Share Premium Received By Issuance Of Shares Is On Capital Account And Gives Rise To No Income: Bombay High Court

The Bombay High Court has held that the share premium received by the issuance of shares is on the capital account and gives rise to no income.

The bench of Justice K. R. Shriram and Justice Dr. Neela Gokhale has observed that even if the assessee had violated the provisions of the Companies Act, 1956, it would be penalized by the provisions of that Act, and it would never turn a capital receipt into a revenue receipt or vice versa. There is nothing on record from the balance sheet filed indicating that the share premium amount has been utilized for purposes other than what is prescribed in Section 78(2) of the Companies Act, 1956.

The appellant/assessee was a joint venture between Indian promoters, viz., Pantaloons Retail India Limited (PRIL), Pantaloon Industries Limited (PIL), and M/s. Participatie Maatschappij Graafsshap Holland NV (PMG), a company incorporated under the laws of the Netherlands. The appellant was also a promoter of an insurance company called Future Generali India Insurance Company Limited.

From Assessment Year 2008–2009 to Assessment Year 2012–2013, the appellant or assessee issued various quantities of shares on different dates to the promoters. All the inward remittances as well as the issuance of shares were in accordance with the laws, regulations, and rules, including the Foreign Exchange Management Act, 1999 (FEMA) and the RBI guidelines.

The appellant also complied with legal and procedural requirements for the issue of shares as laid down under the Foreign Direct Investment (FDI) Scheme, as indicated in the notification issued by the RBI. The investment made by PMG was also within the sectoral policy and cap permissible under the automatic route of the RBI. PMG still holds shares in the assessee's company as of date.

During the scrutiny assessment proceedings for Assessment Year 2009–2010, the issue of share capital was raised by the Assessing Officer, who issued various notices from time to time. The appellant responded to the notices. After considering the various details and submissions filed by the appellant, the assessing officer found the issue of share capital to be proper and genuine, and no addition was made to the order dated December 29, 2011, passed under Section 143(3) for the assessment year 2009–2010. Similarly, for Assessment Year 2010–2011, the issue of share capital came up for consideration during the assessment proceedings, and the explanation given by the appellant was accepted, and an assessment order under Section 143(3) for Assessment Year 2010–2011 was passed.

The Assessing Officer, notwithstanding the view taken by the department for Assessment Years 2009–2010 and 2010–2011 with regard to the share premium and issue of share capital, took the view in the assessment order passed under Section 143(3) that the entire share premium received amounting to Rs. 47,88,27,000 was unexplained cash credit under Section 68 and added the same to the income of the appellant. The addition was made on two counts: there was no justification for charging a share premium, and there was a violation of the provisions of Section 78(2) of the Companies Act, 1956.

The appellant preferred an appeal before the CIT (A). The CIT (A) upheld the addition made by the assessing officer. The order was carried out on appeal before the Income Tax Appellate Tribunal (ITAT), and the appeal was dismissed by the Tribunal. The Tribunal did not accept the submissions of the appellant and dismissed the appeal with a direction to the Assessing Officer to examine in detail the aspect as to whether there was a violation of the provision of Section 78(2) of the Companies Act, 1956, with respect to the utilization of the share premium account.

The issue raised was whether the money received as a premium for a share issued on account of a capital account transaction can give rise to income.

The assessee contended that the share premium amount had not been depleted. If there was no difference in the balances, i.e., the opening balance plus the newly infused share premium amount, how the conclusion has been drawn that the share premium money was utilized for business purposes and not preserved for the purposes for which it was collected has not been explained or even considered. Without any evidence, all the authorities have held that the assessee used the money for purposes other than the purposes for which it was collected.

The department contended that the appellant breached the provisions of Section 78 of the Companies Act, 1956, because Section 78 places restrictions on the application of share premium money. Therefore, the company having violated provisions of Section 78 of the Companies Act, 1956, the Assessing Officer was justified in treating the share premium amount as an unexplained cash credit under Section 68.

The court observed that for determining the due taxes, the assessing officer should avoid bringing far-fetched fancies and ideas. In the case under consideration, they have done the same. Without understanding the basic philosophy of income, they have referred to the provisions of the Companies Act, 1956, so that the amount in question can be taxed at any cost. It is not a fair or judicious approach to dealing with the subjects of the state.

The court held that the closing and opening balances of the share premium money only indicate that there is an increase in the share premium account by way of an infusion of funds and not depletion. It was further observed that there is nothing to indicate that the assessee has used the share premium money to invest in shares. It was noted that the Revenue failed to understand the difference between the utilization of funds and the creation of a share premium account in the books of accounts for the share premium receipt.

Counsel For Appellant: R.A. Dada

Counsel For Respondent: Suresh Kumar

Case Title: Shendra Advisory Services P. Ltd. Versus The Deputy Commissioner of Income Tax

Case No.: Income Tax Appeal No.299 Of 2021 With Income Tax Appeal No.300 Of 2021

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