The
Mumbai bench of the Income Tax Appellate Tribunal (“ITAT”), in a recent ruling
in the case of Green Infra Ltd. (“the taxpayer”), has held that
premium on issue of shares is a capital receipt not chargeable to tax as Income
from Other Sources (“IOS”) under the Income-Tax Act, 1961 (“the Act”). The ITAT
also held that such a transaction cannot be treated as a sham transaction and
further, that such premium cannot be taxed as unexplained cash credit under
section 68 of the Act.
Brief
facts of the case
•
The
taxpayer, a newly incorporated company, issued equity shares of Rs 10 per share
at a premium of Rs.490 per share and credited the premium to the Share Premium
account;
•
The
taxpayer adopted the Discounted Cash Flow (“DCF”) method in its
valuation report and justified the premium charged;
•
The
Assessing Officer (“AO”) questioned the
validity of share premium and claimed it to be a sham transaction on the basis
that the DCF valuation was based on unrealistic and vague projections as is
evidenced from the actual results of the subsequent years which were available
at the time of assessment;
•
The AO
also noted that the taxpayer did not comply with the provisions of the Companies
Act, 1956 in terms of collection and utilisation of share
premium;
•
Accordingly, the AO
treated the share premium as a revenue receipt chargeable under section 56 of
the Act as IOS.
Issue
before the ITAT
•
Whether
the issue of shares by the taxpayer at a premium is a sham
transaction?
• Whether
section 56(1) of the Act is wide enough to charge the share premium as a Revenue
Receipt?
• Whether the
share premium is taxable as unexplained cash credits under section 68 of the
Act?
Taxpayer’s
contention
•
98
percent of the shareholding of the taxpayer was held by IDFC Private Equity
Fund-II, which is a venture capital fund duly registered with SEBI and managed
by a wholly owned subsidiary of a Government company;
• The board of
directors of the taxpayer are also related to IDFC Group, which is a government
controlled entity;
• The valuation
of share premium is based on the Discounted Cash Flow method, which is an
accepted method by CBDT for determining fair market value of the unquoted equity
shares;
• There is no
prohibition under the Companies Act, 1956 or any other law providing any limit
on the quantum of share premium that could be charged;
• The share
premium received by the taxpayer is in the nature of capital receipt as
established by various Supreme Court (“SC”) rulings and hence,
not liable to tax under the Act.
Revenue’s
contention
•
The
valuation of shares is not supplemented by increase in the net worth or assets
of the taxpayer. Thus, the shares did not have any intrinsic value to justify
the issue at premium;
• Since the
explanation provided for charging such a large premium by the taxpayer was found
unconvincing, the premium should be treated as unexplained cash credit under
section 68 of the Act.
Ruling
of the ITAT
•
The
shareholders of the taxpayer and the holding company of such shareholders are
all either Public Sector Undertakings or Government companies. Therefore, a
transaction which has an element of involvement of the Government, directly or
indirectly, cannot be questioned as a sham transaction;
• The issue of
shares at a premium is a prerogative of the Board of Directors and the decision
to subscribe for shares at a premium is the wisdom of the shareholders. The
Revenue cannot question this commercial decision without any specific
restriction imposed by any law;
• Share premium
is a capital receipt and cannot be taxed under section 56(1) of the Act as
revenue receipt;
• Ruling on the
new plea raised by the Revenue regarding taxability under section 68 of the Act,
the identity of the shareholder is confirmed by the AO based on the information
obtained under section 133(6) of the Act. Since the entire transaction is
through banking channels and the shareholders are indirectly under the control
of the Government, the genuineness and the source of the transaction cannot be
questioned. Further, the taxpayer has clearly established that it has utilized
the proceeds for investment in its wholly owned subsidiaries and hence, the
credibility of the application of funds could not be
questioned.
• The
transaction can thus, not be charged as unexplained cash credits under section
68 of the Act.
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