KBC INDIA PVT. LTD.,NEW DELHI vs. ITO WARD-14(3), NEW DELHI

This is an appeal by the assessee against order date

27.09.2019 of learned Commissioner of Income Tax (Appeals)-5,

New Delhi, pertaining to assessment year 2016-17.

an amount of Rs.41,70,000/- under section 56(2)(viib) of the

Income-tax Act, 1961 (for short ‘the Act’)/

entity. For the assessment year under dispute, assessee filed its

ITA No.9710/Del/2019 AY: 2016-17

return of income on 11.10.2016 declaring nil income. Assessee’s

case was selected for limited scrutiny to examine large share

premium received during the year. In course of assessment

proceeding, the Assessing Officer noticed that the assessee, in the

year under consideration, had allotted 10,000 equity shares

having face value of Rs.100 per share at a cost of Rs.1,500/- per

share, including premium of Rs.1,400/- per share, to its holding

company M/s. Puran Associates Pvt. Ltd. Noticing this fact, the

Assessing Officer called upon the assessee to justify the share

premium of Rs.1,400/- per share and to further explain, why the

share premium received being in excess of the Fair Market Value

(FMV) of shares as on date of sale, should not be treated as

income of the assessee under section 56(2)(viib) of the Act. In

response to the query raised, the assessee submitted that as per

section 56(2)(viib) read with rule 11UA, the fair market value of

share can be either as per rule 11UA or on the basis of face value

of asset, including, intangibles, whichever is higher. In support of

such claim, the assessee furnished a valuation report of a

registered valuer to justify the FMV of share, wherein, the

registered valuer has valued the FMV of share by taking the value

of the asset, i.e., the land determined at Rs.26,75,00,000/-. The 2 | P a g e

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Assessing Officer, however, was not convinced with the

submission of the assessee. He observed that the assessee itself

has not adopted the methodology prescribed under rule 11UA and

DCF method to value FMV of shares. Referring to rule 11UA, the

Assessing Officer observed that FMV of shares can be determined

by Net Asset Value (NAV) method or as per DCF method and there

is no other method prescribed under the statute. On the aforesaid

premises, he rejected assessee’s valuation of shares. Having done

so, he proceeded to determine the fair market value of shares by

applying NAV method and determined the FMV of shares at

Rs.1083 per share. Thus, he concluded that the share price

received by the assessee is in excess of the FMV by Rs.417 per

share. Accordingly, multiplying Rs.417/- to 10,000 equity shares

allotted during the year, the Assessing Officer made addition of an

amount of Rs.41,70,000/- under section 56(2)(viib) of the Act.

Though, the assessee contested the aforesaid addition before

learned Commissioner (Appeals), however, the addition was

sustained.

submitted that section 56(2)(viib) of the Act is an anti-abuse

provision introduced by the legislature, keeping in mind the 3 | P a g e

ITA No.9710/Del/2019 AY: 2016-17

devices adopted by public at large to convert unaccounted money

as accounted money. He submitted, if the transaction undertaken

is not meant for the purpose of tax avoidance or converting

unaccounted money to accounted money, then the provision

cannot be attracted to make any addition or disallowance. In this

context, learned counsel drew my attention to the speech of

Hon’ble Finance Minister while introducing the Finance Bill,

2012, wherein section 56(2)(viib) was brought into the statute for

the first time. He submitted, in the present case, the shares were

allotted to the holding company and not to any outsider from

whom any unaccounted money could have flown to the assessee.

He submitted, section 56(2)(viib) of the Act being a deeming

provision has to be construed keeping in mind the purpose and

object for which the provision was made. He submitted, it is not

the case of the Revenue that holding company, which has been

allotted the share is either not identifiable or has made

investment of unaccounted money or it is unaccounted money of

the assessee. He submitted, the sole beneficiary of the investment

in shares is the holding company, M/s. Puran Associates Pvt. Ltd.

Hence, it cannot be said that the owner has made the investment

for the benefit of others. 4 | P a g e

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could have been made. In this context he relied upon the

following decisions:

read with its Explanation fair market value shall be the value as

determined in accordance with the method prescribed or based on

the value of the assets of the company, including, intangible

assets. He submitted, in case of the assessee, the major asset is a

land at Salarpur Brijwasan admeasuring 5.35 acres. He

submitted, the registered valuer applying Net Value Asset method

as prescribed in section 56(2)(viib) of the Act has determined the

value of the land at Rs.26,75,00,000/- and on that basis he has

determined the FMV of the shares. He submitted, while

undertaking similar transaction of allotment of shares to the

holding company in financial year 2013-14 corresponding to

assessment year 2014-15, another registered valuer has

determined the fair market value of the very same land at

Rs.42,00,00,000/- by applying the circle rate prescribed by State

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Government for stamp duty purpose. He submitted, while dealing

with the issue of identical addition made in assessment year

2014-15, learned first appellate authority deleted the addition,

being convinced with the fact that the FMV of shares as

determined by the assessee for allotment to holding company is

correct. He submitted, assessee’s case is factually identical in the

impugned assessment year, as well. Thus, he submitted, the

addition made should be deleted.

