Case Law Details
FIS Payment Solutions And Services India Private Limited Vs Union of India & Ors. (Delhi High Court)
Delhi High Court recently adjudicated on the writ petition filed by FIS Payment Solutions and Services India Private Limited, challenging the applicability of Section 56(2)(viib) of the Income Tax Act, 1961. The petitioner sought a declaration that the provision, introduced via the Finance Act, 2012, was unconstitutional. Alternatively, it requested that the provision be read down to apply only to unaccounted income cases and not to transactions between wholly owned subsidiaries and their holding companies. Additionally, the petitioner contested the Dispute Resolution Panel’s (DRP) order dated June 29, 2024, which had led to an income tax addition under this provision.
The Court examined precedents set by the Income Tax Appellate Tribunal (ITAT), including BLP Vayu (Project-1) (P.) Ltd. vs. Principal Commissioner of Income Tax and DCIT v Kissandhan Agri Financial Services (P.) Ltd. [2023] 150 com 390 (ITAT, Delhi). In both cases, ITAT had clarified that Section 56(2)(viib) was intended to prevent tax evasion through artificially inflated share premiums but was not applicable to transactions between a wholly owned subsidiary and its holding company. The Tribunal emphasized that such transactions do not lead to any real gain or transfer of value, thereby falling outside the scope of the deeming provisions.
The Court noted the respondent’s concession that the DRP’s order should be reconsidered in light of these ITAT rulings. Given this acknowledgment, the Court refrained from ruling on the constitutional validity of Section 56(2)(viib). Instead, it allowed the petition in part, quashing the DRP’s order and directing it to reassess the issue while taking into account the precedents set by ITAT. The Court maintained that all other contentions on the matter remain open for further adjudication.
This ruling underscores the judiciary’s consistent approach towards Section 56(2)(viib) in cases involving intra-group transactions. The decision affirms that such transactions should not be subjected to tax under this provision unless there is a clear element of income or unjustified premium benefiting an external party. The matter now returns to the DRP for a fresh determination based on established legal interpretations.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. This writ petition has been preferred seeking the following reliefs:-
“a) Issuance of declaration that Section 56(2)(viib) of the Income-Tax Act,1961, inserted vide Finance act, 2012, is ultra vires being violative of Article 14 of Constitution of India, 1950;
b) In the alternative to prayer (a). this Hon’ble Court may read down the provision as being applicable in situations where any unaccounted income or money can possibly be involved and would not apply to issuance of shares by a wholly owned subsidiary to its holding company; and
c) In addition to Prayer (a) or (b), issuance of a writ of Certiorari quashing the impugned directions dated 29.06.2024 issued by the Ld. DRP to the extent of the addition arising out of Section 56(2)(viib) of the Income Tax Act, 1961.
d) In the alternative to prayer (c), issuance of a writ of Mandamus or any other appropriate writ order or direction directing the Assessing Officer to not make the addition arising out of Section 56(2)(viib)of the Income-tax Act, 1961 while passing the final assessment order.
e) For ad-interim reliefs as the Court may deem fit; and
f) For the costs of this Petition;
g) Pass any other further order (s) / direction (s) as this Hon’ble Court may deem fit and proper in the fact and circumstances of the case.”
2. As would be evident from the above, apart from the challenge which stands raised to the directions as framed by the Dispute Resolution Panel1, the petitioner also questions the validity of Section 56(2)(viib) of the Income Tax Act, 19612 which came to be inserted in terms of Finance Act, 2012.
3. We note that the Income Tax Appellate Tribunal3 in BLP Vayu (Project-1) (P.) Ltd. vs. Principal Commissioner of Income- tax4 had an occasion to construe the ambit of that provision and had ultimately observed as follows:-
“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 v. 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. ITO in ITA No. 9710/Del/2019, 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.”
4. An identical view came to be expressed by the Tribunal in Deputy Commissioner of Income-tax vs. Kissandhan Agri Financial Services (P.) Ltd.5 to the following effect:-
“12. This apart, as pointed out on behalf of the assessee, the shares have been subscribed by the holding company, i.e., the existing shareholders only. Pertinent to say, Section 56(2)(viib) creates a legal fiction whereby the scope and ambit of expression ‘income’ has been enlarged to artificially tax a capital receipt earned by way of premium as taxable revenue receipt. Hence, such a deeming fiction ordinarily requires to be read to meet its purpose of taxing unaccounted money and thus needs to be seen in context of peculiar facts of present case. The legal fiction has been created for definite purpose and its application need not be extended beyond the purpose for which it has been created. Bringing the premium received from holding company to tax net under these deeming fictions would tantamount to stretching provision to an illogical length and will lead to some kind of absurdity in taxing own money of shareholders without any corresponding benefit.”
5. Mr. Bhatia, learned counsel appearing for the respondent on instructions states that the respondents remain bound to act in terms of the declaration of the law as embodied in the decisions of the Tribunal aforenoted and that consequently the DRP may be called upon to revisit the direction impugned herein.
6. In view of the aforesaid, we find no occasion to go into the challenge raised with respect to the Section 56(2)(viib), since the apprehension of the writ petitioner stands duly allayed in light of the stand taken by the respondents herein and who have conceded to the enunciation of the legal position by the Tribunal in the decisions
7. We accordingly allow the writ petition in part and quash the direction of the DRP dated 29 June 2024. The matter shall stand remitted to the said authority who shall examine the issue afresh bearing in mind the judgments of the Tribunal in BLP Vayu and Kissandhan Agri. All other rights and contentions of respective parties on merits are kept open.
Notes:
1 DRP
2 Act
3 Tribunal
4 2023 SCC OnLine ITAT 397
5 ITA No. 8734/Del/2019
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