56(2)(viib) applies to company, issuing shares at premium, where public are not substantially interested

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-

• • Assessee Company was incorporated in the year 2008 as special purpose vehicle to carryon the business of developing, constructing, commissioning, operating and maintaining 1320 MW coal based thermal power project at Shri Potti Sri Ramulu [SPSR] Nellore district, Andhra Pradesh India. The company was promoted by NCC Ltd (a company listed on various recognized stock exchanges in India since 1992 and predominantly in infrastructure sector) through its wholly owned subsidiary company NCC Infrastructure Holdings Ltd (Hereinafter referred to as ‘NCG’ for short).
  • In the year 2011 Gayatri group and NCC group inked a strategic partnership to pool in their resources with reference to the power project promoted by NCC Ltd through assesse company. Accordingly a share subscription agreement was executed between Assesse Company, NCCL and Gayatri Energy Ventures Pvt Ltd [Hereinafter referred to as ‘GEVPL’ for short in the year 2011. It accordance with the agreement, the share capital in the assesse company was to be subscribed at a premium of Rs. 3.378/- per share by GEVPL. Such take home of premium was justified in view of the following commercial factors – At that point in time with reference to the power project undertaken by the assessee company, various lucrative commercial rights were vested with the company including following –

(a) The Letter of intent for power purchase

(b)The letter of assurance in relation to coal linkage for the property (c) Environmental Clearance

(d) Sanctioned letters from the lenders namely Rural Electrification Corporation, Power Finance Corporation and ICICI Ltd.

(e) Provisioning for land acquisition for the project in terms of agreements and understandings executed by assessee company.

(ii} Existence of various business I commercial rights in the assessee company contributed to the substantial increase in the market value of shares. Apart from above, appellant also owned various immovable properties.

(iii) Further the risk as assumed by NCCI in the power project was higher as compared to what was going to be assumed by the new promoter being Gayatri Infra. At the time of execution of share purchase agreement, the essential wherewithal’s to development of power project viz. sourcing of inputs, loan finance, land, clearances and approvals, power sale contracts, were already in place with the project having reached the plug and play mode’. Naturally therefore, for businesses seeking to venture in to infrastructure, making investment in Assessee Company was lucrative option as now on as a venturer one has to assume only of Operations, commercial and legal risk because the project had already surpassed the biggest risk specific to power sector entities being the development risk.

6.5 Considering the above aspects, it is respectfully submitted that in view of the clause b to explanation to section 56 (2) (viib) of the Act, transaction of issue of shares at premium is justified having regard to business, assets, pre-existing rights etc. as on the date of fixation of price for share allotment and accordingly, your honor may please delete the impugned unjustified addition carried under section 56(2)(viib) of the Act.

6.6 Also since the additions are arbitrarily carried to the returned income, have been carried in gross violation of principles of natural justice and also after not applying the appropriate procedure I machinery prescribed under the referred section, these aspects in the current case facts have vitiated the locus-standi of the assessment framed in this case and has also rendered the assessment framed to be void in law.

7. Contention considering the totality of facts considering the intention with which the section was introduced in statute books, no addition under section 56(2)(viib) of the Ac.t ought to be added to appellants returned income:

7.1 The provisions of section 56 (2) [uiib] of the Act were introduced with the intention to curb the practice of circulation of black money in the form of share capital being subscribed at exorbitant prices by an incapacitate shareholder without any commercial rationale with the intention that other existing shareholder yields the disproportionate benefit of such exorbitant subscription. It was primarily introduced to combat the practice where the shares are issued at an exorbitant price without any underlying assets to support of such pricing. This aspect is highlighted by Han. Chennai Tribunal in the decision rendered in the case of Vaani Estates (P.) Ltd. vs. Income-tax Officer, Corporate Ward- 3 (4), Chennai (1352 of 2018 / IT Appeal No. 1352 (Chennai) of 20 18)

7.2 With the above background, in the current case the transaction of share allotment must be regarded to be bonafide considering the fallowing aspects and it is the contention of the appellant that provisions of section 56 (uiib] were not introduced to cause prejudice to cases as present _

a. Such price issue to Gayatri Energy Ventures Put Ltd is justifiable considering the business and commercial considerations as explained elsewhere.

b. The transaction of share allotment is made in pursuant to a strategic alliance between two big groups – viz. NCC Group and Gayatri Group who are established names in the infrastructure sector. The ultimate holding company of both of these groups are listed on various recognized stock exchanges. In such a scenario wherein the allotment is decidedly agreed at a particular value between two equals, one can logically rule out any possibility of unjust enrichment to be the intention in issuance of shares at premium by either of the parties.

c. The value of premium charged is not exorbitant and it is only 34 percent of the face value.

