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Facts
The assessee company received share application money from its existing shareholders. Due to financial difficulties and pending ROC formalities, shares were not allotted immediately. The Assessing Officer added the share application money as business income under Section 28(iv) of the Income Tax Act, 1961.
Held
The Tribunal held that share application money received by the company is a capital receipt and not revenue receipt. Therefore, it cannot be brought to tax under Section 28(iv) as business income. The subsequent allotment of shares confirmed the capital nature of the transaction.
Key Issues
Whether share application money received by a company and subsequently allotted with shares is to be treated as capital receipt or business income under Section 28(iv) of the Income Tax Act.
Sections Cited
143(3), 28(iv), 68
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Income Tax Appellate Tribunal, “D” BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
Assessment Year: 2017-18 Asst. Commissioner of Dewanchand Ramsaran Income-tax 6(1)(1), Industries Pvt. Ltd. Room No. 504, 5th floor, Flat No. 15 4th floor, Krishna Aayakar Bhavan, M.K. Road, Vs. Niketan, Sion Main Road, King Mumbai-400020. Circle, Mumbai-400022. (PAN : AABCD7193H) (Appellant) (Respondent) Present for: Assessee : Ms. Aarti Sathe a/w Ms. Aasavari Kadam Revenue : Shri R. R. Makwana, Addl. CIT Date of Hearing : 21.01.2025 Date of Pronouncement : 21.04.2025 O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the Revenue is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, vide order no. ITBA/NFAC/S/250/2023-24/1061827856(1), dated 06.08.2024, passed against the assessment order by Assessing Officer, Circle 6(2)(1), Mumbai, u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 25.12.2019, for Assessment Year 2017-18.
2. Grounds taken by the Revenue are reproduced as under:
Dewanchand Ramsaran Industries Pvt. Ltd. A.Y. 2017-18 1. Whether on the facts and in the circumstance of the case and in law, the Ld. CIT(A) has erred in granting relief to the assessee company by deleting the disallowance/addition of Rs.10,17,05,000/- made by the A.O u/s 28(iv) of the Income tax Act, despite the fact that though the share premium was received in the F.Y. 2011-12 & 2012-13, no shares were allotted against them as late as March 2021.
2. The Appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.
Brief facts as culled out from records are that assessee carries on its business activity in the field of charter hiring of drilling rigs and work over rigs. It obtained secured loans in foreign currency to finance the purchase of rigs, which were employed into its business. However, it went into financial trouble when one of its contracts, for which it had purchased additional rigs got cancelled much before the end of its contract period due to recession in the oil industry, and assessee did not have sufficient funds to finance the loan repayment. Assessee had to sell its rigs in order to service the interest and principal payment on these loans. Owing to this financial crisis, business came to standstill.
3.1. Assessee filed its return of income on 31.03.2018, reporting total income at Nil after setting off of the business loss and unabsorbed depreciation. In the course of assessment proceedings, ld. Assessing officer asked assessee, inter alia, to show cause as to why share application money of Rs. 10,17,05,000/- should not be added to the total income. Assessee filed its reply wherein, inter alia, confirmation from all parties from whom share application money was received along with their balance sheets as at 31s March, 2017 and Income Tax Return filed acknowledgments were submitted. Details furnished for each of the share applicant is tabulated as under:
Dewanchand Ramsaran Industries Pvt. Ltd. A.Y. 2017-18 Name of the Party PAN Address Amount (Rs.) Shorilal Dewanchand AAFPM9646R 216, Navratan Building, 69, 1,00,00,000/- Makad P.D.Mello Road, Carnac (Legal Heir Swarnakanta S Bunder. Junction, Mumbai- Makad) 400009. Confirmation enclosed Annexure I Swarnakanta S Makad AAFPM9641J 215, 2nd Floor, Navratan 35,00,000/- Building, 69, P.D. Mello Road, Carnac Bunder Junction, Mumbai-400009. Confirmation enclosed. Annexure II Rajesh Makad AAFPM9640K 216, Navratan Building, 69, 95,00,000/- P.D.Mello Road, Carnac Bunder Junction, Mumbai- 400009. Confirmation enclosed. Annexure III Gopal S Makad AAFPM7322J 216, Navratan Building, 69, 75,00,000/- P.D.Mello Road, Carnac Bunder Junction, Mumbai- 400009. Confirmation enclosed. Annexure IV Mamta Rajesh Makad AAFPM9642M 216, Navratan Building, 69, 35,00,000/- P.D.Mello Road, Carnac Bunder Junction, Mumbai- 400009. Confirmation enclosed. Annexure V Poona Rubber AABCP7930N 216, Navratan Building, 69, 77,00,000/- Manufacturing Pvt Ltd P.D.Mello Road, Carnac Bunder Junction, Mumbai- 400009. Confirmation enclosed. Annexure VI Dewanchand Ramsaran AACCD9550F 218, Navratan Building, 69, 6,00,05,000/- Corporation Pvt Ltd P.D.Mello Road, Carnac Bunder Junction, Mumbai- 400009. Confirmation enclosed. Annexure VII Total 10,17,05,000/- 3.2. Assessee also highlighted the details shareholding pattern of its equity share capital as on 31.03.2017 as reported in its audited financial statement to demonstrate that all of them are existing shareholders of the assessee. The details are tabulated below:
Sr. No. Name and Residential Address PAN No. of Share % of Shares Held Held 1. Mr. Shorilal Dewanchand AAFPM9646R 18,99,620 24,59% Makad 14, Krishna Niketan, Sion Main Road, Mumbai-400022.
