Telangana High Court Holds Share Premium From Non-Resident Is Capital Receipt, Quashes ₹44.07 Cr Demand

The Telangana High Court on 11 August held that the share premium received by Escientia Advanced Sciences Pvt. Ltd. from a non-resident shareholder on a fresh issue of equity shares is a capital receipt and cannot be treated as taxable income.

A Division Bench comprising Justices P. Sam Koshy and Narsing Rao Nandikonda allowed the company's writ petition and quashed a Rs. 44.07 crore tax demand raised for assessment year 2019-20. The judges held:

"..the premium received by the petitioner on issue of shares to ELS being a receipt on capital account, cannot be treated as income chargeable to tax, and the very foundation on which the impugned notices and order proceed, namely, an alleged sale of shares, is factually unsustainable..."

During the relevant assessment year, Escientia Advanced Sciences issued 6,38,702 fresh equity shares to its Mauritius-based shareholder, Escientia Life Science (ELS), and received Rs. 44,07,04,380 towards share premium. It reported the transaction through Form PAS-3 filed with the Registrar of Companies and reflected it in its audited financial statements.

The Income Tax Department, however, proceeded on the premise that the company had sold shares to ELS and treated the share premium as income that had escaped assessment. It subsequently issued a notice proposing reassessment and passed an order holding that the case was fit for issuance of a reassessment notice.

Escientia Advanced Sciences challenged the action, contending that there had been no sale or transfer of existing shares. It submitted that the shares had been freshly issued to its existing non-resident shareholder and that the amount received towards share premium was a capital receipt. It also pointed out that it had furnished its share allotment records, bank statements, audited financial statements and valuation report to the Income Tax Department.

The Bench found that the reassessment proceedings rested on an incorrect factual premise. It noted that the Form PAS-3 returns, audited financial statements and valuation report established that the transaction involved a fresh allotment of shares.

The Court relied on the Bombay High Court's decision in Vodafone India Services Pvt. Ltd. v. Union of India, which held that amounts received on the issue of share capital, including share premium, are on capital account and do not constitute income unless legislation specifically brings them within the scope of taxable income. It also relied on the decision in Shendra Advisory Services Pvt. Ltd., which similarly held that the share premium received on the issue of fresh shares is a capital receipt. The Supreme Court had declined to interfere with that decision.

The Bench further noted that the provision treating excessive share premium as income applied to premium received from a resident, whereas ELS was a non-resident entity. The Revenue also failed to identify any other provision under which the amount could be brought to tax.

The judges also criticised the Income Tax Department for shifting its stand during the reassessment proceedings. After the company clarified that there was no share purchase agreement because the shares had been freshly issued, the Department introduced a new allegation that the genuineness of the transaction had not been established.

Further, the Bench held that the Department had never put this ground to the company during the show-cause stage. Introducing the allegation later, without giving Escientia Advanced Sciences an opportunity to respond, violated the principles of natural justice.

It also took note of the CBDT Instruction/Circular dated 29 January 2015, issued following the Vodafone India Services judgment, which directed field officers to follow the ruling in cases involving share premium received on capital account transactions. It observed that circulars issued by the Central Board of Direct Taxes under the Income Tax Act are binding on income tax authorities.

Therefore, the Bench quashed the impugned notices and order, holding that the share premium received on the fresh issue of equity shares could not be treated as taxable income.

Accordingly, the High Court allowed the writ petition with no order as to costs.

For Petitioner: T. Suryanarayana, Senior Counsel

For Respondent: J. Sunitha, Senior Standing Counsel