Section 56(2)(viib) Not Applicable to Old Share Application Money – Addition Deleted

Savera India Riding Systems Company Pvt. Ltd. Vs DCIT (ITAT Mumbai)

Section 56(2)(viib) Not Applicable to Old Share Application Money – Addition Deleted

Mumbai ITAT deleted addition made under Section 56(2)(viib) on share premium, holding that the provision cannot apply retrospectively where share application money was received prior to its introduction (i.e., before 01.04.2013).

The Tribunal noted that the entire share application money was received in FY 2006–07 and 2007–08, though shares were allotted later in AY 2016-17 due to RBI approval delays. Since no consideration was received during the relevant year, one of the key conditions of Section 56(2)(viib) failed.

Further, the ITAT rejected the CIT(A)’s attempt to sustain the addition under Section 68, holding that:

• Necessary details (identity, creditworthiness, bank statements, ITRs) were already furnished and accepted by the AO
• CIT(A) violated Section 251(2) by making enhancement without notice
• Once AO made no addition u/s 68, CIT(A) cannot arbitrarily invoke it

Additionally, even on merits, the AO’s approach was flawed as he rejected DCF valuation without adopting any prescribed method, which is contrary to law.

Accordingly, the Tribunal held that no addition is sustainable either u/s 56(2)(viib) or u/s 68, and the entire addition was deleted.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The assessee has filed the present appeal against the impugned order dated 27/11/2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Additional/Joint Commissioner of Income Tax (Appeals), Panaji, reamed Addl./Joint CIT(A)”], for the assessment year 2016-17.

2. In this appeal, the assessee has raised the following grounds: –

“This appeal is against the order passed by the learned Additional / Joint Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, dated November 27, 2025, and relates to Assessment Year 2016-17.

1. The Appellant submits that the Order of the learned Commissioner of Income Tax (Appeals) is contrary to the facts on record, and also the law applicable to the facts of the case.

2. The learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs. 59.82,060/-.

3. The learned Commissioner of Income Tax (Appeals) erred in confirming the addition under section 56(2)(viib) in respect of share premium received in Assessment Year 2007-08, when section 56(2)(viib) was not on the statute.

4. The learned Commissioner of Income Tax (Appeals) erred in confirming the addition of share premium of Rs. 59,82,060/- by invoking section 68 of the Act, ignoring the fact that there was no receipt of share premium in Assessment Year 2016-17.

5. The learned Commissioner of Income Tax (Appeals) erred in confirming the addition by invoking provisions of Section 68 of the Act, when the provisions of the said section do not apply to opening balances.

6. The learned Commissioner of Income Tax (Appeals) erred in not giving opportunity before confirming the addition under section 68 of the Act and further erred in contravening the provisions of Section 251(2) of the Act.

7. The learned Commissioner of Income Tax (Appeals) erred in confirming the addition by ignoring the documentary evidences including acknowledgments and bank statements of the subscribers which were placed before the Assessing Officer and Commissioner of Income Tax (Appeals) proving source, identity and creditworthiness of the subscribers.

8. The learned Commissioner of Income Tax (Appeals) erred in law in confirming the addition of share premium, which is a capital receipt and not chargeable to tax.

9. Having regard to the facts and circumstances of the case, the Appellant submits that the Assessing Officer be directed to delete the said addition of Rs. 59,82,060/- pertaining to share.

10. The learned Commissioner of Income Tax (Appeals) erred in confirming the Assessing Officer’s action of not allowing set-off of brought forward unabsorbed depreciation of Rs. 59,82,060/-.

11. Without prejudice to Ground No. 10 above, both the lower authorities erred in ignoring the Department’s own assessment record.

12. Having regard to the facts and circumstances of the case, the Appellant submits, without prejudice to the contentions in Ground Nos. 1 to 9 above, that the Assessing Officer be directed to set-off brought forward unabsorbed depreciation of Rs. 59,82,060/-.

13. The learned Commissioner of Income Tax (Appeals) erred in confirming the levy of interest under section 2348 of the Act of Rs. 1,59,522/-.

14. Having regard to the facts and circumstances of the case, the Appellant submits that the Assessing Officer be directed to delete the levy of interest under section 2348 of Rs. 1,59,522/-.”

