Loading judgment…
Facts
The assessee company issued shares at a premium. The Assessing Officer (AO) treated the share premium amount of Rs. 17.10 Crores as unexplained credit under Section 68 of the Income Tax Act. The assessee argued that the premium was determined by a valuation report based on DCF method.
Held
The Tribunal held that the AO did not dispute the identity or capacity of the subscribers and the share premium was based on a valuation report using a recognized method. The AO failed to provide an independent valuation report to justify the addition.
Key Issues
Whether share premium received by a company is to be treated as income or a capital receipt when the identity and capacity of subscribers are not disputed and a valid valuation report supports the premium amount.
Sections Cited
68
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, HON’BLE & SHRI SANDEEP SINGH KARHAIL, HON’BLE
आदेश/O R D E R PER NARENDRA KUMAR BILLAIYA, AM:
are two separate orders of NFAC, Delhi [hereinafter referred to as “the ld. CIT(A)”] pertaining to AY 2009-10 & 2010-11. C.O. No. 81/Mum/2025 & C.O. No. 80/Mum/2025 are cross-objections by the assessee preferred against the very same order of the ld. CIT(A).
Since the underlying facts in the issues in the appeals by the revenue are identical, we heard the representatives on the facts of AY 2009-10.
Briefly stated the facts of the case are that during the course of scrutiny assessment proceedings, the assessee was requested to furnish the details of issue of shares at huge premium for AY 2009-10 and 2010- 11.
During the course of assessment proceedings, the AO noticed that the assessee company had introduced a sum of Rs. 19 Crores on account of share capital and share premium. The details can be understood from the following chart:-
It was found that the assessee company had issued the shares at Rs. 100/- per share which included the premium component of Rs. 90/- per share. Out of these shares, total number of 9,50,000 shares of face value of Rs.10/- each were issued to M/s. K2C Residencial Ltd. (Formerly Eredene Mauritius Ltd.) a foreign company based at Mauritius at premium of Rs.90 per share and remaining 9,50,000 shares were issued to the various entities which are closely association with the assessee group. The AO formed a belief that the transactions appear to be C.O. No. 81/Mum/2025 & C.O. No. 80/Mum/2025 4 abnormal, unnatural and suspicious. A reference to FT&TR, New Delhi, was made under Exchange of Information Article in the DTAAs/TIEAs/Multilateral Agreements. 5.1. Surprisingly, the AO has only questioned the genuineness of the transactions i.e., charging of share premium of Rs. 90/- per share thereby accepting the identities and capacity of the subscribers. At the very outset, it has to be understood that deciding the share premium is the prerogative of the principal directors of the company and subscribing shares at premium is the wisdom of the subscriber and the commercial prudence of the subscribers should not be questioned by the authorities. The AO has categorically mentioned at para 10.2. of his order “The relevant details are already on record to arrive at logical conclusion. Moreover, it is not the identity or capacity of the investor which is being deliberated upon here, instead it is the nature of transaction which is the subject matter of discussion.” After referring to various judicial decisions, the AO finally concluded by treating the sum of Rs. 17.10 Crores being the share premium amount as unexplained credit within the meaning of Section 68 of the Act and added the same.
The assessee agitated the matter before the ld. CIT(A). It was vehemently argued that the share premium amount has been decided as per the valuation report of the approved valuer based upon the comparison chart of actual final report of the balance sheet as well as profit and loss account for the period from FY 2009-10 to FY 2014-15. The share premium has been determined on the basis of DCF method which is completely based on the projections. It was explained that as per the C.O. No. 81/Mum/2025 & C.O. No. 80/Mum/2025 5 valuation report, the operation was expected to start from April, 2009 and it in fact started in the year April, 2009, which is evident from the recommendation made in the P&L account of the assessee for AY 2010- 11.
After considering the facts and the submissions and the valuation report, the ld. CIT(A) observed that the AO has not disputed the identity of the creditors i.e., subscribers of the shares at premium. The capacity of the subscribers or the creditworthiness of the subscribers. After referring to various judicial decisions and in particular decision of Hon’ble Jurisdictional High Court of Bombay in the case of Shendra Advisory Services (P.) Ltd. v. Dy. CIT [(2024) 298 Taxman 261 (Bom.)(HC)] and SLS Energy (P) Ltd. vs. ITO [2023] 154 taxmann.com 400 (Bom.), the ld. CIT(A) deleted the addition of Rs. 17,10,00,000/- on account of share premium.
Before us, the ld. D/R reiterated what is mentioned in the assessment order and read the operative part of the assessment order. The ld. Counsel for the assessee strongly relied on the findings of the ld. CIT(A).
The undisputed facts is that the AO has neither questioned the identity nor the capacity of the subscribers and in fact the subscribers are the existing shareholders of the assessee company. It is also not in dispute that the valuation of share premium is supported by valuation report which is based upon a well recognised method of DCF. Nowhere in the assessment order, the AO has brought any independent valuation report to justify his stand. Mere rejection of the valuation report based upon a well recognised method would not justify the assessment. Moreover, the Hon’ble Jurisdictional High Court of Bombay in the case of Shendra Advisory Services (P.) Ltd. v. Dy. CIT (supra), has held as under:- “11. The issue at hand is very narrow. Whether the money received as premium of share issued on account of a capital account transaction can give rise to income?
In SLS Energy (P.) Ltd. v. ITO [2023] 154 taxmann.com 400 (Bom.) the Court considered whether the receipt of premium on issuance of shares was receipt of income and came to a finding that the receipt of premium on issuance of shares was not receipt of income but was a capital receipt. The Court came to a finding that the receipt of share capital including the premium was on capital account and gave rise to no income. It will be useful to reproduce paragraphs 24 to 30 of SLS Energy (P) Ltd. (supra) which read as under : .............................................. ……………………………. ……………………………. …………………………….
The charge of tax under the Act is on income. The receipt of share premium on the issue of fresh shares is on capital account and constitutes a capital receipt, which is not chargeable to tax under the Act. There is no provision under the Act to tax the receipt of share premium for the assessment year under consideration. As held in Vodafone India Services (P.) Ltd. (supra) the amount received on issue of shares is admittedly a capital account transaction not separately brought within the definition of income during the relevant period. Thus, capital account transaction not falling within the statutory explanation cannot be brought to tax.”
The Hon’ble High Court of Bombay in the case of Vodafone India Services Pvt. Ltd. vs. Union of India & Ors. [2014] 368 ITR 1 (Bom.), has held that the receipt of share capital including premium was on capital account and gave rise to net income. The amendments incorporated in the definition of income u/s 2(24)(xvi) and 56(2)(viib) of the Act were the amendments which were to apply from 01/04/2013 i.e., AY 2013-14. The amendment to Section 68 by incorporation of the first proviso also came into effect by virtue of the Finance Act, 2012 w.e.f. 01/04/2013 and was to apply for AY 2013-14 and onwards and, therefore, since the amendments were not applicable to the assessment years in question i.e., 2009-10 and 2010-11 and there would be no basis for the assessment made as such.
Considering the facts of the case in totality, we do not find any reason to interfere with the findings of the ld. CIT(A). Accordingly, appeals of the revenue are dismissed. Since we have dismissed the appeals of the revenue, the issues raised in the cross-objections are left open. 12. In the result, appeals of the revenue are dismissed.
Order pronounced in the Court on 25th August, 2025 at Mumbai.