Court Rules Share Premium from Non-Resident as Capital Account Transaction, Not Taxable Income
In a significant ruling, the Telangana High Court has quashed the tax assessment proceedings initiated by the Income Tax Department against Escientia Advanced Sciences Private Limited. The court held that the share premium received by the company from its non-resident shareholder, Escientia Life Science, based in Mauritius, is a capital account transaction and cannot be taxed as income under the Income Tax Act, 1961.
The case revolved around the assessment year 2019-20, where Escientia Advanced Sciences received Rs. 44,07,04,380/- as share premium from issuing fresh equity shares to its shareholder. The Income Tax Department had initiated proceedings under Sections 148 and 148A of the Income Tax Act, alleging that the transaction constituted income that had escaped assessment.
The court, presided over by Justices P. Sam Koshy and Narsing Rao Nandikonda, found that the proceedings were based on an incorrect factual premise, as there was no sale of shares but rather a fresh issue of shares to a non-resident shareholder. The court highlighted that amounts received on the issue of share capital, including the premium, are on capital account and do not constitute income under Section 2(24) of the Income Tax Act. It was noted that Section 56(2)(viib) of the Act, which taxes premium received from residents, does not apply to non-residents.
The court also emphasized the binding nature of CBDT Circulars, specifically Circular No.F.No.500/15/2014-APA-I, issued following the Bombay High Court's decision in the Vodafone India Services case. The circular clarified that share premium received in a capital account transaction should not be considered income. The court criticized the Income Tax Department for disregarding this circular, which led to a lapse in due diligence.
In light of these findings, the court quashed the tax notices and orders levying tax, ruling in favor of Escientia Advanced Sciences. The decision reaffirms the position that share premium from non-resident shareholders is not taxable as income, providing clarity on the interpretation of capital account transactions under Indian tax law.
Bottom Line :
Share premium received by a company from a non-resident shareholder for fresh issue of equity shares is a capital account transaction and cannot be taxed as income under the Income Tax Act, 1961.
Statutory provision(s): Section 2(24), Section 56(2)(viib), Section 148, Section 148A of the Income Tax Act, 1961; Article 226 of the Constitution of India.
