Case Law Details
BLP Vayu (Project-1) Pvt. Ltd Vs PCIT (ITAT Delhi)
The assessee company issued 513978 shares @ Rs 1284.10 per share to its 100% Holding Company in tune with the valuation report following DCF method towards calculation of fair market value of shares as per Rule 11UA(2)(b) of the Income Tax Rules for which share application money was received in AY 2013-2014. Assessment for AY 2013-2014 and AY 2014-15 were completed u/s 143(3) of the Act. LD PCIT set aside the order for AY 2014-2015 u/s 263 of the Act for failure of the ld AO to examine the genuineness of the transactions, creditworthiness of the persons from which share premium was received and identity and share premium. In the second round the ld AO made addition of securities premium amounting of Rs.65,48,60,220/- u/s Section 56(2)(viib) of the Act.
According to the case records, it is an undisputed fact that the shares have been allotted at a premium to the 100% holding of the company. Therefore, the applicability of Section 56(2)(viib) needs to be considered in this context. In the case of DCIT vs. Ozone India Ltd., the Co-ordinate Bench of the Tribunal, in its order dated 13.04.2021 (ITA No.2081/Ahd/2018), analyzed the deeming provisions of Section 56(2)(viib) of the Act extensively. The bench observed that the deeming clause should be interpreted in a systematic manner.
In the present case, the transaction of allotment of shares at a premium is between the holding company and its subsidiary. When viewed holistically, it can be seen that there is no benefit derived by the assessee from the issuance of shares at a certain premium, even if the share premium exceeds the fair market value in a given case. Essentially, it is a transaction between oneself, so to speak. The true intention of Section 56(2)(viib) was analyzed in the Ozone case, where it was observed that the objective behind the provision is to prevent unlawful gains by issuing companies disguised as capital receipts.
In this particular case, not only is the fair market value supported by an independent valuer’s report, but the allotment has also been made to an existing shareholder holding 100% equity. Therefore, there is no change in the interest or control over the money due to such share issuance. The purpose of deeming an unjustified premium charged on share issuance as taxable income under Section 56(2)(viib) is entirely inapplicable to transactions between a holding company and its subsidiary, where no income can be said to accrue to the ultimate beneficiary, i.e., the holding company. The chargeability of deemed income arising from transactions between a holding and subsidiary company contradicts the main objective of Section 56(2)(viib) of the Act.
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