The officer says nobody would pay this premium for shares in my company. Is that a ground for taxing it under s.68?
No. Even if the premium at which the shares are issued defies commercial prudence, the receipt cannot be assessed as an unexplained credit where the identity of the payer, the genuineness of the transaction and the capacity of the subscriber are not disputed. Whether to subscribe at a heavy premium is the shareholder's decision, not the officer's.
Decided by the High Court (Bombay High Court — M. S. Sanklecha J and A. K. Menon J) on 2017-01-16, reported as [2017] 78 taxmann.com 340 / 392 ITR 7 / 292 CTR 233 (Bom); IT Appeal No. 1162 of 2014; affirming Green Infra Ltd. v. ITO [2013] 38 taxmann.com 253 / 145 ITD 240 / [2014] 159 TTJ 728 (Mum. - Trib.) on the interest limb. It bears on section 68, section 56, section 28 of the Income Tax Act 1961, in Cash Credits & Unexplained Money, Assessment & Scrutiny and Evidence & Burden of Proof matters.
It separates two arguments the department runs together. One is that the subscriber is not proved — that is a s.68 argument and is answered on the three limbs. The other is that the premium is too high for a company with these numbers — that is a commercial argument, and this decision says it is not a s.68 argument at all. Useful where the officer has accepted the subscriber but attacked the price.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 2011-12 the assessee company issued shares at a premium of Rs 490 per share. The Revenue's case was that the premium defied commercial prudence and that the receipt should be taxed as an unexplained cash credit under s.68. Identity of the subscribers had been confirmed through notices issued under s.133(6) and was not disputed by the Revenue. The transaction was recorded in the books, reflected in the financial statements and routed through banking channels, and about 98 per cent of the shares were held by a private equity fund itself funded by public sector undertakings.
The Court did not decide that share premium is outside s.68. Of the three questions the Revenue pressed, two were declined and one was admitted. On s.68 the Court held only that the Tribunal had examined the Revenue's case on the parameters of identity, genuineness and capacity and had found on the facts that s.68 was not attracted, and that the Revenue had not been able to show that finding to be perverse; question (ii) therefore gave rise to no substantial question of law and was not entertained (para 3(b)-(d)). On interest earned on fixed deposits of one, twenty-eight and ninety days, the Court held that commencement of business cannot vary with the claim being made — commenced for expenses and not commenced for income — and, following its own decision in Indo Swiss Jewels, that the short duration for which the money was parked awaiting use in the business meant the interest was business income; question (iii) was likewise not entertained (para 4(d)-(f)). The appeal was then admitted on question (i) — whether the Tribunal was justified in holding that the Rs 490 per share received constituted share premium — and the Registry was directed to have the Tribunal keep the papers available (paras 4(g) and 5). That question was left undecided by this order.
The reasoning on s.68 is short and is about the standard of review, not about the character of share premium. The Tribunal had allowed the Revenue to raise the s.68 plea for the first time before it, and had then applied the three parameters: identity confirmed by the Assessing Officer's own notices under s.133(6), and not in any event disputed by the Revenue; genuineness from the books, the financial statements and the banking channel evidenced by bank statements the Tribunal examined; capacity from the fact that 98 per cent of the shares were held by IDFC Private Equity Fund-II, whose contributors are public sector undertakings. Counsel for the Revenue argued that because the Tribunal's own order said a premium of Rs 490 per share defies all commercial prudence, the receipt had to be treated as a cash credit. The Court's answer was that the Tribunal had found on the facts that s.68 was not attracted and that the Revenue had shown no perversity in that finding, so no substantial question of law arose. On the interest limb the Court reasoned that the Revenue had not challenged the Tribunal's finding that the business had commenced, which it had accepted for the purpose of allowing depreciation and expenses, and that it could not treat the business as commenced for expenditure and not commenced for income.
We find that the Tribunal has examined the case of the Revenue on the parameters of Section 68 of the Act and found on facts that it is not so hit. Therefore, Section 68 of the Act cannot be invoked. The Revenue has not been able to show in any manner the factual finding recorded by the Tribunal is perverse in any manner.
