Whether for purposes of sec. 28(iv), amount received on account of share capital ought not to be treated as business income 

Crescent Payments Pvt Ltd Vs DCIT

ITA No. 559/Mum/2017

Short Overview of the Case: 

Assessee-company, registered originally as M/s. Alertpay Solutions Pvt. Ltd., later changed its name to M/s. Crescent Payments Pvt. Ltd.

During scrutiny, AO observed that the assessee had received an amount as remittance from M/s. Alertpay, Canada without any instruction and hence, treated it as a gift received.

AO show-caused assessee to explain as to why receipt of amount credited to reserves and surplus be not treated as its income u/s 28(iv) r.w.s. 2(24)(ix).

Assessee submitted it had no business connection with Alertpay Inc, Canada. Money received was used for purchasing capital assets and never used for any revenue purposes. Besides, in order to circumvent regulations of FEMA, the assessee was advised to treat receipt of the amount as a gift. However, AO rejected assessee’s submissions and observed that utilisation of funds either for capital/revenue purposes would not change character of receipt, as long as money was not received in the shape of share capital. Thus, AO treated the amount as taxable income in the hands of the assessee. As CIT (A) upheld AO’s order, assessee filed a present appeal.

On Appeal, the issue before ITAT was as to whether for purposes of sec. 28(iv), amount received on account of share capital ought not to be treated as business income

 ITAT held it as Yes with following observation:

for applicability of provisions of sec. 28(iv), assessee-company should have carried on any business during previous year, leading to benefit that must be revenue in character, i.e., must be of income in nature.

In the instant case, these conditions were not satisfied. Besides, the amount received by the assessee partner of a firm towards valuation of goodwill and assets of a firm at time of retirement from firm did not attract provisions of sec. 28(iv) as the same could not be perquisite arising from the business.

– Even otherwise it would not partake in the character of income. Amount received on account of share capital ought not to be treated as business income. In the instant case, amounts originally received by assessee-company from the non-resident was only for issuance of share capital. As the same was not implemented by the assessee-company within prescribed time, the assessee-company as instructed by the concerned remitter from abroad, had chosen to treat the receipt as gift and accordingly, had directly credited the same to ‘reserves and surplus’ in the balance sheet.

Thus, it was held that the receipt of the sum could not be taxed as income in the hands of the assessee.