Difference in share premium received and the fair value of equity shares

The Income Tax Appellate Tribunal considered a case where a company received a significantly higher share premium than the fair value of its equity shares from a foreign investor. The Tribunal found the assessee's explanation for the discrepancy insufficient, particularly as their own valuation showed a much lower share value. Consequently, the matter was remitted back to the CIT(A) for a fresh consideration of whether the excess premium should be added to the company's total income under Section 68 of the Income Tax Act.

THE INCOME TAX APPELLATE TRIBUNAL
“C” Bench, Mumbai
Shri Shamim Yahya (AM) & Shri Pavankumar Gadale (JM)
I.T.A. No. 3897/Mum/2017 (Assessment Year 2010-11)

DCIT-CC-2(4)
Room No. 802
8th Floor
Old CGO Annex Bldg
M.K. Road
Mumbai-400 020.

(Appellant)

Vs.

M/s. Concord Enviro
Systems Pvt. Ltd.
101, HDIL Tower
Anant Kanekar Marg
Banddra East
Mumbai-400 051.
PAN : AAACC8962C

(Respondent)

Assessee by Shri Percy Pardiwala
Department by Shri V. Sreekar
Date of Hearing 05.05.2021
Date of Pronouncement 26.07.2021
O R D E R

This is an appeal by the Revenue against the order of learned CIT(A) dated 20.3.2017 and pertains to assessment year 2010-11.

2. Apropos addition under section 68 of the Act. Brief facts of the case are that assessee-company is a private company. During the year under consideration, assessee’s company received funds from M/s. India Waste Water Treatment Company (I.W.W.T.C) a private equity firm based in Mauritius, for this assessee has issued 30 equity shares of Rs. 100 each and Rs. 4,20,000/- CCPS of Rs.1,000 each to the said party. The equity share were issued at a premium of Rs.63,233 per share.

3.In view of the facts as discussed above the contention of the assessee with regard to accepting share premium at a much higher rate than its fair value/book value is not acceptable as the same is without any proper explanation or evidence. Therefore, the higher share premium claimed to be taken by the assessee, as worked as under, is required to be added to its total income u/s 68 of the I.T. Act as the assessee has failed to satisfactorily explain the nature of such transaction.

4.Regarding the valuation of shares as obtained by the appellant, it has been stated that it was obtained only for the purpose of statutory requirement as enforced by RBI and it was not the basis of negotiating the price of shares between the appellant and the investor.

5. Furthermore, we find that assessee’s own valuation by a approval valuer showed significantly lower value for the shares issued as compared to that transacted. In this regard, the claim of the assessee duly accepted by the Ld.CIT(A) is that this was only for the purpose of filing before RBI for obtaining permission for issue of shares to a non residents.

6. Since we have remitted the first issue to the file of Ld.CIT(A), we deem it appropriate to remit this issue also to the file of Ld.CIT(A). Ld.CIT(A) is directed to consider this issue also afresh. In remitting the matter on this issue also we draw support from Hon'ble Apex Court in the case of Kapurchand Srimal (supra).

7. In the result, appeal filed by the revenue is allowed for statistical purpose.
Pronounced in the open court on 26.7.2021

Please find attached the enclosed file for the full judgement