The Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) observed that allotment of enquiry shares to subscribers was outside scope of Section 56(2) ( viib ) of the Income Tax Act, 1961
The assessee-company was engaged in the import and trade of crude palm oil and coal business. The assessee had filed a return of income declaring a total loss of Rs. 1,61,70,427/- for the Assessment Year 2016-17 in question. The return filed by the assessee underwent scrutiny assessment under Section 143(3) of the Income Tax Act, 1961
The Assessing Officer, among other observations, noted that the assessee had issued 52,60,000 equity shares to one of the subscribers, K.V. Aromatics Pvt. Ltd., in January 2016 at a premium of Rs. 5/- per share. Additionally, equity shares were issued to three other subscribers around the same time without any premium.
The Assessing Officer recalculated the Fair Market Value ( FMV ) of the equity shares, resulting in a negative figure of Rs. 1.11 crore. Consequently, the AO invoked the provisions of Section 56(2)( viib ) of the Income Tax Act, 1961 and determined that the share premium charged on the issuance of equity shares to KV Aromatics exceeded the FMV. As a result, a sum of Rs. 2,63,00,000/- collected by way of share premium from KV Aromatics was deemed taxable. Subsequently, this amount was added to the total income of the assessee.
The counsel for the Revenue Rahul Khare, has challenged the decision of the CIT(A) concerning the allotment of equity shares to the subscriber KV Aromatics Pvt. Ltd. under the purview of Section 56(2)( viib ) of the Income Tax Act, 1961. It’s notable that KV Aromatics Pvt. Ltd. was the existing shareholder, possessing 51% of the equity shares of the assessee-company.
The two member bench of the tribunal comprising Yogesh Kumar ( Judicial member ) and Pradip Kumar Kediya s( Accountant member ) observed that when allotments are made to existing shareholders, the deeming provisions of Section 56(2)( viib ) of the Income Tax Act, 1961, would not typically apply .According to the valuation report, the Fair Market Value ( FMV ) has been determined at Rs. 14.815 per share, which aligns with the FMV at which shares were issued to the holding company.
In the result, the appeal of the Revenue was dismissed.
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