2021 (5) TMI 349 - AT - Income Tax

Addition on account of share premium received by the assessee u/s 56(1) - income from other sources - HELD THAT - We hold that receipt of share premium per se cannot be treated as income or the revenue receipt. We hold that in order to bring a particular receipt to be taxable within the ambit of Section 56(1) of the Act, the receipt should be in the nature of income as defined in Section 2(24) of the Act. We find that the share premium received by the company admittedly forms part of share capital and shareholders funds of the assessee company. When receipt of share capital partakes the character of a capital receipt, the receipt of share premium also partakes the character of capital receipt only. Hence, at the threshold itself, the receipt in the form of share premium cannot be brought to tax as the revenue receipt and consequently treat the same as income u/s.56(1). With regard to yet another observation made by the ld. AO in his order that receipt of premium was akin to gift and hence taxable u/s.56(1) we find that receipt of share capital and share premium is normal in case of a limited company and the same at any stretch of imagination cannot be equated with gift. Moreover, gift can be received only by individuals or HUFs and cannot be received by a company. Hence, this observation made by the ld. AO is dismissed in limine. With regard to yet another observation made by the ld. AO that assessee had acquired certain intangible assets at the time of acquisition of business and those intangible assets were impaired in the same year and that this fact itself proves malafide intention of the assessee for allotment of shares at a premium. We are unable to persuade ourself to accept to this contention of the ld. AO in view of the fact that though the assessee had acquired certain intangible assets while acquiring business, and though the said intangible assets had been written off during the year due to impairment, we find that assessee company had not claimed the same as deduction. Hence, the relevant observation of the ld. AO in this regard is baseless and devoid of any merit. In the instant case, we find the addition has been admittedly made by the ld. AO u/s.56(1) of the Act and no such enquiries doubting the genuineness of the transactions or the genuineness of the investors were doubted by the ld. AO in the instant case. Hence, the decision relied by the ld. DR, in our considered opinion, would not advance the case of the revenue. We find that all the necessary documents relating to the allotment of shares with premium together with relevant documentary evidences were indeed submitted by the assessee before the ld. AO which are not doubted at all. CIT(A) had rightly deleted the addition made u/s.56(1) of the Act on account of receipt of share premium for the A.Y.2011-12. Ground raised by the Revenue are dismissed.

Summary

Issues Involved:
1. Inclusion of customs duty in transfer pricing adjustment.
2. Taxability of share premium received by the assessee under Section 56(1) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Inclusion of Customs Duty in Transfer Pricing Adjustment:
The revenue raised Ground No. 2 challenging the direction of the Commissioner of Income Tax (Appeals) [CIT(A)] to include customs duty while working out the arithmetic mean concerning transfer pricing adjustment. The assessee conceded this issue during the hearing. Consequently, the Tribunal allowed Ground No. 2 raised by the revenue.

2. Taxability of Share Premium Received by the Assessee under Section 56(1) of the Income Tax Act:
The primary issue in this appeal was whether the CIT(A) was justified in deleting the addition of ?8,07,52,945 on account of share premium received by the assessee under Section 56(1) of the Income Tax Act.

- Background:
The assessee, a private limited company engaged in manufacturing and trading polycarbonate sheets and high impact polystyrene articles, filed its return for the Assessment Year (A.Y.) 2011-12, declaring a total loss of ?17,39,073. During A.Y. 2011-12, the assessee issued 7,00,000 shares at a price of ?125.36 per share, with a face value of ?10 and a premium of ?115.36, resulting in a share premium of ?8,07,52,945.

- Assessing Officer's (AO) Grounds for Addition:
The AO treated the share premium as taxable under Section 56(1) on the following grounds:
a) The face value of the shares was ?10, and the assessee did not justify the premium of ?115.36 per share with a business plan or projections.
b) The year under consideration was the first year of business operations, making the premium unjustifiable.
c) The share premium was received without adequate consideration.
d) The share premium was utilized for purposes other than those specified under Section 78 of the Companies Act, 1956, making it taxable as income.

- Arguments and Findings:
The Departmental Representative (DR) supported the AO's observations, while the Assessee's Representative (AR) argued that the share premium was a capital receipt and not taxable under Section 56(1). The AR also contended that the provisions of Section 56(2)(viib) were not applicable for the year under consideration.

The Tribunal found that the share premium forms part of the share capital and shareholders' funds, making it a capital receipt. It referred to the case of Credit Suisse Business Analysis (India) (P) Ltd., where the Tribunal held that share premium could not be taxed as a revenue receipt under Section 56(1). The Tribunal also cited the case of Green Infra Ltd., which supported the view that share premium is a capital receipt and not taxable under Section 56(1).

- Conclusion:
The Tribunal held that the receipt of share premium per se cannot be treated as income or a revenue receipt. It emphasized that for a receipt to be taxable under Section 56(1), it must be in the nature of income as defined in Section 2(24) of the Act. The Tribunal concluded that the share premium is a capital receipt and not taxable under Section 56(1). Consequently, it upheld the CIT(A)'s decision to delete the addition made by the AO. The Tribunal dismissed the revenue's grounds related to this issue.

General Grounds:
The Tribunal noted that Grounds Nos. 3 and 4 raised by the Revenue were general in nature and did not require specific adjudication.

Result:
The appeal of the Revenue was partly allowed, with the Tribunal allowing Ground No. 2 and dismissing the grounds related to the taxability of share premium under Section 56(1).