Case Law Details
Aadinath India Pvt. Ltd. Vs DCIT (ITAT Delhi)
The Income Tax Appellate Tribunal (ITAT), Delhi, allowed the assessee’s appeal against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, relating to Assessment Year 2014-15. The dispute concerned an addition of ₹55,55,056 made under Section 56(2)(viib) of the Income Tax Act on account of the issue of shares at a premium.
The assessee, engaged in the business of trading welding rods, air compressors, lubricating oils, bearings, and machinery parts, had issued 100,001 equity shares of face value ₹10 each at a premium of ₹115 per share to an existing shareholder. During assessment, the Assessing Officer (AO) computed the fair market value (FMV) of the shares at ₹69.45 per share using the Net Asset Value (NAV) method under Rule 11UA(2) and held that the premium exceeded the FMV, resulting in the impugned addition under Section 56(2)(viib).
The assessee contended that the FMV had been determined at ₹136 per share by considering the market value of its assets, including goodwill, on the date of allotment. The valuation was supported by reports of registered valuers dated 30.11.2016. Since the shares were issued at ₹125 per share, which was below the computed FMV, the assessee argued that no addition could be made. It further relied on Explanation (a) to Section 56(2)(viib), submitting that where the FMV determined under its valuation was higher than the value computed under the prescribed method, the higher valuation should be adopted. The assessee also argued that the share application money had been received in earlier assessment years and only the allotment of shares took place during the relevant year, making Section 56(2)(viib) inapplicable.
The Tribunal observed that the AO had not identified any defect or deficiency in the valuation reports furnished by the assessee. It noted that the assessee had valued both its tangible assets and goodwill through registered valuers while determining the FMV as on the date of allotment.
The Tribunal also noted that the shares had been allotted to existing shareholders. Referring to earlier decisions of the Delhi Tribunal, including Anchal Property, Suri Agro Fresh Pvt. Ltd., Dhruv Milkose Pvt. Ltd., BLP Vayu (Projects-I) Pvt. Ltd., Ozone India Ltd., and KBC India Pvt. Ltd., it observed that the provisions of Section 56(2)(viib) do not ordinarily apply where shares are allotted to existing shareholders, particularly when there is no fresh inflow of funds during the relevant year and no benefit accrues to outsiders.
Considering that the assessee’s FMV was higher than the value computed by the AO under the NAV method, that the valuation was supported by registered valuers, that the shares were allotted to existing shareholders, and that no fresh funds were received during the year under appeal, the Tribunal held that there was no justification for making the addition under Section 56(2)(viib). It therefore deleted the addition of ₹55,55,056 and allowed the assessee’s appeal.
Appellant was represented by Shri Sidharth Ranka, Adv.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal is filed by assessee against the order dated 30.07.2021 by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld. CIT(A)”] passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of the assessment order dated 26.12.2016 passed u/s 143(3) of the Act pertaining to Assessment Year 2014-15.
2. Brief facts of the case are that the assessee is a company, engaged in the business of trading of welding rods and air compressors, lubricating oils, bearings and other machinery parts. The return of income was e-filed on 24.10.2018 and the case was selected under CASS for scrutiny and notice u/s 143(2) was issued on 15.09.2015. Thereafter, various notices were issued from time to time. During the year under appeal, assessee has issued 100001 equity shares of face value INR 10/- each to M/s Ramgarh Leisure & Entertainment Pvt. Ltd. at a premium of INR 115/- per share. The AO asked the assessee about the basis for issue of shares at a premium of INR 115/- per share as according to the AO, the Fair Market Value (“FMV”) of share under NAV method comes to INR 69.45 and accordingly, INR 59.45 per share was charged in excess to the FMV, therefore, the AO proposed the addition for the same u/s 56(2)(viib) of the Act. In reply, assessee submitted that FMV was computed as per market value of the assets as on the date of allotment and further valued the goodwill of the company and accordingly, per share price was computed at INR 136/- per share as against which the shares were issued at INR 125/- per share including premium of INR 115/- per share. However, the AO has not accepted the submissions of the assessee and rejected the FMV taken by the assessee and substituted the FMV at INR 69.45 per share and accordingly, the differential amount of INR 55,55,056/- was treated as income u/s 56(2)(viib) of the Act.
