TMI Blog2015 (2) TMI 942X X X X Extracts X X X X X X X X Extracts X X X X ..... ld, which otherwise would not be taxable? - Held that:- Simply going with the facts of the case, the revenue authorities could not have brought to tax the amount in question, because, the income so disputed never belonged to the assessee, as the assessee did not exist at the time, when the income was actually generated. It changed hands, it went to individual persons, named earlier. The amount actually came into the account books of the assessee as per the order consequential to the scheme approved by the Hon’ble Bombay High Court. Undisputedly it was a case of amalgamation, wherein, as seen from the order of Hon’ble Bombay High Court, the amounts collected as share premium by those three companies were ordered to be brought into the books of the assessee either as General Reserve or as Goodwill. This amount was shown by the assessee company in the General Reserve. The receipt in the hands of the assessee shown as General reverse could not be brought to tax. This for two reasons (a) the receipt does not carry the character of income under any provision of the Act, and (b) it became a receipt in the hand of the assessee on a specific direction of Hon’ble Bombay High Court, relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not taxable under Income Tax Act, 1961. Thus, the addition made u/s 56 of the Income Tax Act, of ₹ 31,61,92,500/- may please be deleted. The appellant reserves its right to add, alter, amend or delete the grounds of appeal . 2. The facts are that the assessee company was incorporated on 15.10.2008, i.e. in assessment year 1009-10. The assessee filed its return of loss of ₹ 29,28,751/-. In the accounts of the assessee company, the AO noticed that it had debited expense of ₹ 28,89,560/-. The AO, in the assessment proceedings called for an explanation with regard to this expense and it was explained to him that after the incorporation, the assessee company started exploring business avenues, which consisted start up activities, such as legal expenses, payments to ROC etc. The assessee, though claimed the expense to be revenue in nature, prayed that if the expense is not to be allowed, then the expenses be treated as preliminary expense to be deferred u/s 35D @ 20%. 3. The AO, after considering the explanation of the assessee, observed that since no business had not been booked in the financial year, the expense, incurred by the assessee in period, prior to com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Justice Chagla, in Western India Vegetable Products Ltd. v. CIT (1954) 26 ITR 151. The following pithy observations are worth quoting - It seems to us, that the expression setting up means, as is defined in the Oxford English Dictionary, to place on foot ‟ or to establish , and in contradiction to commence . The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under sec. 10(2) . 9. The Tribunal has observed that having regard to the business of the assessee, which is the development of real estates, the participation in the tender represents commencement of one activity which would enable the assessee to acquire the land for development. If the assessee is in a position to commence business, that means the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) because as we have already observed, the question is essentially one of fact depending upon the nature of the business and none of the authorities cited by both the sides was directly on the question as to when a real estate business can be said to have been set-up. Under section 260A of the Act, an appeal lies to the High Court only on a substantial question of law. The finding of the Tribunal in the present case is a finding of fact and it cannot be said that the finding was without any basis or material. Moreover, the Tribunal did take note of the distinction between the commencement of a business and setting-up of a business and applied the test laid down by the Bombay High Court (supra) which decision has been noticed by us to have formed the bedrock of almost all the authorities cited before us . 9. This decision, it may be noted has in fact, followed the decision of Hon ble Bombay High Court, as referred to in the body of the decision. 10. The AR also placed reliance on the decision of the CIT vs Saurashtra Cement and Chemical Industries Ltd., reported in 91 ITR 170 (Guj), wherein it was held, Business connotes a continuous course of activities. All the acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the assessee s main business was real estate business, and that the assessee had advanced money to various land owners for the purpose of acquiring and dealing in landed properties, was not in dispute. Therefore, the moment the company was incorporated and the amounts were advanced for the purpose of acquiring and dealing in landed property, the business of the assessee should have been treated as having commenced. Interest earned thereby could not be treated as income from business and necessary benefits or deductions claimed had to be treated as income from business and necessary benefits or deductions claimed had to be allowed in accordance with law . 12. The AR, taking support of the above decisions, pleaded that the assessee has rightly claimed the expense of ₹ 28,89,560/-. The AR alternatively pleaded for allowance of expense u/s 35D to be deferred in five years. 13. The DR supported the orders of the revenue authorities and pleaded that the expense was rightly disallowed. 14. We have heard the arguments and have perused the orders of the revenue authorities and the case laws cited before us. 15. It is an un-denied fact that the assessee company was inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch shares has been shown as equity shares suspense. Further, it is also mentioned that excess of book value of net assets taken over by the company over the aid up value of equity shares to be issued amounts to ₹ 32,40,89,219/- and the same has been credited to the Genera! Reserves Account as prescribed in the scheme. It was further stated that, had the scheme not prescribed this accounting treatment, the said amount would have been credited to Capital Reserve. 