Dy.CIT Vs Sembcorp Energy India Limited (ITAT Hyderabad)
Applicability of section 56(2)(viib) is only in a case where the shares are issued at a premium by a company in which public are not substantially interested.
Facts- During the course of assessment proceedings, it was craved before AO that price at which the shares were issued to shareholder Gayatri Energy Ventures Pvt. Ltd is Justified in view of the business considerations. Further value as per the request, FMV as per net asset method of rule 11 UA was worked out and provided in submissions. Unfortunately in the current case Id.AO simply carried the additions to the returned income by working the addition based on difference between the issue price and fair market value as per “the net asset value method without appreciating the fact that said method is just one of the method is net asset value method prescribed under rule 11 UA and in the interest of fairness, it was essential to provide the appellant an opportunity to exercise the options prescribed under Explanation (a)(ii) to section 56(2)(viib) of the Act. Not only this, also no prior show-cause notice was issued before making the addition to the returned income as per the assessment order. AO assessed the income of assessee after carrying an addition of Rs. 4,52,02,269 to the returned income under section 56(2)(viib).
On appeal, CIT(A) deleted the addition.
Conclusion- Next comes the issue whether assessee qualifies to be a company eligible for section 56(2)(viib)’s exemption since covered under the clinching legislative expression where a company, not being a company in which the public are substantially interested as per section 2(18)(b)(B)(c) since the said other company was a listed one holding more than 50% of its stake in the relevant previous year the assessee had duly filed its shareholding chart before CIT(A), the correctness of which was nowhere rebutted it was noted that the assessee had duly filed its shareholding chart before the CIT(A) whose correctness had nowhere been rebutted in Revenue s pleadings in the instant appeal. CIT(A) had also placed reliance on Co-ordinate Bench s decision adjudicating the very issue in assessee’s favour and against the department Therefore, there was no reason to interfere with CIT(A)’s correct approach in deleting the impugned section 56(2)(viib) addition in question.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
This Revenue’s appeal ITA 1774/Hyd/2019 and Cross Objection C.Ono.02/Hyd/2020 for AY 2014-15 arises against the CIT(A)-9 Hyderabad’s order dated 14.08.2019 passed in case no. 10317/2018-19 involving proceedings u/s 143(3) of the Income Tax Act, 1961; in short ‘the Act’.
Heard both the parties. Case file perused.
2. The Revenue has raised the following substantive grounds in its appeal ITA 1774/Hyd/2019 :-
“1. The Ld. CIT (A) erred both in law and on facts of the case.
2. The Ld.CIT(A) erred in concluding that assessee company is a deemed public limited company and hence provisions of section 56(2)(viib) are not applicable.
3. The Ld.CIT(A) erred in concluding that assessee company is a deemed public limited company without giving an opportunity to the Assessing Officer to verify claims of assessee with regard to NCC Infrastructure Holding Limited being deemed public limited company because of NCC Limited which is a listed company held more than 40% shares of NCC Infrastructure Holding Limited during the year under consideration.
4. The Ld.CIT(A) erred in concluding that assessee company is a deemed public limited company ignoring the fact that assessee claimed before the Assessing Officer that NCC Infrastructure Holding Limited is a public limited company but not deemed public limited, which fact was first brought before Ld.CIT(A) and Assessing Officer had no chance to verify.
5. The Ld.CIT(A) erred in concluding that assessee is a deemed public limited company ignoring the fact that the Assessing Officer has no occasion to verify whether NCC Infrastructure Holding Limited, NCC Limited qualify to be public limited companies as per provisions of Section 2(18) in order for assessee to be qualified as public limited company.
2.1. Both the learned representatives invited our attention to the CIT(A)’s detailed discussion on the sole issue of section 56(2)(vii)(b) addition of Rs.4,52,02,269/- reading as under :
“4.2. During the appellate proceedings the appellant filed written submission on 01/03/2019 as under:
Referred appeal arises out of the assessment order passed by Ld.AO under section 143 (3) of the Act in the case of Sembcorp Gayatri Power Ltd [a nonexisting company). Appellant Sembcorp Gayatri Power Ltd [Amalgamating Company} has been amalgamated into Sembcorp Energy India Ltd [Amalgamated Company} with effect from 01/04/2017 vide sanction order of the Regional Director, South East Region, Hyderabad dated 31st October, 2018 passed with reference to the scheme of amalgamation. The copy of the scheme of arrangement along with order of the Regional Director, South East Region, Hyderabad sanctioning the scheme has been attached herewith vide Annexure
2. For the referred appeal currently additional submissions are being made by the successor company [Sembcorp Energy India Ltd} in good faith based on the information available on record. Reference hereunder to ‘the term ‘appellant’ as the context requires refers to Sembcorp Gayatri Power Ltd / Sembcorp Energy India Ltd. [For instance for factual points, the term appellant refers to ‘Sembcorp Gayatri Power Ltd’ and for legal submissions the term appellant has to be read as ‘Sembcorp Energy India Ltd’}
3. In this case assessment order under section 143(3) was passed by Ld. AO in case of the appellant, assessing the income for A. Y. 2014-2015 at Rs. 8, 02, 62,170/ – after carrying an addition of Rs.4, 52, 02,269/ – to the returned income under section 56(2)(viib) of the Act. The quantum of addition was worked out by assessing to tax the value realized by appellant company from shareholder Gayatri Energy Ventures Ltd at the rate of Rs.13.3781- per share over and above value of Rs. 11.5 per share as arrived at as per net asset method prescribed under rule 11 of the Income Tax Rules. Aggrieved by such order, the appellant craves relief as per the grounds of appeal based on the factual and legal submissions as detailed hereinafter appropriately under title heads. Here itself in the background it must be mentioned that the addition carried to the returned income of the appellant is clearly unjustified/ arbitrary and is resentful that in this case the Id. AO has carried such additions inter-alia –
a.) By transgressing the express language of section 56 (2) (viib) of the Act.
