S/s. 56, 68. Share premium being a capital receipt cannot be charged to tax as income.
Facts:
In the course of assessment proceedings the Assessing Officer (AO) observed that an amount of Rs. 47,97,10,000 was credited under Share Premium. He observed that the assessee company was incorporated on 03-04-2008 and had collected share premium of Rs. 47,97,10,000 on allotment of shares of face value of Rs. 10 each at a premium of Rs. 490 per share. He asked the assessee interalia to justify the premium charged with specific reference to basis of valuation, furnish note on factors considered for allotting shares at a premium.
The assessee filed a detailed reply explaining that the subscribers to the Memorandum of Association have subscribed to 50,000 equity shares of Rs. 10 each amounting to Rs. 5,00,000. These shares were allotted at par and all remaining shares were allotted at a premium. The Companies Act, 1956 does not specify the price at which shares are to be issued. Also, it does not limit the premium at which shares are to be issued. Share premium is a capital receipt and has to be dealt with in accordance with section 78 of the Companies Act, 1956. The assessee also filed internal valuation report which was obtained prior to issuance of equity shares at a premium. It was also contended that the assessee company is not required to prove the genuineness, purpose or justification for charging premium on shares. As regards chargeability of share premium u/s. 56(1), it was submitted that the share premium being a capital receipt is not income in its ordinary sense.
The AO was of the belief that premium charged on allotment is not justified. He was of the opinion that these funds were introduced by the assessee through the shareholders in the guise of share premium. He held that there is no basis for the estimates made in the valuations and that the values adopted are nowhere near to the actual and achievements. He also observed that the assessee did not have any hidden assets in the form of patents, copy rights, intellectual property rights or even investments, etc belonging to the company based on which the assessee would be likely to substantially enhance its profits. He also observed that of the total receipts of Rs. 47,97,10,000 an amount of Rs. 45,36,95,212 was invested in units of IDFC Mutual Fund and balance amounts were utilised for investments in shares of subsidiary companies, bank FDRs, advances to subsidiaries, etc. He held that the assessee has entered into a sham transaction. Accordingly, he invoked the provisions of section 56(1) of the Act and taxed the share premium under the head `Income from Other Sources’.
Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.
Aggrieved the assessee preferred an appeal to the Tribunal where the capital structure of the assessee company was explained. It was explained that IDFC Private Equity Fund-II is holding 98% shares in the assessee company and almost all the Directors of the assessee company are related with IDFC group.
Held: The Tribunal noted that the transaction of issue of shares at such a premium by a zero balance sheet company could raise eye brows but considering the subscribers to the assessee company, the test for the genuineness of the transaction goes into oblivion. It observed that 10,19,000 equity shares were subscribed and allotted to IDFC PE Fund II which company is a Front Manager of IDFC Ltd., in which company Government of India is holding 18% of shares. The contributors to IDFC PE Fund-II who is subscriber to the assessee’s share capital, are LIC, Union of India, Oriental Bank of Commerce, Indian Overseas Bank and Canara Bank all of which are public sector undertakings. Therefore, to raise eye brows to a transaction where there is so much involvement of the Government directly or indirectly does not make any sense.
No doubt a non-est company or a zero balance company asking for a share premium of Rs. 490 per share defies all commercial prudence but at the same time we cannot ignore the fact that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such huge premium without any bar from any legislated law of the land. Details of subscribers were before the Revenue authorities. The AO has also confirmed the transaction from the subscribers by issuing notice u/s 133(6) of the Act. The Board of Directors contains persons who are associated with IDFC group of companies, therefore their integrity and credibility cannot be doubted. The entire grievance of the Revenue revolves around the charging of such huge premium so much so that the revenue authorities did not even blink their eyes in invoking provisions of section 56(1) of the Act.
Having gone through the provisions of section 56(1), the Tribunal held that the emphasis in section 56(1) is on `income of every kind’, therefore, to tax any amount under this section, it must have some character of “income”. It is settled proposition of law that capital receipts, unless specifically taxed under any provisions of the Act, are excluded from income. The Supreme Court has laid down the ratio that share premium realised from the issue of shares is of capital nature and forms part of share capital of the company and therefore cannot be taxed as revenue receipt. It is also a settled proposition of law that any expenditure incurred for the expansion of capital base of a company is to be treated as a capital expenditure as has been held by the SC in the case of Punjab State Industrial Corporation vs. CIT 225 ITR 792 and in the case of Brooke Bond India Ltd. vs. CIT. Thus the expenditure and receipts directly relating to the share capital of a company are capital in nature and therefore cannot be taxed u/s. 56(1) of the Act.
In the course of hearing, the DR raised the plea that the nature of transaction should be judged from the parameters of section 68 as well. Though, the counsel of the assessee raised a strong objection to such a plea, the Tribunal in the interest of justice and fair play, drawing support from the decision of SC in Kapurchand Shrimal vs. CIT (131 ITR 451) allowed the DR to raise this issue.
Considering the arguments of the DR, the Tribunal held that the identity of the subscribers has been established beyond all reasonable doubts nor have the revenue authorities questioned the identity of the shareholders. On facts, it held that the capacity of the shareholders cannot be doubted. To counter the argument of the Revenue that charging of premium of Rs. 490 per share is beyond any logical sense and that the transaction is a sham transaction, the Tribunal looked at the application of the funds so raised. It held that the ultimate beneficiaries of the share premium may clear the clouds over the transaction being alleged to be a sham.
The Tribunal fund that the assessee company invested funds in its three subsidiary companies wherein the assessee is holding 99.88% of share capital which meant that the funds were not diverted to an outsider. This, according to the Tribunal, cleared the doubt about the application of funds and the credibility of the company in whom the funds were invested.
The Tribunal held that it could not find a single evidence which could lead to the entire transaction to be a sham. It held that the revenue authorities erred in treating the share premium as income of the assessee u/s. 56(1) of the Act. The Tribunal directed the AO to delete the addition of Rs. 47,91,00,000.
This ground of appeal filed by the assessee was allowed.
