2026 (1) TMI 1191 - AT - Income Tax

Share premium valuation under Section 56(2)(viib): rectification merged with assessment and inapplicability to non-resident subscribers affirmed

Rectification order under Section 154 merged with the assessment framed under Section 143(3), extinguishing the addition made under Section 56(2)(viib) in ... Addition u/s 56 (2)(viib) - valuation of the shares issued at premium - effect of rectification order - whether NFAC grossly erred on facts and in law in holding, that too, in appeal against the assessment order that the rectification order passed by the assessing officer u/s 154 deleting the incorrect addition made under section 56(2)(viib) to be non-est and in restoring the additions made in the assessment order? - On query regarding the valuation of the shares, the assessee submitted that the assessee has the option to adopt the valuation under Rule 11UA(2)(a) or under Rule 11UA(2)(b) i.e. the fair market value of unquoted shares determined by a merchant broker or an accountant as per discounted free cash flow method - Difference of opinion among members of ITAT - matter refferred to third member HELD THAT:- Rectification order passed u/s 154 of the Act and the original assessment framed u/s 143(3) of the Act were for all practical purposes, and also for all legal purposes stood merged and the addition made by the AO in the assessment order passed u/s 143(3) of the Act in respect of the share premium u/s 56(2)(vii) of the Act stands extinguished in terms of order passed u/s 154 of the Act. To this extent, the grievance raised by the assessee in appeal before the CIT(A), against the deletion on the said addition, in rectification proceedings, becomes academic and infructuous. As noted that the CIT(A) disposed of this appeal and he proceeded to adjudicate this very issue, which was subject matter of rectification u/s 154 of the Act, the course of action of the CIT(A), in our considered view, was not permissible under the provisions of the Act. Once the rectification order is passed under Section 154 of the Act, the grievance of the assessee does not survive because rectification order has been passed giving relief on that account by some other authority i.e., the Assessing Officer, it is not open for the CIT(A) to adjudicate that grievance. Once the addition on share premium, doubted by the AO under Section 56(2)(viib) of the Act has been deleted by the AO while acting under Section 154 of the Act which stood merged in the assessment order, it is not open for the CIT(A) to examine the merits of such addition and declare his opinion on the same. This view of mine is supported by the identical adjudication of issue and principle laid down in the case of Tata Education and Development Trust [2020 (9) TMI 486 - ITAT MUMBAI] Rectification order passed by the AO under Section 154 of the Act is in existence and original assessment order passed under Section 143(3) of the Act for all practical and for all legal purposes stood merged, the order of the CIT(A) ignoring the effect of rectification order and thus proceeds to adjudicate on a question which has become academic and infructuous is liable to be set aside. Accordingly, the order of CIT(A) is reversed on this issue and the ground of this appeal is allowed. For this purpose, agree with the view expressed by learned Judicial Member. Applicability of the provisions of Section 56(2)(viib) on issuance of shares to non-resident subscribers - whether the provision of Section 56(2)(viib) of the Act applies to non-resident subscribers of shares or not in term of Section 6(3) of the Act? - Applicability of the provisions of Section 6(3) of the Act for the purpose of POEM, the Revenue could not bring any evidence that these two subscribers have place of effective management in India and the entire basis of CIT(A) is just based on presumptions, conjectures and surmises. Hence, the order of the CIT(A) and that of the AO on this issue cannot be sustained. Ld' Judicial Member has clearly held that in the given facts and circumstances of the case, once two subscribers are non-residents, the provisions of Section 56(2)(viib) of the Act are not applicable to the shares issued to non-residents. Since in the case of the assessee, subscribers to share capital were non-residents, the provisions of Section 56(2)(viib) of the Act are not applicable and therefore, irrespective of whether the rectification order is to be considered or not, the addition made under Section 56(2)(viib) of the Act is not sustainable in law. There is no expressed dispute or dissent between learned Members on the fundamental issues decided on (a) since in the case of assessee subscribers to share capital were non-residents and the provisions of Section 56(2)(viib) of the Act are not applicable and, (b) once the AO accepted the position by