Case Law Details
KBC India Pvt. Ltd. Vs ITO (ITAT Delhi)
In a recent case between KBC India Pvt. Ltd. and the Income Tax Officer (ITO), heard by the Income Tax Appellate Tribunal (ITAT) Delhi, an appeal was made against an order pertaining to the assessment year 2016-17. The crux of the dispute lay in the addition of Rs. 41,70,000/- under section 56(2)(viib) of the Income-tax Act, 1961. The contention revolved around the valuation of shares allotted by the assessee to its holding company at a premium, and whether such premium attracted tax liability under the said provision.
Background
KBC India Pvt. Ltd., a resident corporate entity, filed its return of income declaring nil income for the relevant assessment year. During the assessment proceedings, it came to light that the company had allotted 10,000 equity shares to its holding company, M/s. Puran Associates Pvt. Ltd., at a premium of Rs. 1,400/- per share. The Assessing Officer questioned the justification for such a premium and sought clarification from the assessee regarding the fair market value (FMV) of the shares.
Assessment and Dispute
The Assessing Officer rejected the valuation provided by the assessee and determined the FMV of the shares using the Net Asset Value (NAV) method. Consequently, an addition of Rs. 41,70,000/- was made under section 56(2)(viib) of the Act, on the grounds that the share premium exceeded the FMV as determined by the Assessing Officer. The assessee contested this addition before the Commissioner (Appeals), but the addition was sustained.
Arguments and Analysis
The crux of the assessee’s argument rested on the interpretation of section 56(2)(viib) as an anti-abuse provision, intended to prevent the conversion of unaccounted money into accounted money. The contention was that since the transaction involved the allotment of shares to the holding company and not to any external party, the provision should not be invoked.
The ITAT, in its analysis, noted that the dispute primarily concerned the determination of FMV of the shares and the applicability of section 56(2)(viib) of the Act. It observed that the transaction being between a holding company and its wholly-owned subsidiary did not benefit any external party. Hence, it concluded that logically, no addition could be made under section 56(2)(viib) of the Act.
Moreover, the tribunal examined the valuation methods employed by the assessee, particularly the valuation of land owned by the company. It found that the valuation based on the circle rate declared by the State Government was reasonable and accepted it as the FMV of the shares.
Conclusion
In light of the factual circumstances and legal interpretation, the ITAT ruled in favor of the assessee, deleting the addition made under section 56(2)(viib) of the Act. The decision highlights the importance of considering the nature of transactions and the applicability of tax provisions in accordance with the legislative intent.
This case serves as a significant precedent in clarifying the application of anti-abuse provisions in taxation laws, particularly concerning intra-group transactions involving share allotments at a premium.
FULL TEXT OF THE ORDER OF ITAT DELHI
This is an appeal by the assessee against order date 27.09.2019 of learned Commissioner of Income Tax (Appeals)-5, New Delhi, pertaining to assessment year 2016-17.
2. The dispute in the present appeal is confined to addition of an amount of Rs.41,70,000/- under section 56(2)(viib) of the Income-tax Act, 1961 (for short ‘the Act’)/
3. Briefly the facts are, the assessee is a resident corporate entity. For the assessment year under dispute, assessee filed its return of income on 11.10.2016 declaring nil income. Assessee’s case was selected for limited scrutiny to examine large share premium received during the year. In course of assessment proceeding, the Assessing Officer noticed that the assessee, in the year under consideration, had allotted 10,000 equity shares having face value of Rs.100 per share at a cost of Rs.1,500/- per share, including premium of Rs.1,400/- per share, to its holding company M/s. Puran Associates Pvt. Ltd. Noticing this fact, the Assessing Officer called upon the assessee to justify the share premium of Rs.1,400/- per share and to further explain, why the share premium received being in excess of the Fair Market Value (FMV) of shares as on date of sale, should not be treated as income of the assessee under section 56(2)(viib) of the Act. In response to the query raised, the assessee submitted that as per section 56(2)(viib) read with rule 11UA, the fair market value of share can be either as per rule 11UA or on the basis of face value of asset, including, intangibles, whichever is higher. In support of such claim, the assessee furnished a valuation report of a registered valuer to justify the FMV of share, wherein, the registered valuer has valued the FMV of share by taking the value of the asset, i.e., the land determined at Rs.26,75,00,000/-. The Assessing Officer, however, was not convinced with the submission of the assessee. He observed that the assessee itself has not adopted the methodology prescribed under rule 11UA and DCF method to value FMV of shares. Referring to rule 11UA, the Assessing Officer observed that FMV of shares can be determined by Net Asset Value (NAV) method or as per DCF method and there is no other method prescribed under the statute. On the aforesaid premises, he rejected assessee’s valuation of shares. Having done so, he proceeded to determine the fair market value of shares by applying NAV method and determined the FMV of shares at Rs.1083 per share. Thus, he concluded that the share price received by the assessee is in excess of the FMV by Rs.417 per share. Accordingly, multiplying Rs.417/- to 10,000 equity shares allotted during the year, the Assessing Officer made addition of an amount of Rs.41,70,000/- under section 56(2)(viib) of the Act. Though, the assessee contested the aforesaid addition before learned Commissioner (Appeals), however, the addition was sustained.
4. Before me, learned counsel appearing for the assessee submitted that section 56(2)(viib) of the Act is an anti-abuse provision introduced by the legislature, keeping in mind the devices adopted by public at large to convert unaccounted money as accounted money. He submitted, if the transaction undertaken is not meant for the purpose of tax avoidance or converting unaccounted money to accounted money, then the provision cannot be attracted to make any addition or disallowance. In this context, learned counsel drew my attention to the speech of Hon’ble Finance Minister while introducing the Finance Bill, 2012, wherein section 56(2)(viib) was brought into the statute for the first time. He submitted, in the present case, the shares were allotted to the holding company and not to any outsider from whom any unaccounted money could have flown to the assessee. He submitted, section 56(2)(viib) of the Act being a deeming provision has to be construed keeping in mind the purpose and object for which the provision was made. He submitted, it is not the case of the Revenue that holding company, which has been allotted the share is either not identifiable or has made investment of unaccounted money or it is unaccounted money of the assessee. He submitted, the sole beneficiary of the investment in shares is the holding company, M/s. Puran Associates Pvt. Ltd. Hence, it cannot be said that the owner has made the investment for the benefit of others.
5. That being the case, no addition under section 56(2)(viib) could have been made. In this context he relied upon the following decisions:
1. ACIT Vs. Y. Venkannachaudhary, 180 ITD 166
2. Vaani Estates Pvt. Ltd. Vs. ITO, [2018] 98 com 92
6. Proceeding further, he submitted, as per section 56(2)(viib) read with its Explanation fair market value shall be the value as determined in accordance with the method prescribed or based on the value of the assets of the company, including, intangible assets. He submitted, in case of the assessee, the major asset is a land at Salarpur Brijwasan admeasuring 5.35 acres. He submitted, the registered valuer applying Net Value Asset method as prescribed in section 56(2)(viib) of the Act has determined the value of the land at Rs.26,75,00,000/- and on that basis he has determined the FMV of the shares. He submitted, while undertaking similar transaction of allotment of shares to the holding company in financial year 2013-14 corresponding to assessment year 2014-15, another registered valuer has determined the fair market value of the very same land at Rs.42,00,00,000/- by applying the circle rate prescribed by State Government for stamp duty purpose. He submitted, while dealing with the issue of identical addition made in assessment year 2014-15, learned first appellate authority deleted the addition, being convinced with the fact that the FMV of shares as determined by the assessee for allotment to holding company is correct. He submitted, assessee’s case is factually identical in the impugned assessment year, as well. Thus, he submitted, the addition made should be deleted.
7. Per contra, learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).
8. I have considered rival submissions in the light of the decisions relied upon and perused the materials on record. On a reading of the assessment order as well as the order of learned first appellate authority, it is very much clear that the genuineness of the transaction relating to sale of shares by the assessee to its holding company has not been doubted.
