By TIOL News Service

MUMBAI, APRIL 06, 2017: THE ISSUE IS - Whether amount received on account of share application money can be treated as income u/s 41(1) or 28(iv), if the same is forfeited in the books of A/c. NO is the answer.

Facts of the case:

The assessee, an investment company, had sold investments during the year under consideration and earned long term capital gain/loss. During assessment, it was noted by the AO from the notes given in the financial statements filed by assessee along with return of income that 'capital reserve represents advance against equity of Rs.4,50,00,000/- written back during the year, as the purported allotment of shares had not materialized and the amount was no longer repayable'. In view of the same, the AO asked the assessee to justify as to why the amount transferred to the said reserve should not be included in the total income of the current period. In response, the assessee submitted detailed reply to the AO stating that the aforesaid amount was capital receipt and, therefore, correctly transferred to capital reserve and, therefore, could not have been treated as income of the assessee. However, AO did not agree with the submissions of the assessee. It was observed by the AO that the aforesaid amount was offered to tax by Shri M.V.S. Sesagiri Rao, director of JSW Steel Ltd during the course of recording of his statement by the search officials. During the course of search proceedings on JSW Steel Ltd, the said director had admitted an aggregate amount of Rs.262 crores as additional income. Thus, the AO held that the impugned amount received as advance on account of share capital from M/s Anand Transport, which was subsequently forfeited and credited to capital reserve account was income of the assessee arising out of business activity of the assessee u/s 28(iv). On appeal, the CIT(A) deleted the additions made by AO.

On appeal, the ITAT held that,

++ the issue under consideration is, whether the amount received on account of share application money could be treated as income of the assessee, if the same is written-back in the books of account, either u/s 41(1) or 28(iv) of the Income-tax Act, 1961. But before that we came across another facet viz. the AO had relied upon the statement made by Shri M.V.S. Sesagiri Rao for making impugned addition, wherein aforesaid amount has been allegedly offered to tax on behalf of the assessee. It is noted from the information that search had taken place on JSW group of companies wherein statement of Shri M.V.S. Sesagiri Rao was recorded wherein he had allegedly made a surrender of an aggregate amount of Rs.262 crores which comprises of the amount of Rs.4.50 crores on account of write-back of the share application money. We have gone through the statement recorded of Shri Rao as well as the break-up of the aforesaid sum, subsequently provided by Mr Rao. It is noted that statement of Shri Rao was recorded u/s 132(4) on 17-03-20121 by the DDIT(Inv), Unity-IX(3), Mumbai on the occasion of search carried out at the premises of JSW group. In response to the question with regard to connection with the JSW group, it was replied that Shri Rao was managing director and group CEO of JSW group of companies and was incharge of steel business of JSW Steel Ltd. It appears that said statement was given by Mr Rao in the capacity of director of JSW Steel Ltd. In the entire statement, at no place, name of the assessee company has been mentioned. There is no mention in the entire statement whether the statement was being given by Shri Rao on behalf of the assessee company also. Further, we have also gone through the question and answers with regard to so called offer / surrender of aggregate amount of Rs.262 crores made by Shri Rao, and it is seen that in the aforesaid statement, name of the assessee company has nowhere specifically mentioned while offering the additional income of Rs.262 crores;

++ this Tribunal has carefully gone through the entire exercise of making this statement and furnishing of this break-up of offer of additional income. It is noted that nowhere it has been mentioned that the impugned amount was bogus or non-genuine. It has nowhere been admitted that the aforesaid amount represents undisclosed income of the assessee. Thus, there is no admission on facts by anyone to the effect that impugned amount could be treated as undisclosed income of the assessee. What has been offered is that '…writing back of the advance received towards subscription to share capital may be treated as income of the assessee…' Thus, it is a case of purely a legal issue. It is settled law that on legal issue, the assessee cannot be always made bound by its 'admissions'. If a particular item or receipt or transaction is taxable as per the provisions of the Act, then it is, and if it is not, then it is not. The position of law remains unchanged and the legal position is not altered even on the basis of consent of an assessee especially when the consent is subsequently withdrawn. It is because of the fact that as per the constitutional framework of our country, no tax can be collected except as per authority of law, as has been clearly laid down under Article 265 of Constitution of India. Thus, from the evidences and the legal position as discussed, we find that the AO could not have adopted the aforesaid offer as the sole basis to make addition in the hands of assessee. Therefore, in our considered view, the taxability of this amount as income in the hands of the assessee should be decided purely on its merits and strictly in accordance with the provisions of Income-tax Act, 1961. As far as merits of this issue are concerned, it is noted that the facts are undisputed that the assessee had received the impugned amount on account of share application money which has been written-back as the shares were not allotted. Now question arises, whether this amount could be treated as part of income of the assessee and that too, of the year under consideration. It is brought to our notice that this issue is no more res-integra as Bombay High Court in the cases of Softworks Computers Pvt Ltd and Xylon Holdings Pvt Ltd., wherein it is held that the amount received on account of share capital can neither be treated as taxable either u/s 41(1) or u/s 28(iv) if the same is written-back in the books of account. Thus, the order passed by CIT(A) is well reasoned and no interference is called for in his order.

(See 2017-TIOL-434-ITAT-MUM)