The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has deleted the addition made, as the holding-subsidiary transaction does not attract taxation under Section 56(2)(viib) of the Income Tax Act, 1961, in the absence of any benefit occurring to any outsider.
The Revenue has challenged the additions of Rs.4, 09, 11,014/- made by the AO on account of share premium received on the contours of Section 56(2)(viib) of the Act.
Briefly stated, the assessee filed return of income for Assessment Year 2015-16 in question, declaring total loss of Rs.1,30,40,430/-. The return filed by the assessee was subjected to scrutiny assessment. The AO in the course of the scrutiny assessment observed that the assessee company in the year under consideration 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. Sun Edison Solar Power India Pvt. Ltd. which is an existing shareholder and 100% holdings company of the assessee
The Assessing Officer 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 under Section 56(2)(viib) r.w. Rule 11UA of the Income Tax Rules, 1962.
The AO rejected the DCF Method adopted by the assessee and adopted Net Asset Liability Method described in Rule 11UA of the Income Tax Rules, 1962 to ascertain the value of shares and thereby concluded that no premium of shares allotted is justified. An amount of Rs.4, 09, 11,014/- was thus added as deemed income under Section 56(2)(viib) of the Act to the loss returned by the assessee.
The CIT (A) took note of the factual matrix as submitted by the assessee and the position of law prevailing in this regard. The CIT (A) found merit in the plea of the assessee that the provisions of Section 56(2)(viib) cannot be justifiably invoked in the peculiar facts of the case
The two member bench of the tribunal comprising Kul Bharat (Judicial member) and Pradip Kumar Kediya (Accountant member) affirmed that observation in the case KBC India Pvt. Ltd. vs. ITO 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.”
The ITAT 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.
Thus, the premium charged was supportable by the valuation report and the premium has been charged to existing shareholders. Thus effectively, the benefit if any arising to the company in turn benefits the subscriber having pre-existing rights in the company. While applying Section 56(2)(viib), the purpose for which deeming provision has been inserted is not achieved in the instant case. Accordingly, the appeal of the Revenue was dismissed.
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