Company's share premium to existing 51% shareholder not taxable under Section 56(2)(viib) as deeming provisions don't apply

The ITAT Delhi dismissed the Revenue's appeal challenging deletion of addition under Section 56(2)(viib) for excess share premium. The assessee company issued shares at premium to its existing 51% shareholder. The CIT(A) deleted the addition, which was upheld by ITAT. The Tribunal held that deeming provisions of Section 56(2)(viib) ordinarily don't apply when shares are allotted to existing shareholders. The assessee provided a valuation report showing fair market value of Rs. 14.815 per share, matching the issue price, thus supporting the premium charged. The premium was negligible and charged to an existing shareholder with pre-existing rights.

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Issues Involved:
1. Deletion of addition under Section 56(2)(viib) on account of excess share premium.
2. Deletion of addition under Section 68 on account of unexplained cash credit in terms of unsecured loans.

Summary:

Issue 1: Deletion of Addition under Section 56(2)(viib) on Account of Excess Share Premium

The Revenue contested the deletion of an addition of Rs. 2,63,00,000/- made by the AO under Section 56(2)(viib) due to excess share premium recorded by the assessee. The AO had recomputed the Fair Market Value (FMV) of the equity shares at a negative figure and invoked Section 56(2)(viib), leading to the addition. The CIT(A) deleted the addition, noting that the premium was minimal and collected from the holding company, KV Aromatics Pvt. Ltd., which held 51% of the assessee-company's shares. The CIT(A) emphasized that the valuation was done as per the Discounted Cash Flow (DCF) method, supported by an independent auditor's report. The Tribunal upheld the CIT(A)'s decision, affirming that the premium charged was supported by the valuation report and was in accordance with the law. The Tribunal referenced various case laws, including the Hon'ble ITAT Delhi's decision in the case of Cinestaan Entertainment Pvt. Ltd., which underscored that the AO cannot change the method of valuation or reject a valid valuation by a competent person.

Issue 2: Deletion of Addition under Section 68 on Account of Unexplained Cash Credit in Terms of Unsecured Loans

The Revenue also challenged the deletion of an addition of Rs. 77,20,700/- made by the AO under Section 68 due to unexplained cash credit in terms of unsecured loans. The Tribunal considered the submissions and documents presented by both sides and upheld the CIT(A)'s decision. The Tribunal found that the CIT(A) had correctly evaluated the evidence and legal provisions, leading to the deletion of the addition.

Conclusion:

The Tribunal dismissed the Revenue's appeal, endorsing the CIT(A)'s reasoning and decision. The Tribunal concluded that the additions made by the AO under Sections 56(2)(viib) and 68 were not sustainable either on facts or in law. The appeal of the Revenue was dismissed, and the order was pronounced in the open Court on 13/12/2023.

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