2024 (10) TMI 182 - HC - Income Tax

Validity of Section 56(2)(viib) came to be inserted in terms of Finance Act, 2012 - shares have been subscribed by the holding company - HELD THAT - We note that the Income Tax Appellate Tribunal Tribunal in BLP Vayu (Project-1) (P.) Ltd 2023 (6) TMI 209 - ITAT DELHI held that not only that the fair market value is supported by independent valuer report, the allotment has been made to the existing shareholder holding 100% equity and therefore, there is no change in the interest or control over the money by such issuance of shares. The object of deeming an unjustified premium charged on issue of share as taxable income u/s 56(2)(viib) is wholly inapplicable for transactions between holding and its subsidiary company where no income can be said to accrue to the ultimate beneficiary, i.e., holding company. The chargeability of deemed income arising from transactions between holding and subsidiary or vice versa militates against the solemn object of Section 56(2)(viib) of the Act.Section 56(2)(viib) could not be applied in the case of transaction between holding company and wholly owned subsidiary in the absence of any benefit occurring to any outsider. Also decided in Kissandhan Agri Financial Services (P.) Ltd 2023 (3) TMI 769 - ITAT DELHI held that section 56(2)(viib) creates a legal fiction whereby the scope and ambit of expression 'income' has been enlarged to artificially tax a capital receipt earned by way of premium as taxable revenue receipt. Hence, such a deeming fiction ordinarily requires to be read to meet its purpose of taxing unaccounted money and thus needs to be seen in context of peculiar facts of present case. The legal fiction has been created for definite purpose and its application need not be extended beyond the purpose for which it has been created. Bringing the premium received from holding company to tax net under these deeming fictions would tantamount to stretching provision to an illogical length and will lead to some kind of absurdity in taxing own money of shareholders without any corresponding benefit. We find no occasion to go into the challenge raised with respect to the Section 56(2)(viib), since the apprehension of the writ petitioner stands duly allayed. We accordingly allow the writ petition in part and quash the direction of the DRP dated 29 June 2024. The matter shall stand remitted to the said authority who shall examine the issue afresh.

Summary

Issues:
Challenge to the validity of Section 56(2)(viib) of the Income Tax Act, 1961 and the directions issued by the Dispute Resolution Panel (DRP) based on this provision.

Analysis:
The writ petition sought a declaration that Section 56(2)(viib) of the Income Tax Act, 1961, inserted via the Finance Act, 2012, is ultra vires as it allegedly violates Article 14 of the Constitution of India. Additionally, the petitioner requested the court to read down the provision to exclude situations where unaccounted income or money may be involved, especially in the context of shares issued by a wholly owned subsidiary to its holding company. The petition also sought the quashing of the directions issued by the DRP on 29.06.2024 related to Section 56(2)(viib) and requested the Assessing Officer not to make any additions under this provision in the final assessment order. The court was asked to grant ad-interim reliefs, costs, and any other appropriate orders.

The court noted that the challenge included questioning the validity of Section 56(2)(viib) and the directions issued by the DRP. Referring to the decision in BLP Vayu (Project-1) (P.) Ltd. vs. Principal Commissioner of Income-tax, the court highlighted that the applicability of Section 56(2)(viib) should be viewed in the context of transactions between a holding company and its subsidiary. The court emphasized that the objective of Section 56(2)(viib) is to prevent unlawful gains by issuing companies in the guise of capital receipts. The court cited the decision in Ozone India Ltd., stating that the provision is inapplicable to transactions between a holding and its wholly owned subsidiary where no income accrues to the ultimate beneficiary.

The court referenced a similar view expressed in Deputy Commissioner of Income-tax vs. Kissandhan Agri Financial Services (P.) Ltd., emphasizing that the legal fiction created by Section 56(2)(viib) should not be extended beyond its purpose of taxing unaccounted money. The court highlighted that taxing premiums received from a holding company under this provision would be illogical and lead to absurd outcomes.

The respondent acknowledged the binding nature of the Tribunal decisions and agreed that the DRP should reconsider the impugned direction in light of the Tribunal's rulings. Consequently, the court found no need to delve into the challenge against Section 56(2)(viib) since the respondent had accepted the legal position established by the Tribunal decisions. The court partially allowed the writ petition, quashing the DRP's direction and remitting the matter back to the authority for fresh examination in line with the Tribunal's judgments. All other aspects of the case were left open for further arguments and considerations.