2021 (4) TMI 802 - AT - Income Tax

Income from other sources - advance against share capital received during the year - applicability of provision of section 56(2)(viib) - HELD THAT - We notice from the record that the assessee is an investment holding company, wholly-owned subsidiary of EIL, pursuant to the merger of the investment and finance division of EIL, the assessee became a wholly owned subsidiary of ICSPL. The assessee has invested in various unlisted companies including M/s The Mobile Stores Ltd (TMSL), which is wholly-owned subsidiary of the assessee company. The tax authorities invoked the provision u/s 56(2)(viib) without bringing on record whether the investment received by the assessee are genuine or not. We notice that the provision introduced by the legislature in order to curb the practice of generation and circulation of unaccounted money. In the current case, the tax authorities have not brought on record any generation or circulation of unaccounted money. Rather they acknowledged that the funds were invested by the holding company and received by the subsidiary company as advance towards share capital. It is not disputed that the net worth of the company is NIL because of investment in step down subsidiary company (due to provision towards revaluation of investment). It is also not disputed that the funds were moved from the holding company to the assessee and the funds were re-invested in the step down subsidiary company in order to revive the step down subsidiary in that process, the investment in such step down company is safeguarded. The receipt of consideration for issue of shares to mean the proceeds for exchange of ownership for the value. The term consideration means something in return i.e. Quid Pro Quo . The receipt is exchanged with the ownership in the company. In the given case, the holding company passed the resolution to finance TMSL through the assessee and the funds intended for TMSL, which is step down subsidiary and the funds were remitted to the assessee as an advance towards share capital during this impugned assessment year (we do not intend to discuss the quantum of actual receipt of the advance during this assessment year at this stage. It is a separate discussion since assessee has only passed journal entries to convert the unsecured loan into advance towards share capital). The consideration means the promise of the assessee to issue shares against the advances received. In our view, the receipt of advances are a liability and will never take the character of the ownership until it is converted into share capital. The assessee can never enjoy the receipt of money from the investor until the ownership for the money received is not passed on i.e. by allotment of shares. The receipt of consideration during the previous year means the year in which the ownership or allotment of shares are passed on to the allottee in exchange for the investment of money. The tax authorities interpretation that when the receipt of money and mere agreement for allotment of shares without actual allotment of shares will make the consideration complete as per the contractual laws. In our view, unless and until the event of allotment of shares takes place, the assessee cannot become the owner of the funds invested in the company. The event of allotment will change the colour of funds received by the assessee from liability to the ownership. In our considered view, the provision of section 56(2)(viib) are attracted only in the year of allotment of shares i.e. assessment year 2014-15 - In case we accept the proposition of tax authorities then any fund received by the sick or capital eroded subsidiary companies will be more than the fair market price of the shares By merely transferring funds as unsecured loan or advances towards share capital will not trigger the deeming provision under section 56(2)(viib). We do not foresee that the legislature must have intended to tax such legitimate investment under section 56(2)(viib). This is a peculiar case where not only share premium are brought under the deeming provision but including face value of shares. In our view, the tax authorities have mechanically invoked the deeming provision without actually investigating whether the assessee has actually indulged in any money laundering activities. The tax authorities are not expected to act mechanically without appreciating the soul and purpose of introduction of the particular and specific provision. Considering the above discussion, in our view, the provision of section 56(2)(viib) is applicable only in the year in which assessee issued actual share capital and AO is directed to drop the additions initiated under section 56(2)(viib) during this assessment year, therefore order of Ld. CIT(A) is set aside.

Summary

Issues Involved:
1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961.
2. Determination of the relevant assessment year for the application of Section 56(2)(viib).
3. Quantum to be considered for taxation under Section 56(2)(viib).
4. Validity of the valuation date and balance sheet date for determining the fair market value of shares.
5. Legitimacy of writing back the provision for diminution in the value of investments.

Issue-wise Detailed Analysis:

1. Applicability of Section 56(2)(viib):
The Tribunal examined whether Section 56(2)(viib) was applicable to the assessee, an investment holding company that received funds from its holding company. The provision applies to companies not substantially interested by the public when they receive consideration for shares exceeding the fair market value. The Tribunal noted that the primary purpose of this section is to deter the generation and circulation of unaccounted money. It was found that the funds received by the assessee were genuine and intended for investment in a step-down subsidiary, TMSL, to revive its adverse financial position. The Tribunal concluded that the tax authorities failed to demonstrate any tax abuse or laundering of unaccounted money, thus Section 56(2)(viib) was not applicable.

2. Determination of the Relevant Assessment Year:
The Tribunal analyzed whether the provisions of Section 56(2)(viib) should be applied in the year the funds were received (AY 2013-14) or the year the shares were issued (AY 2014-15). It was determined that the receipt of funds as an advance towards share capital remains a liability until shares are actually allotted. The Tribunal concluded that the provision of Section 56(2)(viib) is triggered only in the year of actual allotment of shares, which in this case was AY 2014-15.

3. Quantum to be Considered for Taxation:
The Tribunal addressed whether the entire amount of ?313.63 crores received in AY 2013-14 should be taxed under Section 56(2)(viib). It was noted that the authorized share capital of the assessee during AY 2013-14 was only ?1 crore, and thus only a part of the funds could be considered as received towards share capital. The Tribunal held that only ?282 crores could be taxed in AY 2013-14, and the balance should be considered in AY 2014-15 when the authorized share capital was increased.

4. Validity of the Valuation Date and Balance Sheet Date:
The Tribunal examined the appropriate valuation date and balance sheet for determining the fair market value of the shares. It was argued that the valuation date should be the date of actual allotment of shares (7th March 2014) and the balance sheet date should be 31st March 2013. The Tribunal found that the tax authorities incorrectly considered the balance sheet as on 31st March 2012, which was not in accordance with the rules. The Tribunal concluded that the balance sheet as on 31st March 2013 should be used for valuation purposes.

5. Legitimacy of Writing Back the Provision for Diminution in Value of Investments:
The Tribunal reviewed the assessee’s action of writing back the provision for diminution in the value of investments in TMSL. It was found that the write-back was justified due to the improved financial position of TMSL. The Tribunal held that the tax authorities could not substitute the book value of assets with a perceived fair value and must accept the audited financial statements prepared in accordance with the relevant accounting standards.

Conclusion:
The Tribunal concluded that the provisions of Section 56(2)(viib) were not applicable in AY 2013-14 as the actual allotment of shares occurred in AY 2014-15. The appeal was partly allowed, and the additions made by the AO under Section 56(2)(viib) for AY 2013-14 were directed to be dropped. The Tribunal also kept open the issues regarding the adoption of the valuation date and the balance sheet for academic purposes.