Subscription of shares at a Premium at the time of Incorporation
November 23, 2016 by bsamrishindia.com
Company Incorporation has been simplified significantly with turnaround time a lot lesser than what it used to be. While shares are generally subscribed at par by the promoters at the time of incorporation, there can be a situation where shares are to be subscribed by the investors. In such situation, promoters enter into share subscription agreement and the terms may require investor shareholders to subscribe shares at a premium. Companies Act, 2013 do not prohibit such subscription of shares at a premium but it might be difficult to justify such a transaction under Income Tax Act. Section 56 of the Income Tax Act prescribes issuance of shares at fair value. The moot question is, … what is the fair value of a Company yet to be incorporated or for that matter, of a newly incorporated company yet to commence its business?
Share premium can be defined as the excess amount received by the company over and above the face value of its shares. All types of companies can issue their shares at premium.
Shares at a premium at the time of incorporation
As per the provisions of Section 52 of the Companies Act, 2013 a company can issue shares at a premium, whether for cash or otherwise. But, you will hardly find the practice of issue of shares at premium, at the time of incorporation, because no subscriber would like to take shares at a premium. Issue of shares at premium at the time of incorporation of Company is very much valid under the provisions of Companies Act, 2013.
In the decided case of Green infra ltd. (the assessee), where the Mumbai Income Tax Appellate Tribunal (Tribunal) held that shares allotted at premium by newly incorporated company is neither sham nor income and cannot be taxed as income under section 56(1) of the Income tax Act, 1961.Mentioned below are the important highlights of the ruling by ITAT:
- Issue of shares at premium is a commercial decision and does not require any justification under any law currently in force.
- The amount of securities premium will depend upon the business terms.There is no need of a valuation certificate.
- It is the prerogative of the board of directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to shares at such premium or not
- In the absence of any restriction from any law in force, the revenue cannot question the charging of premium.
- Any receipt can be taxable under section 56(1) of Income Tax Act,1961 only if it has some character of income.
- The genuineness and identity of the depositor shall be established through the banking channels.
Can we use the amount received as Share premium for business?
As per Section 52(2) of the Companies Act, 2013, Securities Premium Account may be used for the purpose mentioned therein like, issue of bonus shares, writing off preliminary expenses, buy back of shares, etc.
If the securities premium account is used for other than the aforesaid purpose, then it shall be treated as reduction of share capital and the provisions of capital reduction will apply.
However, please note that the securities premium account and securities premium amount are two different things.
Securities Premium Account represents the premium shown on the liabilities side of the balance sheet.
Securities Premium Amount represents the amount of premium received in the form of Cash or other than Cash and is shown on the asset side of the balance sheet. This amount can be used for the main business of the company including for the purpose of acquiring land or any other assets.