The Tax Publishers2020 TaxPub(DT) 0010 (Mum-Trib) : (2020) 203 TTJ 0797

INCOME TAX ACT, 1961

Section 56(1)

Compulsorily convertible participating preference shares (CCPPS) were converted at a share premium of Rs. 210 each agreed in accordance with share holders agreement entered into with foreign investors and at fair market price which was determined at the time of issue of shares. Also, concerned parties did not have any direct or indirect relation with promoters of assessee. As regards issuance of shares at premium, AO resorted to tax receipt of share premium under section 56(1) which was not valid as legislature sought to tax consideration received from issue of shares over and above fair market value of shares under section 56(2)(viib).

Income from other sources - Taxability - Premium on issuance of fresh shares to non-resident and also on conversion of CCPPS into enquity shares -

Assessee-company issued shares of face value of Rs. 10 each at premium of Rs. 9 per share and also converted 0% compulsorily convertible participating preference shares (CCPPS) of face value of Rs. 220 each into equity shares of face value of Rs. 10 each at premium of Rs. 210 per share. AO took the view that company had suffered losses for the last 5 years and hence premium of Rs. 210 on conversion was not justified and also there was no prospects for assessee to enable investors to make investments in assessee-company at a premium. Accordingly, AO treated concerned transactions as sham as brought receipt of share premium to tax in the hands of assessee under section 56(1). Assessee submitted that shares were issued to foreign investors was in accordance with exchange control regulations.Held: Undisputedly, compulsorily convertible participating preference shares (CCPPS) were converted at a share premium of Rs. 210 each agreed in accordance with share holders agreement entered into with foreign investors and at fair market price which was determined at the time of issue of shares. Also, concerned parties did not have any direct or indirect relation with promoters of assessee. As regards issuance of shares at premium, AO resorted to tax receipt of share premium under section 56(1) which was not valid as legislature sought to tax consideration received from issue of shares over and above fair market value of shares under section 56(2)(viib). Even section 56(2)(viib) introduced only with effect from assessment year 2013-14 onwards could not be made applicable to the year under consideration. Accordingly, issuance of shares and conversion of CCPPS could not be regarded as sham or non-genuine more especially when entire details of investors were duly provided and same were also subjected to due approval received from Foreign Investment Promotion Board (FIPB) and necessary statutory returns were also filed in prescribed form with Reserve Bank of India (RBI).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2010-11

INCOME TAX ACT, 1961

Section 14A

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