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Judgment
PER MANISH AGARWAL, AM :
These are quantum as well as penalty appeals filed by the assessee, have been directed against the separate orders of the Ld. National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “NFAC”] both dated 22.09.2025 arising out the assessment order 29-09-2021 u/s 143(3) r.w.s. and penalty order dated 18.2.2022 passed u/s. 271(1)(c) of the Income Tax Act, 1961 (in short “the Act”) pertaining to A.Y. 2015-16.
The grounds raised in quantum appeal being ITA No.7187/Del/ 2025 read as under:-
1.On the facts and in the circumstances of the case, NFAC erred in passing a completely non-speaking and mechanical order and has confirmed the AO’s findings without testing the same.
2.On the facts and in the circumstances of the case, NFAC erred in holding that the provisions of section 56(2)(viib) of the Act applied in the facts of the present case.
3.On the facts and in the circumstances of the case, NFAC erred in confirming addition u/s. 56(2)(viib) of the Act in a sum of Rs. 2,78,800/-.
The assessee seeks leave to add to, modify, forego, amend, or otherwise alter all or any of the grounds of appeal as raised herein.
The brief facts of the case are that a return of income was filed by the assessee company on 13.01.2016 declaring total income of Rs. 41,640/-. The case of the assessee was selected for ‘Limited Scrutiny’ under CASS on the reasons that (i) Low income in comparison to high loans advances /investments in shares (ii) Low income in comparison to very high investments and large increase in investment; and (iii) large increase in investment in unlisted equities during the year. Assessment u/s. 143(3) of the Act was completed on 24.10.2017 at the returned income of Rs. 41,640/-. Thereafter, on perusal of the assessment records, it was noted by the Ld. PCIT-07, Delhi that during the course of assessment proceedings, the issue of section 56(2)(viib) were neither enquired into nor examined for basis of determination of fair market value of shares. Accordingly, a show cause notice u/s. 263 was issued to the assessee on 17.5.2018 and proceedings u/s. 263 of the Act, were initiated. Further, order u/s. 263 of the Act was passed on 17.3.2020 treating the order of AO to be erroneous in so far as it is prejudicial to the interest of revenue. The relevant paragraph of the directions of PCIT-07, Delhi vide order dated 17.3.2020 observation are as under:-
“In view of the above, it is clear that the consideration for which the assessee sold the said shares of M/s Urjani Buildwell Pvt. Ltd. @ Rs. 100/- per share is more than their fair market value of Rs. 98.30 per share, and attracts taxability u/s. 56(2)(viib) of the Act. In the facts and circumstances of the case, therefore, where these issues were neither enquired into nor examined for basis of determination of fair market value of shares, I am satisfied that the assessment order passed by the AO is both erroneous and prejudicial to the interest of revenue, to this extent, as per Explanation 2 to section 263 of the Act.”
Accordingly, the assessment order u/s. 143(3) of the Act, passed by the AO on 24.10.2017 was set aside to the above extent with a specific decision to make the assessment afresh after taking into account the facts mentioned above and after allowing an opportunity to the assessee of being heard.
In view of the above proceedings, notice dated 14.9.2021 was issued by the AO u/s. 142(1) of the Act, to the assessee to file the reply. However, no reply was filed by the assessee. AO noted that during the year under consideration, the assessee made transactions in the equity shares of the closely held companies, i.e., not being the companies in which the public are substantially interested i.e. Urjani Buildwell P Ltd. (sold): No. of shares – 1,64,000, Price at which purchased / sold Rs. 100 and price as per 11UA Rs. 98.30. The transactions of sale of shares are covered by the provisions of Section 56(2)(viib) of the Act, which, as it stood in Financial Year 2014-15 (relevant to AY 2015-16), provides for taxability as income from other sources in the hands of the company (not being a company in which the public are substantially interested) receiving consideration for issue of shares.
Accordingly, as per the documents available on records with the AO, the Fair Market Values of the shares as per Rule 11UA was worked out by the AO as Rs. 98.30/- per share that was more than the FMV, the provisions of section 56(2)(viib) were attracted in the hands of the assessee company. Thereafter, in the interest of natural justice, a final show cause notice dated 23.09.2021 was issued by the AO as to why the assessment should not be completed and the difference amount of the Fair market value of Rs. 98.30 per share and sale price of Rs. 100 per share of 164000/- shares sold during the year under consideration should not be added in the income of the assessee company u/s. 56(2)(viib) of the Act. However, the assessee company did not file any reply in response to the notice. Therefore, the consideration of Rs. 2,78,000/- (i.e., the amount for which the assessee sold the said shares of M/s Urjani Buildwell Pvt. Ltd. @ Rs. 100 per share was more than their Fair Market Value of Rs. 98.30 per share, and attracts taxability u/s. 56(2)(viib) of the Act,) was added by the AO to the income of the assessee company and completed the assessment proceedings u/s. 143(3) r.w.s. 263 of the Act, on 29.9.2021. Against the above, assessee appealed before the Ld. CIT(A), who vide his impugned order dated 22.9.2025 dismissed the appeal of the assessee. Aggrieved, assessee is in appeal before the Tribunal.
Heard the rival contentions and perused the material on record. The solitary issue in this appeal is with respect to addition of Rs. 2,78,000/- made by the AO by invoking the provisions of section 56(2)(viib) of the Act by holding that assessee has sold shares of M/s Urjani Buildwell Pvt. Ltd. @ Rs. 100 per share, which is more than the Fair Market Value of Rs. 98.30 per share. It was the claim of the assessee that it had invested /purchased the shares from the closely held companies and has made the investment, therefore, the provisions of section 56(2)(viib) of the Act are not applicable to a company who had received consideration on the issue of shares. The provisions of Section 56(2)(viib) of the Act read as under:-
“56(2)(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:
Provided that this clause shall not apply where the consideration for issue of shares is received –
(i)by a venture capital undertaking from a venture capital company or a venture capital fund or a specified fund; or
(ii)by a company from a class or classes of persons as may be notified by the Central Government in this behalf:
Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has under reported the said income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year:
[Provided also that the provisions of this clause shall not apply on or after the 1st day of April, 2025.]
Explanation.—For the purposes of this clause,—
(a)the fair market value of the shares shall be the value –
(i)as may be determined in accordance with such method as may be prescribed; or
(ii)as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, license, franchises or any other business or commercial rights of similar nature, which is higher;
(aa)“specified fund" means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulated under the [International Financial Services Centre Authority (Fund Management) Regulations, 2022 made under the] International Financial Services Centres Authority Act, 2019 (50 of 2019);
(ab)"trust" means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force;
(b)"venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10;”
Upon careful consideration of the provisions of section 56(2)(viib), it is observed that the said section is applicable where a company in which the public is not substantially interested, had received any consideration for issue of shares that exceeds the fair market value of such shares. As observed above, in the instant case, assessee has purchased /subscribed the shares and not received any consideration, therefore, the provisions of section 56(2)(viib) are not applicable and accordingly, the addition made on this account is hereby deleted and the ground raised by the assessee is allowed.
In the result, the quantum appeal is allowed in above terms.
As regards penalty appeal (ITA No. 7188/Del/2025) is concerned, since we have already deleted the addition in dispute in the quantum appeal as aforesaid, hence, the penalty involved in this appeal has no legs to survive and thus, the penalty in dispute is hereby deleted and resultantly, the instant penalty appeal is also allowed.
In the result, both the appeals filed by the assessee are allowed in the aforesaid manner.