Brief facts of the case –
The Assessee Company was incorporated on 3rd April, 2008. The Company issued shares of Rs.10 each at a premium of Rs.490 each. The Assessee company filed an internal valuation report using discounted flow method (DCF) and other relevant documents related to determination of the value of the shares, which had been obtained before the issue of shares at premium.
The AO stated that the company had collected premium of Rs. 47,97,10,000 on issue of shares of the FV of Rs.10 each issued at premium of Rs.490 each in the first year of its incorporation.
The AO noticed that the initial subscription to the share capital of the company by promoters was Rs.5,00,000 being 50,000 shares issued to subscribers to Memorandum of Association at face value of Rs.10 each. AO asked to Assessee Company to show cause as to why such receipts received in excess of any justifiable amounts should not be treated as income u/s. 56(1) and taxed under the head Income from Other Sources. The AO found that the company had no hidden fixed assets, any Reserves and Surplus on the date of issue of shares at premium. The book value of the share being Rs.10 each on the date of issue of shares there was no justification to issue shares at a premium of Rs.490. The AO also alleged that the share premium received by the company was not utilized for the purposes and objectives for which the same was collected without following the conditions specified under the Companies Act, 1956. The AO noticed that out of the total receipts of Rs. 47,97,10,000/- an amount of Rs. 45,36,95,212/- has been invested in the units of IDFC Mutual Fund and the balance amounts were utilized for investments in shares of subsidiary companies, bank FDR’s, advances to subsidiaries etc. The AO further questioned the investments made by IDFC Trustee Co. Ltd. i.e. IDFC Infrastructure Fund-2, IDFC Private Equity Fund-II which according to the AO are in violation of provisions of SEBI (Mutual Fund) Regulations Act, 1993 and 1996, questioning the validity of charging of share premium and making a firm belief that the assessee has entered into a sham transaction. The AO therefore held that the transaction relating to issue of shares at a premium of Rs. 490 was colorable and therefore relying on the judgments in the cases of Mcdowell & Co. Ltd. vs. Commercial tax Officer (1985) 154 ITR 148 (SC); CIT vs. Ramdeo Samadhi (1986) 160 ITR 179 (Raj); CIT vs. Smt. Shanti Meattle (1973) 90 ITR 385 (All); CIT vs. K. Thangamani (2009) 309 ITR 15 (Mad); CIT vs. Mogul Lines Ltd. (1962) 46 ITR 590 (Bom) held that the taxability of the amount cannot be decided on the basis of the entries made in the books of accounts but has to be decided in accordance with the provisions of law.
During the course of hearing before ITAT, the DR raised an additional contention of taxing the share premium as sham, since the nature of transaction has been questioned by revenue authorities.
The assessee strongly contended that the company is not required to prove the genuineness, purpose or justification for charging a premium on shares. The assessee submitted that issuing the shares at a premium was a commercial decision and did not require justification under the law currently in force. It was also submitted that share premium receipt is a capital receipt and not chargeable to tax. The assessee company relied on the decision of Supreme Court in the case of CIT vs. Allahabad Bank Ltd. (1969) 73 ITR 745 (SC). Reliance was also placed on the decisions of Supreme Court in the case of CIT vs. Standard Vaccum Oil Co. Ltd. (1966) 59 ITR 685 (SC); Delhi High Court in the case of Asst. CIT vs. Om Oils & Seeds Exchange Ltd. (1985) 152 ITR 552 (Del); MP High Court in CIT vs. Krishnaram Baldeo Bank (P) Ltd. (1980) 144 ITR 600 (MP).
The Assessee Company submitted that even otherwise the share premium received by the company cannot be taxed u/s. 56(1) of the Act. It was explained that the share premium by its very nature is a capital receipt and is not income in its ordinary sense. (Para 5.1 of the order)
Tribunal’s Ruling
(i) It is the prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to shares at such a premium or not.
(ii) In the absence of any restriction from any law in force, the revenue cannot question the charging of the premium.
(iii) Any receipt can be taxable under section 56(1) of the Act only if it has some character of income.
(iv) Share premium is in the nature of capital receipt. Relied on the decision of Supreme Court in the case of Standard Vaccum Oil Co.
(v) The decisions relied on by the Revenue are distinguishable and not applicable to the facts of this case.
(vi) The shareholders in all the related transactions under issue are directly or indirectly related to the Government of India and identity of the shareholders had been established beyond all reasonable doubts. The revenue authorities had not questioned the identity of the shareholders either. Furthermore, the entire transaction has been done through banking channels and hence section 68 of the Act was not applicable.
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