3. The solitary grievance of the assessee is against the addition made under section 56(2)(viib) of the Act.

4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of manufacturing Elevator Guide Rails, Fish Plates and components of elevator systems. For the year under consideration, the assessee filed its return of income on 30/11/2016, declaring a loss of INR 43,72,319. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. From the audited financial statements of the assessee for the year ending 31/03/2016, it was noticed that the assessee has issued equity shares to Perfiles Especiales, Mr. V.K.Kothari and Mr. Girish Jain, having a face value of INR 10 per share with a premium of INR 30 per share. Accordingly, the assessee received a total share premium of INR 1,22,08,260 upon issue of equity shares. During the assessment proceedings, the assessee was asked to furnish complete details and justification for charging a premium on shares issued during the year. In response, the assessee submitted the following details of shares allotted and premium received: –

5. The assessee submitted that the valuation has been done on the basis of projected future performance of the company by adopting the Discounted Cash Flow (“DCF”) method of valuation. It was further submitted that the assessee made an offer for the right issue to all its shareholders at its Board Meeting held on 29/12/2006, at a price of INR 40 per share, including a share premium of INR 30 per share. While the other shareholders refused to subscribe to the right issue, only three shareholders, namely Perfiles Especiales, Mr. V.K.Kothari and Mr. Girish Jain, opted to subscribe for the right issue. It was further submitted that, since one of the subscribers to the right issue was a foreign company, allotment was required to be made within 180 days from the date of the share application money, which the assessee failed to do. Accordingly, it obtained the necessary approval from the Reserve Bank of India (“RBI”) for allotment of shares after 180 days from the date of receipt of the share application money. Since the entire process took a long time, and finally the RBI permitted approval for allotting the shares on 15/03/2016, the assessee allotted the shares to the aforementioned shareholders on 28/03/2016, i.e. the year under consideration. Regarding the applicability of the provisions of section 56(2)(viib) of the Act, the assessee submitted that the said provisions are applicable from the period beginning with assessment year 2013-14, and since the share application money was received by the assessee in the year 2007, when the said provision was not in existence in the statute, therefore, the provision of section 56(2)(viib) of the Act is not applicable to the present case. On a without prejudice basis, the assessee submitted that one of the subscribers is a foreign entity and hence, the said provisions cannot apply in respect of shares allotted to the foreign entity. Further, it was submitted that the shares were issued at a premium of INR 30 per share, which was done on the basis of a valuation report obtained prior to the receipt of the share application money, and therefore, no addition is warranted under section 56(2)(viib) of the Act.

6. The Assessing Officer (“AO”), vide order dated 20/12/2018 passed under section 143(3) of the Act, disagreed with the submissions of the assessee and held that since the allotment of shares was made in the year under consideration, therefore the year of allotment is relevant for the purpose of applicability of the provisions of section 56(2)(viib) of the Act, and not the year in which the funds were received. The AO agreed with the submissions of the assessee that the provisions of section 56(2)(viib) of the Act are not applicable in respect of shares allotted to a non-resident. However, in respect of shares allotted to Mr. V.K.Kothari and Mr. Girish Jain, the AO held that the calculation of premium by following DCF method by the assessee is by following one of the prescribed methods, however, just by following the method of valuation of a share will not make the premium justified and explained, as the profit before tax and profit after tax has not been met even in the financial year ending 31/03/2018, rather the assessee had negative profits for the above year. The AO also rejected the contention of the assessee that it has charged premium less than the value per share arrived at by the Chartered Accountant on the basis that the premium charged at INR 30 per share though stated to be less that the value per share determined by the accountant, is also found to be much higher looking into the available financial statements of the assessee. Thus, on the basis that there is no basis for charging such a high premium and the mere fact that the assessee has only adopted the DCF method, which in itself has been found to be unrealistic and purely based on vague projections, the AO considered the premium on the shares issued by the assessee to Mr. V.K.Kothari and Mr. Girish Jain to be INR Nil and made an addition of INR 59,82,060 under section 56(2)(viib) of the Act, by considering the same as assessee’s income under the head “Income from Other Sources”.

