Share Premium is Capital Receipt, Not taxable: Bombay HC [Read Judgment]

Shares

The division bench of the Bombay High Court recently held that receipt from share premium on issue of share by the Assessee-Companies cannot be taxed as profit and gains of business under Section 28(iv) of the Income Tax Act since the same amount to capital receipt.

The decision was in the light of decisions in Vodafone India Services Pvt. Ltd. vs. Addl. CIT and the apex Court ruling in M/s G.S. Homes & Hotels P.Ltd.

In the instant case, Assessees, during the assessment year 2012-13 had increased its Share Capital by issuing its shares at a premium. While completing assessment, AO observed that Assessee did not have any significant business at the time of issue of share capital to warrant receipt of share premium and added the share premium received to its income as profits and gains of business under Section 28(iv) of the Income Tax Act.

Assessee maintained that the share premium received by it on issue of shares was a capital receipt and hence could not be taxed as Business income. On appeal, both the appellate authorities allowed the claim of the assessee and held that the share premium received by the Assessee Company is capital receipt and it cannot be taxed under Section 68 of the Act.

The bench noticed the decision in Vodafone India Services Pvt. Ltd. vs. Addl. CIT wherein, it was held that the amount received on share capital including premium are on capital account in absence of express legislation.

With regard to the taxability of the said amount under section 68, the bench pointed out that the amendment to Section 68 of the Act by the addition of proviso thereto took place with effect from 1st April, 2013 and therefore, it is not applicable for the subject Assessment year 2012-13.

Dismissing the departmental appeals, Justices M.S Sanklecha and Manish Pitale said that “the definition of income as provided under Section 2(24) of the Act at the relevant time did not define as income any consideration received for issue of share in excess of its fair market value. This came into the statute only with effect from 1st April, 2013 and thus, would have, no application to the share premium received by the Respondent – Assessee in the previous year relevant to the assessment year 2012 – 2013. Similarly, the amendment to Section 68 of the Act by addition of proviso was made subsequent to previous year relevant to the subject Assessment year 2012-13 and cannot be invoked.”

Read the full text of the Judgment below.

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