Subsidiary deemed public company under section 2(71) exempted from section 56(2)(viib) addition on preference shares premium

ITAT Delhi ruled in favor of the assessee company regarding addition under section 56(2)(viib) for issuing preference shares at premium to its holding company. The tribunal held that the assessee, being a subsidiary of a public company, is deemed to be a public company under section 2(71) of the Companies Act, 2013. Therefore, section 56(2)(viib) provisions regarding companies where public are not substantially interested do not apply. The tribunal rejected Revenue's argument that the deeming provision was stretched beyond its intended purpose, emphasizing that statutory fiction must be carried to its logical conclusion.

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Issues Involved:
1. Whether the assessee company is a company in which the public are substantially interested.
2. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961.

Summary:

Issue 1: Whether the assessee company is a company in which the public are substantially interested.
The Revenue contended that the Ld. CIT(A) erred in deleting the addition by holding the assessee company as a public company and stretching the scope of deeming provision under section 2(71) of the Companies Act, 2013. The assessee, a wholly-owned subsidiary of Contech, received loans and advances converted to Share Application Money (SAM) from Contech, which is a subsidiary of Allcargo Logistics Ltd., a public limited company. The Ld. AO held that the assessee company is a private company and section 56(2)(viib) is applicable. However, the Ld. CIT(A) concluded that the assessee company is deemed to be a public company as per section 2(71) and 2(87) of the Companies Act, 2013, and thus does not come within the ambit of section 56(2)(viib) of the Act. This conclusion was supported by interpretations and precedents, including the judgment of the Bombay High Court in Petrosil Oil Co. Ltd. v. CIT and the ITAT Ahmedabad Bench in Assistant Commissioner of Income-tax v. Ajax Investment Ltd.

Issue 2: Applicability of Section 56(2)(viib) of the Income Tax Act, 1961.
The Ld. AO added Rs. 4,49,35,344/- to the income of the assessee under section 56(2)(viib) of the Act, arguing that the assessee received the amount in excess of the fair market value of shares. The Ld. CIT(A) deleted this addition, holding that the assessee company is deemed to be a public company and thus section 56(2)(viib) is not applicable. The Tribunal agreed with the Ld. CIT(A)'s interpretation that the assessee company, being a subsidiary of a public company, is deemed to be a public company and thus does not fall under section 56(2)(viib).

Conclusion:
The Tribunal upheld the Ld. CIT(A)'s order, concluding that the assessee company is deemed to be a public company and section 56(2)(viib) of the Income Tax Act, 1961 is not applicable. The appeal of the Revenue was dismissed.

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