The Chennai bench of the Income Tax Appellate Tribunal ( ITAT ) has ruled that, Securities Premium can’t be Taxed as “Other Income” u/s 56(2) (viib) of the Income Tax Act.
The assessee,M/s. Archean Chemical Industries Pvt.Ltd. is a private limited company carrying on business of manufacturing of salt and other industrial chemicals. The cost of project is estimated at Rs.800 crores and assessee company has spent an amount of Rs.763.42 crores. The assessee had filed its return of income for the assessment year 2014-15 admitting total loss of Rs.43,37,54,020/-. During the course of assessment proceedings, the Assessing Officer has sought an explanation regarding the share premium of Rs.16,36,72,482/- received on allotment of equity shares of Rs.10/- per share with premium of Rs.99.21 per share. In response, the assessee submitted that the company had allotted 93,99,950 equity shares of Rs.10/- per share with premium of Rs.99.31 per share.
During the financial year relevant to the assessment year 2014-15, the assessee company has received balance amount of Rs.3/- as call money and balance share premium amount Rs.30.31 per share payable on partly paid equity shares held by shareholders. The assessee had also justified premium charged on issue of share capital and explained that share price has been determined after taking into account, inter-alia, future profitability of the company after commissioning marine chemical project. The AO opined that excess consideration received on allotment of equity shares over and above fair market value as on date of allotment is income of the assessee u/s.56(2)(viib) of the Income Tax Act, 1961.
The CIT, after considering relevant submissions of the assessee and also taken note of provisions of section 56(2)(viib), opined that when the assessee had issued shares in financial year 2010-11 and received share premium, the Assessing Officer cannot invoke provisions of section 56(2)(viib) of the Act.
The bench consisting of V Durga Rao, Judicial Member and G Manjunatha Accountant Member held that “Therefore, we are of the considered view that the Assessing Officer cannot invoke provisions of section 56(2)(viib) of the Act, because receipt of balance consideration towards allotment of shares cannot be equated with allotment of equity shares. Hence, we are of the considered view that the Assessing Officer has erred in invoking the provisions of section 56(2)(viib) of the Act and taxed securities premium under the head ‘income from other sources’ for the assessment year in question”.
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