Receipt in the form of share premium cannot be brought to tax as revenue receipt

FACTS
The assessee, a private limited company engaged in the business of manufacturing and trading of polycarbonate sheets, articles and high impact polystyrene articles, commenced business operations in the previous year relevant to the assessment year under consideration. For the A.Y. 2011-12, it filed its return of income declaring therein a loss of Rs. 17,39,073.

During the year under consideration, the assesse had issued 7,00,000 equity shares of Rs. 10 each at a premium of Rs. 115.361351 per share. Of the 7,00,000 equity shares issued, 3,57,000 were issued to a foreign company Bayer Material Science for a monetary consideration; 3,08,000 shares were issued to Malibu Plastica Private Limited (‘MPPL’) and 35,000 to Malibu Tech Private Limited (‘MTPL’) for non-monetary consideration, i.e., for purchase of polycarbonate extrusion and thermo-forming sheet material from the said Indian companies.

While assessing the total income of the assessee, the A.O. treated share premium of Rs. 8,07,52,945 (7,00,000 x 115.361351) as taxable u/s 56 on the ground that the assessee sought to justify the issue price of the shares by adopting the DCF method without furnishing business plans and projections to justify the premium; the year of issue of shares was the first year of business of the assessee; and the assessee has utilised the share premium for purposes other than those specified u/s 78 of the Companies Act, 1956; hence, the receipt of share premium partakes the character of revenue receipt taxable as income.

Aggrieved, the assessee preferred an appeal to the CIT(A), who upheld the action of the A.O. The assessee then preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the addition had been made by the A.O. u/s 56(1) and hence what is to be adjudicated is limited and confined to the fact as to whether receipt of share premium per se could be treated as revenue receipt so as to make it taxable u/s 56(1).

It held that receipt of share premium per se cannot be treated as income or revenue receipt. In order to make a particular receipt taxable within the ambit of section 56(1), the receipt should be in the nature of income as defined in section 2(24). Share premium received by the company admittedly forms part of share capital and shareholders’ funds of the assessee company. When receipt of share capital partakes the character of a capital receipt, the receipt of share premium also partakes the character of capital receipt only. Hence, at the threshold itself, the receipt in the form of share premium cannot be brought to tax as revenue receipt and consequently be treated as income u/s 56(1).

The Tribunal noted that the Co-ordinate Bench of the Tribunal in the case of Credit Suisse Business Analysis (India) (P) Ltd. vs. ACIT [72 taxmann.com 131 (Mum-Trib)] has addressed the very same issue and decided in favour of the assessee. This order was the subject matter of challenge by the Revenue before the High Court and the question of law was not admitted by the High Court on the addition made u/s 56(1). A similar view has been taken by the Tribunal in the case of Green Infra Ltd. vs. ITO [38 taxmann.com 253].

The Tribunal dismissed in limine the observation made by the A.O. in his order that receipt of premium was akin to a gift and hence taxable u/s 56(1). It held that receipt of share capital and share premium is normal in case of a limited company and the same by no stretch of imagination can be equated with a gift. Moreover, a gift can be received only by individuals or HUFs and not by a company.

The Tribunal held that the case of Cornerstone Property Investment Pvt. Ltd. vs. ITO [ITA No. 665/Bang/2017 dated 9th February, 2018], on which reliance was placed by the Revenue, is distinguishable on facts as in that case addition had been made u/s 68 by doubting the genuineness of the parties from whom share premium had been received.

The ground of appeal filed by the assessee was allowed.