Mr. Rajesh Shorifal. Makad AAFPM9640K 18,18,360 23.54% 14, Krishna Niketan, Sion Main Road, Mumbai-400022.
3. Mr. Gopal ShorilaL Makad, AAFPM7322J 23,61,165 30.57% 14, Krishna Niketan, Sion Main Road, Mumbai - 400 022.
Mrs. Swarnakanta ShorilaL AAFPM9641J 6,91,230 8.95% Makad 14, Krishna Niketan, Sion Main Road, Mumbai-400022. 5 Mrs. Mamta Rajesh. Makad AAFPM9642M 6,76,500 8.76% 14, Krishna Niketan, Sion Main Road, Mumbai-400022. 6 Infrastructure Leasing & AAACI0989F 2,78,125 3.60% Financial Services Ltd. IL&FS Financial Centre, Plot No. C22, G Block, B KC, Bandra (E), Mumbai 051. Total No. of Shares 77,25,000 100% 3.3. In its explanation, as mentioned earlier, it was submitted that assessee went into financial crisis and did not have sufficient funds to meet its interest payments on secured loans. Hence, it obtained share application money from its existing members and their related parties in Dewanchand Ramsaran Industries Pvt. Ltd. A.Y. 2017-18 order to finance the interest payments. These monies were not taken from any outside third party, but from existing members and parties belonging to the same group. The said amounts were paid by them to the assessee out of their own personal funds which was corroborated by the respective balance sheets and confirmation letters placed on record. According to the assessee, the Makad family infused money in the form of share application money which assessee could not refund, resulting into pendency of allotment of shares. Assessee could not complete the RoC formalities which also resulted in the pendency of issue and allotment of shares. All the parties being existing shareholders were aware of this fact and hence did not claim their investment even after lapse of six years, nor initiated any action against the company.
3.4. However, ld. Assessing Officer completed the assessment by making the addition, inter alia, of Rs.10,17,05,000/- as business income u/s 28(iv) towards share application money, pending for allotment by holding that it represents the value of benefit accruing to the assessee arising from business.
4. Aggrieved, assessee went in appeal before the ld. CIT(A) and reiterated the above stated submission along with corroborative documentary evidences. According to the assessee, impugned share application money is of a capital nature and neither a benefit, nor a perquisite is received by it. Addition so made of share application money u/s. 28(iv) of Rs. 10,17,05,000/- is unsustainable. Before the ld. CIT(A), assessee brought on record vital fact relating to the impugned transaction that it had completed the formalities of allotting the equity shares in the Financial Year 2020-21, to all the concerned parties from Dewanchand Ramsaran Industries Pvt. Ltd. A.Y. 2017-18 whom it had received the share application money of Rs 10,17,05,000/-. In this respect, it furnished the following documents:
a. Letter dated 25.03.2021 written by Company Secretary JHR & Associates informing payment of Stamp Duty of Rs 5,086 /- and affixing the same to the respective share certificates issued to the parties from whom the shares application money of Rs 10,17,05,000/- was received, along with copy of the challan of Rs 5086/-. b. Photo Copies of the Share Certificates issued of Rs 10,17,05,000/- to parties from whom share application money has been received (equity share of Rs 10/- each), for which details are: i. Rajesh Makad Rs 95,00,000/- [9,50,000 Shares) ii. Mamta Makad Rs 35,00,000/- [3,50,000 Shares) iii. Swarnakanta S Makad Rs 1,35,00,000/- [13,50,000 Shares) iv. Gopal Makad Rs 75,00,000/- [7,50,000 Shares) v. Dewanchand Ramsaran Rs 6,00,05,000/- [60,00,500 Shares] Corporation Pvt Ltd vi. Poona Rubber Manufacturers Pvt Rs 77,00,000/- [7,70,000 Shares) Itd 4.1. Assessee thus, based on above stated factual position, claimed, now that shares have been issued and allotted to the persons from whom the company has received share application, no addition is called for under Section 28(iv).
