Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Tribunal deletes addition under section 56(2)(viib), basis specific fact pattern and observing there was nothing to suggest use of
unaccounted money in the garb of share premium
January 21, 2020
In brief
The Delhi bench of the Income-tax Appellate Tribunal (Tribunal) held that addition made by AO on account of alleged excess share premium is unjustified when those v ery shares are sold in the next financial year (FY) at much higher amount to a non-resident buyer. Elucidating the legislative intent behind section 56(2)(viib) of the Income-tax Act, 1961 (Act), the Tribunal held that the aforesaid provision applies where unaccounted money is received in the garb of share premium, which is not the matter in the instant case.
In detail
Facts
• The taxpayer-company1 filed its return for the FY 2013-14 declaring a loss.
• During the same FY, the taxpayer had issued shares at a premium.
• The same amount of premium was charged and collected from both resident and non-resident
applicants.
• The issue price for shares were determined based on a v aluation report from a chartered accountant using the discounted cash flow (DCF) method.
1 I.T.A. No. 2222/ Del/ 2019
• The Tax Officer (TO) determined the fair market v alue (FMV) of the shares under Rule 11UA of the Income-tax Rules, 1962 (Rules) and added the difference between such FMV and the share issue price to the total income of the taxpayer under section 56(2)(viib) of the Act.
Issue before the Tribunal Whether the premium received was in excess of the FMV of shares?
Taxpayer’s contentions
• The money received as share premium was clean money and did not involve any unaccounted money. As
per the legislative intent behind insertion of section 56(2)(viib) of the Act, the said provision applies when unaccounted money is received in the garb of share premium.
• Share premium is fully justified from the fact that the same shares were sold in the next FY, after proper due diligence, to a non- resident at more than double the issue price, and capital gains were also offered to tax by the seller.
• The v aluation report determining the fair value of shares was not countered by TO through a substitute
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v aluation from an alternate expert on the basis of the chosen DCF method.
Revenue’s contention Share premium received by the taxpayer in excess of the
v aluation determined under Rule 11UA of the Rules should be liable to tax under section 56(2)(viib) of the Act.
Tribunal’s ruling
• There is considerable cogency in the taxpayer’s plea
mentioning that the share premium received is justified due to the fact of shares being sold subsequently to a non- resident buyer for a much
higher value.
• When shares are bought by the non-resident buyer on the basis of detailed due diligence and the same is substantiated by share purchase agreement and resolution, it cannot be said that the subsequent money received by the seller is not clean money.
• The taxpayer does not come within the mischief of section 56(2)(viib) of the Act as the legislative intent is to tax unaccounted money received in the garb of share premium, whereas the share premium received by taxpayer is clean money.
• Hence, FMV of shares as substantiated by the taxpayer should be accepted and addition of share premium made by the TO is deleted.
The takeaways
The judgement is a welcome decision from the Tribunal wherein it has relied on the fact of a subsequent share sale
transaction for justifying the share premium received by the taxpayer.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Tax Insights
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