Is the difference between the fair market value and the issue price of shares at a premium considered as income of the assessee?

IN THE INCOME TAX APPELLATE TRIBUNAL
“A” BENCH : BANGALORE

BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT
AND SHRI B R BASKARAN, ACCOUNTANT MEMBER

ITA No.139/Bang/2020
Assessment year : 2016-17

M/s. Town Essential Private Limited,
54/1, Industrial Suburb,
Yeshwanthpur,
Bengaluru – 560 022.
PAN : AABCT 4200 D
APPELLANT 

Vs. 

The Commissioner of Income Tax
 (Appeals)-7,
Bengaluru.
RESPONDENT

Appellant by : None (Adjournment request refused)
Respondent by : Shri Kannan Narayanan, Jt.CIT(DR)(ITAT), Bengaluru.

Date of hearing : 24.06.2021
Date of Pronouncement : 30.06.2021

O R D E R

Per N.V. Vasudevan, Vice President

This appeal by the Assessee is against the order of the Commissioner of Income Tax (Appeals)–7, Bangalore, dated 29.11.2019 in relation to assessment year 2016-17.

2. The only issue involved in the appeal is as to whether the revenue authorities were justified in invoking provisions of section 56(2)(viib) of the Income Tax Act, 1961 (the Act) and bringing to tax the difference between the fair market value and the issue price of shares at a premium as income of the Assessee. Section 21 clause (B) of Finance Act, 2012 introduced Sec.56(2)(viib) of the Act with effect from the 1st day of April, 2013, and the said provisions reads thus:- 

“Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :—

(i) ….. (viia)……

(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:

Provided that this clause shall not apply where the consideration for issue of shares is received—

(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or

(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Explanation.—For the purposes of this clause,—

(a) the fair market value of the shares shall be the value—

(i) as may be determined in accordance with such method as may be prescribed, or

(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature,whichever is higher;

(b) "venture capital company", "venture capital fund" and

"venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause

(c) of Explanation to clause (23FB) of section 10;”

3. Section 56(2)(viib) of the Act was introduced by the Finance Act 2012 with effect from the 1st day of April, 2013, which requires a Company (issuer), not being a company in which the public are substantially interested, to issue shares at Fair Market Value (FMV). Any consideration received by such issuing Company in excess of the FMV, to the extent it exceeds the face value of such shall be liable to tax. For the purpose of this section, FMV shall be the value, Higher of the following:- 

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