Bombay High Court: Share Premium from Share Issuance Is Capital, Does Not Constitute Income

Bombay High Court: Share Premium from Share Issuance Is Capital, Does Not Constitute Income

The Bombay High Court has ruled that the share premium obtained from share issuance is categorized under the capital account and does not constitute income.

The bench, comprising Justices K. R. Shriram and Dr. Neela Gokhale, noted that any violation of the provisions of the Companies Act, 1956, by the assessee would be subject to penalties specified in that Act. Importantly, such violations would not alter the classification of a capital receipt into a revenue receipt or vice versa. The absence of evidence in the filed balance sheet indicates that the share premium amount was not utilized for purposes other than those prescribed in Section 78(2) of the Companies Act, 1956.

The appellant/assessee represented a joint venture involving Indian promoters, namely, Pantaloons Retail India Limited (PRIL), Pantaloon Industries Limited (PIL), and M/s. Participatie Maatschappij Graafsshap Holland NV (PMG), a company incorporated under the laws of the Netherlands. Additionally, the appellant served as a promoter of Future Generali India Insurance Company Limited, an insurance company.

From the Assessment Year 2008–2009 to the Assessment Year 2012–2013, the appellant or assessee issued shares to the promoters on multiple occasions, adhering to applicable laws, regulations, and guidelines, including those outlined in the Foreign Exchange Management Act, 1999 (FEMA), and the RBI directives.

The appellant diligently adhered to the legal and procedural prerequisites for share issuance, as stipulated by the Foreign Direct Investment (FDI) Scheme, as outlined in the RBI's notification. Additionally, the investment by PMG remained consistent with the sectoral policy and permissible cap under the automatic route established by the RBI.

During the scrutiny assessment for Assessment Year 2009–2010, the Assessing Officer raised inquiries regarding the issue of share capital, issuing multiple notices over time. The appellant duly responded to these notices, providing comprehensive details and submissions. After a thorough examination, the assessing officer concluded that the issue of share capital was legitimate and genuine. Consequently, no adjustments were made to the order dated December 29, 2011, issued under Section 143(3) for the assessment year 2009–2010. Similarly, during the assessment proceedings for Assessment Year 2010–2011, the matter of share capital was reviewed, and the explanation furnished by the appellant was accepted. Subsequently, an assessment order under Section 143(3) for Assessment Year 2010–2011 was issued.

Despite the department's stance favoring the legitimacy of share premiums and the issuance of share capital in the Assessment Years 2009–2010 and 2010–2011, the Assessing Officer, in the assessment order under Section 143(3), adopted a different perspective. The officer deemed the entire share premium of Rs.47,88,27,000 as unexplained cash credit under Section 68, adding it to the appellant's income. This addition was based on two grounds: the absence of justification for the share premium charge and an alleged violation of the provisions of Section 78(2) of the Companies Act, 1956.

The appellant appealed to the CIT (A), who upheld the addition made by the assessing officer. Subsequently, the appellant took the case to the Income Tax Appellate Tribunal (ITAT), where the appeal was dismissed. The Tribunal rejected the appellant's submissions and instructed the Assessing Officer to thoroughly investigate whether there was a violation of Section 78(2) of the Companies Act, 1956, regarding the utilization of the share premium account.

The issue was whether funds received as a premium for shares issued in connection with a capital account transaction can be considered income.

The assessee argued that the share premium amount had not been depleted. If there was no difference in the balances. The conclusion that the share premium funds were utilized for business purposes rather than being preserved for their intended purpose was reached without explanation or consideration of the fact that the balances remained unchanged, comprising the opening balance and the newly infused share premium amount. The authorities determined, without evidence, that the assessee diverted the funds for purposes other than their original intended use.

The department argued that the appellant has violated Section 78 of the Companies Act, 1956, which imposes limitations on the utilization of share premium funds. Consequently, given the company's violation, the Assessing Officer was justified in classifying the share premium amount as an unexplained cash credit under Section 68.

The court noted that the assessing officer should avoid bringing far-fetched fancies and ideas. In the case under consideration, they have done the same. Without understanding the basic philosophy of income, they have referred to the provisions of the Companies Act, 1956, so that the amount in question can be taxed at any cost. It is not a fair or judicious approach to deal with the subjects of the state.

The court observed that the closing and opening balances of the share premium funds demonstrate an augmentation in the share premium account through the infusion of funds, not a reduction. Importantly, there is no indication that the assessee utilized the share premium funds for investing in shares. The court criticised the assessing officers for their failure to comprehend the distinction between the utilization of funds and the mere creation of a share premium account in the books to record share premium receipts.