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Issue of share capital at premium – recent judgment of Bombay High Court- pre amendment S.68 |
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Issue of share capital at premium – recent judgment of Bombay High Court- pre amendment S.68 |
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Relevant links and references: By following: COMMR. OF INCOME TAX Versus M/s LOVELY EXPORTS (PVT) LTD - 2008 (1) TMI 575 - SUPREME COURT OF INDIA Lovely Exports case (supra.) In this case appeal of Revenua by way of SLP was dismissed. It was held that share application money cannot be added income from undisclosed sources u/s 68 when the assessee has furnished all relevant details of shareholders and shareholders were existing. The Court held that that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to re-open their individual assessments in accordance with law but it cannot be treated as undisclosed income of company who had issued shares. Even after this judgment Revenue is disputing on issue and making additions u/s 68. An amendment has also been made to make enquiry about source of source in case shares are issued at premium. Case of Gagandeep (supra.) : In this case The CIT(A) had deleted addition made u/s 68 on account of share capital and share premium. On appeal of Revenue, the order of CIT(A) was confirmed by Tribunal approving reasoning of CIT(A) and also making its own observations. The Tribunal noted observations and order of CIT(A), which are analysed below: a. After considering the facts and the submissions, the Ld. CIT(A) observed that the AO has not given any reason as to why the investment with a premium is not genuine when the assessee has produced all the details of investors in the form of share application form, bank account details, copies of the return of income alongwith balance sheet. b. The Ld. CIT(A) further observed that charging of premium is outlook of the investors. If an investor finds that the payment of premium is justified then only he would look to invest otherwise he may not invest in the shares of newly promoted company. c. The Ld. CIT(A) was of the belief that the department cannot question the charging of premium by the company. d. The Ld. CIT(A) further observed that the genuineness and the credit worthiness of the investors could have been examined by the AO which he has not made. e. Drawing support from the decision of the Hon’ble Supreme Court in the case of Lovely Exports Pvt. Ltd. 216 CTR 195, the Ld. CIT(A) deleted the addition holding that the AO has not justified in adding the increase in share capital alongwith share premium as unexplained cash credit u/s 68 of the Act. Arguments of The Ld. Departmental Representative: a. The Ld. Departmental Representative strongly relied upon the findings of the AO. b. That the onus was on the assessee to justify the premium charged on the issue of shares which the assessee has grossly failed and c. therefore the AO has rightly made additions u/s. 68 of the Act. On the other hand the Ld. Counsel for the assessee reiterated the facts as they were stated before the lower authorities. Observations and order of Tribunal analyzed: a. We have carefully perused the orders of the lower authorities. b. In our considered view, the issue of shares at premium is always a commercial decision which does not require any justification. c. The premium is a capital receipt which has to be dealt with in accordance with Sec. 78 of the Companies Act, 1956. d. The company is not required to prove the genuineness, purpose or justification for charging premium of shares, e. Share premium by its very nature in a capital receipts and is not income for its ordinary sense. f. It is not in dispute that the assessee had filed all the requisite details/documents which are required to explain credits in the books of accounts by the provisions of Sec. 68 of the Act. g. The assessee has successfully established the identity of the companies who have purchased shares at a premium. h. The assessee has also filed bank details to explain the source of the share holders and the i. genuineness of the transaction was also established by filing copies of share application forms and Form No. 2 filed with the Registrar of Companies. j. The entire dispute revolves around the fact that the assessee has charged a premium of ₹ 190/- per share. k. No doubt a non-est company or a zero balance sheet company asking for ₹ 190/- per share defies all commercial prudence but at the same time we cannot ignore the fact that it is a prerogative of the Board of Directors of the company to decide the premium amount and it is the wisdom of the share holders whether they want to subscribe to such a heavy premium. l. The Revenue authorities cannot question the charging of such huge premium without any bar from any legislated law of the land. m. The amendment has been brought in the Income Tax Act under the head "Income from other sources" by inserting Clause (viib) to Sec. 56 of the Act wherein it has been provided that any consideration for issue of shares, that exceeds the fair value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be treated as the income of the assessee but the legislature in its wisdom has made this provision applicable w.e.f 1.4.2013 i.e. on and from A.Y. 2013-14. n. In so far as the year under consideration is concerned, the transaction has to be considered in the light of the provisions of Sec. 68 of the Act. o. There is no dispute that the assessee has given details of names and addresses of the share holders, their PAN Nos, the bank details and the confirmatory letters. p. Considering all these undisputed facts, it can be safely concluded that the initial burden of proof as rested upon the assessee has been successfully discharged by the assessee. q. Even if it is held that excess premium has been charged, it does not become income as it is a capital receipt. r. The receipt is not in the revenue field. s. What is to be probed by the AO is whether the identity of the assessee is proved or not. t. In the case of share capital, if the identity is proved, no addition can be made u/s. 68 of the Act. u. We draw support from the decision of the Hon’ble Supreme Court in the case of Loevely Exports Pvt. Ltd. 317 ITR 218. v. We, therefore do not find any error or infirmity in the findings of the Ld. CIT(A). w. Ground No. 1 is accordingly dismissed. Observations of author: The Tribunal has considered all facts and circumstances of the case and applicable law related to Companies about share capital and share premium. The facts found by Tribunal