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Handle my notice → Ask a CA on WhatsAppNo. Even if the premium at which the shares are issued defies commercial prudence, the receipt cannot be assessed as an unexplained credit where the identity of the payer, the genuineness of the transaction and the capacity of the subscriber are not disputed. Whether to subscribe at a heavy premium is the shareholder's decision, not the officer's. This was decided by the High Court (Bombay High Court — M. S. Sanklecha J and A. K. Menon J) and bears on section 68, section 56, section 28 of the Income Tax Act 1961. It is reported as [2017] 78 taxmann.com 340 / 392 ITR 7 / 292 CTR 233 (Bom); IT Appeal No. 1162 of 2014; affirming Green Infra Ltd. v. ITO [2013] 38 taxmann.com 253 / 145 ITD 240 / [2014] 159 TTJ 728 (Mum. - Trib.) on the interest limb. It separates two arguments the department runs together. One is that the subscriber is not proved — that is a s.68 argument and is answered on the three limbs. The other is that the premium is too high for a company with these numbers — that is a commercial argument, and this decision says it is not a s.68 argument at all. Useful where the officer has accepted the subscriber but attacked the price. If it applies to you, the first step is this: Separate the two objections in the reply: deal with identity, genuineness and capacity on evidence, and answer the premium objection as a question of commercial judgement.
For assessment year 2011-12 the assessee company issued shares at a premium of Rs 490 per share. The Revenue's case was that the premium defied commercial prudence and that the receipt should be taxed as an unexplained cash credit under s.68. Identity of the subscribers had been confirmed through notices issued under s.133(6) and was not disputed by the Revenue. The transaction was recorded in the books, reflected in the financial statements and routed through banking channels, and about 98 per cent of the shares were held by a private equity fund itself funded by public sector undertakings. The matter was decided on 2017-01-16 by the High Court (Bombay High Court — M. S. Sanklecha J and A. K. Menon J). On those facts the High Court held as follows. The Court did not decide that share premium is outside s.68. Of the three questions the Revenue pressed, two were declined and one was admitted. On s.68 the Court held only that the Tribunal had examined the Revenue's case on the parameters of identity, genuineness and capacity and had found on the facts that s.68 was not attracted, and that the Revenue had not been able to show that finding to be perverse; question (ii) therefore gave rise to no substantial question of law and was not entertained (para 3(b)-(d)). On interest earned on fixed deposits of one, twenty-eight and ninety days, the Court held that commencement of business cannot vary with the claim being made — commenced for expenses and not commenced for income — and, following its own decision in Indo Swiss Jewels, that the short duration for which the money was parked awaiting use in the business meant the interest was business income; question (iii) was likewise not entertained (para 4(d)-(f)). The appeal was then admitted on question (i) — whether the Tribunal was justified in holding that the Rs 490 per share received constituted share premium — and the Registry was directed to have the Tribunal keep the papers available (paras 4(g) and 5). That question was left undecided by this order.
The reasoning on s.68 is short and is about the standard of review, not about the character of share premium. The Tribunal had allowed the Revenue to raise the s.68 plea for the first time before it, and had then applied the three parameters: identity confirmed by the Assessing Officer's own notices under s.133(6), and not in any event disputed by the Revenue; genuineness from the books, the financial statements and the banking channel evidenced by bank statements the Tribunal examined; capacity from the fact that 98 per cent of the shares were held by IDFC Private Equity Fund-II, whose contributors are public sector undertakings. Counsel for the Revenue argued that because the Tribunal's own order said a premium of Rs 490 per share defies all commercial prudence, the receipt had to be treated as a cash credit. The Court's answer was that the Tribunal had found on the facts that s.68 was not attracted and that the Revenue had shown no perversity in that finding, so no substantial question of law arose. On the interest limb the Court reasoned that the Revenue had not challenged the Tribunal's finding that the business had commenced, which it had accepted for the purpose of allowing depreciation and expenses, and that it could not treat the business as commenced for expenditure and not commenced for income. In the words reproduced by the source cited on this page: "We find that the Tribunal has examined the case of the Revenue on the parameters of Section 68 of the Act and found on facts that it is not so hit. Therefore, Section 68 of the Act cannot be invoked. The Revenue has not been able to show in any manner the factual finding recorded by the Tribunal is perverse in any manner."
