GASIFPOWER TECH PRIVATE LIMITED,THANE WEST vs. INCOME TAX OFFICER, THANE WEST

3. The assessee vide letter dated 29.04.2025 raised an additional ground which reads as under: "In the facts and in the circumstances of the case the ld. AO was not justified in invoking the provisions of section 56(2)(viib) of the Act to the share premium received from the promoter director."

4. The additional grounds raised are pure legal issue, which does not require investigation of new facts. Hence, placing reliance on the judgment of the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC), we admit the additional grounds.

Sl Name Before Allotment After Allotment No. Amount Equity share Amount Equity share Gasifpower Tech Private Ltd. % before % before allotment allotment 1 Paradip Menon 40,000 40% 129320 68% 2 Mukund Gharpure 45,000 45% 45000 24% 3 Shashidhar Shastri 15,000 15% 15000 8% At the time of allotting shares it was discussed amongst promoters / shareholders that in order to keep existing shareholding undistorted, it was essential to take only small amount of unsecured loan towards share capital while balance amount was to be treated as share premium. If 15 lacs shares were allotted to Mr. Pradip Menon his share holding would have gone to 99.60% which was not in the interest of other two technocrats who possessed knowledge to produce and market the product. For easy understanding of the situation, we have extrapolated the possible situation, if shares were allotted as face value which is as under. Existing If shares The Percentage of share were allotted shareholdi shareholding holding without ng would would have Name of share before premium have been been (%) holder allotment (Shares) (Shares) Pradeep Menon 4,000 1,489,858 1,493,858 99.60 Mukund 4,500 NIL 4,500 0.30 Gharpure Shashidhar 1,500 NIL 1,500 0.10 Shashtri Total 10,000 1,489,858 1,499,858 100.00 The intention of the promoters was not to bring to surface any undisclosed income or to take benefit in the hands of the company to convert such undisclosed money without payment of taxes. It was a genuine business requirement to convert already held unsecured loan into equity shares to bind the company from not withdrawing the same once the loan is availed. In these genuine circumstances, it cannot be gain said that the transaction should suffer taxes under deeming provisions of section 56(2)(viib) as it fails the purposive test of invoking section 56(2)(viib) of the Act"

(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received— (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Explanation.—For the purposes of this clause,— Gasifpower Tech Private Ltd. (a) the fair market value of the shares shall be the value— (i) as may be determined in accordance with such method as may be prescribed10; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; (b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10;

9. From the plain reading of the above provision it is clear that if a closely held company receives any consideration during the year for issue shares in excess of the face value, then the excess over the fair market value will be treated as Income from Other Sources to be taxed under the Act. Before proceeding further, it is important to understand the intention of the legislature for introducing the stringent provisions of section 56(2)(viib) of the Act The Hon'ble Finance Minister in his speech of Finance Bill 2012 had stated at para 155 as follows

"I propose a series of measures to deter the generation and use of unaccounted money. To this end, I propose— **** * Increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value. * Taxing of unexplained money, credits, investments, expenditures etc., at the highest rate of 30%., irrespective of the slab of income."

10. From the above observations of the Hon'ble Finance Minister it is clear that the intention behind introduction of section 56(2)(viib) is to discourage the generation and use of unaccounted money. The Chennai Bench of the Tribunal in Gasifpower Tech Private Ltd. the case of Vaani Estates Pvt. Ltd (supra) has made the following observations with regard to interpretation of the provisions of section 56(2)(viib) – 7.2. **************** Thus in the case of the assessee, when the provisions of Section 56(2)(vi), (viib) & (x) of the Act, are interpreted in a harmonious manner lifting the corporate wheel of the assessee company, it is abundantly clear that the provisions of Section 56(2)(viib) of the Act, has no implication in the case of the assessee company, more-so keeping in view of the speech delivered by the Hon'ble Finance Minister referred herein above. It is also pertinent to mention that in the instant case the benefit of infusing cash into the assessee company by way of equity share with premium by Mrs.Sasikala Raghupathy will not benefit any other shareholders inducted in the company in future because in such event the shares will have to be allotted on the basis of the intrinsic value of the shares of the assessee company otherwise at that point of time the provisions of Section 56(2)(viib) of the Act will be instantly attracted. In the present situation we are also reminded of the principles of harmonious construction explained by Crawford in Statutory Construction "Hence the Court should, when it seeks the legislative intent, construe all the constituent parts of the statute together and seek to ascertain the legislative intention from the whole Act, considering every provision thereof in the light of the general purpose and object of the Act itself and endeavouring to make every part effective, harmonise and sensible". Further mischief rule of interpretation also propagate that where a statute has been passed to remedy a weakness in the law, the interpretation which will correct that weakness is the one to be adopted. 7.3 It should be also kept in mind that provisions of Section 56(2)(viib) of the Act creates a deeming fiction and while giving effect to such legal fictions all facts and circumstances incidental thereto and inevitable corollaries thereof have to be assumed. At this juncture we are reminded of the decision of the Hon'ble Kolkata High Court in the case M.D. Jindal v. CIT [1986] 28 Taxman 509/164 ITR 28, wherein it was held that "legal fictions are created only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond the legitimate field. But the legal fiction has to be carried to its logical conclusion within the framework of the purpose for which it is created." Further it is apparent from the Finance Minister's speech that the provisions of Section 56(2)(viib) has been enacted to deter the generation and use of unaccounted money. At this juncture we are also reminded of the decision of the Hon'ble Apex Court in the case Allied Motors (P.) Ltd. v. CIT [1997] 91 Taxman 205/224 ITR 677, wherein it was held that the Finance Minister's Budget speech explaining the provisions are relevant in construing the provisions. ******** Gasifpower Tech Private Ltd.

