TaxTMI 
TaxTMI 
2025 (2) TMI 1899
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted of Rs. 5,00,76,180/-. He observed that reason for selection of this in scrutiny is receiving of large share premium during the year. When the assessee was asked to furnish necessary documents and valuation of shares as per Rule 11UA of the Income-tax Rules, 1961 (for short 'the Rules'), the assessee has submitted share valuation certificate dated 31.03.2015 from a Chartered Accountant wherein fair market value of the share was determined at Rs. 10.20 and the relevant copy of the valuation is reproduced in the assessment order itself. The AO observed that in the valuation report, the assessee has determined the value of investment in Aftaab Solar Private Ltd. at Rs. 12,28,21,000/- while the book value of the shares of Aftaab Solar Private Ltd. mentioned in the books of the assessee is of Rs. 11,77,75,408/-. Therefore, the assessee has enhanced the value of Rs. 50,45,592/- on its own and, therefore, the fair market value of Rs. 10.20 per share is wrongly calculated by the assessee but in actual it should be lower than Rs. 10.20 per share. With the above observation, a show cause notice was issued to the assessee vide letter dated 12.12.2017. In response, the assessee submitted vi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fact of the case is that the assessee has received premium in the year under consideration i.e. A.Y. 2015-16 which is, the way beyond 'than' FMV of the shares of the company. 8. Section 56(2)(viib) reads as under: 8.1 Where a company, not being a company in which public are substantially interested, receives, in any previous year, from. any person being a resident, any consideration for issue of shares that exceeds the face value of such share, the aggregate consideration received for such shares as exceeds the fair market value of the share. Provided that this clause shall not apply where the consideration for issue of shares is received. (i) By venture capital undertaking from a venture capital company or venture capital fund or (ii) By a company from class or classes of persons as may be notified by the Central Government in this behalf, 8.2 Clause (viib) of sub section (2) of section 56 was inserted vide finance act, 2013 w.e.f 01.04.2013 i.e. for A. Y. 2013-14 to provide that where a closely held company issues its shares' at a price which is more than its-fair market value then the amount received in excess of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... company is negative & the calculation provided under 11UA is after including premium amount in the balance sheet and it is apparent that before including premium amount, the valuation of the share is in negative figure. 9.2 Therefore, in view of above discussion, the premium received by the assessee company of Rs. 5,00,76,180/- is added to the income of the assessee u/s 56(2)(viib) of the Income Tax Act, 1961, Considering the facts discussed above, it is very much evident that the assessee has furnished inaccurate particulars of income, therefore, penalty u/s 271(1)(c) read with Explanation 1 of the provision is being initiated separately." 4. Aggrieved with the above order, assessee preferred an appeal before the ld. CIT(A)-8, New Delhi and filed detailed submissions. After considering the detailed submissions of the assessee, ld. CIT(A) dismissed the ground raised by the assessee. 5. Aggrieved assessee is in appeal before us raising following grounds of appeal :- "1. Under the facts and circumstances of the case, the CIT(A) has grossly erred on facts as well as in law in partly confirming the order passed by the Ld. AO which is ex-facie illegal, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is a damp squib. The addition is thus unsustainable in law on this ground alone." * DCIT Vs Kissandhan Agri Financial Services (P.) Ltd.; [2023] 150 taxmann.com 390 (Delhi - Trib.) "12. This apart, as pointed out behalf of the assessee, the shares have been subscribed by the holding company, i.e., the existing shareholders only. Pertinent to say, section 56(2)(viib) creates a legal fiction whereby the scope and ambit of expression 'income' has been enlarged to artificially tax a capital receipt earned by way of premium as taxable revenue receipt. Hence, such a deeming fiction ordinarily requires to be read to meet its purpose of taxing unaccounted money and thus needs to be seen in context of peculiar facts of present case. The legal fiction has been created for definite purpose and its application need not be extended beyond the purpose for which it has been created. Bringing the premium received from holding company to tax net under these deeming fictions would tantamount to stretching provision to an illogical length and will lead to some kind of absurdity in taxing own money of shareholders without any corresponding benefit. 13. In totality, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s backdrop, the extent of inquiry on the purported credibility of premium charged does not really matter as no prejudice can possibly result from the outcome of such inquiry. Thus, the condition for applicability of section 263 for inquiry into the transactions between to interwoven holding and subsidiary company is of no consequence. We also affirmatively note the decision of SMC Bench in the case of KBC India (P.) Ltd. v. ITO [IT Appeal No. 9710/Del/2019, dated 2.11.2022] where it was observed that section 56(2)(viib) could not be applied in the case of transaction between holding company and wholly owned subsidiary in the absence of any benefit occurring to any outsider." Valuation of Compulsorily Convertible Preference Shares (CCPS): 3. The appellant has filed valuation report from a qualified chartered accountant who has determined the value of each CCPS @ 1020/-. Annexure-1 to the valuation report [Page 64 & 65 of the PB] prepared after considering the financials, clearly indicates the value of equity shares on conversion @ 10.52 per share. Note No.2 to the balance sheet [Page 54 of the PB] lays down that each CCPS is convertible into equity shares within a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly. Hence there was no case for making any addition. 7. In view of the facts and law as discussed above, it is very humbly requested that the addition made by Ld. A.O may kindly be deleted." 7. On the other hand, ld. DR of the Revenue relied on the orders of the authorities below and submitted that the basic transaction of issue of shares and Compulsorily Convertible Preference Share (CCPS) are different. Therefore, the case law relied by the ld. AR are distinguishable. He brought to our notice page 8 of the ld. CIT(A)'s order and page 12 of the assessment order. 8. Considered the rival submissions and material placed on record. We observed that the assessee has issued 50,582 CCPS of Rs. 1000 per share with a premium of Rs. 990. We observed that the abovesaid shares were issued to its holding company, Hindustan Clean Energy Ltd. and were holding 100% share in its subsidiary company i.e. in assessee company. We observed that assessee has submitted a valuation report justifying the issuance of CCPS @ Rs. 1000 per share. We observed that the AO rejected the valuation report submitted by the assessee and invoked the provisions of section 56(2)(viii)(b) to bring to tax sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... observed that the objective behind the provisions of Section 56(2)(viib) is to prevent unlawful gains by issuing company in the garb of capital receipts. In the instant case, not only that the fair market value is supported by independent valuer report, the allotment has been made 10 the existing shareholder holding 100% equity and therefore, there is no change in the interest or control over the money by such issuance of shares. The object of deeming an unjustified premium charged on issue of share as taxable income under Section 56(2)(viib) is wholly inapplicable for transactions between holding and its subsidiary company where no income call be said to accrue 10 the ultimate beneficiary, i.e., holding company. The chargeability of deemed income arising from transactions between holding and subsidiary or vice versa militates against the solemn object of Section 56(2)(viib) of the Act. In this backdrop, the extent of inquiry on the purported credibility of premium charged does not really matter as no prejudice can possibly result from the outcome of such inquiry. Thus. the condition for applicability of Section 263 for inquiry into the transactions between to interwoven ....