrieved by the above assessment orders, the respondent-asses sees in all the six appeals carried the above issue in appeal to the Commissioner of Income-tax (Appeals) (CIT(A)). By six distinct orders all dated March 15, 2016 (one in respect of each respondent-assessee) held that section 28(iv) of the Act would have no application, as it dealt with the benefit other than cash or money arising out of business as held by this court in Mahindra & Mahindra Ltd. v. CIT [2003] 128 Taxman 394/261 ITR 501 (Bom.) . It is also to be noted that the Commissioner of Income-tax (Appeals) also held that section 68 of the Act will not apply as during the course of assessment proceedings, complete details of the investor i.e. the PAN, balance-sheet of IT return, copies of bank statements, resolution of the board authorising the parties and also the parties who made the investment have confirmed the transaction in assessment proceedings. In his remand report also the Assessing Officer did not dispute the above position. Thus, the six appeals of the respondent-assessees were allowed by six orders dated March 15, 2016 of the Commissioner of Income-tax (Appeals).

6. Being aggrieved the Revenue carried the above issue in appeal to the Tribunal. Admittedly, the only issue which was urged before the Tribunal is the addition of share capital premium received by the respondents-assessees to its income under the head of profits and gains of business under section 28(iv) of the Act. On the only issue urged before it, the impugned order of the Tribunal holds that section 28(iv) of the Act will have application only on the amounts received as income and not on capital account. The impugned order placed reliance upon the decision of this court in the case of Vodafone India Services (P.) Ltd. v. Union of India [2015] 228 Taxman 50/[2014] 50 taxmann.com 300/368 ITR 1 (Bom.) wherein, it has been held that the amount received on share capital including premium are undoubtedly on capital account in absence of express legislation. Further reliance was placed upon the decision of the hon'ble apex court in G. S. Homes & Hotels (P.) Ltd. v. Dy. CIT [2016] 73 taxmann.com 120/242 Taxman 58/387 ITR 126 wherein, the decision of the Karnataka High Court holding that the amount received on account of shares from various share holders be treated as business income was reversed. The impugned order also made reference to the unreported decision of this court in Idea Cellular Ltd. v. Union of India [2013] 40 taxmann.com 112 wherein, this court while dealing with issue of non-granting of stay of demand in its writ jurisdiction has observed that any benefit which is received on capital account cannot be subject matter of Income-tax under section 28(iv) of the Act. Thus, the appeals of the Revenue were dismissed by following the decision of this court and of apex court that the receipt of share premium is on capital account and cannot be brought to tax as income.

7. In the back-drop of the above facts, we shall now decide the above two questions which arise for our consideration.

Regarding Question A :

(a) The issue raised by the Revenue in this question is to bring to tax the share premium received under section 68 of the Act. We find that the issue of bringing the share premium to tax under section 68 of the Act was not an issue which was urged by the appellantâ€"Revenue before the Tribunal. The only issue which was urged before the Tribunal as recorded in para 11 of the impugned order is the addition of share capital and share application money in the hands of the assessee as income under section 28(iv) of the Act. We find that the Commissioner of Income-tax (Appeals) did consider the issue of applicability of section 68 of the Act and concluded that it does not apply. The Revenue seems to have accepted the same and did not urge this issue before the Tribunal. Mr. Bhoot, learned counsel appearing for the Revenue also fairly states that the issue of applicability of section 68 of the Act was not urged by the Revenue before the Tribunal.
(b) It is a settled position in law as held by this court in CIT v. Tata Chemicals Ltd. [2002] 122 Taxman 643/256 ITR 395 (Bom.) that in an appeal under section 260A of the Act, the High Court can only decide a question if it had been raised before the Tribunal even if not determined by the Tribunal. Therefore, no occasion to consider the question as prayed for arises.
(c) In any case, we may point out that the amendment to section 68 of the Act by the addition of proviso thereto took place with effect from April 1, 2013. Therefore, it is not applicable for the subject assessment year 2012-13. So for as the pre-amended section 68 of the Act is concerned, the same cannot be invoked in this case, as evidence was led by the respondents-assessees before the Assessing Officer with regard to identity, capacity of the investor as well as the genuineness of the investment. Therefore, admittedly, the Assessing Officer did not invoke section 68 of the Act to bring the share premium to tax. Similarly, the Commissioner of Income-tax (Appeals) on consideration of facts, found that section 68 of the Act cannot be invoked. In view of the above, it is likely that the Revenue may have taken an informed decision not to urge the issue of section 68 of the Act before the Tribunal.
(d) We may also point out that decision of this court in Major Metals Ltd. v. Union of India [2012] 19 taxmann.com 176/207 Taxman 185/[2013] 359 ITR 450 Bom. proceeded on its own facts to uphold the invocation of section 68 of the Act by the Settlement Commission. In the above case, the Settlement Commission arrived at a finding of fact that the subscribers to shares of the assesseeâ€"company were not creditworthy inasmuch as they did not have financial standing which would enable them to make an investment of Rs. 6,00,00,000 at premium at Rs. 990 per share. It was this finding of the fact arrived at by the Settlement Commission which was not disturbed by this court in its writ jurisdiction. In the present case the person who have subscribed to the share and paid share premium have admittedly made statement on oath before the Assessing Officer as recorded by the Tribunal. No finding in this case has been given by the authorities that shareholder/share applicants were unidentifiable or bogus.
(e) In the above view Question No. A is not being entertained in view of the decision in Tata Chemical Ltd. ( supra). Accordingly, the question (A) is not entertained.

Regarding Question B :

(a) We find that the impugned order of the Tribunal upheld the view of the Commissioner of Income-tax (Appeals) to hold that share premium is capital receipt and therefore, cannot be taxed as income. This conclusion was reached by the impugned order following the decision of this court in Vodafone India Services (P.) Ltd. ( supra) and of the apex court in G. S. Homes and Hotel (P.) Ltd. ( supra). In both the above cases the court has held that the amount received on issue of share capital including premium are on capital account and cannot be considered to be income.
(b) It is further pertinent to note that the definition of income as provided under section 2(24) of the Act at the relevant time did not define as income any consideration received for issue of share in excess of its fair market value. This came into the statute only with effect from April 1, 2013 and thus, would have, no application to the share premium received by the respondentâ€"assessee in the previous year relevant to the assessment year 2012-13. Similarly, the amendment to section 68 of the Act by addition of proviso was made subsequent to previous year relevant to the subject assessment year 2012-13 and cannot be invoked. It may be pointed out that this court in CIT v. Gagandeep Infrastructure (P.) Ltd. [2017] 80 taxmann.com 272/247 Taxman 245/394 ITR 680 (Bom.) has while refusing to entertain a question with regard to section 68 of the Act has held that the proviso to section 68 of the Act introduced with effect from April 1, 2013 will not have retrospective effect and would be effective only from the assessment year 2013-14.
(c) In view of the above, question No. B as proposed also does not give rise to any substantial question of law as it is an issue concluded by the decision of this court in Vodafone India Services (P.) Ltd. ( supra) and in the apex court in G. S. Homes and Hotels (P.) Ltd. ( supra). Thus not entertained.

Therefore, all the six appeals are dismissed. No order as to costs.