4.2. In addition, it placed reliance on the following decisions which covers the case of the assessee:
4.2.1. DCIT v. Inex Infotech Pvt. Ltd [2016] (11) TMI 1463 ITAT Nagpur, dated 25.11.2016, wherein it was held in para 28 that - Dewanchand Ramsaran Industries Pvt. Ltd. A.Y. 2017-18 "28. From the above it is evident that the share capital and share application money with premium received by the assessee company is an amount received on capital account. From the above case laws, it is quite evident that sums received on capital account cannot be treated as income. Once it is held that the share capital and share application money with premium are received on capital account, such receipts cannot be added as income from business and profession u/s 28 of the I.T or for that matter u/s 28(iv) of the I.T. Act. In this regard even at the risk of repetition we find that section 28(iv) provides that following amount shall be chargeable to income-tax under the head profits and gains from business or profession, "the value of any benefit or perquisite convertible into money or not arising from business or the exercise of a profession. In this regard we fail to understand as to how section 28(iv) is applicable on the facts of the present case where share application money has been received by the Company. Section 28(iv) covers the value of any benefit or perquisite and not sums received on capital account which is the case in the present context." Hence in our considered opinion the AO could not resort to this provision as the receipt was of capital nature." 4.2.2. PCIT Vs Apeak Infotech and others 2017 (9) TMI 1590 wherein Hon’ble jurisdictional High Court Bombay upheld the decision of Inex Infotech (supra) by ITAT Nagpur. It was held by the Hon’ble High Court that amount received towards share capital cannot be treated as income.
We have heard both the parties and perused the material on record. We have also perused the orders of the authorities below for the observations and findings given by them on the issue in hand before us. Admittedly, it is a fact on record that assessee received share application money in the financial year 2011-12 and 2012-13 against which shares could not be issued and allotted to the investors. It is also a fact on record that investors are the same existing shareholders who have infused their funds in the assessee company for the purpose of mitigating financial crisis faced by it. Identity and creditworthiness of the investors is not doubted and also there is no question on the genuineness of the transaction in this respect. Assessee could not Dewanchand Ramsaran Industries Pvt. Ltd. A.Y. 2017-18 comply with certain requirements with Registrar of the Company (RoC) for the purpose of issuing the shares and allotting them to these investors which remained pending for several years. Reference was made to the balance sheet for the year under consideration as on 31.03.2017 wherein share application money pending allotment of Rs.10,17,05,000/- was reported. Similar amount was also reported in the column for the year ending on 31.03.2016, to demonstrate that this amount had been regularly and continuously reported by the assessee in its audited financial statement from the first year when it was received in the year ending on 31.03.2012 and part of it in the year ending 31.03.2013. Assessee also referred to the audited financial statements for the year ended 31.03.2021 being the year in which shares were issued and allotted to the respective shareholders against the share application money pending for allotment. In this respect due disclosure was made in the said balance sheet and the amount against share application money pending allotment was reported as Nil with corresponding increase in the amount of share capital and premium. Disclosure made is in note No. 24 forming part of the financial statement placed in the Paper Book page No. 127.
5.1. It is contented that the investors who paid these amounts towards share application are related to each other and existing shareholders in the assessee company who are aware of the fact about the financial crisis faced by the assessee and therefore, did not pursue for allotment of the shares nor took any other adverse action pending such allotment. Yet another fact undisputed as placed by the assessee is that ultimately shares have been issued and allotted to the respective investors against the share application money paid by them for which necessary Dewanchand Ramsaran Industries Pvt. Ltd. A.Y. 2017-18 corroborated documentary evidences were placed on record before the ld. CIT(A). These documentary evidences evidently established that the transaction of share application money received by the assessee has ultimately culminated into issuance of equity shares and allotment thereof to the respective parties.