23. During the course of assessment proceedings, the AO called for the necessary details concerning the treatment and additions to General Reserve, shown in the first year of assessment. The assessee company was also asked to show cause as to why the same should not be brought to tax since the company has transferred the amounts to General Reserve, (Distributable Profits among shareholders), and not to the Securities Premium Account which is subject to the restrictions imposed by section 78 of the Companies Act, 1956. In response to the same, the assessee stated that during the year they have not received any amount of securities premium and the General Reserves shown is a securities premium pursuant to the amalgama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of the objectives for which the same was collected and as such the conditions specified under companies Act, 1956 are violated. Therefore, the amount brought in to the books of the assessee in the form of share premium is not a share premium within the meaning of the provisions of the Companies Act and hence the same needs to be treated as such for the purpose of the Income-tax Act, 1961. p view of the above stated facts and provisions of law, you are required to explain as to why the amount of premium appearing in the assessee's balance sheet as General Reserve should not be taxed as assessee's income for the year under the head income from Other Sources within the meaning of sub-section (1) of section 56 of the Income-tax Act, 1961. 4.8 In response to the same, the Assessee Company by their AR's letter dated 14.03.2013 has filed their submissions, which are forming part of the records and are not being repeated here for the sake of brevity. It is the contention of the assessee that the acquisition of shares of AMPL RVPL and VTPL were by the Chaturvedi family and after the said acquisition: the funds available with these companies by way of investment in shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of being share premium. During the course of assessment proceedings, the Assessee Company was asked to submit the details of utilization of share premium. The Assessee Company has not submitted the same. However, on perusal of the records, it is seen that the majority of the amount is utilized for payments to sister concerns, which is a clear violation of section 78 of the Companies Act, 1956. The contention of the assessee that there are no restrictions imposed by section 78 of the Companies Act, 1956 are incorrect. As per section 78 of the Companies Act when a company a issues securities at a premium, the aggregate amount or value of the premium of those securities shall be transferred to the Securities Premium Account and the provisions relating to the reduction of share capital shall apply as if the amount appearing in the Securities Premium account were paid up share capital of the company. The securities premium account can be utilized by the company for - (a) in paying up unissued securities of the company to be issued to members of the company as fully paid bonus securities. (b) in writing off the preliminary expenses of the company; (c) in writing off the expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the assessee after quoting from the Honourable Supreme Court judgment in the case of Kale Khan Mohammad Hanif vs. CIT (1963) 50 ITR 1 (SC) The onus of proving the source of a sum of money found to have been received by the assessee is on him. If he disputes liability for tax, it is for him to show either that the receipts was not income or that if it was, it was exempt from taxation under the provisions of the Act. In the absence of such proof, the ITO is entitled to treat it as taxable income. These are settled principles of law and not be altered at the instance of the assessee. However, in the instant case, the 'Share Premium' received was ever treated as a share premium. After receipt of the same, it was transferred to the Assessee Company by resorting to an 'amalgamation' with the clear intention of transfer of funds to the assessee company without subjecting the same to tax. It may not be out of place to mention here that all these transactions have taken place in the year under consideration which also goes to prove the real intention behind entering into such a convoluted route. Hence, the 'share premium' received by AMPL, RVPL and VTPL and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 2012. Even in the Explanatory Notes to the Finance Act, 2012, it is mentioned that Section 56(2) provides for the specific category of incomes that shall be chargeable to incometax under the head 'Income from other sources'. It is proposed to insert a new clause in section 56(2). It is nowhere mentioned / discerned in / from the said Explanatory Notes that the new clause has been inserted to remedy the existing mischief. Hence, in such a case, the principles of harmonious construction will apply. A statute must be read as a whole and one provision of the Act should be construed with reference to other provisions in the same Act so as to make a consistent enactment of the whole statute. Such a construction has the merit of avoiding any inconsistency or repugnancy either within a section or between a section and other parts of the statute. It is the duty of the courts to avoid a head on clash between two section of the same Act and, whenever it is possible to do so, to construe provisions which appear to conflict so that they harmonise. It should not be lightly assumed that Parliament had given with one hand what it took away with other (Commissioner of Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and subsection (1) (2) of section 56 are only complimentary in nature. In view of the authoritative pronouncement by the Honourable Courts and in view of the detailed reasoning given in paragraphs 4.1 to 4.12, amount of ₹ 31,61,92,500 received by the assessee company in the guise of 'share premium' is treated as Income from Other Sources u/s 56(1) of the Income-tax Act, 1961 and added back to the Total Income of the Assessee Company . 