deleting the addition made by the AO by exercising jurisdiction under Section 154 of the Act, Revenue can no longer be treated as aggrieved party. In terms of the above, on merits also, the provisions of Section 56(2)(viib) of the Act do not apply to the assessee's case, as subscribers to share capital were non-residents and therefore, the provisions of Section 56(2)(viib) of the Act are not applicable in the given facts and circumstances of the case. Delete the addition in dispute on merits also on this second facet of the arguments. Issues: (i) Whether the First Appellate Authority (CIT(A)/NFAC) could dismiss grounds as 'not adjudicated' and remit the issue without deciding merits in contravention of section 251(1) and section 250(6) of the Income-tax Act, 1961; (ii) Whether the addition of Rs. 418,66,34,625 made under section 56(2)(viib) is sustainable where shares were allotted to non-resident subscribers and where the Assessing Officer subsequently rectified the assessment under section 154.Issue (i): Whether the CIT(A)'s order dismissing grounds as 'not adjudicated' for want of facts and thereby failing to decide the appeal on merits was permissible under sections 250(6) and 251(1) of the Income-tax Act, 1961.Analysis: The Tribunal examined the scope of powers of the first appellate authority under section 251(1)(a) and the duty of the FAA to decide appeals on merits (confirm, reduce, enhance or annul). The Accountant Member held that the FAA cannot merely record that an issue 'cannot be adjudicated' and must either decide the issue on merits or exercise the powers under section 251(1)(a) to pass an appropriate order; accordingly the FAA's dismissal as 'not adjudicated' was set aside for fresh adjudication. The Judicial Member and Third Member concurred that an appellate authority must respect final orders (e.g., rectification) but agreed that the FAA cannot mechanically dismiss on mere lack of facts without proper application of section 251(1)(a) and section 250(6).Conclusion: The Tribunal holds in favour of the Assessee on this issue to the extent that the FAA cannot dismiss substantive grounds as 'not adjudicated'; the Accountant Member set aside the CIT(A) order on that procedural defect and directed fresh adjudication, while the majority outcome treated the matter consistent with the merged rectification (see Issue (ii)).Issue (ii): Whether the addition of Rs. 418,66,34,625 under section 56(2)(viib) survives where (a) the shares were allotted to non-resident subscribers supported by TRCs and FIRCs, and (b) the Assessing Officer passed a rectification order under section 154 deleting the addition.Analysis: The Third Member (majority) analysed: (a) evidence on record showing initial allotment to non-resident entities supported by Foreign Inward Remittance Certificates and Tax Residency Certificates; (b) the PCIT's view in section 263 show-cause that section 56(2)(viib) applies to receipts from residents; (c) the Assessing Officer's rectification order under section 154 deleting the addition which merged with the assessment; and (d) legal precedents on effect of rectification and on treatment of TRCs and POEM. The Judicial Member dissented, finding material and factual issues (alleged round-tripping, need to examine POEM and share movement) warranting remand for verification. The Third Member concluded that where the AO has validly rectified the assessment deleting the addition and the rectification has attained finality, the appellate authority could not ignore the rectification and restore the addition; on merits, the majority also concluded section 56(2)(viib) did not apply because the subscribers were non-residents as evidenced on record.Conclusion: The Tribunal (majority) answers in favour of the Assessee and deletes the addition of Rs. 418,66,34,625 under section 56(2)(viib); the CIT(A)'s confirmation is reversed. The dissenting member disagreed on the same issue and favoured remand for further enquiry.Final Conclusion: The appeal is partly allowed; the Tribunal, by majority, directs deletion of the section 56(2)(viib) addition of Rs. 418,66,34,625 and otherwise disposes the other grounds as recorded (some grounds set aside for fresh adjudication by the Accountant Member and some dismissed), resulting in a partly allowed appeal overall.Ratio Decidendi: Where an assessing officer validly rectifies an assessment under section 154 deleting an addition and that rectification attains finality and is supported by documentary evidence establishing non-resident status (e.g., TRCs, FIRCs), the rectification merges with the assessment and the appellate authority cannot ignore the rectification to restore the deleted addition; section 56(2)(viib) applies to receipts from residents and does not apply to share subscriptions by non-residents shown to be non-resident on record.