2021 (7) TMI 96 - AT - Income Tax

Addition u/s. 56(2)(vii)(b) - difference in the value of shares transferred by the assessee company to its holding company, pursuant to a scheme approved by the Hon ble Jurisdicational High Court - Shares issued at premium - wholly owned subsidiary company issued shares to its Holding Company in consideration of transfer of assets and liabilities of a division to it by the holding company at a value determined under the Scheme of Arrangement duly approved by the learned High Court of Bombay - CIT-A rejected assessee s contention that transfer in pursuant to Hon ble High Court order effective from a appointed ate, which is the basis of valuation and contention of 5% tolerance - HELD THAT - it is noted that the scheme was approved by the Hon ble High Curt on 01/08/2014 without any variance in the appointed date. The appointed date as per the scheme approved by the Hon ble High Court was 01/04/2013 or such other date as the Hon ble High Court may direct or approve. The Hon ble High Court order while approving the scheme did not direct otherwise regarding the appointed date. Hence, the appointed date of the scheme approved by the High Court is 01/04/2013. As scheme approved by the Hon ble High Court provided an appointed date to be 01/04/2013 or any other date directed by Hon ble High Court while accepting the scheme Hon ble High Court has not directed any change in appointed date, we are of the considered opinion, the appointed date is 01/04/2013 and hence, the value considered by the assessee, which is nearer to the date is appropriate. The valuation date taken by the AO is not in accordance with the appointed date approved by Hon ble High Court and in this view of the matter appointed date taken and the valuation done by the AO is incorrect. Hence, we do not find any infirmity in value taken by the assessee as per the scheme approved by the Hon ble High Court and appointed date therein. Hence, the addition made is directed to be deleted. Appeal by the assessee stands allowed.

Summary

Issues Involved:
1. Addition under Section 56(2)(viib) of the Income Tax Act.
2. Determination of the valuation date for share issuance.
3. Consideration of deferred tax liability in share valuation.
4. Applicability of Section 47(iv) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Addition under Section 56(2)(viib) of the Income Tax Act:
The primary issue in this case was the addition of ?60,67,429 under Section 56(2)(viib) of the Income Tax Act. The assessee issued shares to its holding company in consideration of the transfer of assets and liabilities. The Assessing Officer (AO) computed the fair market value of the shares using the book value of the assets as on 31.03.2014, which differed from the assessee's valuation based on the appointed date of 01.04.2013. The AO concluded that the valuation method adopted by the assessee was not correct and added the excess value of ?60,67,429 to the total income of the assessee as income from other sources.

2. Determination of the Valuation Date for Share Issuance:
The assessee argued that the valuation date should be 01.04.2013, as per the appointed date in the Scheme of Arrangement approved by the Hon’ble High Court. The AO, however, took the valuation date as the actual date of share issuance in FY 2014-15. The CIT(A) upheld the AO's decision, stating that the valuation should be determined on the date when the shares were issued. The Tribunal, however, found that the appointed date as per the scheme approved by the High Court was 01.04.2013, and thus, the valuation date considered by the assessee was appropriate.

3. Consideration of Deferred Tax Liability in Share Valuation:
The AO reduced the deferred tax liability from the total assets while calculating the book value of shares. The assessee contended that deferred tax liability is not an ascertained liability but only a notional amount shown in accounts to comply with prescribed Accounting Standards and should not be considered for valuation purposes. The Tribunal did not specifically address this issue in its final decision, as the primary issue regarding the valuation date was resolved in favor of the assessee.

4. Applicability of Section 47(iv) of the Income Tax Act:
The assessee argued that the transfer of assets and liabilities between a holding company and its wholly-owned subsidiary should not be regarded as a transfer under Section 47(iv) of the Act, and thus, there should be no tax implication. The AO rejected this contention, stating that the parent company was not a 100% shareholder of the subsidiary company. The CIT(A) also rejected the applicability of Section 47(iv), focusing instead on the determination of the fair market value of the shares. The Tribunal did not delve into this issue in its final ruling, as the valuation date issue was decisive.

Tribunal's Decision:
The Tribunal found that the appointed date of 01.04.2013, as per the scheme approved by the Hon’ble High Court, was the correct valuation date. The valuation done by the assessee based on this date was appropriate. The valuation date taken by the AO was not in accordance with the appointed date approved by the High Court. Consequently, the addition made by the AO was directed to be deleted. Other grounds of challenge by the assessee were deemed to be of academic interest and were not adjudicated.

Conclusion:
The Tribunal allowed the appeal by the assessee, setting aside the orders of the authorities below and deleting the addition made under Section 56(2)(viib) of the Income Tax Act.