S.56(2)(viib) Not Applicable to Shares issued to Non-Resident Holding Company: ITAT Deletes ₹198 Cr Addition [Read Order]

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) deleted a massive addition of ₹198 crores made under Section 56(2)(viib) and held that the provisions aimed at taxing share premiums exceeding fair market value did not apply when the shares are issued to a non-resident entity.

Scania Commercial Vehicles India Private Limited (assessee) engaged in the business of dealing in heavy-duty trucks, buses, and coaches, filed a return showing a total loss for the assessment year 2018-19.

During the year, the assessee issued 2,00,000 equity shares with a face value of ₹100 each to its foreign holding company. These shares were issued at a premium of ₹9,900 per share, totaling an issue price of ₹10,000 per share.

The Assessing Officer (AO) noted that a valuation report determined the fair market value (FMV) of the shares to be only ₹4.36 per share. The AO treated the difference between the issue price and the FMV as income and made an addition of ₹198 crores under Section56(2)(viib). This action was subsequently confirmed by the Dispute Resolution Panel (DRP).

The counsel for the assessee argued that Section 56(2)(viib) is only attracted when the consideration for the issue of shares is received from a "resident". Since the shares were issued to its foreign holding company, which is a non-resident, the provision could not be applied.

The counsel for the revenue contended that the DRP and the AO maintained that the addition was justified given the significant gap between the FMV and the actual issue price.

The two member bench comprising Prashant Maharishi (Vice President) and Keshav Dubey (Judicial Member) analyzed the statutory language of Section 56(2)(viib). The tribunal observed that the reading of the provision clearly shows it applies only if the consideration is received from a resident person.

The tribunal noted that It was an undisputed fact recorded in the Assessment Order that the shares were issued to a foreign holding company, which was a non-resident. The bench relied on coordinate bench decisions, such as Edulink Private Limited vs. ITO, which held that the provisions of Section 56(2)(viib) do not apply to shares issued to non-residents.

The tribunal concluded that no such addition could have been made under the law and directed the Assessing Officer to delete the addition of ₹198 crores. The Tribunal allowed this ground of appeal.

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