2024 (2) TMI 538 - AT - Income Tax

Revenue's appeal dismissed as Section 56(2)(viib) doesn't apply to share premium when issued to existing shareholders with DCF valuation support

ITAT Delhi dismissed Revenue's appeal regarding share premium addition under Section 56(2)(viib). AO rejected assessee's DCF valuation method, applied Net ... Addition on account of share premium received on the contours of Section 56(2)(viib) - Premium has been charged to existing shareholder - Related parties / subscriber having pre-existing right in the company - AO rejected the DCF Method adopted by the assessee and adopted Net Asset Liability Method described in Rule 11UA of the Income Tax Rules, 1962 to ascertain the value of shares and thereby concluded that no premium of shares allotted is justified - CIT(A) found merit in the plea of the assessee that the provisions of Section 56(2)(viib) cannot be justifiably invoked HELD THAT:- The issue is no longer res-integra. The effect of issue of shares to holding company at a premium has been examined in the case of BLP Vayu (Projects-I) Pvt. Ltd. . [2023 (6) TMI 209 - ITAT DELHI] wherein as essentially observed that where the allotment has been made to existing shareholders, the deeming provisions of Section 56(2)(viib) would not ordinarily be applicable. This apart, in the instant case, the assessee has also supported the premium determined on issue of shares by DCF Method. Thus, the premium charged is supportable by the valuation report and the premium has been charged to existing shareholder. Thus effectively, the benefit if any arising to the company in turn benefits to the subscriber having pre-existing right in the company. While applying Section 56(2)(viib), the purpose for which deeming provision has been inserted is not achieved in the instant case. Hence, in our view, the conclusion drawn by the CIT(A) cannot be faulted either on facts or in law. Appeal of the Revenue is dismissed. Issues Involved:1. Addition of Rs. 4,09,11,014/- under Section 56(2)(viib) of the Income Tax Act, 1961.2. Claim of unabsorbed depreciation and MAT credit.Summary:Issue 1: Addition of Rs. 4,09,11,014/- under Section 56(2)(viib) of the Income Tax Act, 1961The Revenue challenged the addition of Rs. 4,09,11,014/- made by the Assessing Officer (AO) on account of share premium received, invoking Section 56(2)(viib) of the Income Tax Act, 1961. The AO disputed the share premium received by the assessee, arguing that it exceeded the Fair Market Value (FMV) as per Rule 11UA of the Income Tax Rules, 1962. The AO rejected the Discounted Cash Flow (DCF) Method adopted by the assessee and instead used the Net Asset Liability Method to determine the value of shares, concluding that no premium was justified.The Commissioner of Income Tax (Appeals) [CIT(A)] found merit in the assessee's argument that Section 56(2)(viib) should not be invoked in this case. The CIT(A) noted that the DCF Method was a valid option under Rule 11UA(2) and that the AO had no jurisdiction to insist on a particular method. The CIT(A) also referenced decisions from the Hon'ble ITAT, Jaipur Bench, and Hon'ble Delhi ITAT, emphasizing that the AO cannot change the method of valuation chosen by the assessee and that the projections in the DCF Method cannot be compared with actual figures.The Tribunal upheld the CIT(A)'s decision, referencing the Co-ordinate Bench's observations in the case of BLP Vayu (Projects-I) Pvt. Ltd., which stated that Section 56(2)(viib) is inapplicable for transactions between a holding company and its subsidiary. The Tribunal concluded that the premium charged was supported by a valuation report and that the deeming provisions of Section 56(2)(viib) were not applicable in this case.Issue 2: Claim of unabsorbed depreciation and MAT creditThe CIT(A) directed the AO to verify the claims of unabsorbed depreciation and MAT credit for AY 2013-14, as the assessee had filed a rectification application that had not been disposed of. The Tribunal endorsed this direction, allowing the claims in accordance with the law.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 4,09,11,014/- and directing the AO to verify and allow the claims of unabsorbed depreciation and MAT credit. The order was pronounced in the open Court on 08/02/2024.