7.3 The appellant requests your honor to kindly consider the above bonafide aspects to kindly vacate the addition made under section 56 (2) (uiib] of the Act because the transaction falls beyond the periphery apparent form the legislative intent with which the section was introduced

Amalgamation

The appellant Company invites attention to the fact that Sembcorp Gayatri Power Limited has been amalgamated with and into the appellant Company vide sanction order of the Regional Director, South East Region, Hyderabad dated 31s! October, 2018 with effect from the appointed date of Is! April, 2018. The appeal was originally filed by Sembcorp Gayatri Power Limited only. However, Sembcorp Gayatri Power Limited does not exist on account of amalgamation with appellant Company and hence, the appeal should be adjudicated in the hands of the Appellant Company. In order to substantiate the fact, the Appellant Company would like to submit the copy of the scheme of arrangement along with order of the Regional Director, South East Region, Hyderabad sanctioning the scheme of arrangement vide Annexure -1 to this letter.

The Assessee invites your honor’s attention to recent pronouncement of Hon’ble ITAT, Hyderabad dated 12th April, 2019 in case of Apollo Sugar Clinics Limited, Hyderabad vs. DCIT, Circle 1 (1). Hyderabad whereby the matter has been decided in the favor of Apollo Sugar Clinics Limited, Hyderabad. It is to be noted that the facts of the above case is similar to the case of the assessee. The pronouncement of Hon’ble ITAT, Hyderabad is attached herewith vide Annexure·2 to this submission. Considering this, the assessee requests your honor to consider the above judgement of Hon’ble ITAT, Hyderabad while passing order of appeal in case of Assessee.

5. The Hon’ble ITAT ‘A’ Bench, Hyderabad in ITA No. 2045/Hyd/2018 in the case of Apollo Sugar Clinics Limited vs. DCIT, Circle-1(1), for A.Y. 201516 vide order dated 12.04.2019 held as under:

“4. Before the CIT(A), the assessee submitted that the name of the company was changed from M/ s. Apollo Clinics (Gujarat) Limited to M/ s. Apollo Sugar Clinics Limited. It had allotted equity shares to M/ s. Apollo Health and Lifestyle Limited (AHLL) and M/s. Sanofi Synthelabo (India) Limited (SSIPL) at a premium and thereby received total amount of Rs. 70,54,53,300/ – towards share premium. The allotment of shares is as under:

4.1 The assessee submitted that clause (b) item (B) to Section 2(18) is that where the shares of the company, carrying not less than 50% of the voting power have been held by and were throughout the relevant previous year beneficially held by (a) government, or(b) the statutory corporation, or (c) a widely held company or a wholly owned subsidiary of such widely held company. The assessee submitted that Apollo Hospitals Enterprise Limited (AHEL) is a parent company which is a public company listed on the Bombay Stock Exchange (Security Scrip: APOLLOHOSP) and the National Stock Exchange (Security Scrip: APOLLOHOSP). Since Apollo Hospitals Enterprise Limited (AHEL) is a listed company, the same is a company in which public are substantially interest within the meaning of Section 2(18)(b)(A) of the Act. The assessee submitted that M/ s. Apollo Health and Lifestyle Limited (AHLL) is a wholly owned subsidiary of AHEL} wherein 100% of the shares of AHLL were held by AHEL during the FY 2014-15. Since AHLL is a 100% subsidiary of AHEL (a listed company), AHLL is also a company in which public are substantially interested within the meaning of Section 2(18)(b)(B)(c) of the Act. The assessee is a subsidiary of M/ s. Apollo Health and Lifestyle Limited (AHLL) wherein 80% of shares of the assessee were held by AHLL during the FY 2014-15. Since AHLL is a 100% subsidiary of AHEL (a listed company), and the assessee is 80% of subsidiary of AHLL, the assessee satisfies the condition laid down in Section 2(18)(b)(B)(c) of the Act. Hence} the assessee submitted that it is a company in which public are substantially interested within the meaning of Section 2(18) of the Act.

4.2 The assessee submitted that Section 56(2)(viib) of the Act are not applicable where premium on issues of shares is received by a company in which public are substantially interested. The assessee submitted that since specific provisions of Section 56(2)(viib) dealing with taxability of share premium are not applicable in the instant case, the general provisions of Section 56(1) of the Act also cannot be invoked. The assessee submitted Section 56(1) covers all those income which are otherwise not taxable under other heads of income. However, for section 56(1) to apply, the amount received by an assessee must be “income” under the Act. The assessee also submitted that Section 2(24) defines the term as “income”, which does not include ‘receipts on issue of shares’. The only exception to this is sub-clause (xvi) to Section 2(24) which covers share premium as in Section 56(2)(viib) of the Act. The assessee submitted that based on the above, the receipt of share premium is not taxable under the Act. Hence} the share premium may not be treated as taxable.