3. Against the said order, the assessee filed an appeal before Ld. CIT(A) who re-affirmed the observations made by the AO in summary manner without stating as to how the was valuation done by the AO after rejecting the FMV computed by the assessee and uphold the addition made by the AO.
4. Since all the Grounds of appeal raised by the assessee are with respect to the addition made u/s 56(2)(viib) of the Act, therefore, they are taken together for consideration.
5. Before us, Ld.AR reiterated the arguments as made before the lower authorities and submits that the assessee in terms of section 56(2)(viib) of the Act has computed the FMV as on the date of allotment of shares where the immovable properties were taken at FMV based on the report of registered valuer dated 30.11.2016, placed at pages 26 to 35 of the Paper Book. Further the assessee has taken the FMV of goodwill which was valued at 88,67,183/- as per the Valuation Report dated 30.11.2016, placed at pages 36 to 37 of the Paper Book. Accordingly, the assessee has computed the FMV of its shares as on the date of allotment at INR 136/- per share as against which the shares were allotted at INR 125/- per share at a premium of the 115/- per share. Ld.AR submits that as per Explanation (a) to section u/s 56(2)(viib) of the Act, the FMV of the shares is to be computed as per clause (i) & (ii) and the higher value is to be taken. Ld.AR submits that since FMV taken by the assessee as on the date of allotment of shares was higher and the Ao has failed to point out any defect in such valuation, therefore, no addition could be made u/s 56(2)(viib) of the Act.
6. Ld. AR alternatively submits that funds were received in preceding AYs and during the year under appeal, only shares were allotted that too to the existing shareholders therefore, even otherwise, the provision of section u/s 56(2)(viib) of the Act are not applicable which refers the amount received in any previsions year and therefore, the amount received in earlier years cannot be held as income of the assessee in the year under appeal. Ld. AR thus, requested that even in this score also, no addition is required to be made u/s 56(2)(viib) of the Act. He prayed accordingly.
7. Per contra, Ld. Sr. DR vehemently supported the lower authorities and submits that the AO has computed the FMV based on NAV method prescribed under the Rule 11UA(2) of the Income Tax Rules ,192 and therefore, the AO has rightly made the addition which deserves to be uphold. She prayed accordingly.
8. Heard the contentions of both parties at length and perused the material available on record. The solitary issue before us is with respect to whether FMV computed by the assessee at INR 125/- per share is to be taken as FMV for the purpose of section 56(2)(viib) of the Act or the FMV computed by the AO at INR 69.45 based on NAV method is to be taken as FMV for the issue of shares. In the instant case, the assessee has made the valuation of its shares as on the date of allotment by taking the FMV of its assets as on that date and further valued intangible assets in the shape of goodwill. In support of such valuations, assessee placed the copies of Valuation Reports dated 30.11.2016 from the registered valuers which are placed at pages 26 to 37 of the Paper Book. It was the claim of the assessee that since the FMV determined in accordance with the prescribed method i.e. NAV method applied by the AO is lower than the FMV computed by the assessee and no error / deficiency was pointed out by the AO in the same, thus, as per Explanation (a) to section 56(2)(viib), valuation done by the assessee of FMV its shares, being higher, as on the date of allotment should be taken as FMV for issue of shares, and thus, no addition could be made u/s 565(2)(viib) of the Act.
