No Section 56(2)(viib) Addition if Share Premium Difference Fell Within 10% Safe Harbour: ITAT Delhi

International Oncology Services Private Limited Vs DCIT (ITAT Delhi)

The Income Tax Appellate Tribunal (ITAT), Delhi allowed the assessee’s appeal for Assessment Year (AY) 2013-14, deleting both the addition made under Section 56(2)(viib) of the Income Tax Act, 1961 and the disallowance of legal and professional expenses under Section 37(1).

The assessee, a private limited company engaged in providing medical and surgical services, operated its flagship Oncology Centre at Fortis Noida Hospital. During the relevant assessment year, it issued 20,75,264 equity shares at ₹292.45 per share, including a premium of ₹282.45, and received share application money of ₹18,99,69,197 from a venture capital fund, resident and non-resident investors.

During scrutiny assessment, the Assessing Officer (AO) sought the fair market value (FMV) of the shares under Section 56(2)(viib) read with Rule 11UA. The assessee furnished a valuation report determining the FMV at ₹285.88 per share. The AO initially proposed an addition based on a difference between the issue price and the valuation. The assessee explained that all shares were issued at a uniform price to venture capital investors, residents, and non-residents due to a commercial understanding that shares would not be issued to any other investor at a lower price than that offered to the venture capital investor. The assessee also submitted supporting documents, including the valuation certificate, details of share allotments, RBI approvals, statutory filings, board resolutions, ledgers of legal and professional expenses, and related invoices. However, the AO adopted the FMV at ₹285.88 per share and made an addition of ₹27,10,657 under Section 56(2)(viib) in respect of shares allotted to the resident shareholder. The AO also disallowed ₹15,50,000 claimed as legal and professional charges under Section 37(1). The Commissioner of Income Tax (Appeals) upheld both the addition and the disallowance.

Before the Tribunal, the assessee argued that the difference between the issue price and the valuation fell within the 10% safe harbour introduced by CBDT Notification No. 81/2023 dated 25.08.2023. The Revenue contended that the safe harbour provision did not exist during the relevant assessment year.

The Tribunal examined the notification and observed that it provides that where the issue price exceeds the value determined under Rule 11UA by not more than 10%, the issue price shall be deemed to be the fair market value. The Tribunal found that the variation between the issue price and the valuation in the present case fell within the prescribed 10% limit. It further relied on an earlier coordinate bench decision which held that the safe harbour introduced through Notification No. 81/2023 is a curative amendment intended to mitigate hardship arising from unintended consequences of Section 56(2)(viib) and Rule 11UA, and therefore applies retrospectively. Consequently, the Tribunal held that the issue price must be deemed to be the FMV and that no addition under Section 56(2)(viib) could be sustained. The addition was accordingly deleted.

The Tribunal then considered the disallowance of ₹15,50,000 towards legal and professional charges. The AO had treated the expenditure as capital in nature on the ground that it related to raising equity funds. The assessee explained that the expenditure comprised ₹10,00,000 paid to Rajasthan Asset Management Company Pvt. Ltd. for conducting due diligence and ₹5,50,000 paid to Zeus Law Associates for advisory and consultancy services, including meetings, conferences, and drafting and vetting of agreements. These expenses were recorded under legal and professional charges in the books and tax had been deducted at source. During remand proceedings, the AO reiterated that the expenditure facilitated capital financing but did not produce any fresh material to support that conclusion.

The Tribunal allowed the appeal and deleted both the addition under Section 56(2)(viib) and the disallowance of legal and professional expenses.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal preferred by the assessee against the order dated 24.11.2025 of Ld. Commissioner of Income Tax (Appeals)-29 New Delhi (hereinafter referred to as the First Appellate Authority or ‘the ld. FAA’ for short) in Appeal No : CIT(A), Delhi-4, 10998/2015-16 arising out of the assessment order dated 12.02.2016 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by DCIT, Circle-11(1) New Delhi for AY: 2013 -14.

2. Heard and perused the records. The assessee is a private limited company and engaged in the business of providing medical and surgical services. It operates a flagship Oncology Centre at Fortis Noida Hospital. The assessee filed its return of income on 17.09.2013 along with audited financial statements. During the relevant assessment year, the assessee issued equity shares to venture capital investors, non-residents, and residents. The assessee received share application money amounting to Rs. 18,99,69,197/- against issuance of 20,75,264 equity shares at a price of 292.45 per share (including premium of 282.45). The shares were allotted as under:

> M/s SME Tech Fund- Rajasthan Venture Capital Fund Trust I (Venture Capital) – 16,42,598 shares