5. After considering the submissions of the assessee, the CIT(A) upheld the addition made by the AO by observing as under:

“6.9 The submissions of the appellant have been carefully considered. The issue before me is whether the share premium has been calculated as per the market valuation and based on due diligence report. It is seen the premium has varied from 12990 in different cases. On scrutiny, the Assessing Officer pointed out that from M/ s. Sanofi Synthelabo (India) Limited, appellant charged share premium of Rs.1220/ – while on majority share purchase in case of M/ s. Apollo Health & Life Style Limited is Nil. The Assessing Officer has raised the calculation/ valuation of share premium with actuals with regard to profit before taxes and found there is a huge gap between projections and actuals available of the company account. The valuation report submitted by BSR Associates also has lacunae and specifically based on

‘…. financial information and underlying management assumptions provided by the management for the valuation analysis of the company’.

………………  For the purpose of this engagement; and report, we have made no investigation and assume no responsibility for the title to, or liabilities against ASCL …

….. valuation carried out by us is solely for regulatory /nonfinancial reporting purposes and it is the prerogative of the parties to the transaction to decide the transaction price”.

The above extracts from the findings of the Assessing Officer and the submissions made by the BSR Associates pin points the finding that a) The calculation / valuation is made on basis of management assumption b) The calculation / valuation is made for statutory provision of RBI and SEBI

During the appeal proceedings, the appellant was asked to submit the due diligence report on the issue raised by the Assessing Officer regarding the share premium. No such report was submitted before me, hence the finding of the Assessing officer, who is very specific to show that Section 56(2)(viib) is in applicable. On verification, it Is correct that provision of Rule 11 UA for the purpose of Section 56 of IT Act, there is prescribed method for valuation of share premium under Rule 11 UA(I)(b) for the purpose of Section 56 of Income Tax Act. The Appellant has not accepted the valuation of Rs.741/given by the Chartered Accountant under DCF Method nor under Rule 11 UA of IT Act. It is to be noted that the Income Tax. Act is very specific regarding the issue. The appellant may have used negotiations and deliberations during the transactions. But for Income Tax. procedures the Rule 11 UA will apply.

6.10 In the background of this, the appellant has not been able to support its stand. The addition made regarding the excess share premium collected is disallowed u/ s. 56 of IT Act. 1 have verified the issue and find that the Assessing officer is correct in disallowing Rs.58,42,01,700/_ as excess share premium. The addition of Rs.58,42,01, 700/- is upheld.”

9. As regards ground Nos. 3 to 8 regarding addition of receipt in the nature of share premium, the ld. AR submitted that the year under consideration is the first year of operation and assessee-company is the second level subsidiary of M/ s. Apollo Hospitals Enterprises Ltd., (AHEL). At the time of issue of shares, assessee-company was a 99.99% subsidiary of M/ s. Apollo Health and Life Style Ltd., (AHLL) which is subsidiary of AHEL. Since AHEL is a public limited company and by virtue of Section 2(18)(vii) of the Act, the assessee-company also a company in which public are substantially interested. Hence, the provisions of Section 56(2)(viib) will not attract. This fact was also acknowledged by the Assessing Officer in his order. However, the Assessing Officer invoked provisions of Section 56(1) to bring this transaction as income from other sources. He has not considered the fact that this transaction is capital investment and not an income within the meaning of Section 14 of the Act. For this proposition, he relied on the following case law:

1. Vodafone India Services (P) Ltd., [2014] 368 ITR 1 (Bombay)

2. D.P. Sandu Bros. Chembur (P) Ltd., [2005] 273 ITR 1 (SC)

3. CIT Vs. Allahabad Bank Ltd., [1969] 73 ITR 745 (SC)

4. Nalinikant Ambalal Mody Vs. CIT, [1966] 61 ITR 428 (SC).

11. Considered the rival submissions and material on record. We noticed that assessee-company is step-down subsidiary of Apollo Hospitals Enterprises Ltd., The AHEL is a listed company in Stock Exchange in India with the Securities Contracts (Regulations) Act, 1956. Therefore, this company falls under the category of the company in which public are substantially interested. The subsidiary companies viz. AHLL and assessee-company come under the definition of Section 2(18)(b)(B) of the Act, as per which public are substantially interested. This fact was also acknowledged by the Assessing Officer in his order at Pg. 6, para 3.2 as it was agreed that the assessee’s case does not fall u/ s. 56(2)(viib). In order to invoke the provisions of Section 56(2)(viib), the assessee-company should be a company in which public are not substantially interested.

