Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Share premium received held not liable to tax under Income-tax Act
August 10, 2016
In brief
Mumbai Income-tax Appellate Tribunal (Tribunal) held that the share premium received by the taxpayer could not be taxed as revenue receipt as “income from other sources” under section 56(1) of the Income-tax Act, 1961 (the Act).
In detail
Facts:
The taxpayer1, a company, was engaged in the business of providing various forms of business support and information technology- enabled services and infrastructure support services to its group companies.
During the year under consideration, the taxpayer had issued some shares at their face value of INR 10/- each and further shares at a premium. The premium received by the taxpayer was credited to Securities Premium under the head Reserves and Surplus in the Balance Sheet.
The tax officer (TO) added the premium received as income from other sources.
On appeal, the
Commissioner of Income- tax (Appeals) [CIT(A)]
upheld the TO’s order TO.
1 [TS-430-ITAT-2016 (Mumbai)]
The taxpayer filed an appeal before the Tribunal.
Issues before Tribunal
Could the share premium received be taxed as “income from other sources” under section 56(1) of the Act?
Tax authorities’
contentions
It was argued that due to various constraints, the value of shares could not be readily ascertained and hence, the value of shares was taken as INR 10/- per share and the premium received was a device to avoid tax. The TO relied on the case of Ascendas India (P) Limited2 to support this view.
The TO observed that the cash collected through premium, reflecting on the asset side of the balance sheet, had been used for day-to-day business operations, which was a violation of section 78 of the
2 Ascendas (India) Private Limited v.
DCIT [2013] 33 taxmann.com 295 (Chennai – ITAT)
Companies Act, 1956 and thus, the share premium lost its character and became a trading receipt taxable under section 56(1) of the Act.
The CIT(A) principally accepted the taxpayer’s contention citing Vodafone India Services Private Limited,3 wherein it had been held that the securities premium was a capital receipt and did not give rise to income; however, considering that the taxpayer had violated section 78 of the Companies Act, 1956, the CIT(A) held that the share premium had lost its character, and took the colour of a trading receipt.
Taxpayer’s contentions
The taxpayer relied on the CBDT Instruction No. 2/
2015 dated 29.1.2015, wherein it had accepted the order of the Bombay High Court in the Vodafone case3
3 Vodafone India Services Private Limited v. Union of India [2014] 50 taxmann.com 300 (Bombay HC)
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and had instructed its officers to treat the securities premium to be on account of a capital receipt and hence not giving rise to taxable income.
Therefore, the taxpayer contended that the share premium amount could not be taxed as “income from other sources.”
The conclusion drawn by the tax authorities that securities premium was utilised for business purposes was without any evidence, as the securities premium account was not utilised during the year.
Tribunal’s ruling
The approach of the CIT(A) to tax premium on the basis of a contravention of the
Companies Act, 1956 was fundamentally wrong.
The taxability of an amount had to be decided within the four corners of the Act. Even the inclusive definition of income did not stipulate that non-compliance with a provision of any other Act would result in turning a
capital receipt into a taxable revenue receipt. It observed that for determining taxes due, tax authorities should avoid far-fetched fancies and ideas.
The Tribunal held that the tax authorities and the CIT(A), without understanding the basic philosophy of income, had referred to the Companies Act, so that the amount in question could be taxed. Even if the taxpayer had violated the provisions of the Companies Act, the taxpayer would be penalised under the
Companies Act; however, that could never turn a capital receipt into a revenue receipt or vice-versa.
Considering the arguments raised by the taxpayer and the facts of the case, the Tribunal deleted the addition made on account of the share premium.
The takeaways
The Tribunal has reaffirmed the principle that the share premium could not be taxed as a trading receipt. The Tribunal has further affirmed that tax
implications for a transaction had to be decided as per the provisions under the Act; and that violation of any other statute would not impact taxable income, unless
specifically provided under the Act.
It is important to note that the decision relates to an
assessment year before section 56(2) (viib) was inserted into of the Act, which specifically provides for taxation of excessive premium on issue of shares to residents.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
Tax & Regulatory Services – Mergers and Acquisitions
Gautam Mehra, Mumbai +91-22 6689 1154
[email protected] Hiten Kotak, Mumbai +91-22 6689 1255 [email protected]
Tax Insights
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