As per section 68 of the Income Tax Act, if the shares are issued at the premium which defies commercial prudence, the receipt of such amount can’t be assessed as “unexplained Cash credit” if the genuineness of the transaction, an identity of the payer and capacity of the subscriber are not doubtful. The Interest on short-term fixed deposits earned is assessable as PGBP “profits and gains of business & profession” and not as IOS “income from other sources”
High Share Premium that defies Commercial Prudence is not unexplained Cash Credit where identity of payers is disclosed
(i) In the case of CIT vs. Green Infra Limited (Bombay High Court), the court observed the applicability of the provisions of Section 68 of the Income Tax Act on the parameters of the genuineness of the transaction, identity of the payer and the capacity of the payer to the share capital. The tribunal found that the identity of the payer was confirmed by A.O. issuing notices U/s 133(6) of the Income Tax Act to them.
(ii) Further, the tribunal had observed that the department itself makes no complaint of the identity of the payer. So far as the legitimacy and the genuineness of the transaction of is concerned, it concludes as the whole of the transaction is being recorded in the Books of Accounts of the assessee and the same being reflected in the financial statement, since the transaction was done via the banking channels which was well supported by bank statements which were scrutinized and examined by the Tribunal. In respect to the capacity of the payer, the disputed order records an outcome that 98 percent of the shares is being held by a Fund Manager of IDFC Ltd. Known as IDFC Private Equity Fund. Furthermore, all the contributions made to IDFC Private Equity Fund are by the public sector undertakings only.
(iii) Mr.Chhotaray the experienced counsel for the department defines that the disputed order itself holds that Rs.490 as a premium per share confronts commercial prudence. Further, the same has to be recognized to be cash credit. The Tribunal has studied and examined the case of the department on the parameters of the provisions of Section 68 of the Income Tax Act and found on facts that it is not so fit.
Therefore, the provisions of Section 68 of the Income Tax Act can’t be invoked. The department has not been able to reveal in any manner the facts and the findings recorded by the Tribunal are perverse in any manner.
(iv) The Tribunal recorded that there were three fixed deposits for a period of one day, twenty-eight days and ninety days correspondingly. Seeing the nature of business of the concerned, the Tribunal, observed that the interest earned would be liable to be taxed under the head PGBP ‘profit and gains from business and profession’. In support, reliance was placed based on the another judgment in the case of CIT v/s. Indo Swiss Jewels Ltd. & another 284 ITR 389. In respect of the assessee’s business and the tenure of fixed deposits, the Tribunal held that the interest earned on the fixed deposit is liable to tax as business income. In fact, this tribunal held the same judgment in the case of Indo-Swiss Jewels Ltd. (supra) which was similar to the respondent’s case.