11.1 The Assessing Officer instead of invoking Section 56(2)(viib), he went ahead by disallowing the excess of the premium received by assessee by invoking the provisions of Section 56(1) of the Act. In order to invoke Section 56(1), the income earned by the assessee should be classified as revenue income as per Section 14 but should not fall within any of the head of income A,C,D or E. Since section 56(1) is residuary head of income, it falls in the head of income ‘F’ i.e. “income from other sources”. This head of income consists of two parts i.e. section 56(1) and section 56(2). The first part i.e. sub-section (1) deals with income of every kind, which does not fall in any of the head of income A- E and also which is not to be excluded from the total income under this Act. The important thing is, it should fall within the definition of income u/s 2(24) of the Act. At the same time, subsection (2) of section 56, deals with specific income which is not income as per section 2(24) but specifically brought under the definition of income by the Legislature. Therefore, the income which cannot be brought to tax under section 56(2), under specific head, AO cannot bring to tax even u/ s 56(1). As held in the case of Mercantile Corporation Vs. CIT, 83 ITR 700 (SC), “where there is a specific head for the income in question and specific section providing for the head, this residuary section cannot be called in aid”. Similarly, when there is specific provision introduced by the Legislature to bring the specific transaction as income in section 56(2)(viib) because the transaction of issue of shares is capital in nature but under the circumstances as mentioned in above section, this transaction will be considered as income.

11.2 In the given case, the fact is clear that assessee has received share premium and Assessing Officer has mandate to invoke only Section 56(2)(viib) and no other section. This transaction will never fall in any of the heads of income as per Section 14 of the Act. Therefore, in our considered view, Assessing Officer is not correct in bringing this capital investment as income of the assessee after satisfying himself that assessee’s case does not fall u/s. 56(2)(viib) of the Act. Therefore the addition made by Assessing Officer is deleted.

5.1 The Hon’ble !TAT, in this case has held that the addition could have been made only u/s. 56 (2)(viib) and in the facts in that case 56(2)(viib) could not have been invoked. In the present appeal, the Assessing Officer has invoked the section 56(2)(viib) only but the facts indicates that the status of the appellant was of deemed public limited company as per’ section 2(18) of the LT. Act, 1961. Therefore, respectfully following the ratio laid down by the Hon’ble ITAT, the Assessing Officer is directed to delete the addition.”

3.We have considered rival submissions against and in support of the CIT(A)’s impugned findings. Learned departmental representative vehemently contended that the CIT(A) has erred in law and on facts in deleting the impugned addition made by the Assessing Officer in his regular assessment framed on 29.10.2017 thereby holding that M/s NCC Infrastructure Holding Limited, qualified to be a public limited company(ies) merely because NCC Ltd (a listed company) held more than 40% of the former’s shareholding in the relevant previous year. His further case is that the assessing authority did not have any occasion even to verify fulfillment of necessary conditions in this regard on account of the fact that the assessee has raised the corresponding plea for the first time before the CIT(A).

3.1. We find no merit in Revenue’s foregoing arguments. The assessee has filed a detailed paper book running into 99 pages . Page 11 thereof and more particularly page 13 para 9.1 and page 18 are its detailed submissions dated 20.11.2017 and 26.12.2017 before the Assessing Officer himself that section 56(2)(vii)(b) did not apply in view of sec.2(18) containing definition of a “company”. The Revenue’s technical argument that the CIT(A) has not offered any opportunity whilst entertaining the assessee’s argument to this effect goes against the records. The same stands rejected therefore.

4. Next comes the issue whether assessee qualifies to be a company eligible for section 56 (2)(vii b)’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) of the Act since the said other company was a listed one holding more than 50% of its stake in the relevant previous year. We make it clear that the assessee had duly filed its shareholding chart before the CIT(A) (supra) whose correctness has nowhere been rebutted in Revenue’s pleadings in the instant appeal. Coupled with this, the CIT(A) has also placed reliance on coordinate bench’s decision (supra) adjudicating the very issue in assessee’s favour and against the department. We therefore find no reason to interfere with CIT(A)’s correct approach in deleting the impugned sec. 56(2)(vii b) addition in question.

Revenue’s sole instant substantive grievance as well as main appeal ITA 1774/H/19 fail therefore.

4.1. Learned authorized representative is fair enough in not pressing for assessee’s Cross Objection C.O.no. 02/Hyd/2020 in view of our findings on merits in Revenue’s appeal. Ordered accordingly.

To sum up, Revenue’s appeal ITA 1774/H/19 is dismissed and assessee’s Cross Objection 02/Hyd/2020 is dismissed as not pressed. A copy of this common order be placed in the respective case files.

Pronounced on 10^th June, 2021.