9. The dispute between the assessee and the Revenue is only with regard to determination of FMV of the shares and the applicability of section 56(2)(viib) of the Act. Undisputedly, the assessee is an wholly owned subsidiary of M/s. Puran Associates Pvt. Ltd. and in the year under consideration, the assessee had allotted 10,000 equity shares to its holding company at a sale price of Rs.1,500/- per shares having face value of Rs.100 per share. In other words, the assessee has charged share premium of Rs.1,400/- over and above the face value of each share. As rightly contended by learned counsel appearing for the assessee, on a careful analysis of the speech of Hon’ble Finance Minister while introducing Finance Bill, 2012, section 56(2)(viib) is an anti-abuse provision introduced to the statute to check and regulate introduction of unaccounted money through share premium.
10. In the facts of the present appeal, the transaction relating to allotment of shares is between a holding company and its wholly owned subsidiary. Therefore, no outsider is benefited through such transaction. When the assessee-company has been promoted by the holding company, infusion of additional fund through share premium can only benefit either the holding company or the subsidiary and no third party is involved. In such a scenario, logically, no addition can be made under section 56(2)(viib) of the Act. For arriving at such conclusion, I draw support from the decisions of the Tribunal in the case of ACIT Vs. Y. Venkannachaudhary (supra) and Vaani Estates Pvt. Ltd. Vs. ITO (supra).
10. Even otherwise also, it requires consideration, whether the FMV of the shares allotted by the assessee can be taken at Rs.1,500/- per share as per the assessee or Rs.1082 per share as determined by the Assessing Officer. Undisputedly, the assessee has got the FMV of the shares valued through a registered valuer. As per the said valuation report, the registered valuer has applied the Net Asset Value method by considering the value of land at Delhi admeasuring 5.35 acres owned by the assessee. Applying the circle rate declared by the State Government, as on 31.03.2016, the registered valuer has determined the FMV of the land at Rs.26.75 crores as against the value of land as per the circle rate of Rs.50.40 crores. However, learned Commissioner (Appeals) has upheld the valuation made by the Assessing Officer primarily on the reasoning that the value of land determined by registered valuer at Rs.26.75 crores is much higher compared to the book value of land shown at Rs.16.88 crores.
11. In my view, book value of land cannot be equated to FMV of the land. When it is a proven fact that the value of land adopted by the registered value is based on circle rate of the State Government, rather much lower than the circle rate, there is no reason why such valuation should not be accepted. The reasoning of learned Commissioner (Appeals) while rejecting the valuation of land, in my view, is unacceptable when the fact that the circle rate of the land is much higher remains uncontroverted.
12. On a reading of Explanation to section 56(2)(viib) of the Act, it is very much clear that the FMV of shares shall be either the value determined under rule 11UA or based on the value of its assets, including, intangible assets on the date of issue of shares, whichever is higher. So the assessee can determine the FMV by adopting either of the two methods as provided under the Statute. The expression “substantiated by the company to the satisfaction of the Assessing Officer” as used in clause (a)(ii) of Explanation to section 52(b)(viib) does not speak of any subjective satisfaction but has to be considered objectively, keeping in view the value of the assets on the date of issue of shares. In the facts of the present case, the assessee has proved that the value of the asset, i.e., the land at Delhi as per circle rate is more than Rs.26.75 crores determined by the registered valuer. That being the factual position emerging on record, allotment of shares at Rs.1,500/-per share must be considered to be the FMV on the date of sale and not high and excessive compared to the FMV. It is relevant to observe, the assessee had entered into similar transaction with its holding company in assessment year 2014-15 wherein, shares having face value of Rs.100 per share were allotted to the holding company for a premium of Rs.1799 per share. While considering the issue relating to similar addition made by the Assessing Officer under section 56(2)(viib) of the Act, learned first appellate authority has deleted the addition taking note of the fact that the value of land held by the assessee as per the circle rate is Rs.42 crores. Thus, on overall consideration of facts and materials on record, I do not find any reason to sustain the addition of Rs.41,70,000/-. Accordingly, the addition is deleted.
13. In the result, the appeal is allowed.
Order pronounced in the open court on 2nd November, 2022
Author Bio
sir in case of tehlka co share income tax did not objected when share on loss making co were sold to some business men at high premium.