Excess share premium not taxable in hands of closely held co. if its shareholders are relatives- Interesting Judgemnent by Chennai ITAT
Facts:
a) The assessee-company had only two shareholders ‘S’ and her husband. On passing away of husband, his shares devolved on thier daughter ‘V’. Assessee-company proposed to acquire immovable property, viz., the land.
b) The value of the land was approximately Rs. 23.09 crores. Accordingly, ‘S’ who had the funds, brought in money and she was allotted 10100 shares with a share premium of Rs. 23.31 crores.
c) Assessing Officer (AO) opined that company had received excess price/share premium for the shares allotted to ‘S’ over and above the face value of shares. Accordingly, he brought Rs.23.31 crores to tax in the hands of the Company under Section 56(2)(viib).
d) CIT(A) confirmed the order of AO. Aggrieved-assessee filed the instant appeal before the ITAT.
The ITAT held in favour of assessee as under:
1) Though ‘S’ had introduced cash into the company amounting to Rs. 23.31 crores for allotment of shares at premium of Rs. 23,096 per share when the intrinsic value of the share was only Rs.10 per share which was the face value of the shares, the benefit of such investment at an unrealistic share premium had only passed on to her daughter because there were only two shareholders in the company at that point of time.
2) Had ‘S’ gifted the money to her daughter ‘V’ and thereafter if the daughter would have brought the same into the company for allotment of equity shares at face value, question of invoking of the provisions of section 56(2)(viib) would not have arisen.
3) Provisions of section 56(2)(viib) couldn’t be invoked in the case of the assessee-company because by virtue of cash being brought into the assessee-company by ‘S’ for allotment of equity shares with unrealistic premium the benefit had only passed on to her daughter ‘V’ and there was no scope in the Act to tax when cash or asset was transferred by a mother to her daughter. [2018] 98 taxmann.com 92 (Chennai – Trib)
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