Share / security premium is not accumulated profit in any context including for deemed dividend- a case of un-necessary litigation by revenue

[CA DEV KUMAR KOTHARI]

Share / security premium is not accumulated profit in any context including for deemed dividend- a case of un-necessary litigation by revenue.

Security premium:

Security premium is a premium charged at the time of issue of security by issuer (company) by pricing security above face value. In case of shares, when shares are issued at a premium, the face value of share is lower whereas issue price is higher. For example if a share of Re.1/- is issued at a price of ₹ 100/- Re. 1 is received towards share capital and ₹ 99/- towards premium.

Implication and benefits of issue at premium:

When a share is issued at premium share capital remain low, reserves high. This help in keeping better profitability, and servicing of capital because all benefits like dividend will be payable on face value of shares.

In case a bond or debenture is issued at premium, interest will be payable on face value and not issue price. This will help in better servicing.

Premium is not accumulated surplus:

From any point of view, including accounting point of view, legal provisions of Companies Act and also provisions of Income- tax Act, 1961 security premium cannot by any stretch of imagination be called ‘profit’ or “surplus” or gains. Therefore, such premium cannot be part of accumulated profit.

 The purpose of deeming provision is to put a check on practice adopted by closely held companies, of not declaring dividend but advancing money to shareholders having substantial interest in company. 

Securities premium is not any profit, gain or income therefore, The Assessing Officer  was not justified to include the same in accumulated profit while computing deemed dividend under section 2 (22) (e).

Un-necessary litigation:

Even  the Assessing Officer should not have included share premium in accumulated surplus. This was patently wrong. In the case of Shree Balaji Glass Manufacturing Pvt. Ltd. The CIT(A) deleted addition by holding that share premium is not accumulated surplus. The revenue preferred appeal before Tribunal. The Tribunal confirmed order of CIT(A). Then revenue preferred appeal before High Court. The High Court also confirmed the view taken by CIT(A).

One can understand position of AO because to avoid audit objections, many times AO make additions which he himself consider wrong. Many times AO makes order contrary to binding precedence including judgment of the Supreme Court. It is desirable that Assessing Officers must be able to pass orders without fear of objections or criticism in such case and should avoid initiation of un-necessary litigation. We know many cases in which security premium has not be considered as part of accumulated surplus, however, in some cases AO has included share premium in accumulated profit. Author knows some cases in which for small additions on account of deemed dividend due to inclusion of share premium, a reassessment order was passed. These orders are not sustainable due to lack of jurisdiction as well as wrong addition.  However, litigation has been initiated by the AO due to some audit objections or other proceedings. The fear of criticism must not force officers to make wrong orders.

It can be said that filing of appeal before Tribunal and then before High Court on such issues was not at all proper.  The CIT should have applied his mind and should not have granted permission to prefer appeal.

At least counsel of Revenue should not have recommended to file appeal. But unfortunately, greed to  get more briefs (even without merit) and cases to argue, counsels recommend filing of appeal on such issues. We find many counsels who recommend filing of appeals on behalf of assessee against orders under section 263, though it is avoidable and not desirable in most of cases. This is because in  fresh assessment  assessee can convince the AO , after proper enquiry that there is no case for making addition. If the AO make addition, assessee can prefer appeal before CIT(A). Therefore, author rarely recommend to file an appeal against orders under section 263. But generally practioners recommend to file appeals against order u/s 263 which then become infructuous and are withdrawn or dismissed.

For a greedy person, it is really difficult to resist greed to advice client not to prefer appeal, even when it is un-necessary or un-desirable. However, one must have will to resist overcoming of greed and making money should not be main target of life.  

Let us hope that the Revenue will not prefer appeal before the Supreme Court against judgment of Calcutta High Court. In fact Board will do well if a circular is issued that share premium should not be included in accumulated profit for making computations under section 2.22.e for deemed dividend.

A fit case for awarding costs:

This was a fit case and tribunal and High court both could have awarded costs in favour of assessee.