25. The AO, therefore, treated the amount shown as General Reserve as share premium, holding the same to be income from other sources u/s 56(1) and added it to the income of the assessee. 26. The assessee approached the CIT(A), before whom the assessee reiterated the facts and arguments made before the AO. 27. The assessee also provided the pre amalgamation position of the assessee company, which showed zero balance, as per schedule 1 to the Balance Sheet and submitted that Amalgamation Reserve was a result of the directions of the court and in any case, is a capital receipt, therefore, outside the purview of tax. 28. The CIT(A) after considering the complete details and arguments, sustained the order of the AO. 29. Aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AR further submitted that the revenue authorities have brought to tax the amount the amount holding it to be share premium, but share premium itself is an item of capital field and not a revenue nature and therefore outside the scope of tax. 34. Besides the above, if at all it is income then this income pertained to 2006-07 and 2007-08 and pertained to amalgamating companies not to the assessee company, with whom the three companies have amalgamated. In any case, in those years, the assessee company was nowhere in existence. 35. Finally, the AR submitted that as per chart furnished with the revenue authorities the shares were purchased by family members, then in that case any income accruing can only be taxed in their individual hands and not in the hands of the assessee company. The AR therefore submitted that the amount in question was not in the nature of income in the hands of the assessee and the revenue authorities be directed to delete the addition made at ₹ 31,61,92,500/-. 36. On the other hand, the DR very strongly supported the orders of the revenue authorities and pleaded that the amount was rightly brought to tax. 37. We have heard the arguments fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpressly stated, inter alia, that income shall include any capital gains chargeable under section 45. Under Section 2(24)(vi), the Legislature has not included all capital gains as income. It is only capital gains chargeable under Section 45 which has been treated as income under Section 2(24). If the argument of the Department is accepted then all capital gains whether chargeable under section 45 of not, would come within the definition of the word income under section2(24). Further, under section 2(24)(vi) the Legislature has not stated that any capital gains will be covered under the word income. On the contrary, the Legislature has advisedly stated that only capital gains which are chargeable under Section 45 of the Act could be treated as income. In other words, capital gains not chargeable to tax under section 45 fall outside the definition of the word income in section 2(24) of the Act. It is true that section 2(24) of the Act is an inclusive definition However, in this case, we are required to ascertain the scope of Section 2(24)(vi) and for that purpose we have to read the sub section strictly. We cannot widen the scope of sub section by saying that the definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed, 10.3. A simple reading of this section show that income of every kind which is not to be excluded from the total income shall be chargeable to income tax. The emphasis is on that income of every kind , therefore, to tax any amount under this section, it must have some character of income . It is a settled proposition of law that capital receipts, unless specifically taxed under any provisions of the Act, are excluded from income. The Hon ble Supreme Court has laid down the ratio that share premium realized from the issue of shares is of capital in nature and forms part of the share capital of the company and therefore cannot be taxed as a Revenue receipt. It is also a settled proposition of law that any expenditure incurred for the expansion of the capital base of a company is to be treated as a capital expenditure as has been held by the Hon ble Supreme Court in the case of Punjab State Industrial Corporation Ltd. Vs CIT 225 ITR 792 and in the case of Brooke Bond India Ltd. VS CIT. Thus the expenditure and the receipts directly relating to the share capital of a company are of capital in nature and therefore cannot be taxed u/s. 56(1) of the Act. The assessee succe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which loses its existence into the other company and the expression amalgamated company is used for blended undertaking, which holds existence of those two or more companies. In essence thus, the whole exercise of amalgamation in the nature of merger is an exercise in that of pooling of resources, as also pooling of assets, into the company in which two or more companies are blended. In the present case, as a result of amalgamation, the assessee, being the transferee company, will increase its assets and liabilities, and, even if there be any benefit in the process, such a benefit can only be in the capital field because it is relatable to the non trading assets and capital. What it affects is the capital structure of the assessee company and the manner in which business is consolidated. As the Assessing Officer himself observed, that the exercise of amalgamation is also aimed at bolstering the capability of the assessee to conduct business more dynamically and earn more profit. So, the enhancement of its capital reserve, as a result of this amalgamation can only be construed as a benefit accrued to the assessee. Even if, it can be surmised that the assessee is benefited in a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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