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Judgment
PER SATBEER SINGH GODARA, JM
This assessee’s appeal for assessment year 2018-19, arises against the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre [in short, the “CIT(A)/NFAC”], Delhi’s DIN and order no. ITBA/NFAC/S/250/2025-26/1078753949(1), dated 22.07.2025 involving proceedings under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’).
Heard both the parties at length. Case file perused.
Suffice to say, it transpires at the outset with the able assistance from both the parties that the learned lower authorities; and; more particularly, the Assessing Officer’s assessment framed herein dated 23.04.2021 has invoked section 56(2)(vii)(b) addition amounting to Rs.87,89,027/- in the assessee’s hands which stands upheld in the CIT(A)/NFAC’s ex-parte lower appellate discussion. This is what leaves the assessee aggrieved.
We have given our thoughtful consideration to the assessee’s and the Revenue’s respective vehement stands against and in support of the impugned addition. There is no dispute between the parties that the assessee had issued its 3,93,202 shares with premium thereupon @ Rs.728.57 per cent by adopting net asset value where as both the learned lower authorities have upheld the same to the extent of Rs.381.263 leading to the impugned addition of differential value; aggregating to Rs.87,89,207/- forming subject matter of adjudication. There is further no quarrel between the parties that the assessee had issued the shares in question to its existing share holders and group entities only.
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 Co-ordinate 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:
“8.2The 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:
"11.1As 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 ultimatebeneficiary, 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."
8.2The 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. This apart, in the instant case, the assessee has also supported the premium determined on issue of shares by DCF Method. Thus, the premium charged is supportable by the valuation report and the premium has been charged to existing shareholder. Thus effectively, the benefit if any arising to the company in turn benefits to the subscriber having pre-existing right in the company. While applying Section 56(2)(viib), the purpose for which deeming provision has been inserted is not achieved in the instant case. Hence, in our view, the conclusion drawn by the CIT(A) cannot be faulted either on facts or in law.”
9.The Ld. AR also submitted that the CBDT in order to mitigate the hardship faced from the un-intended consequences of section 56(2)(viib) of the Act read with Rule 11UA, via notification 81/2023 dated 25.08.2023 has introduced a safe harbour of 10% variation in value. In support of this argument, the Ld. AR relied upon the order passed by the Co-ordinate Bench of ITAT, Delhi Benches, in the case of Sakshi Fincap Pvt. Ltd. vs. ITO, in ITA No. – 8389/Del/2019, relevant para is reproduced as under:
“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) (viib) 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%.”
10.On the basis of foregoing discussion and established principle of law, we find material substance in the submission advanced on behalf of the assessee and there is strong ground exist to interfere with the order passed by the Ld. CIT(A) and accordingly, the order passed by the Ld. CIT(A) not sustainable in eyes of law and addition in question deserves to be deleted.”
We hereby adopt the above detailed reasoning mutatis mutandis to reverse both the learned lower authorities’ respective detailed findings for this precise reason to delete the impugned section 56(2)(vii)(b) addition of Rs.87,89,027/- in very terms. All other remaining issues between the parties stand rendered academic.
This assessee’s appeal is allowed.