Premium collected by recognized startup for issue of share capital outside scope of Sec 56(2)(viib) of I-T Act: Chennai ITAT

Read order: DEPUTY COMMISSIONER OF INCOME TAX, COIMBATORE vs. M/s KOVAI MEDIA PVT LTD

LE Staff

Chennai, July 30, 2021: While dismissing the appeal of the Revenue Department, the Chennai ITAT held that share premium collected for issue of share capital is outside the scope of the provisions of section 56(2)(viib) of the Income Tax Act, if the taxpayer is a recognized startup from the Ministry of Commerce & Industry. 

The Coram of Duvvuru Rl Reddy (Judicial Member) & G Manjunatha (Accountant Member), dissented from the action of the AO in charging excess premium collected on the issue of equity shares from resident individuals u/s. 56(2)(viib) of the Act, as income of the assessee. 

The assessee-company in the present case is engaged in the business of print and digital media. In the relevant year, the assessee had issued equity shares at share premium to 13 individuals, for which the AO asked for justification. Although, the assessee had filed valuation report in support of issue of share capital at premium, however, such valuation report was not obtained as required u/r 11UA(2)(b) of the I.T. Rules, as per the AO. 

The I-T Department was of the view that market value of equity shares as worked out by the company was arbitrary and hence, they invoked provisions of section 56(2)(viib) of the Income Tax Act and excess premium charged from resident investors was brought to tax as income of the assessee. 

When the matter went on appeal, CIT(A) held that the provisions of section 56(2)(viib) would not be applicable where the assessee was a recognized startup company from the Department for Promotion of Industry and Internal Trade (DIPP). He further held that the assessee being a recognized startup company was covered by Gazette Notification GSR No. 127(E), dated Feb 19, 2019. 

Challenging the order of CIT(A), the Revenue Department had approached the Chennai Income tax Appellate Tribunal. 

After considering the arguments, the Tribunal found that the provisions of section 56(2)(viib) deals with cases 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 shall be chargeable to tax as income of the assessee. 

“The proviso provided to section 56(2(viib) has excluded certain category or class of companies from application on fulfillment of certain conditions. Further, for this purpose notified class of persons has been notified by CBDT vide its circular No. 173/147/2018-ITA I dated Feb 06, 2018, as per which any startup company as recognized by DPIIT, Ministry of Commerce & Industry, Govt. of India is outside the scope of provisions of section 56(2(viib) of the Act,” noted the Coram. 

In the present case, the assessee has filed necessary evidences to prove that it is a recognized startup from DPIIT. The assessee has also furnished a notification issued by CBDT vide reference No.230819001348 dated 28th August, 2019 u/s. 56(2(viib) of the Act, as per which the assessee has satisfied conditions prescribed in the notification for exemption on the amount received on consideration for issue of shares, opined the Tribunal. 

“The CIT(A) has categorically observed that since the assessee is outside ambit of section 56(2(viib) of the Act, issue of non- applicability of Rule 11UA(2)(b) of the Income Tax Rules, 1962, therefore, become infructuous and hence, the question of substantiating value of shares does not arise,” noted the Coram. 

In this view of the matter, the Chennai ITAT concluded that the assessee is a recognized startup from DPIIT, Ministry of Commerce & Industry, Govt. of India and hence, it is outside the scope of the provisions of section 56(2(viib), in respect of consideration received for issue of shares at premium.