In a recent ruling, the Bombay High Court has clarified that the share premium received through the issuance of shares is categorized as a capital account transaction and does not attract taxation as income.
The Division Bench of Justices K. R. Shriram and Dr. Neela Gokhale presided over the case and emphasized that any violation of the Companies Act, 1956, would be penalized under that Act, without converting a capital receipt into a revenue receipt or vice versa.
The case involved an appellant/assessee, a joint venture between Indian promoters (Pantaloons Retail India Limited, Pantaloon Industries Limited) and a Dutch company (Participatie Maatschappij Graafsshap Holland NV – PMG), a promoter of Future Generali India Insurance Company Limited.
The appellant had issued shares to its promoters between Assessment Year 2008–2009 and Assessment Year 2012–2013, complying with all legal and regulatory requirements, including those of FEMA and RBI guidelines.
During the scrutiny assessment for Assessment Year 2009–2010, the Assessing Officer raised concerns about the share capital, but after due consideration, found it proper and genuine. Similar assessments for subsequent years, including 2010–2011, resulted in no adverse findings regarding the share capital.
However, in the assessment order for Assessment Year 2011–2012, the Assessing Officer deemed the entire share premium received (Rs. 47,88,27,000) as an unexplained cash credit under Section 68, citing unjustified charging of share premium and a supposed violation of Section 78(2) of the Companies Act, 1956.
The appellant appealed the decision to the CIT (A), but the addition was upheld. The Income Tax Appellate Tribunal ( ITAT ) also dismissed the appeal, directing the Assessing Officer to examine the alleged violation of Section 78(2).
The central issue revolved around whether premium money for shares issued as part of a capital account transaction can be considered income.
The appellant argued that the share premium amount remained intact, and there was no evidence of its utilization for non-prescribed purposes.
The court criticized the department’s interpretation, stating that the assessing officer should avoid far-fetched interpretations and understand the basic philosophy of income. The court highlighted that the opening and closing balances of the share premium account indicated an increase, not a depletion, and there was no evidence of misuse.
The court’s decision provides clarity on the tax treatment of share premium in capital account transactions. Counsel for the appellant, R.A. Dada, argued the case, while Suresh Kumar represented the respondent.
In conclusion, the court ruled in favor of the appellant, emphasizing the importance of a fair and judicious approach in taxation matters. The Revenue’s failure to distinguish between the utilization of funds and the creation of a share premium account was noted.
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