9. Further, undisputedly, shares were subscribed by the existing shareholders. The Co-ordinate Bench of Delhi Tribunal in Anchal Property in ITA No.5139/Del/2025 order dated 08.04.2026 by placing reliance on the judgement of the Co-ordinate Bench in the case of Suri Agro Fresh Pvt. Ltd. in ITA No.1572/Del/2024 vide order dated 27.02.2025 has held that the provisions of section 56(2)(viib) are not arbitrarily applicable to the shares allotted to the existing of shareholders. The relevant observations of the coordinate bench are as under:
“Faced with this situation, we hereby notice that this tribunal’s learned coordinate bench’s recent order in Suri Agro Fresh Private Limited v. ACIT, ITA No.1572/Del/2024 decided on 27.02.2025 has already settled the issue that section 56(2)(vii)(b) does not ordinarily get attracted an instance of such shares allotment made to the existing share-holders; reading as under:
“8. The Ld. AR, in this regard relied upon the order passed by the Coordinate Bench of ITAT, Delhi in the case of ACIT vs. Dhruv Milkose Pvt. Ltd. in ITA No. 8431/Del/2019, in which held that where the allotment has been made existing shareholders, the deeming provisions of section 56(2)(viib) would not ordinarily be applicable. The relevant para is reproduced as under:
“8.2 The issue is no longer res-integra. The effect of issue of shares to holding company at a premium has been examined by the Co-ordinate Bench of Tribunal in the case of BLP Vayu (Projects-I) Pvt. Ltd. reported in (2023) 151 taxmann.com 47 (Del-Trib.). The relevant operative paragraph of the order of the Tribunal is hereunder:
“11.1 As per case records, it is an undisputed fact that the shares have been allotted at a premium to its 100% holding company. Thus, applicability of Section on 56(2)(viib) has to be seen in this perspective. The Co-ordinate Bench of Tribunal in DCIT vs. Ozone India Ltd. in ITA No.2081/Ahd/2018 order dated 13.04.2021 in the context of Section 56(2)(viib) has analyzed the deeming provisions of Section 56(2)(viib) of the Act threadbare and inter alia observed that the deeming clause requires to be given a schematic interpretation. The transaction of allotment of shares at a premium in the instant case is between holding company and it is subsidiary company and thus when seen holistically, there is no benefit derived by the assessee by issue of shares at certain premium notwithstanding that the share premium exceeds a fair market value in a given case. Instinctively, it is a transaction between the self, if so to say. The true purport of Section 56(2)(viib) was analyzed in Ozone case and it was observed that the objective behind the provisions of Section 56(2)(viib) is to prevent unlawful gains by issuing company in the garb of capital receipts. In the instant case, not only that the fair market value is supported by independent valuer report, the allotment has been made to the existing shareholder holding 100% equity and therefore, there is no change in the interest or control over the money by such issuance of shares. The object of deeming an unjustified premium charged on issue of share as taxable income under Section 56(2)(viib) is wholly inapplicable for transactions between holding and its subsidiary company where no income can be said to accrue to the ultimate beneficiary, i.e. holding company. The chargeability of deemed income arising from transactions between holding and subsidiary or vice versa militates against the solemn object of Section 56(2)(viib) of the Act. In this backdrop, the extent of inquiry on the purported credibility of premium charged does not really matter as no prejudice can possibly result from the outcome of such inquiry. Thus, the condition for applicability of Section 263 for inquiry into the transactions between to interwoven holding and subsidiary company is of no consequence. We also affirmatively note the decision of SMC Bench in the case of KBC India Pvt. Ltd. vs. ITO in ITA No.9710/Del/2019 order dated 02.11.2022 (SMC) where it was observed that 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.”
8.2 The Co-ordinate Bench has essentially observed that where the allotment has been made to existing shareholders, the deeming provisions of Section 56(2)(viib) would not ordinarily be applicable……. ”
10. In view of the aforesaid discussion and by respectfully following the aforesaid judgements of the coordinate bench, we are of the considered opinion that in the instant case, FMV computed by the assessee as on the date of allotment of shares is higher than the FMV computed by the AO as per prescribed method i.e. NAV method and further the shares were allotted to the existing shareholders where funds were received in preceding AYs and no fresh funds were received during the year under appeal, we find no reason for making addition u/s 56(2)(viib) of the Act. Accordingly, the addition made of INR 55,55,056/- is hereby, deleted. All Grounds of appeal raised by the assessee are hence, allowed.
11. In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 05.06.2026.
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