7. The learned CIT(A), vide impugned order, upheld the addition made by the AO under section 56(2)(viib) of the Act. Further, the learned CIT(A) held that even if section 56(2)(viib) of the Act is considered prospective, the burden of proof under section 68 has not been discharged by the assessee, as the assessee failed to produce a valuation report, identity and creditworthiness of subscribers, source of funds and justification of excessive premium. Thus, the learned CIT(A) held that even independently of section 56(2)(viib), the addition is sustainable under section 68 of the Act as unexplained credit. Being aggrieved, the assessee is in appeal before us.

8. During the hearing, the learned Authorised Representative (“learned AR”) submitted that the entire share application money was received by the assessee in the financial years 2006-07 and 2007-08, and thus, the provisions of section 56(2)(viib) of the Act are not applicable to the present case. As regards the findings of the learned CIT(A) that even independently of section 56(2)(viib), the addition is sustainable under section 68 of the Act, the learned AR submitted that during the assessment proceedings, the details such as name, address, PAN of the Applicant along with the application and brief note on the business activity of the Applicant along with copy of the income tax return, bank statement reflecting payment of share application money was sought, which were duly furnished by the assessee vide its submission dated 07/12/2018 filed before the AO. Therefore, the learned AR submitted that after being duly satisfied, no addition was made by the AO under section 68 of the Act. Notwithstanding the above, the learned AR submitted that no notice was issued by the learned CIT(A) before rendering such findings against the assessee, which is in violation of the provisions of section 251(2) of the Act.

9. On the contrary, the learned Departmental Representative (“learned DR”) vehemently relied upon the order passed by the lower authorities.

10. We have considered the submissions of both sides and perused the material available on record. In the present case, during the assessment year 2007-08, the assessee made an offer for right shares to all its existing shareholders at a price of INR 40 per share (including share premium of INR 30 per share). As per the assessee, the said share premium was determined on the basis of a valuation report prepared by a Chartered Accountant on 28/12/2006. Accordingly, three shareholders, namely, Perfiles Especiales (a Spanish Company), Mr V.K.Kothari and Mr. Girish Jain, accepted the offer and subscribed to the right shares. It is further the plea of the assessee that since one of the subscribers to the right issue was a foreign company, the share allotment was required to be completed within 180 days from the receipt of share application money under FEMA. As the assessee failed to allot the said shares within the prescribed time limit, it approached the RBI for specific approval for the allotment of shares after 180 days from the date of receipt of the share application money. Since the entire process took a long time, the RBI finally permitted allotment of the shares on 15/03/2016, and the assessee allotted the shares on 28/03/2016, i.e., during the year under consideration. The primary contention of the assessee is that the provisions of section 56(2)(viib) of the Act, as invoked by the AO, are not applicable to the present case as the entire share application money was received in the financial years 2006-07 and 2007-08.

11. Before proceeding further, it is relevant to note the provisions of section 56(2)(viib) of the Act, which are reproduced as follows: –

“(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—

(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or

(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

Explanation.—For the purposes of this clause,—

(a) the fair market value of the shares shall be the value—

(i) as may be determined in accordance with such method as may be prescribed48; or

(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;

(b) “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10;”

12. Therefore, for the applicability of the provisions of section 56(2)(viib) of the Act following conditions are required to be cumulatively satisfied: –

(a) The company should be a private limited company;

(b) The company receives from a resident any consideration for the issue of shares; and

(c) Such consideration should exceed the face value of such shares.

13. Thus, the aggregate consideration received for such shares as exceeding the fair market value of the shares is considered as income of the company under the head “Income from Other Sources”. In the present case, the assessee consistently pleads that no consideration was received in the relevant assessment year for the issue of shares, and that the entire share application money was received from the aforementioned three subscribers/shareholders in the financial years 2006-07 and 2007-08. In this regard, our attention was drawn to the details of receipt of share application money in the bank account of the assessee, forming part of the paper book on page 69, which we find was also filed before the AO by the assessee along with its written submission dated 07/12/2018 in response to notice issued under section 142(1) of the Act. The said details are reproduced as follows for ready reference: –

14. From the perusal of the aforesaid details, it is evident that the entire share application money was received by the assessee from the aforementioned three subscribers/shareholders from 15/01/2007 to 03/12/2007 in its bank accounts maintained with Union Bank of India and Kotak Mahindra Bank. Thus, we find merit in the assessee’s submissions that the entire share application money was received in the financial years 2006­07 and 2007-08. At this stage, it is also pertinent to note that the provisions of section 56(2)(viib) of the Act were inserted in the statute with effect from 01/04/2013 by the Finance Act, 2013. Therefore, in the year of receipt of the share application money by the assessee, there was no provision for making an addition on account of consideration exceeding the fair market value of the shares. We find that the Hon’ble Jurisdictional High Court in SLS Energy (P.) Ltd. vs. Income-tax Officer, reported in [2023] 154 taxmann.com 400 (Bom.), nheld that the amendments, inter alia, incorporating section 56(2)(viib) of the Act were amendments which were to apply only from 01/04/2013, i.e. assessment year 2013-14.

15. Such being the facts, we are of the considered view that as no share application money was received by the assessee from Mr. V.K.Kothari and Mr. Girish Jain for the issuance of right shares in the year under consideration, and all the share application money was received when the provisions of section 56(2)(viib) of the Act were not in the statute, the AO erred in invoking the provisions of section 56(2)(viib) of the Act for making the impugned addition. As regards the delay in issuance of shares, the assessee has already explained the circumstances, which have not been disputed by the Revenue. Further, the assessee has also placed on record a copy of the correspondence with the RBI regarding the delay in the allotment of shares, and the RBI approval dated 15/03/2016, which forms part of the paper book from pages 52-56. Further, we find that the assessee made a due disclosure of the share application money pending allotment of shares, amounting to INR 1,64,55,099, received from the aforementioned three subscribers/shareholders, in its financial statements for the preceding years. On perusal of the balance sheet for the year ending 31/03/2016, we find that the said disclosure was reduced to Nil from INR 1,64,55,099 in the previous year, thereby reflecting an increase in the assessee’s share capital.

16. As regards the findings of the learned CIT(A) that the addition is sustainable under section 68 as an unexplained credit, independent of section 56(2)(viib) of the Act, it is evident from the perusal of the impugned order that no notice was issued to the assessee prior to rendering such findings. Thus, there is a clear violation of the provisions of section 251(2) of the Act. Be that as it may, the learned CIT(A) is of the view that the assessee has failed to produce the valuation report for share premium, identity and creditworthiness of subscribers, source of funds and justification of excess premium. However, we find that in response to specific query from the AO vide notice issued under section 142(1) of the Act, the assessee provided the details such as name of the Applicants, address, PAN together with of a letter and the acceptance as well as bank statement evidencing the payment together with income tax return of Mr. V.K.Kothari and Mr. Girish Jain. From the perusal of the written submission filed by the assessee dated 07/12/2018 before the AO, a copy of which, along with annexures, forms part of the paper book from pages 31-98, we find that the assessee also furnished copies of FIRC in respect of share application money received from M/s Perfiles Especiales. It is evident from the record that the AO, despite raising a specific query regarding the identity and creditworthiness of the subscribers as well as the source of funds, did not make any addition under section 68 of the Act after receipt of a detailed response from the assessee. Therefore, in view of the aforesaid facts, once the AO did not make any addition under section 68 of the Act on this issue, the remedy doesn’t lie with the learned CIT(A) by making an addition vide order passed under section 250 of the Act and lies elsewhere in the statute. Further, the observations of the learned CIT(A) that the assessee failed to produce the valuation report for share premium are completely misplaced in view of the detailed findings of the AO regarding the share valuation by the assessee following the DCF method. Therefore, we are of the considered view that there is no basis in the findings of the learned CIT(A) in arriving at the conclusion that the addition is sustainable under section 68 of the Act as an unexplained credit.