5.2. Ld. CIT(A) has considered these undisputed facts and based on the same has deleted the addition so made by the ld. AO by invoking the provisions of section 28(iv) of the Act. In this respect similar issue had came up before the Hon’ble Jurisdictional High Court of Bombay in the case of Pr. CIT v. Apeak Infotech and others (supra). In this case, the Ld. AO had added the share premium received by the assessee to the total income as profit and gains of business u/s 28(iv) and no finding was recorded that shareholders/share applicants were unidentifiable or bogus. Ld. AO had not invoked section 68 to bring the share capital premium to tax. Hon’ble High Court by taking note of the findings of Ld. CIT(A) and the Tribunal, dismissed the appeal filed by the Revenue. In this context, it is important to take note of the observations and findings by the Ld. CIT(A) and Tribunal as recorded in para 5 and 6 of this order. According to the same, it was held that section 28(iv) of the Act has no application as it dealt with benefit other than the cash and money arising out of the business. Further, assessee had furnished all the details of the investors which included and balance sheet, ITR, bank statements, resolution of the board and confirmation of transaction. Observation of the Tribunal in this respect was noted about section 28(iv) of the Act which has application only on the amounts received as income and not on capital account. Reference was also made in this judgment of the decision by Hon’ble Supreme Court in the case of G.S. Homes and Hotel Dewanchand Ramsaran Industries Pvt. Ltd. A.Y. 2017-18 Pvt. Ltd. (2016) 387 ITR 120 (SC) wherein the decision by Hon’ble Karnataka High Court of amount received on account of shares from various shareholders be treated as business income was reversed, since Hon’ble High Court of Karnataka had taken the adverse view.
5.3. Reliance was also placed on the decisions of Co-ordinate Bench of ITAT, Nagpur in the case of Inex Infotech (supra) wherein similar issue had come up who elaborately dealt with provision contained in section 28(iv) of the Act. Relevant extracts from this decision as contained in para 14 to 22 are reproduced below:
“14. A reading of the above makes it clear that section 28 refers to the profits and gains of business or profession. It sets out the income which are chargeable to income-tax under the head "profits and gains of business or profession" and clause (iv) thereto states that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. A plain reading of this provision shows conditions precedent for such taxability i.e. (1) that there should be benefits or perquisites; and that (ii) such benefits or perquisites should arise from the business or exercise of the profession. The expression 'arising from the business' essentially implies that the benefit or perquisite must be in the nature of a business receipt or revenue receipt. No matter how wide be the scope of section 28(iv), the difference between capital receipt and revenue receipt cannot be overruled. One must bear in mind the fact that section 28 only refers to the 'income' which can be charged to income tax under the head 'profits and gains from business or profession', and, therefore, when a particular advantage, perquisite or receipt is not in the nature of income, there cannot be any occasion to bring the ame to tax under section 28(iv). It is settled law that a capital receipt, in principle, is outside the scope of income chargeable to tax. It is also important to bear in mind that, the burden is on the revenue to establish that the receipt is of a revenue nature. As to what constitutes capital receipt, is found guidance from Madras High Court's judgment in the case of CIT v. Seshasayee Bros. (P) Ltd. [1996] 222 ITR 818/819 Taxman 13 wherein it was held that "when a receipt is referable to fixed capital, it is not taxable, and it is taxable as a revenue receipt when it is referable to circulating capital or stock in trade". To sum up, unless it is a revenue receipt, it cannot be in the nature of income [except in a situations in which capital receipts are specifically included in the definition of income such as under section 2(24)(vi), and unless it is in nature of income, it cannot be considered for taxation under section 28(iv).
From the above it is clear that to find out whether or not the benefit even if that be so is on capital account or Revenue's account, it is necessary to Dewanchand Ramsaran Industries Pvt. Ltd. A.Y. 2017-18 understand the nature of transaction which resulted in what the AO assessed as benefit to the assessee.
In the present cases share applicants have applied for share capital at a premium. It is well settled accounting principle that share capital, share application money and share premium fall under capital nature of transaction.
The Companies Act which governs the principles and manner of preparations of accounts of Companies also provides under section 211 vide Schedule VI that share capital, share premium, share application money pending allotment be separately shown as capital item in the balance sheet. In such circumstances there is no dispute that share capital, share application money including share premium fall under capital head and thus are to be treated as capital receipt and not as revenue receipt.