are final and cannot be called unreasonable or perverse in any manner. The question raised and admitted before the Honourable High Court was as follows: “(i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in deleting the addition of ₹ 7,53,50,000/under Section 68 of the Act being share capital/share premium received during the year when the Assessing Officer held the same as unexplained cash credit? The facts found by Tribunal have also not been challenged as wrong, unreasonable or perverse in any manner. Judgment of the High Court analysed: a. The impugned order of the Tribunal holds that the respondent-assessee had established the identity, genuineness and capacity of the shareholders who had subscribed to its shares. b. The identity was established by the very fact that the detailed names, addresses of the shareholders, PAN numbers, bank details and confirmatory letters were filed. c. The genuineness of the transaction was established by filing a copy of share application form, the form filed with the Registrar of Companies and as also bank details of the shareholders and their confirmations which would indicate both the genuineness as also the capacity of the shareholders to subscribe to the shares. d. Further the Tribunal while upholding the finding of CIT(A) also that the amount received on issue of share capital alongwith the premium received thereon, would be on capital receipt and not in the revenue field. Further reliance was also placed upon the decision of Apex Court in Lovely Exports (P) Ltd. (supra) to uphold the finding of the CIT(A) and dismissing the Revenue's appeal. e. the learned counsel appearing for the Revenue contends that proviso to Section 68 of the Act which was introduced with effect from 1st April, 2013 would apply in the facts of the present case even for A.Y. 2008-09. f. The basis of the above submission is that the de hors the proviso also the requirements as set out therein would have to be satisfied. g. that the proviso to Section 68 of the Act has been introduced by the Finance Act 2012 with effect from 1st April, 2013. Thus it would be effective only from the Assessment Year 2013-14 onwards and not for the subject Assessment Year. h. In fact, before the Tribunal, it was not even the case of the Revenue that Section 68 of the Act as in force during the subject years has to be read/understood as though the proviso added subsequently effective only from 1st April, 2013 was its normal meaning. i. The Parliament did not introduce to proviso to Section 68 of the Act with retrospective effect nor does the proviso so introduced states that it was introduced “for removal of doubts” or that it is “declaratory”. j. Therefore it is not open to give it retrospective effect, by proceeding on the basis that the addition of the proviso to Section 68 of the Act is immaterial and does not change the interpretation of Section 68 of the Act both before and after the adding of the proviso. k. In any view of the matter the three essential tests while confirming the pre-proviso Section 68 of the Act laid down by the Courts namely the genuineness of the transaction, identity and the capacity of the investor have all been examined by the impugned order of the Tribunal and on facts it was found satisfied. l. Further it was a submission on behalf of the Revenue that such large amount of share premium gives rise to suspicion on the genuineness (identity) of the shareholders i.e. they are bogus. m. The Apex Court in Lovely Exports (P) Ltd. (supra) in the context to the pre-amended Section 68 of the Act has held that where the Revenue urges that the amount of share application money has been received from bogus shareholders then it is for the Income Tax Officer to proceed by reopening the assessment of such shareholders and assessing them to tax in accordance with law. n. It does not entitle the Revenue to add the same to the assessee's income as unexplained cash credit. o. In the above circumstances and particularly in view of the concurrent finding of fact arrived at by the CIT(A) and the Tribunal, the proposed question of law does not give rise to any substantial question of law. Thus not entertained. Observations of author: The High Court has discussed all issues and order of Tribunal in details. The observations of High Court are in nature of affirmation of the order of tribunal. Therefore, although the question was not entertained as involving substantial question of law, yet it amount to affirmation of the ruling of the Tribunal. It is not a simple case of holding that it is purely case of fact finding. Rather it is a case of affirmation of the order of Tribunal which is based on facts and law. Therefore, author hope that the Revenue will follow the judgment of Tribunal as affirmed by High Court in above manner and shall not indulge into litigation before the Supreme Court. The revenue must not question about share premium: As considered and held in this case, and also as discussed by author in an article on issue of share premium, the revenue must not dispute premium because premium really dos not effect shareholders because when shares are issued at premium, the net-worth per share is high. It really make no difference to shareholder whether net worth is represented by lesser number of shares or larger number of shares. For example: A Ltd has issued 10000 shares of ₹ 10/- each at par - paid up capital is ₹ 100000 Reserve is ₹ 0 Net worth of company is ₹ 1,00,000/- Net worth per share is ₹ 10/- Suppose S holds 1000 shares he invested ₹ 10000 and he hold 10% stake. B Ltd has issued 100 shares of ₹ 10/- each at premium of ₹ 990/- Share capital is Rs. 1,000/- Share premium is ₹ 99,000/- Net worth is Rs. 1,00,000/- Net worth per share is ₹ 1000/- S holds 10 shares he invested ₹ 10000/- He hold 10% stake in company. The above example shows that share premium will not affect stake in net worth of company, held by a shareholder. The shareholder will be adversely affected only if in future company issues shares at lower premium. In that situation shareholder has a right to make objections to such an issue. Therefore, issue of shares at premium being beneficial to the interest of company and its shareholders, must not be a matter of intervention by tax authorities. In fact the amendment in provisions, deeming excessive premium are also not proper and in view of author they are not within scope of tax on income and hence appears to be ultravirse the Constitution of India which permit imposition of tax on income and not on capital.
By: CA DEV KUMAR KOTHARI - April 11, 2017
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