b) By conveniently side-stepping the key legal claim of the appellant, if only was fairly considered, would have avoided the protracted litigations.
c) By overlooking the case facts as discernable from evidences placed on record and also from the details as verifiable from documents as available in public domain.
d) By not providing an opportunity to the appellant to exercise its options as per Explanation (a)(ii) to section 56(2) (viib) of the Act.
e) In gross denial of principles of natural justice because in this case no show-cause notice indicating the grounds for making an addition to the returned income of the appellant was issued before passing the assessment order and carrying the prejudicial additions to the returned income.
4. Considering the above aspects, it would not be a misnomer to comment that in the current case the ld.AO has carried the addition under section 56(2) of the Act with the predetermined mindset to tax the realization over and above the value per share as worked out as per one of the methods prescribed under referred section. In the interest of justice, the appellant once again takes opportunity to make submissions as beneath _
5. Contention that provisions of section 56(2)(viib) are not applicable to the allotments made by assessee company in AY 2014·2015 as the status of assessee company for previous year relevant to AY 2014-2015 was ‘company in which the public is substantially interested.’
5.1 In view of the express choice of wordings used in section 56(2) (viib) of the Act, it is clear that inter-alia the applicability of this section triggers only in a case where the shares are issued at premium by. a company in which public is not substantially interested. There is no controversy on this aspect as the referred condition is laid down in the section itself clearly and unambiguously.
Relevant portion of the section is reproduced hereunder for reference purposes
“Section 56(2).
(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares) the aggregate consideration received for such shares as exceeds the fair market value of the shares:
Provided that this clause shall not apply where the consideration for issue of shares is received-
The entire shareholding of Gayatri Energy Ventures Pvt. Ltd was acquired by Sembcorp Utilities PTE Limited 26.02.2014. As on 31.03.2014, 45% of shareholding was held by Sembcorp Utilities PTE Limited.
As on 01.04.2013, NCC Ltd had 100% shareholding in NCC Infrastructure Holding Ltd. Thereafter the shareholding of NCC Ltd. Changed to 67. 71% and remained the same till 31.03.2014.
NCC Ltd is listed on various recognized stock exchange in India since the year 1992.
5.3 The above facts are verifiable from the copy of financial statements of Assessee Company submitted during the course of assessment proceedings wherein inter-alia the details relating to shareholding pattern of the assessee company is mentioned, the names of the holding company and ultimate holding company is mentioned. The details relating to shareholding pattern also concur with the data as available about the share holding pattern of afore referred companies in public domain. Pertinently the tax audit report which supports the return of income of the appellant, at clause 29 of the report wherein the details of transaction of share issue at premium referred to in section 56 (2) (viib ) of the Act the tax auditor has asserted ‘no’ and ‘nil’. This evidence also advances force to the contention of the appellant being that provisions of section 56 (2)(viib) are not applicable to the assesse company to any of its allotments.
5.4 For the sake of completeness and in order to establish beyond doubt that assesse company is a ‘company in which public. is substantially interested’, the conditions as mentioned under section 2 (18) of the Act are run through hereunder in respect of NCC Power Projects Ltd [i.e. assesse company}., NCC Infrastructure Holdings Ltd (holding company of assesse company) and NCC Ltd ultimate holding company). For this purpose, relevant portion of the section is quoted hereunder:
Section 2 (18)
(b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely/-
(A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognized stock exchange in
India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder;
(B) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by-
a) the Government, or
b) a corporation established by a Central, State or Provincial Act, or
c) any company to which this clause applies or any subsidiary company of such company if the whole of the share capital “of such subsidiary company has been held by the parent company or by its nominees throughout the previous year.
