2024 (6) TMI 649 - AT - Income Tax

Addition on account of premium amount in excess of FMV u/s. 56(2)(viib) - assessee has issued and allotted 1,00,000 Optional Convertible Preference Shares ( OCPS ) to its holding company - HELD THAT - The legal effect of issue of shares to holding company at a premium has been examined in case of BLP Vayu (Projects-1) Pvt 2023 (6) TMI 209 - ITAT DELHI and Kissandhan Agri Financial Services (P) Ltd. 2023 (3) TMI 769 - ITAT DELHI as 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. In consonance with the view expressed, the addition under s.56(2)(viib) on the ground of FMV allegedly lesser than the premium charged on allotment of OCPS to parent co. i.e. holding co. is a damp squib. The addition is thus unsustainable in law on this ground alone. Alternate plea with regard to correctness of FMV determined by the AO on the strength of NAV method - As noted, the NAV method is permissible only in the caseof issue of equity shares as per Rule 11UA(2) of the IT Rules. The converted equity shares on conversion of OCPS, when taken as a base for calculation of NAV, the premium charged would, statedly, be negligible or NIL as essentially found by the CIT(A) in paras 4.4 and 4.5 of its order. CIT(A) has endorsed this line of reasoning. We do find traction in such plea of the assessee that the FMV arrived at by the assessee is apparently justifiable when the calculation of the NAV is calculated with reference to the equity shares to be allotted on conversion. We do not see any cogent reason to discard the calculation of FMV with reference to quantity of equity share to arise on exercise of option relatable to issue of OCPS. Otherwise, the provisions of Rule 11UA(1)(c)(c) would be applicable which permits the Valuer to apply DCF method. Thus, seen from any angle, it is difficult to fault the valuation assigned for determination of FMV. Hence, action of the CIT(A) calls for no interference in terms of Rule 11UA(2) of the Rules. Thus, where the convertible shares have been allotted to wholly owned 100% holding company, the benefit if any arising to the assessee company on account alleged excess premium, in turn, effectively benefits the subscribers themselves having pre-existing rights in the company. Thus, on a common sense approach, no purpose will be achieved by obtaining benefit by way of excess premium by the assessee from its own shareholder. The avowed purpose behind the insertion of deeming fiction under Section 56(2)(viib) of the Act to the charge so called excess premium as deemed income of the assessee, would not be achieved when the shares are allotted to the same set of shareholders. Thus in our view, the conclusion drawn by the CIT(A) cannot be faulted either on facts or in law. Hence, we decline to interfere. Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 3,60,83,000/- on account of premium amount in excess of FMV made by the AO u/s 56(2)(viib) of the Income Tax Act, 1961.

Summary:

Issue 1: Deletion of Addition of Rs. 3,60,83,000/- u/s 56(2)(viib)

The Revenue filed an appeal against the order of the Commissioner of Income Tax (Appeals)-8, New Delhi ['CIT(A)'] dated 28.01.2020, which deleted the addition of Rs. 3,60,83,000/- made by the Assessing Officer (AO) u/s 56(2)(viib) of the Income Tax Act, 1961. The AO had recomputed the Fair Market Value (FMV) of the Optionally Convertible Preference Shares (OCPS) issued by the assessee at Rs. 639.17 per OCPS, as opposed to Rs. 1,000/- per OCPS declared by the assessee, and added the excess premium as taxable income.

The CIT(A) found that the AO had incorrectly calculated the FMV by equating OCPS with equity shares without applying the correct conversion factor. The CIT(A) determined that the correct FMV of OCPS was Rs. 993.48 per share, thus justifying the premium charged by the assessee. The CIT(A) relied on various tribunal orders which held that if the assessee opts for the Discounted Cash Flow (DCF) method for valuation, the AO cannot discard it without cogent reasons.

The Tribunal upheld the CIT(A)'s decision, noting that the deeming provisions of Section 56(2)(viib) are not applicable to transactions between a holding company and its subsidiary. The Tribunal cited previous cases, including BLP Vayu (Projects-1) Pvt. Ltd. and DCIT vs. Kissandhan Agri Financial Services (P) Ltd., which established that the legal fiction of Section 56(2)(viib) does not extend to such transactions. The Tribunal also agreed with the CIT(A) that the FMV determined by the assessee was justifiable and that the AO's method of valuation was flawed.

In conclusion, the Tribunal found no fault in the CIT(A)'s decision to delete the addition made by the AO and dismissed the Revenue's appeal. The order was pronounced in the open Court on 12/06/2024.