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.
Given this background, the extent of inquiry into the credibility of the charged premium is not significant since no prejudice can result from the outcome of such an inquiry. Thus, the condition for the applicability of Section 263 for an inquiry into transactions between interwoven holding and subsidiary companies is irrelevant. We also affirmatively note the decision of the SMC Bench in the case of KBC India Pvt. Ltd. vs. ITO, where it was observed in the order dated 02.11.2022 (ITA No.9710/Del/2019, SMC) that Section 56(2)(viib) cannot be applied to transactions between a holding company and its wholly owned subsidiary in the absence of any benefit accruing to an outsider.
Held:
1. Section 56(2)(viib) could not be applied in the case of transaction between holding company and wholly owned subsidiary in the absence of any benefit occurring to any outsider.
2. The money/credit has been entered in the books of the assessee in preceding Assessment Year 2013-14 and therefore, Section 68 itself is not applicable qua AY 2014-15 in question.
3. A revisional action of the Pr.CIT in the context of the facts of the case thus appears to be wholly unjustified and without meeting the jurisdictional requirement of Sect ion 263 of the Act.
FULL TEXT OF THE ORDER OF ITAT DELHI
The captioned appeal has been filed at the instance of the assessee against the revisional order of the ld. Pr.CIT, Gurgaon (‘Pr.CIT’ in short) dated 05. 03.2019 wherein order passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) dated 15. 12.2016 concerning AY 2014-15 was held to be erroneous in so far as prejudicial to the interest of the revenue within the meaning of Section 263 of the Act.
2. The grounds of appeal raised by the assessee read as under:
“ That on the facts and circumstances of the case ld Pr. CIT, Gurgaon in his order dated 05 .03 .2019 passed u/s.263 of the Act, erred in setting aside the order dated 15 .12 .2016 for AY 2014 -15 passed by the Id AO,Ward-1 (3 ), Gurgaon u/ s 143 (3 ) of the Act, by holding that in respect of issue of 513978 shares @ Rs 1284 .10 per share, failure of the ld AO to examine the genuineness of the transactions, creditworthiness of the persons from which share premium was received and identity, rendered the assessment erroneous and prejudicial to the interest of revenue and further erred in exercising the powers u/s. 263 of the Act:
