The two member bench of the Income Tax Appellate Tribunal ( ITAT ) Delhi, observed that chargeability of deemed income between holding and subsidiary contradicts intent of Section 56(2)(viib) of the Income Tax Act, 1961.
The assessee company is engaged in the business of generation of power by non-conventional method using wind. For A.Y. 2015-16, the assessee e-filed its return on 29.09.2015 declaring loss of Rs. 21, 29, 69,144/-. The case was selected for limited scrutiny. Statutory notice(s) along with questionnaire were issued and served upon the assessee. In response, requisite information / details were filed.
The Assessing Officer (“AO”) completed the assessment on total loss of Rs. 5,09,19,730/- including therein disallowance of depreciation of Rs. 12,96,28,561/- on wind mill and addition of Rs. 3,24,20,850/- under Section 56(2)(viib) of the Income Tax Act on 23.12.2017 under Section 143(3) of the Income Tax Act.
The counsels for the assessee R.S. Singhavi and Satyajit Goel emphasised that the assessee issued during the year 12,03,000/- equity shares having face value of Rs. 10/- at Rs. 50/- each and received Rs. 6,01,50,000/-. The valuation is supported by Chartered Accountant’s certificate wherein he determined the fair market value at Rs. 50.50 per share in accordance with the Discounted Cash Flow method as prescribed under Rule 11UA(2)(b) of the Income Tax Rules, 1962.
Further contended that Discounted Cash Flow method is a well recognised method of valuation and if consideration for issue of shares is based on such method, the AO cannot invoke the provisions of section 56(2)(viib) of the Act.
The Coram comprising N.K.Billaiya ( Accountant member ) and Astha Chandra ( Judicial member ) held that the objective behind the provisions of section 56(2) ( viib ) of the Income Tax Act is to prevent unlawful gain by issuing company in the garb of capital receipts. However, in the transaction between holding and its subsidiary company no income can be said to accrue to 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 Income Tax Act. Accordingly, appeal filed by assessee was allowed.
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