Once it is clear that share capital and share application money and premium fall in the realm of capital receipt, they cannot be brought to tax u/s 28 of the I.T. Act as profits and gains of business. This proposition has been duly recognised by the decision of Hon'ble Apex Court and Hon'ble jurisdictional High Court. This view has recently been affirmed by Hon'ble Apex Court in the case of M/s G.S. Homes & Hotels P. Ltd. vs. DCIT in Civil Appeal No.(s) 7379-7380 of 2016 vide order dated 9th August, 2016. The Hon'ble Apex Court expounded as under : " We modify the order of the High Court by holding that the amount (Rs.45,84,000/-) on account of share capital received from the various share- holders ought not to have been treated as business income. The High Court, therefore, in our considered view, fell into error in reversing the order of the Tribunal on the aforesaid issue." In the aforesaid case Karnataka High Court had held following the case of Shree Nirmal Commercial Ltd. 193 ITR 694 (Bom.) and 213 ITR 361 (FB) that both the capital and refundable deposits received by Housing Company from its shareholders in consideration for allotting areas to them is assessable as business profits.
In this regard we may also gainfully refer to Hon'ble Bombay High Court decision in the case of Idea Cellular Ltd. vs. Union of India (supra). In this case the Hon'ble Bombay High Court has referred to the assessee's contention that the benefit which arises on capital account cannot be subject matter of income u/s 28(iv) of the said Act and in this regard the assessee had relied upon the decision of ITAT in the case of ITO vs. Shreyas Investment P. Ltd. 141 ITD 672. Referring to the above ITD decision the Hon'ble High Court has observed that in its application for stay the petitioner had specifically referred to the said decision of the Tribunal that the respondent does not state that this decision is inapplicable to the facts of the petitioner's case and that he does not distinguish the same. In these circumstances the Hon'ble High Court held that "we are not inclined to direct the petitioner to deposit any amount till its application is heard Dewanchand Ramsaran Industries Pvt. Ltd. A.Y. 2017-18 and decided in accordance with law. Similarly Hon'ble Bombay High Court in the case of Vodafone India Services P. Ltd. vs. Union of India 368 ITR 001 has also considered the taxability of share capital including premium as income and held as under : " The word "income" for the purpose of the Income-tax Act, 1961 has a well understood meaning as defined in section 2(24) of the Act. Even though the definition in section 2(24) of the Act is an inclusive definition, income will not in its normal meaning including capital receipts unless it is so specified, as in section 2(24)(vi) of the Act. Amounts received on issue of share capital including the premium are undoubtedly on capital account. Absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as income."
From the above it is evident that the share capital and share application money with premium received by the assessee company is an amount received on capital account. From the above case laws it is quite evident that sums received on capital account cannot be treated as income. Once it is held that the share capital and share application money with premium are received on capital account, such receipts cannot be added as income from business and profession u/s 28 of the I.T or for that matter u/s 28(iv) of the I.T. Act. In this regard even at the risk of repetition we find that section 28(iv) provides that following amount shall be chargeable to income-tax under the head profits and gains from business or profession, "the value of any benefit or perquisite convertible into money or not arising from business or the exercise of a profession. In this regard we fail to understand as to how section 28(iv) is applicable on the facts of the present case where share application, application money has been received. Section 28(iv) covers the value of any benefit or perquisite and not sums received on capital account which is the case in the present context. Hence in our considered opinion the AO could not resort to this provision as the receipt was of capital nature.
In the background of aforesaid discussion and precedent, we do not find any infirmity in the order of learned CIT(Appeals).
Since we are deciding the issue on the basis of Hon'ble Apex Court decision and Hon'ble Jurisdictional High Court decision, we do not find any need to deal with the other case laws referred by the learned counsel of the assessee which are also relevant on the facts of this case and support the assessee's case.” 5.4. In the present case before us also, assessee had received share application money from its existing shareholders. In this respect, provisions of section 68 were not urged upon by the ld. AO. Thus, accepting the identity and creditworthiness of the investors and genuineness of the transaction, addition made by the ld. AO is by way of Dewanchand Ramsaran Industries Pvt. Ltd. A.Y. 2017-18 invoking provisions of section 28(iv) to bring this amount to tax under the head ‘profit and gains’ ‘business or profession’ on account of assessee receiving benefit or perquisite. The most clinching fact for the assessee is that it has ultimately issued the shares and allotted the same to the respective investors which is not in dispute. This fact establishes that impugned transaction is on capital account and thus the receipt in the hands of the assessee is a capital receipt, not liable to be taxed under the provisions of section 28(iv).
Considering the facts on record and submissions made as well as jurisprudence discussion above, we do not find any reason to interfere with the findings arrived at by the ld. CIT(A), deleting the addition of Rs.10,17,05,000/- made u/s 28(iv) by the ld. AO. Accordingly, ground raised by the Revenue in this respect is dismissed.
In the result, appeal of the Revenue is dismissed.
Order is pronounced in the open court on 21 April, 2025.