2018 (10) TMI 1393 - AT - Income Tax

Tribunal rules excess premium on preference shares not taxable under Section 68

The Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO regarding the excess premium received on the issue of preference shares. ... Addition of excess premium received by the assessee on issue of preference shares u/s. 68 - Held that:- We are of the view that the “nature” of the transaction has been explained by the assessee as Share Premium, which could not be contradicted by the revenue with any other material. There is no dispute with regard to the “Source”. Hence, in effect, the conditions prescribed in sec. 68 of the Act has been fulfilled by the assessee. With regard to the basis for excess premium, we have noticed that the AO has considered the share premium amount as excess in nature, only for the reason that it is in excess of Book value of shares. We have noticed that the “book value” of shares would value only “Equity shares” and not “Preference shares”. Hence, the very basis on which the AO determined the excess premium” should, in our view, is not sustainable. The assessee has shown that the transaction is a commercial transaction involving receipt of money @ ₹ 500/- per share and repayment of the same @ ₹ 750/- per share after a period of five years. Yet another point, which supports the case of the assessee is that the assessee had received funds in the earlier years and not during the year under consideration. During the year under consideration, the assessee has transferred the funds to “preference shares account” and “shares premium” account by passing journal entries. There should not be any doubt that the provisions of sec.68 shall apply only in the year in which the cash credit was found. There is no justification in assessing the alleged excess premium as income of the assessee. Accordingly we are of the view that the CIT(A) was justified in deleting the impugned addition and accordingly we uphold his decision. - Decided against revenue. Issues Involved:1. Justification of excess premium received on the issue of preference shares.2. Applicability of Section 68 of the Income Tax Act.3. Comparison between preference shares and equity shares for valuation purposes.4. Applicability of Section 56(2)(viib) of the Income Tax Act.5. Nature and source of receipts under Section 68.Detailed Analysis:1. Justification of Excess Premium Received on the Issue of Preference Shares:The assessee issued 610,825 non-cumulative, non-convertible redeemable preference shares at a premium of Rs. 490 per share, redeemable at Rs. 750 after five years. The Assessing Officer (AO) questioned the high premium, given the assessee's recent losses and determined a fair market value of Rs. 38 per share, allowing a reasonable premium of Rs. 28 per share. Consequently, the AO assessed the excess premium of Rs. 462 per share as income.2. Applicability of Section 68 of the Income Tax Act:The AO impliedly invoked Section 68, questioning the nature of the receipts. The assessee contended that Section 68 applies only in the year funds are received, not when they are transferred to the preference share capital account. The assessee cited the Supreme Court decision in P Mohanakala (291 ITR 278) to support this view. The Tribunal agreed, noting the funds were received in earlier years and only transferred during the year under consideration.3. Comparison Between Preference Shares and Equity Shares for Valuation Purposes:The assessee argued that preference shares differ from equity shares, being quasi-debt instruments with fixed returns and no participation in profits or management. The Tribunal agreed, noting that the AO erred in comparing the net asset value of the company, which pertains to equity shares, with the value of preference shares.4. Applicability of Section 56(2)(viib) of the Income Tax Act:The Commissioner of Income Tax (Appeals) (CIT(A)) noted that Section 56(2)(viib), which addresses excess premium on shares, applies prospectively from AY 2013-14. The AO did not explicitly invoke this section, and the Tribunal confirmed that it was not applicable for the assessment year in question (2011-12).5. Nature and Source of Receipts Under Section 68:The Tribunal found that the assessee had proved the source of the receipts (Sahara India Commercial Corporation Ltd) and the nature of the receipts (share premium on preference shares). The AO's suspicion was based solely on the premium exceeding the book value of equity shares, which was not a valid comparison for preference shares. The Tribunal noted that the transactions were commercial, involving a return of Rs. 750 per share after five years, justifying the premium.Conclusion:The Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO. It was determined that the excess premium could not be taxed under Section 68, as the assessee had adequately explained the nature and source of the receipts. The AO's basis for determining the premium was found unsustainable, and the appeal by the revenue was dismissed.