PH4 Food and Beverages Private Limited Vs DCIT (ITAT Bangalore Bench)
Convertible Tomorrow Is Not Equity Today: FCCDs Outside “Issue of Shares” u/s 56(2)(viib)—Bangalore ITAT Deletes ₹3.88-Crore Angel-Tax Addition
Summary: The Bangalore ITAT held that money received on the issue of Fully & Compulsorily Convertible Debentures (FCCDs), which were convertible into equity only in a future year, could not be taxed u/s 56(2)(viib) as excess consideration for the “issue of shares.” In the absence of any deeming provision treating unconverted FCCDs as shares, the Tribunal deleted the addition of ₹3,88,31,457.
Two Instruments, Two Different Valuations
The assessee, engaged in the food & beverages business, issued equity shares at ₹352 per share & FCCDs at ₹704 each during AY 2021-22.
An internal DCF working prepared for the equity rights issue determined the value at approximately ₹352 per share. A subsequent valuation by an IBBI-registered valuer, also under the DCF method, determined the value of FCCDs at ₹703.89.
The assessee explained that the equity issue was relatively small & undertaken during severe Covid-related financial stress to ensure immediate survival of the business. Subsidiaries that had not commenced operations were valued at their investment/book value without considering projected cash flows.
The later FCCD issue raised approximately ₹18.15 crore for investment in subsidiaries, business expansion, repayment of loans, emergency funding & completion of a brewery project. Improved economic conditions, expansion plans & expected future cash flows of subsidiaries were therefore considered in the registered valuation.
