2025 (3) TMI 44 - AT - Income Tax

CIT's revision under section 263 invalid for CCPS valuation to holding company as section 56(2)(viib) doesn't apply to subsidiary-parent transactions

ITAT Delhi ruled that CIT's revision u/s 263 was invalid regarding valuation of CCPS issued to holding company. Tribunal held that s. 56(2)(viib) ... Revision u/s 263 - As per CIT AO has not conducted enquiries with regard to valuation at which the Compulsorily Convertible Preference Shares ('CCPS') were issued to holding company of the Appellant - HELD THAT:- As relying on FIS PAYMENT SOLUTIONS[2024 (10) TMI 182 - DELHI HIGH COURT], M/S. BLP VAYU [2023 (6) TMI 209 - ITAT DELHI] and M/S. KISSANDHAN AGRI FINANCIAL SERVICES PVT. LTD. [2023 (3) TMI 769 - ITAT DELHI] Provisions of s. 56(2)(viib) would not apply in the present case where the transaction is between the assessee (subsidiary company) with its 100% holding company as issuance of share to the holding company cannot be seen to involve circulation of any unaccounted money of the assessee company per se. Thus, twin conditions of sec 263 do not simultaneously exist in the present case. The deeming fiction of s. 56(2)(viib) would not apply in the present case and consequently, the assessment order cannot be regarded as ‘erroneous’ per se. Hence jurisdiction un/s 263 is not available to the revisional authority. Appeal of the assessee is allowed. The instant appeal before the Appellate Tribunal concerned the challenge to a First Appellate order passed by the Principal Commissioner of Income Tax under section 263 of the Income Tax Act, 1961, arising from an assessment order pertaining to the assessment year 2018-19. The key issues raised by the appellant included the initiation of proceedings under section 263, valuation of Compulsorily Convertible Preference Shares (CCPS), applicability of section 56(2)(viib) of the Act, and the method used for computing Fair Market Value (FMV) of CCPS.The appellant contended that the revisional directions were unjustified and lacked proper jurisdiction, arguing that the Assessing Officer had conducted necessary inquiries during the assessment proceedings. The appellant also challenged the valuation of CCPS and the proposed addition to its income based on the share premium amount. Additionally, the appellant disputed the application of the Net Asset Value (NAV) method for computing FMV, asserting that the Discounted Cash Flow (DCF) method was more appropriate.In response, the appellant cited several decisions by Co-ordinate Benches that favored the assessee in similar circumstances, emphasizing that the provisions of section 56(2)(viib) should not apply when transactions occur between a subsidiary company and its 100% holding company. The appellant argued that the conditions for invoking section 263 were not met in this case, as the assessment order was not erroneous, and the deeming fiction of section 56(2)(viib) did not apply.The Tribunal referred to a judgment by the Hon'ble Delhi High Court, which supported the appellant's position by stating that transactions between a holding company and its wholly owned subsidiary, such as the issuance of shares, are not covered under section 56(2)(viib) unless there is a benefit arising from such transactions. Consequently, the Tribunal held that the assessment order in question could not be considered erroneous, and the prerequisites for invoking section 263 were not satisfied. As a result, the revisional order under section 263 was set aside and quashed, leading to the allowance of the appellant's appeal.In conclusion, the Tribunal's decision was based on the interpretation of relevant legal provisions, precedents, and the specific facts of the case, ultimately resulting in the dismissal of the revisional order and the allowance of the appellant's appeal regarding the valuation and taxation of Compulsorily Convertible Preference Shares.