M/S EDULINK PRIVATE LIMITED ,BANGALORE vs. INCOME TAX OFFICER WARD-2(1)(4), BANGALORE

The only issue that arises for consideration in this appeal is with regard to the correctness of an addition of Rs.5,09,04,876 made by the Assessing Officer (AO).

The aforesaid addition was made by the AO under the following facts and circumstances. The assessee is a company engaged in the business of commercial training of computer gaming, art and animation. In the course of assessment proceedings u/s. 143(3) of the Income-Tax Act, 1961 [“the Act”] for the AY 2015-16, the AO noticed from the audited financials of the assessee that assessee has shown a sum of Rs.5,09,04,876 under the head ‘Other current liability’ – “Share application money received (Amount received in excess of authorized capital – Note 1.1)”. In the Notes to the Accounts in Note 1.11, it was mentioned as follows:-

The break-up of the share application money received by the assessee, the Financial Years in which they were received are reflected in the ‘Other current liabilities’ were as follows:-

The individuals who provided share application money were all non- residents and this fact is not disputed. The details of persons who contributed to the share application money and their status is as follows:-

The query of the AO was two-fold: (i) How the assessee received share application money in excess of authorized share capital of assessee; & (ii) receipt of share application money is liable to be taxed as income from other sources u/s. 56(2)(viib) of the Act. The provisions of sec.56(2)(viib) of the Act, reads as follows:-

In reply to the aforesaid query of AO, the assessee pointed out that–

The assessee submitted that the fact that share application money received exceeds the authorized share capital of assessee will have no effect on the genuineness of transaction as it was only lack of awareness that the assessee received share application money beyond authorized share capital. The assessee also submitted that it would take necessary steps to increase its authorized share capital. The assessee gave details of the Foreign Inward Remittance Certificates (FIRCs) evidencing receipt of share application money from non-residents through inward remittances from outside India. The assessee submitted that even the provisions of section 68 of the Act cannot be applied by the AO because the assessee has established the identity of the share applicants, their creditworthiness and genuineness of the transaction.

The AO, however, was of the view that the act of receiving share application money in excess of authorized share capital of assessee was not in accordance with law and therefore money received cannot be considered as towards share application money. The AO therefore treated the money received from non-residents as income of the assessee. He ultimately brought the sum of Rs.5,09,04,876 to tax under the head ‘income from other sources’ for the following reasons:-

On appeal by the assessee, the CIT(Appeals) confirmed the action of the AO. The CIT(A) did not address the contention of assessee as were put forth before the AO. Aggrieved, the assessee is in appeal before the Tribunal.

The ld. counsel for the assessee reiterated the submissions as were made before the AO. He also brought to our notice that if the provisions of section 68 are sought to be applied, the AO or the CIT(A) has not brought on record as to which of the three ingredients necessary for making the addition u/s. 68 of the Act were present in the case of assessee. His next submission was that an addition u/s. 68 can be made in an assessment year relevant to previous year in which there was an entry of cash credit. He pointed out that the undisputed factual position is that during the previous year relevant to AY 2015-16, the assessee received share application money only to the tune of Rs.35 lakhs and therefore addition of Rs.5,09,04,876 made by the revenue authorities cannot be sustained.

The ld. DR relied on the order of the CIT(Appeals).

We have considered the rival submissions. The details of receipt of share application money on various dates given in page 50 of assessee’s PB is enclosed as Annexure-I to this order. The assessee had applied to the Registrar of Companies for increase in authorized share capital of 32,90,000 equity shares and application money received from various share applicants was converted into equity shares under Board Resolution allotting shares to the various share applicants dated 26.03.2018 at page 57 of assessee’s PB. We are of the view that in the light of evidence available on record, no case has been made out by the revenue for invoking the provisions of section 68 of the Act.

As far as invoking the provisions of section 56(2)(viib) is concerned, as rightly contended by the ld. counsel for the assessee, those provisions are applicable only for receipt of consideration for issue of shares from a resident and not in the case of a non-resident. As we have already noticed, in the present case, the consideration for issue of share application money was received from non-residents. Secondly, those provisions are applicable only when the shares are issues over and above the face value of such shares. Admittedly, the shares have been subscribed at face value and there is no premium whatsoever. In the facts and circumstances of the case, we are of the view that the aforesaid provisions of law are also not attracted. There is no other basis on which the addition made by the AO and confirmed by the CIT(Appeals) can be sustained. In the circumstances, we hold that the addition made by the AO and confirmed by the CIT(A) is unsustainable and the same is directed to be deleted.

In the result, the appeal by the assessee is allowed.