Share premium under anti-abuse valuation rules cannot be added on subscription by a holding company in a wholly owned subsidiary.

Section 56(2)(viib) was held inapplicable where compulsorily convertible preference shares were issued by a subsidiary to its 100% holding company, because there was no change in control or shareholding and the subscription was by an existing shareholder. The deeming provision was treated as aimed at curbing unaccounted money and excessive premium in closely held companies, not ordinarily at capital infusions by a parent into a wholly owned subsidiary. The Tribunal also accepted that the assessee's valuation report could not be rejected merely on the Assessing Officer's approach, as the conversion structure had to be considered in determining fair market value. The share premium addition was deleted.

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Issues: Whether section 56(2)(viib) of the Income-tax Act, 1961 could be invoked to tax share premium received on issue of compulsorily convertible preference shares to the assessee's 100% holding company, and whether the valuation report furnished by the assessee could be rejected for making the addition.

Analysis: The assessee issued compulsorily convertible preference shares to its holding company, which already held 100% of the shareholding. The Tribunal noted that there was no change in control or shareholding and that the transaction was between the subsidiary and its existing shareholder. Following earlier co-ordinate bench decisions, it held that the deeming fiction under section 56(2)(viib) is intended to curb unaccounted money and unlawful premium in closely held companies, and its application does not ordinarily extend to subscriptions by a holding company in a wholly owned subsidiary. The Tribunal also accepted the alternate submission that the valuation could not be rejected merely on the basis adopted by the Assessing Officer, since the assessee had furnished a valuation report and the issue of compulsorily convertible preference shares required consideration of the conversion structure while evaluating fair market value.

Conclusion: Section 56(2)(viib) was held to be inapplicable on the facts, and the addition of share premium was deleted.

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