Section 68 IT Act Not Applicable to Share Swapping Transactions Without Cash: ITAT Delhi - 2025-03-15

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ITAT Delhi: Section 68 of Income Tax Act Not Applicable to Share Swapping Transactions

New Delhi, March 7, 2025 – The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has ruled in favor of M/s Telplay Packaging Solutions Pvt. Ltd., dismissing an appeal by the Income Tax Department. The tribunal upheld the decision of the Commissioner of Income Tax (Appeals) [CIT(A)], which had deleted additions made by the Assessing Officer (AO) under Section 68 and Section 14A of the Income Tax Act, 1961.

The bench, comprising Judicial Member Shri Anubhav Sharma and Accountant Member Shri Manish Agarwal , presided over the case ITA No.5892/Del/2017 for the Assessment Year 2012-13.

Background of the Case

The case originated from an assessment order passed by the AO under Section 143(3) of the Income Tax Act. The AO had made an addition of Rs. 7,70,00,000 under Section 68 on account of share capital and share premium, arguing that the assessee company had failed to prove the genuineness of share subscriptions. A further disallowance of Rs. 28,900 was made under Section 14A.

Telplay Packaging Solutions Pvt. Ltd. appealed to the CIT(A), who overturned the AO's order. Aggrieved by the CIT(A)'s decision, the Revenue (Income Tax Department) filed an appeal before the ITAT.

Revenue's Arguments

The Revenue argued that the CIT(A) had erred in deleting the addition under Section 68 by relying on a previous ITAT decision in M/s Vital Communication Ltd. , especially since the CIT(A) had herself termed the assessee company a "paper company". The Revenue contended that the term "sum" in Section 68, relevant to cash credits, was still open to interpretation by the Delhi High Court in the context of Vital Communication Ltd. . They further argued that share allotment under a swapping arrangement without cash inflow could attract Section 68 provisions. The Revenue also challenged the deletion of disallowance under Section 14A.

Assessee's Defense

M/s Telplay Packaging Solutions Pvt. Ltd. contended that they had provided all necessary details of the share subscriber companies, including incorporation documents, PAN, income tax details, and financial statements, establishing their identity and creditworthiness. Crucially, they argued that the transaction was a "share swap," where shares were issued in exchange for shares of other companies, with no cash or cheque involved. Therefore, they asserted that Section 68, which pertains to "sum" credited, was not applicable. They relied on precedents including M/s Vital Communication Ltd. and ITO vs. M/s Elative Building Solutions (P) Ltd. , where similar transactions were held not to fall under Section 68.

Tribunal's Observations and Decision

The ITAT meticulously examined the facts and arguments. It concurred with the CIT(A)'s finding that the transactions were indeed "swapping of shares" with no cash or cheque deposits in the assessee's bank account.

The tribunal highlighted that the assessee had furnished details establishing the identity of the subscriber companies. Regarding creditworthiness, the ITAT noted that since it was a share swap, and no payment was made in cash, the question of creditworthiness in the conventional sense was not relevant. The subscriber companies were transferring assets (shares) already reflected in their balance sheets.

The ITAT cited several precedents to support its view, including:

• M/s Elative Building Solutions (P) Ltd.: A coordinate bench decision of ITAT holding Section 68 inapplicable to share swaps.
• M/s Vital Communication Ltd.: The case relied upon by the CIT(A), emphasizing that Section 68 is invoked when a "sum" is credited, denoting monetary transactions.
• H.H. Sri Rama Verma vs. CIT (Supreme Court): Defining "sum" under Section 80G as an amount of money, reinforcing the monetary context.
• Jatia Investment Company (Co.) vs. CIT (Calcutta High Court): Supporting the view that Section 68 doesn't apply to barter systems of share exchange.
• ITO vs. M/s Anand Enterprises Ltd. (Kolkata ITAT): A similar case where Section 68 was held inapplicable in share swap scenarios.

The tribunal quoted extensively from the Elative Building Solutions (P) Ltd. judgment, emphasizing that "any sum" in Section 68 refers to money brought into books via cash, cheque, or draft, and not mere book entries or share exchanges.

On the disallowance under Section 14A, the ITAT sided with the assessee and CIT(A), citing the jurisdictional High Court's decision in Cheminvest , which states that no disallowance under Section 14A can be made if no exempt income is received. As no exempt income was earned from the share swap, the disallowance was deemed unjustified.

Final Verdict:

The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s order. The tribunal firmly established that Section 68 of the Income Tax Act is not applicable to share swapping transactions where no monetary consideration is exchanged. This ruling provides significant clarity on the interpretation of "sum" under Section 68 in the context of modern business transactions involving share exchanges.

The appeal of the Revenue was dismissed. The order was pronounced in open court on March 7, 2025.

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Bench: Shri Anubhav Sharma (Judicial Member), Shri Manish Agarwal (Accountant Member) Case Number: ITA No.5892/Del/2017 Assessment Year: 2012-13 Appellant: Income Tax Officer Ward-25(2), New Delhi Respondent: M/s Telplay Packaging Solutions Pvt. Ltd. Order Date: March 7, 2025 ```