By Tarunkumar G. Singhal, Raman Jokhakar Chartered Accountants
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A recent move by the tax department has flummoxed corporates and businessmen who are calling it ‘tax terrorism’ — a phrase that has gained currency after it found its way into BJP’s manifesto. Hundreds of closely held firms, many owned by the country’s top business houses, have been questioned on the premium collected against the sale of shares. In notices served a day before the close of the last financial year, the Incometax (I-T) office, after collecting data from the registrar of companies (RoC), has told them to justify the premium, failing which the amount would be treated as income and therefore taxed. A senior tax official said the department was simply following a new rule that came into force from 2012-13. Its intention is to curb money laundering and bogus transactions where the premium an investor pays per share cannot be explained. But tax practitioners ET spoke to feared the department’s sweeping and hurriedly taken decision to beat the March 31 deadline could mean endless hassles for companies. “First, any such transaction prior to 2012-13 (when the new rule came) should not be taxed, but the department has, nonetheless, gone ahead with a fresh circular. This would be legally challenged. Second, one cannot question transactions simply on the basis of RoC data. There has been no evaluation and there is no evidence that income has escaped assessment.
According to tax circles, close to 200 companies have received notices from the tax office in connection with share premium charged by them. The unstated fear among companies is the possible outcome of reopening of assessment. “There is no guarantee that the I-T department would stop with the share premium issue. It’s very much possible that it may rake up other matters. At present, 2008-09 assessments have been reopened which would become time barred post March 31, 2014. But the department, we believe, is collecting data for subsequent years as well. So, it’s a matter of time more notices would be served. Companies issue shares to financial investors, JV partners, co-promoters and parent companies, and often these are influenced by shareholder agreements. The pricing is on the basis of either book value of the unlisted company or its discounted cash flow which estimates future earnings. All cases where the value of share premium is more than Rs.1 crore have come under the department’s scrutiny. The move to tax unexplained premium is aimed at plugging sham deals priced at bloated valuation to carry out shady transfer of funds. However, the department’s March 28 circular puts a question mark on genuine transactions as well.
(Source: The Economic Times of India, dated 25-04- 2014)