17. Even though we have arrived at the conclusion that the provisions of section 56(2)(viib) of the Act are not applicable in the present case, from the perusal of the order passed by the lower authorities, we are of the considered view that the AO, for making the impugned addition, has not complied with the provisions of the statute. In the present case, it is undisputed that the Chartered Accountant, as per the valuation report dated 28/12/2006, arrived at the fair value of INR 40 per share of the assessee. The assessee also issued the shares to the subscribers at the said value, i.e., face value of INR 10 per share and a premium of INR 30 per share. Further, for arriving at the aforesaid valuation, it is undisputed that the DCF method was adopted. However, the AO, vide assessment order, computed the premium at INR Nil without following any method as prescribed under Rule 11UA(2) of the Income Tax Rules, 1962, read with section 56(2)(viib) of the Act. For coming to the aforesaid conclusion, the AO merely compared the financials of the assessee for the subsequent years and the projections made by the valuer adopting the DCF method and held that such projections are unrealistic and vague. We find that in a similar factual matrix, the Coordinate Bench of the Tribunal in PNP Maritime Services (P.) Ltd. vs. DCIT, reported in [2024] 204 ITD 810 (Mumbai – Trib.), observed as follows: –

“10. In the present case, it is undisputed that the assessee opted for valuation as per the DCF method and the auditor arrived at the fair market value of Rs. 735 per share. Since the assessee had issued the shares at Rs. 600 (including a premium of Rs. 590), which was lower than the fair market value determined by the auditor on the basis of the DCF method, the assessee claimed that section 56(2)(viib) of the Act is not applicable, as the said section only brings to tax the consideration in excess of the fair market value. In the alternative, during the appellate proceedings before the learned CIT(A), the assessee also furnished the fair market value of the shares at Rs. 410.14 per share as per the NAV method. However, it is evident from the record that the AO neither accepted the valuation report as furnished by the assessee to arrive at the fair market value of the shares on the basis of the DCF method nor pointed out any mistake in the valuation report so furnished by the assessee. Rather, in the present case, the AO treated the value of the premium on the shares at Rs. Nil without following any of the methods prescribed under the relevant Rules. The Hon’ble jurisdictional High Court in Vodafone M-Pesa Ltd v. PCIT [2019] 92 taxmann.com 73/256 Taxman 240 (Bom.) held that there is certainly no immunity from the scrutiny of the valuation report submitted by the assessee and the AO is entitled to scrutinise the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer, however the basis has to be the method adopted by the assessee and it is not open to the AO to change the method of valuation which has been opted for by the assessee under Rule 11UA(2) of the Rules. Therefore, we are of the considered view that the addition made by the AO under section 56(2)(viib) of the Act is not in conformity with the provisions of the statute. Further, we find the decision of the coordinate bench of the Tribunal in Agro Portfolio (P.) Ltd. v. ITO [2018] 94 taxmann.com 112/171 ITD 74 (Delhi-Trib.), relied upon by the learned Departmental Representative, to be factually distinguishable, as in the said decision the AO applied NAV method to determine the fair market value of the shares after doubting the correctness of the result as per DCF method adopted by the taxpayer. However, as noted above, in the present case the AO did not follow any of the methods prescribed under the relevant Rules for making the impugned addition.

11. It is evident from the record that the AO by comparing the financials of the assessee and “Projected Summarised Financials” in the valuation report noted that the assessee has in fact incurred loss during the assessment year 2018-19. In this regard, it is relevant to note that the Hon’ble Delhi High Court in Pr. CIT v. Cinestaan Entertainment (P.) Ltd. [2021] 433 ITR 82 (Delhi) held that the valuer makes a forecast of approximation based on the potential value of business, while the underline facts and assumptions can undergo change over a period of time. The Hon’ble High Court further held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. The relevant findings of the Hon’ble High Court, in the aforesaid decision, are reproduced as under:-

“13. .There is no dispute that methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent-Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares.”

18. Therefore, respectfully following the aforesaid decision, we do not find any merits even in the addition made by applying the provisions of section 56(2)(viib) of the Act.

19. Thus, we do not find any basis for making the addition under section 56(2)(viib) or under section 68 of the Act in the present case. Accordingly, the impugned order is set aside, and Grounds No. 1-9 raised in assessee’s appeal are allowed.

20. Grounds No. 10-12 are raised on a without prejudice basis and therefore, in view of the aforesaid findings, have been rendered academic. Thus, the same are kept open.

21. Grounds No. 13 and 14, raised in assessee’s appeal, pertain to the levy of interest under section 2348 of the Act, which is consequential in nature. Therefore, the same need no separate adjudication.

22. In the result, the appeal by the assessee is allowed.

Order pronounced in the open Court on 22/04/2026