Income Tax Addition Made Towards Unsubstantiated Share Capital Is Eligible For Section 80-IC Deduction: Delhi High Court

The Delhi High Court has held that income tax additions made towards unsubstantiated share capital are eligible for deduction under Section 80-IC of the Income Tax Act.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav has refused to grant the reliefs as sought by the respondents-Department to set aside the Income Tax Settlement Commission's (ITSC) order insofar as it granted immunity from penalty and prosecution to the petitioner-assessee or, for that matter, its decision to allow the claim of the petitioner-assessee relating to infusion in share capital from M/s Balaji Enterprises, M/s Sai Enterprises, and M/s Molu Ram Pramanand and allowing the claim of deductions under Section 80IC of the Income Tax Act.

The petitioner-assessee impugned the order passed by the Income Tax Settlement Commission, with the challenge being restricted to the additions made with respect to the infusion of share capital and the denial of benefit of deductions under Section 80IC of the Income Tax Act, 1961, on the income of INR 24.99 crores. The Principal Commissioner of Income Tax has also assailed the order of the ITSC and the extent to which relief was accorded to the assessee, including the grant of immunity from prosecution.

The petitions constituted the second round of litigation since the application for settlement had initially come to be disposed of by the ITSC in terms of an order dated July 31, 2013. The order was assailed before the Court by way of W.P.(C) 929/2015, which came to be allowed by way of an order dated May 6, 2016. The Court quashed and set aside the order passed by the ITSC and required it to examine the issues emanating from the infusion of unexplained share capital and the deductions liable to be accorded in terms of Section 80 IC of the Income Tax Act.

Upon the matter being taken up afresh, the ITSC took note of the judgment rendered in the writ petition, including the reliance that had been placed on a letter addressed by the Commissioner of Income Tax asserting that the introduction of share capital amounting to INR 34,66,19,000/- had been found duly recorded and thus verifiable from the ledger account of the share applicants.

The communication had also alluded to an arithmetical error appearing in the report dated July 10, 2013 submitted to the ITSC, where the figure of INR 28,71,90,800 came to be erroneously mentioned instead of the correct figure of INR 28,71,908. The PCIT also appears to have submitted a letter that took a stand at variance with the earlier communication. The PCIT took the position that the entire amount should be treated as unexplained credit and taxed in accordance with Section 68 of the Income Tax Act.

The assessee contended that the additions made in the course of assessment proceedings initiated in respect of M/s Amit Goods and Suppliers Private Ltd. having been subjected to tax and the source of the funds having been duly identified by the respondents themselves.

The department contended that the amount that was surrendered by the petitioner-assessee and the details that appear in Paragraph 11 of the impugned order would be liable to be added in terms of Section 68 of the Act and, in any case, would not constitute part of the gross total income of the assessee, which could constitute a subject matter of consideration under Section 80IC of the Act. According to learned counsels, since the source of the surrendered income remained unverified, the same would be liable to be treated as income derived otherwise than from the business of an undertaking or enterprise, as covered under Section 80 IC, and therefore, the claim for benefits has been rightly negated.

The court held that the surrendered income would not fall within the ambit of Section 115 BBE since the said provision did not even exist for the AYs in question. Section 115 BBE came to be inserted by virtue of the Finance Act, 2012, with effect from April 1, 2013. Since the provision did not even exist at the relevant point in time, it could not have been invoked by the ITSC.

Counsel For Petitioner: S. Ganesh

Counsel For Respondent: Puneet Rai

Case Title: Valley Iron & Steel Co.Ltd Versus PCIT

Citation: 2024 LiveLaw (Del) 397

Case No.: W.P.(C) 5081/2017

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