The I-T Appellate Tribunal (ITAT), a quasi-judicial authority, in its order on January 5, has struck down the contention of the I-T department that had questioned the genuineness of transactions and creditworthiness of investors who had subscribed to shares of Jagati Publications, the Reddy-promoted company owning the Telugu daily ‘Shakshi’, at a premium.
The case pertains to assessment year 2008-09.
The Hyderabad office of the tax department had alleged that underlying these investments were quid pro quo deals and the new shareholders directly or indirectly benefited from their association with the firm controlled by the YSR Congress Party president. The taxman, which had questioned the two valuation reports by Jagdisan & Co and Deloitte that justified the share premium, had presented the findings of the Central Bureau of Investigation (CBI) which had conducted a search on Reddy’s group companies in August 2011.
Ruling that the ‘share premium’ amount of ₹277 crore – which arose as shares of ₹10 each were sold at a premium of ₹350 a piece – was not taxable, the tribunal observed that the CBI charge sheet was irrelevant as ‘additional evidence’. “This ruling considers important factors in determining the production of additional evidence before the ITAT and it has been ultimately held that parties cannot claim a right to adduce additional evidence. Additional evidence will be admitted only if the tribunal is of the view that such evidence will be required by it in deciding the issues before it….The issues before the tribunal were restricted to whether the share premium received were taxable under Section 56 or 68 of the Income-tax Act, 1961),” said Ashish Mehta, partner at law firm Khaitan & Co.
The 2012-13 Union Budget had amended the tax law with a new provision (section 56(2)(viib) of the IT Act) that required a company receiving issuing shares to investors will be taxed if it fails to justify the share premium. This law came into effect in AY 2013-14 — one of the reasons the ruling went in favour of Jagati.
According to senior chartered accountant Dilip Lakhani, “The tribunal has reaffirmed the legal position that share capital and premium are capital receipt and can’t be treated as income in spite of findings given by other agencies. If the assessee has established the identity, creditworthiness and genuineness, then the initial burden is discharged, and the department must bring on record contrary evidence to prove that the company has introduced unaccounted money in the guise of share capital. Though this is a tribunal decision the finding will help in a large number of litigation on this issue.”
Additions were made by the Tax Authorities holding that the investee company was a new company and the valuation reports were prepared merely based on management representations without any independent examination or verification. “The Tribunal looked at the actual numbers achieved by the investee company and held that no flaws could be found in the valuation methodology adopted and in fact a lot of projected numbers were achieved by the investee company, which shows the genuineness of the valuation. It was further held that it is settled law (before introduction of deeming provisions under Section 56(2)(viib) from AY 2013-14 that share capital and securities premium being capital receipts cannot be taxed as incomes in the hands of the recipient company,” said senior Mehta.
Significantly, the Tribunal’s decision to quash the tax department’s charge that Jagati had violated Section 68 of the IT Act (dealing with unaccounted income) is contrary to an earlier ruling by a Mumbai bench of ITAT. In the Jagati matter, the tribunal held that the assessee was not bound to establish the source of funds of the investor companies.
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