In general, tax can only be levied on an amount, which falls within the meaning of the term ‘income’ or ‘deemed income’. Capital receipts are not taxable except where they are characterised as ‘income’ through specific provisions in the Income-tax Act, 1961 (“IT Act”). Thus, amounts received by way of share capital, whether the amount representing face value or premium, being capital receipt are not characterised as ‘income’ of a company, and therefore not taxed. However, it has been seen that this exemption under the law can be misused. A time-tested strategy aimed at laundering an individual’s unaccounted funds involves incorporation of sham entities with huge capital at premium, which in turn invests these funds in the individual’s legitimate businesses by way of subscription to shares at a premium. Section 68 (‘Cash Credits’) of the IT Act attempts to deter such practices by bringing to tax any sum found credited in the books of an assessee if the assessee offers no or unsatisfactory explanations on the nature and source of the credit.
Continue Reading By Hook or By Crook: When IT dept. sought to tax rights issue as unexplained cash credit but Tribunal refused