Telangana High Court Quashes Reassessment on Share Premium from Non-Resident, Rules it a Non-Taxable Capital Receipt

In a significant judicial pronouncement, the Telangana High Court has struck down reassessment proceedings initiated against an assessee concerning the receipt of share premium from a non-resident entity. The ruling in the case of Escientia Advanced Sciences Private Limited Vs ACIT reaffirms the established legal principle that share premium received on the fresh issuance of equity shares to a non-resident shareholder constitutes a capital account transaction. Consequently, such receipts fall outside the ambit of taxable income under the Income Tax Act 1961, unless specifically brought within the tax net by express statutory provisions.

The Court decisively quashed the order dated 12.04.2023, which had proposed a tax demand of Rs.44,07,04,380/- for the assessment year (AY) 2019-20. The judgment serves as a critical reminder to the revenue authorities regarding the binding nature of circulars issued by the Central Board of Direct Taxes (CBDT) and the imperative to adhere strictly to the principles of natural justice during the reassessment process under Section 148A of the Income Tax Act 1961.

Factual Matrix of the Dispute

The assessee, Escientia Advanced Sciences Private Limited, operates as a private limited enterprise specializing in research, development, and manufacturing partnerships catering to pharmaceutical and biotechnology innovators.

During the relevant financial period corresponding to AY 2019-20, the assessee undertook a corporate transaction involving the fresh issuance of 6,38,702 equity shares. These shares were allotted to its existing shareholder, Escientia Life Science (ELS), an entity incorporated and registered in Mauritius.

To ensure full statutory compliance, the assessee meticulously executed the following procedural steps:

• It filed the mandatory Form PAS-3 returns with the Registrar of Companies (ROC) in accordance with the stipulations of Section 39 and Section 42 of the Companies Act 2013.
• The comprehensive details regarding the equity share allotment were transparently disclosed within the assessee's audited financial statements.
• Subsequently, the assessee filed its corporate tax return under Section 139(1) of the Income Tax Act 1961 for AY 2019-20. In this return, it declared a total loss amounting to Rs.25,09,88,052/- under the normal provisions of the statute, alongside a computed book loss of Rs.26,51,85,087/- in accordance with the provisions of Section 115JB.

Initiation of Reassessment Proceedings

The genesis of the legal dispute traces back to a notice dated 07.03.2023, issued by the assessing authority under Section 148A(a) of the Income Tax Act 1961. The revenue department initiated this inquiry operating under a fundamental factual misconception: it presumed that the Mauritius-based entity, ELS, had purchased existing shares from the assessee. Based on this flawed premise, the department demanded the submission of a share purchase agreement and allied documentation pertaining to the alleged secondary transfer of shares.