It was decided by the High Court on 2017-01-16 and is reported as [2017] 78 taxmann.com 340 / 392 ITR 7 / 292 CTR 233 (Bom); IT Appeal No. 1162 of 2014; affirming Green Infra Ltd. v. ITO [2013] 38 taxmann.com 253 / 145 ITD 240 / [2014] 159 TTJ 728 (Mum. - Trib.) on the interest limb. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 68, section 56, section 28, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The Court did not decide that share premium is outside s.68. Of the three questions the Revenue pressed, two were declined and one was admitted. On s.68 the Court held only that the Tribunal had examined the Revenue's case on the parameters of identity, genuineness and capacity and had found on the facts that s.68 was not attracted, and that the Revenue had not been able to show that finding to be perverse; question (ii) therefore gave rise to no substantial question of law and was not entertained (para 3(b)-(d)). On interest earned on fixed deposits of one, twenty-eight and ninety days, the Court held that commencement of business cannot vary with the claim being made — commenced for expenses and not commenced for income — and, following its own decision in Indo Swiss Jewels, that the short duration for which the money was parked awaiting use in the business meant the interest was business income; question (iii) was likewise not entertained (para 4(d)-(f)). The appeal was then admitted on question (i) — whether the Tribunal was justified in holding that the Rs 490 per share received constituted share premium — and the Registry was directed to have the Tribunal keep the papers available (paras 4(g) and 5). That question was left undecided by this order. It arises in Cash Credits & Unexplained Money, Assessment & Scrutiny and Evidence & Burden of Proof matters, on section 68, section 56, section 28 of the Income Tax Act 1961, and was decided by Bombay High Court — M. S. Sanklecha J and A. K. Menon J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where the officer has conceded or verified the subscriber's identity — often through his own s.133(6) notices — record that concession in writing. Do not offer a commercial justification of the premium as if the burden lay on you; put it as a matter for the subscriber's judgement. Check the assessment year against s.56(2)(viib) and the second proviso to s.68 before relying on this — for the years those apply, the premium is separately in issue.
Searched for later treatment; none was found. That is not the same as a source affirming it. Nothing overruling or doubting this order was traced. It cannot be certified as good law for a different reason: on its own terms it is incomplete. The two limbs it disposed of were disposed of by declining to frame a substantial question of law under s.260A, and the appeal was admitted on the first question — whether the Rs 490 per share constituted share premium at all. No later order disposing of that admitted question was traced in a subscription case-law database, and no later decision applying, following or affirming this order was confirmed. Its practical reach is in any event cut down by statute rather than by case law: s.56(2)(viib) and the second proviso to s.68 apply to closely held companies from assessment year 2013-14. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read this as an order under s.260A, not as authority that share premium is beyond s.68. The Court declined to frame a question on s.68 because the Tribunal's finding on identity, genuineness and capacity was one of fact and was not shown to be perverse, and it admitted the appeal on the separate question whether the Rs 490 per share was share premium at all. The 'defies all commercial prudence' formula that circulates as the holding of this case is not the Court's: it originates in the Tribunal's order at para 10.1 and appears in this judgment only in the Court's record of what counsel for the Revenue submitted. There is a discrepancy on the face of the reports about the year: the judgment states at para 1 that the impugned order is in respect of assessment year 2011-12, while the Tribunal order it was directed against, [2013] 38 taxmann.com 253 (Mum. - Trib.), is reported for assessment year 2009-10. The assessment order in the interest limb is dated 23 December 2011. The point is separately cut down by statute: for a closely held company in a later year the premium is chargeable under s.56(2)(viib) to the extent it exceeds fair market value, and the subscriber's own source has to be explained under the second proviso to s.68, both from assessment year 2013-14. The judgment has now been read. What is missing is the disposal of the question the Court admitted — whether the Rs 490 per share constituted share premium — for which no later order was traced. Because the s.68 limb was decided as a question of fact, the judgment says nothing about what would have happened had the Tribunal found the other way, and nothing about the position under s.56(2)(viib) or the second proviso to s.68, neither of which applied to the year before it. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Court did not decide that share premium is outside s.68. Of the three questions the Revenue pressed, two were declined and one was admitted. On s.68 the Court held only that the Tribunal had examined the Revenue's case on the parameters of identity, genuineness and capacity and had found on the facts that s.68 was not attracted, and that the Revenue had not been able to show that finding to be perverse; question (ii) therefore gave rise to no substantial question of law and was not entertained (para 3(b)-(d)). On interest earned on fixed deposits of one, twenty-eight and ninety days, the Court held that commencement of business cannot vary with the claim being made — commenced for expenses and not commenced for income — and, following its own decision in Indo Swiss Jewels, that the short duration for which the money was parked awaiting use in the business meant the interest was business income; question (iii) was likewise not entertained (para 4(d)-(f)). The appeal was then admitted on question (i) — whether the Tribunal was justified in holding that the Rs 490 per share received constituted share premium — and the Registry was directed to have the Tribunal keep the papers available (paras 4(g) and 5). That question was left undecided by this order.
TaxSphere, “CIT v Green Infra Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-green-infra-premium-defying-commercial-prudence/ (validity last checked 2026-08-20)
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