> Mr. Sunil Baijal (Resident) – 1,08, 167 shares

> Mr. Ajay Rastogi (Non- Resident) – 2,70,416 shares

> Mr. Rahul Jain (Non- Resident)- 54,083 Shares

3. Subsequently, the Ld. AO issued notice under section 143(2) dated 04.09.2014 (PB Pg. 49), followed by notice under section 142(1), calling upon the assessee to furnish the Fair Market Value (FMV) of the shares in accordance with section 56(2)(viib) read with Rule 1 lUA. In response, the assessee submitted a valuation report determining the FMV of equity shares at 785.88 per share. Based on the same, the Ld. AO issued a show cause notice dated 20.01.2016, proposing addition of 76.57 per share (792.45 – 785.88) on 1,08,167 shares allotted to Mr. Sunil Baijal under section 56(2)(viib). In reply, the assessee submitted that the shares were issued at a uniform price of 292.45 per share to venture capital investors, non-residents, and residents. There was a commercial understanding with the venture capital investor that shares would not be issued to any other party at a price lower than the price offered to them. Accordingly, the issue price was justified on commercial and contractual grounds. The assessee also furnished supporting documents, including:

> Share Valuation Certificate prepared by AAR & Co. dated 08.06.2012 (PB Pg 62-63)

> Details of shares allotted during the year to the venture capital, Non-Residents and Residents (PB Pg 64)

> RBI Letter in respect of shares issued to non-residents. (PB Pg 65-66)

> Form FC-GPR filed through the Authorised Dealer to RBl in respect of shares issued to non-residents. (PB Pg 67-73)

> Form 2 filed to report the allotment of shares to non-residents. (PB Pg 74-77)

> Extract of Minutes of meetings of BOD for allotment of shares. (PB Pg 78-80)

> Ledger of legal and professional charges in the books of assessee. (PB Pg 81-90)

> Invoice of M/s Rajasthan Asset Management Company Pvt. Ltd. (PB Pg 91)

4. However, the Ld. AO, without rejecting the valuation report, adopted the FMV at 285.88 per share and made an addition of 27,10,6571- under section 56(2)(viib), being the difference on shares issued to the resident shareholder. The Ld. AO also disallowed Rs. 15,50,000/- under section 37(1).

5. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A). and reiterated its submissions but the additions were upheld for which assessee is in appeal. The foremost contention made by ld. Counsel is that the difference in valuation taken by the assessee and the ld. AO falls within 10% Safe Harbour so no addition is sustainable under Section 56(2)(viib) of the Act. The same was rebutted by ld. DR by submitting that at relevant time there was no such provision of benefit of safe harbor rule.

6. We find that the CBDT, issued Notification No. 81/2023 dated 25.08.2023, introducing a safe harbour of 10% variation in valuation. The relevant extract of the said notification is reproduced below:

“(4) For the purposes of clause (A) or clause (B) of sub-rule (2), where the issue price of the shares exceeds the value of shares as determined in accordance with –

(i) sub-clause (a) or sub-clause (b) of clause (A), for consideration received from a resident, by an amount not exceeding ten percent. of the valuation price, the issue price shall be deemed to be the fair market value of such shares; (ii) sub-clause (a) or sub-clause (b) or sub-clause (d) of clause (A), for consideration received from a non- resident, by an amount not exceeding ten per cent. of the valuation price, the issue price shall be deemed to be the fair market value of such shares”.

7. A plain reading of the above provision makes it abundantly clear that where the variation between the issue price and the value determined under Rule 11UA does not exceed 10%, the issue price itself is to be deemed as the Fair Market Value (FMV).

8. In the present case, the issue price of shares is Rs. 92.45/- per share and the valuation as per report is Rs. 85.88/- per share. The difference works out to 76.57 per share, which is within the permissible safe harbour limit of 10%.

9. Thus, once the variation is within the statutorily permitted range, the issue price is deemed to be FMV by legal fiction, and no addition under section 56(2)(viib) can be sustained. This position is now well-settled by judicial precedents relied by ld. Counsel and we find that in M/s Sakshi Fincap Pvt. Ltd. Versus Income Tax Officer, Ward-22 (2), New Delhi-2024(5) TMI 1232 – ITAT DELHI, Dated:- April 16, 2024– a co-ordinate bench has held the benefit of safe harbor provisions to be applicable with retrospective effect and relevant part is extracted below;

“12. We find that the CBDT after having detailed consultation with various stakeholders, in order to mitigate the hardship faced from the un-intended consequences of Section 56(2)(viib) read with rule 11UA, via notification 81/2023 dated 25.08.2023 has introduced a safe harbour of 10% variation in value. Relevant extract of the notification are as follows:

“(4) For the purposes of clause (A) or clause (B) of sub-rule (2), where the issue price of the shares exceeds the value of shares as determined in accordance with –

(i) sub-clause (a) or sub-clause (b) of clause (A), for consideration received from a resident, by an amount not exceeding ten percent, of the valuation price, the issue price shall be deemed to be the fair market value of such shares;

(ii) sub-clause (a) or sub-clause (b) or sub-clause (d) of clause (A), for consideration received from a non- resident, by an amount not exceeding ten per cent, of the valuation price, the issue price shall be deemed to be the fair market value of such shares.”

13. From perusal of above notification, it is evident that where the difference between the issue price and value adopted by the AO is 10% or less, in such cases issue price will be deemed to be the fair value of shares for the purpose of Rule 11UA of the Income Tax Rules, 1962. In the present case the issue price is Rs. 15 per share and the value adopted by the AO is Rs. 14.68/per share, hence the difference between the issue price and value adopted by AO is Rs. 0.32 i.e. 2.21% (0.32/15) which is less the then the safe harbor of 10% variation in value introduced by CBDT notification 81/2023 dated 25.08.2023.