relied upon the observations of the Assessing Officer and learned

Commissioner (Appeals).

decisions relied upon and perused the materials on record. On a

reading of the assessment order as well as the order of learned

first appellate authority, it is very much clear that the

genuineness of the transaction relating to sale of shares by the

assessee to its holding company has not been doubted.

with regard to determination of FMV of the shares and the

applicability of section 56(2)(viib) of the Act. Undisputedly, the

assessee is an wholly owned subsidiary of M/s. Puran Associates 6 | P a g e

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Pvt. Ltd. and in the year under consideration, the assessee had

allotted 10,000 equity shares to its holding company at a sale

price of Rs.1,500/- per shares having face value of Rs.100 per

share. In other words, the assessee has charged share premium

of Rs.1,400/- over and above the face value of each share. As

rightly contended by learned counsel appearing for the assessee,

on a careful analysis of the speech of Hon’ble Finance Minister

while introducing Finance Bill, 2012, section 56(2)(viib) is an anti-

abuse provision introduced to the statute to check and regulate

introduction of unaccounted money through share premium.

allotment of shares is between a holding company and its wholly

owned subsidiary. Therefore, no outsider is benefited through

such transaction. When the assessee-company has been

promoted by the holding company, infusion of additional fund

through share premium can only benefit either the holding

company or the subsidiary and no third party is involved. In such

a scenario, logically, no addition can be made under section

56(2)(viib) of the Act. For arriving at such conclusion, I draw

support from the decisions of the Tribunal in the case of ACIT Vs.

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Y. Venkannachaudhary (supra) and Vaani Estates Pvt. Ltd. Vs. ITO

(supra).

FMV of the shares allotted by the assessee can be taken at

Rs.1,500/- per share as per the assessee or Rs.1082 per share as

determined by the Assessing Officer. Undisputedly, the assessee

has got the FMV of the shares valued through a registered valuer.

As per the said valuation report, the registered valuer has applied

the Net Asset Value method by considering the value of land at

Delhi admeasuring 5.35 acres owned by the assessee. Applying

the circle rate declared by the State Government, as on

31.03.2016, the registered valuer has determined the FMV of the

land at Rs.26.75 crores as against the value of land as per the

circle rate of Rs.50.40 crores. However, learned Commissioner

(Appeals) has upheld the valuation made by the Assessing Officer

primarily on the reasoning that the value of land determined by

registered valuer at Rs.26.75 crores is much higher compared to

the book value of land shown at Rs.16.88 crores.

the land. When it is a proven fact that the value of land adopted

by the registered value is based on circle rate of the State 8 | P a g e

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Government, rather much lower than the circle rate, there is no

reason why such valuation should not be accepted. The reasoning

of learned Commissioner (Appeals) while rejecting the valuation of

land, in my view, is unacceptable when the fact that the circle

rate of the land is much higher remains uncontroverted.

it is very much clear that the FMV of shares shall be either the

value determined under rule 11UA or based on the value of its

assets, including, intangible assets on the date of issue of shares,

whichever is higher. So the assessee can determine the FMV by

adopting either of the two methods as provided under the Statute.

The expression “substantiated by the company to the satisfaction

of the Assessing Officer” as used in clause (a)(ii) of Explanation to

section 52(b)(viib) does not speak of any subjective satisfaction

but has to be considered objectively, keeping in view the value of

the assets on the date of issue of shares. In the facts of the

present case, the assessee has proved that the value of the asset,

i.e., the land at Delhi as per circle rate is more than Rs.26.75

crores determined by the registered valuer. That being the factual

position emerging on record, allotment of shares at Rs.1,500/-

per share must be considered to be the FMV on the date of sale 9 | P a g e

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and not high and excessive compared to the FMV. It is relevant to

observe, the assessee had entered into similar transaction with its

holding company in assessment year 2014-15 wherein, shares

having face value of Rs.100 per share were allotted to the holding

company for a premium of Rs.1799 per share. While considering

the issue relating to similar addition made by the Assessing

Officer under section 56(2)(viib) of the Act, learned first appellate

authority has deleted the addition taking note of the fact that the

value of land held by the assessee as per the circle rate is Rs.42

crores. Thus, on overall consideration of facts and materials on

record, I do not find any reason to sustain the addition of

Rs.41,70,000/-. Accordingly, the addition is deleted.

Order pronounced in the open court on 2nd November, 2022

Sd/- (SAKTIJIT DEY) JUDICIAL MEMBER

Dated: 2nd November, 2022. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

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