Conversion of liability into share capital and share premium not treated as unexplained cash credits

By | May 23, 2025
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Cash Credit Addition on Share Capital Not Involving Cash: Deleted

Issue: Whether an addition under Section 68 of the Income-tax Act, 1961, can be made on account of unexplained cash credits in the form of share capital and share premium, when the assessee-company received shares of other private limited companies in lieu of its own allotted shares, implying no actual cash inflow.

Facts:

  • For Assessment Year 2012-13, the assessee-company allotted shares at a premium.
  • In consideration for these allotted shares, the assessee received shares of other private limited companies, rather than cash.
  • The Assessing Officer (AO) issued notices under Section 131 to all directors of the shareholder companies of the assessee.
  • However, no response was received to these notices, leading the AO to make an addition under Section 68 on account of share capital.
  • It was noted that in cases similar to the assessee’s, the High Court had previously held that since no cash was involved in the transaction of said allotment of shares, the conversion of liability into such share capital and share premium could not be treated as unexplained cash credits under Section 68.

Decision: Following the aforesaid view, the addition made under Section 68 was to be deleted.

Key Takeaways:

  • Applicability of Section 68: Section 68 specifically deals with “cash credits,” implying the presence of money or cash entries in the books of accounts that are unexplained.
  • Non-Cash Transactions: If a transaction involves the exchange of shares for shares, or conversion of existing liabilities into share capital/premium, without any actual cash inflow, it typically falls outside the ambit of “cash credits” under Section 68.
  • Substance Over Form: The court looks at the substance of the transaction. If no actual cash is received by the company, even if share capital is issued, the conditions for applying Section 68 for “unexplained cash credits” are not met.
  • Distinction from Other Disallowances: While the transaction might be scrutinized under other provisions (e.g., valuation, bona fides of the transaction itself), it may not fit the specific criteria of Section 68 if no cash is involved.
  • Precedent and Consistency: The court relied on similar High Court decisions, emphasizing the principle of judicial consistency in interpreting statutory provisions.
HIGH COURT OF CALCUTTA
Principal Commissioner of Income-tax
v.
Vishnu Distributors (P.) Ltd.
T.S. SIVAGNANAM, CJ.
and CHAITALI CHATTERJEE (DAS), J.
ITAT/56/2025
IA NOs. GA 1 and 2/2025
MAY  5, 2025
Aryak Dutta and Prithu Dudheria, Advs. for the Appellant. Subash Agarwal and R. Chatterjee, Advs. for the Respondent.
ORDER
1. There is a delay of 98 days in filing the appeal. As the delay has been properly explained the same is condoned. The application is allowed.
2. This appeal filed by the revenue under Section 260A of the Income Tax Act, 1961 (the Act) is directed against the order dated 20.5.2024 passed by the Income Tax Appellate Tribunal “B” Bench, Kolkata (the Tribunal) in ITA/50/Kol/2022 for the assessment year 2012-13.
3. The revenue has raised the following substantial questions of law for consideration :
“a. WHETHER in facts and in the circumstances of the case the Ld. Income Tax Appellate Tribunal was justified in law in deleting the addition of Rs.3,98,44,628/- on account of unexplained share capital and share premium, completely without considering the fact that before the Ld. Assessing Officer, the assessee-company had not discharged the basic onus of establishing the identity, genuineness and capacity of the Share Holders who had infused capital into the Company?
b. WHETHER in facts and in the circumstances of the case the Ld. Income Tax Appellate Tribunal was not justified in law by not considering the ground of appeal taken by the Assessing Officer that the Ld. CIT (Appeals) has violated the provisions of Rule 46-A and adjudicated the matter on the basis of documents provided by the appellant assessee, and taken a legal approach on such documents, without remanding the matter to the Ld. Assessing Officer to examine the said new documents?”
4. We have heard Mr. Aryak Dutta, learned senior standing Counsel assisted by Mr. Prithu Dudheria for the appellant and Mr. Subash Agarwal, learned senior standing Counsel assisted by Mr. R. Chatterjee, learned Advocate for the respondent.
5. The revenue filed the appeal before the learned Tribunal challenging the correctness of the order passed by the Commissioner of Income Tax (Appeals)-7, Kolkata dated 19.02.2020 which was dismissed affirming the order passed by the first appellate authority. After we have elaborately heard the learned senior standing Counsel for the appellant and the submissions of the learned Advocate for the respondent/assessee, we find that the learned Tribunal was fully justified in dismissing the revenue’s appeal. We note that the Tribunal has referred to the two decisions of this Court in the case of Pr. CIT v. Alishan Steels (P.) Ltd. [IT Appeal No. 50 of 2024, dated 19-2-2024] as well as the decision in the case of Pr. CIT v. Abhijeet Enterprise Ltd.  dated 17.11.2023. In the second decision, the Division Bench of this Court took into consideration the decision in the case of V. R. Global Energy (P) Ltd. v. ITO  ITR 145 (Madras), wherein it was held that the assessee allotted share to a company in settlement of their existing liability of assessee to the said company since no cash was involved in the transaction of the said allotment of shares, conversion of this liability in such share capital and share premium could not be treated as unexplained cash credits under Section 68 of the Act. The court also took note of the fact that the revenue had filed appeal before the Hon’ble Supreme Court against the said decision which was dismissed in the case of ITO v. V. R. Global Energy (P) Ltd.  (SC). Apart from that two other decisions, one of the Division Bench of this Court in the case of Jatia Investment Co. v. CIT(Calcutta) and the decision of the High Court of Delhi in CIT v. Ritu Anurag Agarwal [IT Appeal No. 325 of 2008, dated 22-7-2009] /2009(7) TMI 1247 (Delhi) also support the case of the assessee. The Tribunal took note the above decision and the admitted facts in position and dismissed the appeal filed by the revenue thereby affirming the order passed by the CIT(A). Thus, we find no question of law much less substantial question of law arises for consideration in this appeal.
6. Accordingly, the appeal fails and the same is dismissed.