Holding company receiving convertible shares at premium exceeding FMV not taxable under section 56(2)(viib)

ITAT Delhi held that addition under section 56(2)(viib) for premium amount exceeding FMV on allotment of Optional Convertible Preference Shares to holding company was unsustainable. The tribunal found that deeming provisions of section 56(2)(viib) do not ordinarily apply when allotment is made to existing shareholders. Additionally, the FMV calculation using NAV method was justified when computed with reference to equity shares arising on conversion. Since convertible shares were allotted to wholly owned holding company, any benefit from alleged excess premium would effectively benefit the same shareholders with pre-existing rights. The tribunal declined to interfere with CIT(A)'s order and decided against revenue.

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Issues Involved:
1. Deletion of addition of Rs. 3,60,83,000/- on account of premium amount in excess of FMV made by the AO u/s 56(2)(viib) of the Income Tax Act, 1961.

Summary:

Issue 1: Deletion of Addition of Rs. 3,60,83,000/- u/s 56(2)(viib)

The Revenue filed an appeal against the order of the Commissioner of Income Tax (Appeals)-8, New Delhi ['CIT(A)'] dated 28.01.2020, which deleted the addition of Rs. 3,60,83,000/- made by the Assessing Officer (AO) u/s 56(2)(viib) of the Income Tax Act, 1961. The AO had recomputed the Fair Market Value (FMV) of the Optionally Convertible Preference Shares (OCPS) issued by the assessee at Rs. 639.17 per OCPS, as opposed to Rs. 1,000/- per OCPS declared by the assessee, and added the excess premium as taxable income.

The CIT(A) found that the AO had incorrectly calculated the FMV by equating OCPS with equity shares without applying the correct conversion factor. The CIT(A) determined that the correct FMV of OCPS was Rs. 993.48 per share, thus justifying the premium charged by the assessee. The CIT(A) relied on various tribunal orders which held that if the assessee opts for the Discounted Cash Flow (DCF) method for valuation, the AO cannot discard it without cogent reasons.

The Tribunal upheld the CIT(A)'s decision, noting that the deeming provisions of Section 56(2)(viib) are not applicable to transactions between a holding company and its subsidiary. The Tribunal cited previous cases, including BLP Vayu (Projects-1) Pvt. Ltd. and DCIT vs. Kissandhan Agri Financial Services (P) Ltd., which established that the legal fiction of Section 56(2)(viib) does not extend to such transactions. The Tribunal also agreed with the CIT(A) that the FMV determined by the assessee was justifiable and that the AO's method of valuation was flawed.

In conclusion, the Tribunal found no fault in the CIT(A)'s decision to delete the addition made by the AO and dismissed the Revenue's appeal. The order was pronounced in the open Court on 12/06/2024.

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