Premium Charged On Issue Of Shares To Existing Shareholder Is Not Deemed Income U/s 56(2)(Viib) If No Income Accrues To Ultimate Beneficiary: Delhi ITAT
Pankaj Bajpai
17 March 2024 8:30 PM IST
Recently, the Delhi ITAT reiterated that object of deeming an unjustified premium charged on issue of share as taxable income u/s 56(2)(viib) of the Income tax Act is wholly inapplicable for transactions between holding and its subsidiary company where no income can be said to accrue to the ultimate beneficiary, i.e., holding company. The Bench of Kul Bharat (Judicial Member) and...
Recently, the Delhi ITAT reiterated that object of deeming an unjustified premium charged on issue of share as taxable income u/s 56(2)(viib) of the Income tax Act is wholly inapplicable for transactions between holding and its subsidiary company where no income can be said to accrue to the ultimate beneficiary, i.e., holding company.
The Bench of Kul Bharat (Judicial Member) and Pradip Kumar Kedia (Accountant Member) observed that “the premium charged is supportable by the valuation report and the premium has been charged to existing shareholder. Thus effectively, the benefit if any arising to the company in turn benefits to the subscriber having pre-existing right in the company”. (Para 8.2)
As per the brief facts of the case, the assessee filed return declaring total loss of Rs.1,30,40,430/-. The AO during scrutiny observed that the assessee has allotted 9223 number of equity shares of Rs.10/ - each at a premium of Rs.4435.76/ - per share amounting to Rs.4,09,11,014/ - to M/s. SunEdison Solar Power India Pvt Ltd which is an existing shareholder and 100% holdings company of the assessee. The AO disputed the amount of share premium received per share on the ground that the premium received exceeded the Fair Market Value (FMV) of such shares contemplated u/s 56(2)(viib) r.w Rule 11UA. The AO also rejected the DCF Method adopted by the assessee and adopted Net Asset Liability Method described in Rule 11UA to ascertain the value of shares and thereby concluded that no premium of shares allotted is justified. Accordingly, an amount of Rs.4,09,11,014/ - was thus added as deemed income u/s 56(2)(viib) to the loss returned by the assessee.
The Revenue controverted the action of the CIT(A) on the touchstone of Sec 56(2)(viib) towards allotment of shares to subscriber 'Sun Edition Solar Power India Pvt Ltd' which is existing shareholder holding 100% of the equity shares of the assessee-company.
The Bench noted that the effect of issue of shares to holding company at a premium has been examined by the Co-ordinate Bench of Tribunal in the case of BLP Vayu (Projects-I) Pvt Ltd. [(2023) 151 taxmann.com 47 (Del -Trib), wherein it was clarified that chargeability of deemed income arising from transact ions between holding and subsidiary or vice versa militates against the solemn object of Sec 56(2)(viib) of the Act.
The Bench found that the Co-ordinate Bench has essentially observed that where the allotment has been made to existing shareholders, the deeming provisions of Section 56(2)(viib) would not ordinarily be applicable.
This apart, in the instant case, the assessee has also supported the premium determined on issue of shares by DCF Method, added the Bench.
Hence, observing that the purpose for which deeming provision of Section 56(2)(viib) has been inserted is not achieved in the instant case, the ITAT dismissed the Revenue's appeal.
Counsel for Appellant/ Revenue: Pawan Chakrapani
Counsel for Respondent/ Taxpayer: Vivek Kumar Upadhyay
Case Title: ACIT verses Dhruv Milkose Pvt. Ltd.
Case Number: I.T.A. No. 8431/DEL/2019
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