Section 68 Of The Income Tax Act Is Not Applicable On Share Premium: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that Section 68 of the Income Tax Act, which relates to the taxability of unexplained cash credits, is not applicable to share premiums.

The bench of Narender Kumar Choudhry (Judicial Member) and B.R. Baskaran (Accountant Member) has observed that the provisions of Section 68 would be attracted when the assessee fails to prove the identity of the creditor, credit worthiness of the creditor, and genuineness of transactions. The examination under Section 68 of the Income Tax Act has to be with reference to the creditor who has given money to the assessee.

The appellant/assessee is engaged in providing health care services. The shareholders of the assessee company are M/s. Fortis Healthcare Limited and M/s. Fortis Healthcare Holdings Pvt. Limited. Both shareholders held 40% and 60% of the shares, respectively.

During the year ending on 31.3.2012 relating to A.Y. 2012–13, the assessee issued 30 lakh equity shares having a face value of Rs. 10 each with a premium of Rs. 90 per share to FHL.

As a result, there was a change in the shareholding pattern between both shareholders, i.e., the holding of FHL increased to 85%, while the holding of FHHPL got reduced to 15%. It is pertinent to note that the assessee had accumulated losses remaining to be set off as of April 1, 2011.

The issue relates to the addition made under Section 68 of the Income Tax Act. The Assessing Officer noticed that the accumulated loss as of 31.3.2012 in the hands of the assessee stood at Rs. 58.60 crore. The AO was of the view that the share premium collected by the assessee on the issue of shares is not commensurate with the overall financial position of the assessee company. Hence, the Assessing Officer asked the assessee to justify the share premium received by it and also proposed to assess the share premium as a revenue receipt.

The assessee submitted that the share premium can be assessed as income only under the provisions of Section 56(2)(viib) of the Income Tax Act, which was inserted by the Finance Act 2012 w.e.f. 1.4.2013. Hence, the provisions of Section 56(2)(viib) shall be applicable w.e.f. A.Y. 2013–14 only. The share premium cannot be assessed as income of the assessee in AY 2012–13 since Section 56(2)(viib) is applicable from AY 2013–14 only.

The Assessing Officer, however, did not accept the explanations given by the assessee. The share premium collected by the assessee requires examination under the provisions of Section 68. The Assessing Officer held that the assessee has not offered proper explanations with regard to the nature and source of the share premium received by it. He assessed the share premium amount of Rs. 27 crores as an unexplained cash credit under Section 68.

The CIT (A) held that the charging of a premium of Rs. 90 per share when the assessee company was running into a huge loss would put commercial expediency in question. The CIT (A) confirmed the addition made under Section 68.

The ITAT held that the assessee could collect the premium of Rs. 90 on the basis of a valuation done under the discounted cash flow method, which takes into consideration future cash inflows. However, the tax authorities have given importance to past losses. Ultimately, the discussions between the tax authorities and the assessee have boiled down to the quantum of the share premium collected.

The tribunal finds that the tax authorities are not justified in assessing the share premium amount under Section 68.

The ITAT directed the AO to delete the addition of Rs. 27 crore made under Section 68 of the Income Tax Act.

Case Title: Hiranandani Healthcare Private Limited Versus CIT (A)

Case No.: I.T.A. No. 3240/Mum/2022

Date: 27.07.2023

Counsel For Appellant: Sukhsagar Syal, Atul Suraiya

Counsel For Respondent: Madhumalti Ghosh

Click Here To Read The Order