2021 (6) TMI 500 - AT - Income Tax

Addition u/s 56 (2)(vii)(b) - assessee company is a deemed public limited company - shareholding pattern of the assessee company - DR contended that the CIT(A) has erred deleting the impugned addition made by the Assessing Officer in his regular assessment framed thereby holding that M/s NCC Infrastructure Holding Limited, qualified to be a public limited company(ies) merely because NCC Ltd (a listed company) held more than 40% of the former s shareholding in the relevant previous year. HELD THAT - We find no merit in Revenue s foregoing arguments. The assessee has filed a detailed paper book before the Assessing Officer himself that section 56(2)(vii)(b) did not apply in view of sec.2(18) containing definition of a company . The Revenue s technical argument that the CIT(A) has not offered any opportunity whilst entertaining the assessee s argument to this effect goes against the records. The same stands rejected therefore. Whether assessee qualifies to be a company eligible for section 56 (2)(vii b) s exemption since covered under the clinching legislative expression where a company, not being a company in which the public are substantially interested as per section 2(18)(b)(B)(c) of the Act since the said other company was a listed one holding more than 50% of its stake in the relevant previous year - We make it clear that the assessee had duly filed its shareholding chart before the CIT(A) (supra) whose correctness has nowhere been rebutted in Revenue s pleadings in the instant appeal. Coupled with this, the CIT(A) has also placed reliance on coordinate bench s decision (supra) adjudicating the very issue in assessee s favour and against the department. We therefore find no reason to interfere with CIT(A) s correct approach in deleting the impugned sec. 56(2)(vii b) addition in question - Decided against revenue.

Summary

Issues Involved:
1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961.
2. Determination of the status of the assessee company as a "company in which the public is substantially interested" under Section 2(18) of the Act.
3. Verification of shareholding and public interest status by the Assessing Officer.
4. Procedural fairness and opportunity to exercise options under Explanation (a)(ii) to Section 56(2)(viib).
5. Principles of natural justice and issuance of show-cause notice.
6. Commercial justification for share premium and its impact on taxability.
7. Impact of amalgamation on the appeal process.

Detailed Analysis:

1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961:
The core issue revolves around whether the provisions of Section 56(2)(viib) apply to the assessee company. This section is triggered when a company, not being a company in which the public is substantially interested, receives consideration for the issue of shares exceeding the fair market value. The CIT(A) concluded that Section 56(2)(viib) was not applicable as the assessee company qualified as a "company in which the public is substantially interested."

2. Determination of the Status of the Assessee Company:
The CIT(A) found that the assessee company met the criteria under Section 2(18) of the Act, which defines a "company in which the public is substantially interested." The CIT(A) noted that NCC Ltd., a listed company, held more than 40% of the shares in NCC Infrastructure Holding Limited, which in turn held a significant share in the assessee company. This shareholding pattern qualified the assessee company for exemption from Section 56(2)(viib).

3. Verification by the Assessing Officer:
The Revenue argued that the Assessing Officer did not have the opportunity to verify the claims regarding the public interest status of the assessee company. However, the CIT(A) noted that the assessee had provided detailed submissions and evidence during the assessment proceedings, which the Assessing Officer had not adequately considered.

4. Procedural Fairness and Opportunity to Exercise Options:
The assessee contended that the Assessing Officer did not provide an opportunity to exercise options under Explanation (a)(ii) to Section 56(2)(viib). The CIT(A) agreed, noting that the Assessing Officer had made additions without issuing a show-cause notice or allowing the assessee to justify the share premium based on commercial considerations.

5. Principles of Natural Justice:
The CIT(A) observed that the principles of natural justice were violated as no show-cause notice was issued before making the addition. This procedural lapse was a significant factor in the CIT(A)'s decision to delete the addition.

6. Commercial Justification for Share Premium:
The assessee provided a detailed explanation of the commercial rationale behind the share premium, including strategic partnerships, commercial rights, and business considerations. The CIT(A) found these justifications credible and noted that the premium was not exorbitant, further supporting the decision to delete the addition under Section 56(2)(viib).

7. Impact of Amalgamation:
The appeal was originally filed by Sembcorp Gayatri Power Limited, which had been amalgamated into Sembcorp Energy India Ltd. The CIT(A) and ITAT considered the appeal in the hands of the amalgamated entity, ensuring continuity in the adjudication process.

Conclusion:
The ITAT upheld the CIT(A)'s decision, finding that the assessee company was indeed a "company in which the public is substantially interested," thereby exempting it from the provisions of Section 56(2)(viib). The procedural lapses by the Assessing Officer, including the failure to issue a show-cause notice and consider commercial justifications, were significant factors in the decision. Consequently, the Revenue's appeal was dismissed, and the assessee's cross-objection was dismissed as not pressed.