Gasifpower Tech Private Ltd. applies only where the actual consideration received by the assessee is not disclosed and the consideration declared in respect of the transfer is shown at a lesser figure than that actually received."

13. In an identical case of KBC India (P.) Ltd. (supra) equity shares were allotted by the assessee to its holding company at premium and the Tribunal held that in such a scenario no addition can be made u/s 56(2)(viib) of the Act. The observations of the Tribunal contained in paras 9 and 10 of the decision (supra) are extracted below. "8. I have considered rival submissions in the light of the 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.

10. In the facts of the present appeal, the transaction relating to 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 v. Y. Venkannachaudhary (supra) and Vaani Estates Pvt. Ltd. v. ITO (supra).

14. Similarly, in the case of Hometrail Buildtech (P.) Ltd. (supra), the ITAT held thus: "11 . We have given thoughtful consideration to the orders of the authorities below. There is no dispute that the valuation of the assessee is supported by valuation report from a technical expert who has adopted DCF method, which is one of the recognized methods u/r 11UA of the Rules. Therefore, the Assessing Officer erred in rejecting the method.

12. On a perusal of the relevant sections read with the Rules, we are of the view that the action of the Assessing Officer in substituting the method of Gasifpower Tech Private Ltd. valuation is beyond jurisdiction. We are of the view that DCF Method is based on projections which are based on factors like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors.

13. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after a certain period of time.

14. Moreover, valuation of an unquoted equity share, in terms of Rule 11UA of the Rules can, at the option of the assessee, be determined as per either NAV Method or as per DCF Method, which means that the option is given to the assessee and once the assessee has exercised an option, the Assessing Officer is bound to follow the same unless by bringing cogent material on record, the Assessing Officer establishes perversity in the method adopted by the assessee.

15. The Hon'ble High Court of Delhi in the case of PCIT v. Cinestaan Entertainment 433 ITR 82 has held a under: "13. From the aforesaid extract of the impugned order, it becomes clear that the learned ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of fair market values as per prescribed methodology. The Appellant-Revenue had the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method. The Respondent-Assessee being a start- up company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact Gasifpower Tech Private Ltd. science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent-Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then Appellant-Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the Respondent-Assessee, accepted by the learned ITAT, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the Courts for interfering with the findings of a valuer is not satisfied in the present case, as the Respondent- Assessee adopted a recognized method of valuation and Appellant- Revenue is unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process.

15. Following the decisions (supra), we hold that the objective behind the provisions of section 56(2)(viib) of the Act is to prevent unlawful gain by issuing company in the garb of capital receipts. However, in the transaction between holding and its subsidiary company 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. Accordingly, ground No. 2 and its sub-grounds are decided in favour of the assessee.

14. In assessee's case it is not disputed that the shares having face value of Rs.10 are issued at a premium of Rs.1,658 each. From the perusal of the submissions of the assessee before the AO and Form PAS-3 filed before ROC, it is noticed that the assessee has converted unsecured loan received from the promoter director who is an existing share holder into share capital at premium. The reason as submitted by the assessee for converting a small portion of the loan as share capital and the balance loan as share premium is not to distort the overall shareholding percentage. It is also submitted that the assessee is not fully aware of the legal implications of issuing shares at a huge share premium under the Act and that the assessee has been ill-advised by the consultant. This submission is substantiated by the assessee by drawing our attention to the petition filed before NCLT in which the assessee has proposed for a correction in the paid up capital. From the perusal of the ledger copy of the share capital account we notice that the promoter director Mr.Pradeep Menon is an existing shareholder holding 4500 shares of Rs.10 each allotted at the time inception on 12.12.2013. We further notice from the perusal of the ledger of loan account of Mr.Pradeep Menon that he has been introducing funds into the business through loan from inception and the portion of the loan is converted into share Gasifpower Tech Private Ltd. capital at a premium. We also notice from the perusal of AO's order that the valuation under DCF method is rejected for the reason that the Chartered Accountant has relied on data provided by the management and in the nature of business of the assessee there is no certainty for demand sustainability. However the AO has not brought on record any record to show why the projections made using DCF method are incorrect. It is also noticed that the AO has not recorded any adverse finding regarding the loan transactions which according to the assessee is the genuine source for conversion into share capital at premium. Keeping in mind the fact that assessee is an existing shareholder whose shareholding is enhanced by converting his loan to share capital at a premium and respectfully following the ratios laid down above judicial precedence we hold that in assessee's case the provisions of section 56(2)(viib) may not be applicable. The addition made in this regard is hereby deleted. Before parting we would like to mention that our decision in the present case is based on the overall circumstance and facts peculiar to assessee's case and cannot be considered as precedence in the matter of applicability of the provisions of section 56(2)(viib) in any other case.