14. Hence, in view of above-mentioned submission and curative amendment introduced by CBDT notification 81/2023 dated 25.08.2023, addition of Rs. 50,77,334/-u/s 56(2)(viib) read with Rule 11UA is unsustainable.

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17. The amendment brought in Rule 11UA of the Act was introduced to mitigate the hardship faced by taxpayers by the un-intended invocation of Section 56(2)(vlib) read with rule 11UA and therefore the same is a curative amendment. In view of the of the above mentioned judgment of Apex court and judgments of multiple bench’s tribunals, it is established in law that where an amendment which is inserted to remedy unintended consequences and to make the proviso workable, an amendment which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole. Hence, in view of above-mentioned submissions and judicial pronouncements curative amendment in Rule 11UA of the Income Tax Rules, 1962 introduced by CBDT notification 81/2023 dated 25.08.2023 will apply retrospectively and consequently, the addition of Rs.50,77,334 u/s 56(2)(viib) read with rule 11UA is unsustainable as the difference between issue price and value adopted by AO is 2.1% i.e. less than 10%.

18. In the result, the appeal of the assessee is allowed.”

10. In the light of aforesaid discussion we sustain the ground no. 3 as raised and the impugned addition deserves to be deleted.

11. Next issue is disallowance of Rs.15,50,000/- on account of legal and professional charges and the relevant facts are during the course of assessment proceedings, the Ld. AO alleged that an amount of Rs. 15,50,000/- incurred by the assessee under the head “legal and professional charges” pertains to capital financing and is not related to regular business operations. The relevant para 3 of AO order is reproduced as under:

“3. During the assessment proceedings from the details filed by the assessee it was observed that assessee had claimed legal & professional charges of Rs.57,61,725 & out this, an amount of Rs.15,50,000/- has been paid for capital financing… “

11.1 In this regard, ld. Counsel submitted that the said expenditure comprises of 10,00,000/- paid to M/s Rajasthan Asset Management Company Pvt. Ltd. towards due diligence exercise and 25,50,000/- paid to M/s Zeus Law Associates advisory/consultancy services, Including meetings, conferences, and drafting/vetting of agreements. These expenses have been duly recorded under the head “legal and professional charges” in the books of account, and tax has been deducted at source (TDS) thereon. The same is evident from the ledger placed at (PB Pg. 81-90).

11.2 Ld. DR has however relied the findings of ld. Tax authorities below.

12. We find that during appellate proceedings, the Ld. CIT(A) called for a remand report. In the remand report dated 12.09.2025, the Ld. AO reiterated that the expenditure was incurred for raising equity funds and therefore constitutes capital expenditure, without bringing any fresh material or evidence on record and in para 5.2.8 of the remand report following comments have been given:

“5.2.8 Comments of the AO: It is clear from the submission of the assessee that purpose of the above expense was to facilitate capital financing i.e. to raise equity funds and it is not in any manner related to day-to-day operations of the Assessee company hence same must be disallowed u/s 37 of the Act. The claim of the assessee that advantage of payment of Rs.15.50 lacs consist merely in facilitating the assessee’s operations or enabling the management and conduct or the assessee’s business to be carried on more efficiently or more profitably is devoid of merit. Assessee has not substantiated its claim with the help of any example/illustration or documentary evidence. The sole purpose of payment made to Rajasthan asset Management Company Pvt. Ltd. for due diligence undertaking is to attract investment from the venture Capital Fund. Thus, it is clear the expense incurred by the assessee to the tune of Rs.15.50 lacs for the purpose of capital financing is capital expenditure and hence liable to be disallowed.

In view of above discussion. The contentions raised by the assessee on this ground may be dismissed.”

13. We are of considered view that where assessee claims that the impugned expenditure was incurred for conducting due diligence of the business, evaluating financial and operational health of the assessee and obtaining professional advisory services in connection with overall business structuring and growth and such due diligence and advisory services are general business expenditures, but not for any particular or specific project or prospective investment but which may assist not only prospective investors but also lenders and other stakeholders in evaluating the financial position of the assessee, then the expenditure cannot be said to be made for acquisition of any capital asset or that the expenditure has resulted in any enduring benefit of capital nature to the assessee. Thus the reliance placed by the ld. Counsel on the decision of the Hon’ble Supreme Court in Empire Jute Co. Ltd. vs. CIT (1980) helps the assessee for the settled proposition that expenditure incurred for facilitating business operations, even if it results in some advantage, is revenue in nature unless it brings into existence an asset or advantage of enduring nature in the capital field. More so when the Ld. AO has failed to demonstrate on facts as to how the expenditure leads to creation of a capital asset or enduring benefit. Thus the disallowance of Rs.15,50,000/- made by the Ld. AO and confirmed by the Ld. CIT(A) is liable to be deleted. The corresponding ground is sustained.

14. As a result of aforesaid conclusions, we allow the appeal and impugned addition and disallowance stand deleted.

Order pronounced in the open court on 05.06.2026