Section 56(2)(viib) does not tax face-value shares issued under a court-approved amalgamation scheme.

Section 56(2)(viib) applies only where a closely held company receives consideration for issue of shares in excess of face value, targeting unjustified share premium and unaccounted money. In a court-approved amalgamation, where the amalgamated company issues shares at face value to the shareholders of the amalgamating company, no share premium is received and the balancing capital reserve arising from the scheme cannot be treated as taxable income under the deeming fiction. The provision cannot be extended beyond its object to tax notional excess generated by amalgamation accounting. The addition was therefore not sustainable in law.

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Issues: Whether section 56(2)(viib) of the Income-tax Act, 1961 applied to shares issued at face value by the amalgamated company to the shareholders of the amalgamating company under a court-approved amalgamation scheme, so as to tax the excess of net assets received over the value of shares issued.

Analysis: Section 56(2)(viib) taxes consideration received for issue of shares only where the consideration exceeds the face value and, in such cases, only the excess over fair market value is brought to tax. The provision was introduced to curb unjustified share premium and unaccounted money in closely held companies. In the present amalgamation, the shares were issued at face value in discharge of the scheme of amalgamation approved by the High Court, and no share premium was charged. The transaction was a court-sanctioned amalgamation governed by the statutory scheme of amalgamation and accounting treatment under the applicable framework, not a case of receipt of premium on issue of shares. The deeming fiction in section 56(2)(viib) could not be extended beyond its intended object to treat the balancing capital reserve arising from amalgamation and revaluation as taxable income.

Conclusion: Section 56(2)(viib) did not apply to the amalgamation transaction, and the deletion of the addition was in law.

Ratio Decidendi: A court-approved amalgamation in which the amalgamated company issues shares at face value to the shareholders of the amalgamating company does not attract section 56(2)(viib), because the provision is confined to unjustified share premium received on issue of shares and cannot be extended to notional excess arising from amalgamation.

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