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ITAT rules share premiums cannot be treated as income

5 Sep 2013

The Income Tax Appellate Tribunal (ITAT), in a recent ruling in the case of Green Infra Ltd. (Green), has held that the premium on issue of shares is a capital receipt not chargeable to tax as 'Income from Other Sources' (IOS) under the Income-Tax Act. Taxand India discusses the case which led to this verdict. 

Green, a newly incorporated company, issued equity shares of Rs.10 per share at a premium of Rs.490 per share and credited the premium to the Share Premium account. The company adopted the Discounted Cash Flow (DCF) method in its valuation report and justified the premium charged. The Assessing Officer (AO) questioned the validity of this share premium and claimed it to be a sham transaction on the basis that the DCF valuation was based on unrealistic and vague projections, as is evidenced from the actual results of the subsequent years which were available at the time of assessment.
The AO also noted that Green did not comply with the provisions of the Companies Act in terms of the collection and utilisation of the share premium. Accordingly, the AO treated the share premium as a revenue receipt chargeable under section 56 of the Act as IOS.

Green contended that the valuation of their share premium was based on the DCF method, which is an accepted method by CBDT for determining fair market value of the unquoted equity shares. Green also stated that there is no prohibition under the Companies Act or any other law providing any limit on the quantum of share premium that could be charged. The share premium received by Green is in the nature of capital receipt as established by various Supreme Court rulings and therefore, not liable to tax under the Income-Tax Act.

The ITAT ruled that Green's shareholders and their holding company are all either Public Sector Undertakings or Government companies. Therefore, a transaction which has an element of Government involvement cannot be questioned as a sham transaction. The ITAT also stated that the Revenue cannot question the commercial decision of a share premium without any specific restriction imposed by any law and that a share premium is a capital receipt and cannot be taxed under the Income-Tax Act as a revenue receipt. 
Discover more: ITAT ruling - share premium cannot be treated as income

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Mukesh Butani
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Taxand's Take

This decision reaffirms the principle that a share premium is fundamentally a part of the purchase price of shares and cannot be considered as revenue receipt. The decision also upholds that the issuance of shares at a premium is a commercial decision of the company and it is up to the shareholder to decide to invest at the price fixed by the company. There is no bar under any law in this regard.  
The ITAT has relied on the shareholding pattern of the company and the involvement of the Government while concluding that the transaction was not a sham transaction. Technically, even if the transaction did not include any Government involvement, a transaction of subscribing shares at a premium should not be challenged as sham, as this is a legally allowable transaction, which does not provide any tax advantage for the shareholder or the issuing company. 

Taxand's Take Author

Mukesh Butani
Taxand Board member