Explanation.-In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words “not less than fifty per cent”, the words “not less than forty per cent” had been substituted;
5.5 Given the provision of the law, to verify the applicability of section 2(18), the factual details which follow are as under:
a. NCC Ltd is a company whose shares are listed on a recognized stock exchange in India hence it is a widely held company as per clause (b) sub-item (A) of section 2(18) of the Act.
b. NCC Infrastructure Holdings Ltd. is a company in which not less than 51 % of the voting power is held by a company to which the above section applies i.e. NCC Ltd., therefore NCC Infrastructure Holdings Ltd. is also a company in which the public are substantially interested as per clause (b) sub item (B) of section 2(18) of the Act
c. Now, with respect to NCC Power Projects Ltd i.e. assessee company, it is a company engaged in the generation of power, hence shareholding of not less than 40% will be applicable as per the explanation to the Section 2(18) of the Act. Since greater than 40% of voting power in assessee company is held by a NCC Infrastructure Holdings Ltd. i.e. a company to which the clause (b) to subsection 18 of section 2 is applicable, accordingly the status of assessee company is a ‘company in which public is substantially interested’
All in all, since assessee company is conclusively established to be ‘company in which public is substantially interested’ as per section 2(18) of the Act, since the provision of Section 56(2)(viib) expressly states that the same is applicable to “company not being a company in which the public are substantially interested’ , the provisions of Section 56(2)(viib) cannot be applied to any of the allotments made by the assessee company during the financial year 2013-14 even though the allotment could have been made at a price greater than fair value of such shares as worked out as per any of the methods prescribed under section 56 (2) (viib) of the Act read with rule 11 UA of Income Tax Rules. On this short ground alone, the additions carried under section 56 (2) (viib) of the Act must be deleted.
6. Merely because the fair market value as per net asset method prescribed under rule 11 UA of the Act happens to be lower than the value at which the shares are allotted doesn’t automatically lead to charge under section 56(2)(viib) of the Act in cases where allotment is justifiable considering the commercial aspects.
6.1 According to the provisions of section 56 (2) (viib) of the Act read with the income tax rules, the fair market value [FMV] per share can be determined by various prescribed methods which could obviously lead to different values’ depending Upon the methodology adopted to work out the value. Also in view of the definition of valuation date’ as defined under rules, it is open to determine value as on particular date, thus again leading to different fair market values. These aspects clearly indicate of uncertainty in application of section 56 (2) (viib) of the Act because valuation as such is a subjective concept.
6.2 It is worth noticeable that considering the application of clause (ii} to sub-clause (a) of explanation appended to section 56 (2) [uiib] of the Act, even in a given case where shares are issued at value higher than as worked out according to the rules doesn’t automatically lead to addition under section 56 (2) [uiib] of the Act and in cases where Id.AO is satisfied that the value at which shares are issued is justified in case facts, in such a scenario there is no warrant for carrying an addition under the referred section. The expression ‘may’ used in explanation to section 56 (2)(viib) of the Act clearly indicates that income accruat under section 56 (2)( uiib] of the Act is not automatic. It is for this reason that the Han, Calcutta Tribunal in the case of ASG Leather Pvt Ltd us Income Tax. Officer, Ward – 15(1), Kolkata [2018j 95 taxmann.com 151 (Kolkata – Trib.}1[2018] 171 ITD 476 (Kolkata _ Trib.) wherein the court has laid down that the Assessing Officer should have given an opportunity to the assesse to exercise its options as per Explanation (a)(ii) to section 56(2)(viib) of the Act before the additions were sustained. Merely in a given case where value at which the shares are subscribed is higher in comparison to value arrived at considering one of the prescribed methods doesn’t automatically lead to charge under section 56 (2) (viib} of the Act and the language used in referred section sufficiently ensures that a fair chance to substantiation is available to the assesses’s to substantiate the allotment price under clause (a)(ii) to explanation appended to section 56 (2)(viib) of the Act before any prejudice is sustained in their case.
6.3 Now in this case during the course of assessment proceedings, it was craved before Id.AO that price at which the shares were issued to shareholder Gayatri Energy Ventures Pvt. Ltd is Justified in view of the business considerations. Further value as per the request, FMV as per net asset method of rule 11 UA was worked out and provided in submissions. Unfortunately in the current case Id.AO simply carried the additions to the returned income by working the addition based on difference between the issue price and fair market value as per “the net asset value method without appreciating the fact that said method is just one of the method is net asset value method prescribed under rule 11 UA and in the interest of fairness, it was essential to provide the appellant an opportunity to exercise the options prescribed under Explanation (a)(ii) to section 56(2)(viib) of the Act. Not only this, also no prior show-cause notice was issued before making the addition to the returned income as per the assessment order. It is thus the contention of the appellant that the addition has been carried in the case of appellant without adopting the machinery prescribed under the section and also after not pragmatically considering the facts holistically.
6.4 In order that the commercial aspects are duly considered by your honor, the appellant craves to submit the facts relating to transaction of share allotment to Gayatri Energy Ventures Pvt. Ltd. as hereunder-
