In CIT v. M/s. Gagandeep Infrastructure Pvt.Ltd, the division bench of the Bombay High Court held that the amendment to s. 68 requiring explanation for source of Share capital/premium has prospective effect only.
The bench comprising Justices M.S Sanklecha and A.K. Menon observed that in case where the AO finds bogus share capital, it can be assessed from the hands of shareholders and not from the assessee-Company. The decision was based on the ration laid down by the Apex Court in CIT v/s. Lovely Exports (P) Ltd. 317 ITR 218.
In the present case, the Assessing Officer found that the assessee-Company have received a huge amount of share capital by increasing the amount of share premium for the year 2008.09. The assessee-Company explained that this was on the basis of the future prospects of the business. Rejecting the above contention, the Assessing Officer treated an amount of 7.53 crores as unexplained cash credit received by the assessee by invoking s. 68 of the Act.
On appeal, the first appellate authority deleted the addition by relying upon the Supreme Court decision in the case of CIT v/s. Lovely Exports (P) Ltd and held that if the amounts have been subscribed by bogus shareholders it is for the Revenue to proceed against such shareholders. Therefore it held the Assessing Officer was not justified in adding the amount of share capital subscription including the share premium as unexplained credit under Section 68 of the Act.
When the matter was brought before the ITAT, the Tribunal dismissed the Revenue’s appeal by holding that the genuineness of the transaction was proved by the assessee with all the supporting evidences. The Tribunal also found that the amount received on issue of share capital along with the premium received thereon, is a capital receipt, which is not taxable under the Income Tax Act.
Before the High Court, the Revenue contended that the provisions of section 68 was amended through the Finance Act, 2012. As per the amended provision, section 68 also applies to bogus share capital and therefore, the impugned addition is valid.
The bench found that since the proviso to Section 68 of the Income Tax Act has been introduced by the Finance Act 2012 with effect from 1st April, 2013, it would be effective only from the Assessment Year 2013-14 onwards and not for the subject Assessment Year.
The bench also said that, “In fact, before the Tribunal, it was not even the case of the Revenue that Section 68 of the Act as in force during the subject years has to be read/ understood as though the proviso added subsequently effective only from 1st April, 2013 was its normal meaning. The Parliament did not introduce to proviso to Section 68 of the Act with retrospective effect nor does the proviso so introduced states that it was introduced “for removal of doubts” or that it is “declaratory”. Therefore it is not open to give it retrospective effect, by proceeding on the basis that the addition of the proviso to Section 68 of the Act is immaterial and does not change the interpretation of Section 68 of the Act both before and after the adding of the proviso.”
“In any view of the matter the three essential tests while confirming the pre-proviso Section 68 of the Act laid down by the Courts namely the genuineness of the transaction, identity and the capacity of the investor have all been examined by the impugned order of the Tribunal and on facts it was found satisfied. Further it was a submission on behalf of the Revenue that such large amount of share premium gives rise to suspicion on the genuineness (identity) of the shareholders i.e. they are bogus. The Apex Court in Lovely Exports (P) Ltd. (supra) in the context to the pre-amended Section 68 of the Act has held that where the Revenue urges that the amount of share application money has been received from bogus shareholders then it is for the Income Tax Officer to proceed by reopening the assessment of such shareholders and assessing them to tax in accordance with law. It does not entitle the Revenue to add the same to the assessee’s income as unexplained cash credit,” the bench also added.
Read the full text of the Judgment below.