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Facts
The assessee, a hospital, filed a NIL return for AY 2016-17. During limited scrutiny, the AO made an addition of Rs. 6,53,613/- for unsubstantiated sundry creditors and Rs. 77,46,883/- for share premium under Section 56(2)(viib) due to lack of a valuation report, despite the shares being allotted to its holding company. The AO then imposed a penalty of Rs. 25,95,753/- under Section 271(1)(c) for furnishing inaccurate particulars. The CIT(A) dismissed the assessee's appeal for non-prosecution and also on merits.
Held
The Tribunal held that mere inability to substantiate sundry creditors, where transactions are recorded in books and no evidence of incorrectness/bogus exists, does not amount to furnishing inaccurate particulars. It also held that Section 56(2)(viib) does not apply to share premium received by a subsidiary company from its holding company, as the charging provision itself is inapplicable in such inter-company transactions. Consequently, the penalty imposed under Section 271(1)(c) for both additions was vacated.
Key Issues
1. Whether penalty under Section 271(1)(c) is justified for unsubstantiated sundry creditors when no falsity is proven. 2. Whether Section 56(2)(viib) of the Income Tax Act applies to share premium received by a subsidiary from its holding company.
Sections Cited
271(1)(c), 143(1), 143(3), 56(2)(viib), Rule 11UA, 263
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Hyderabad ‘B’ Bench, Hyderabad
Before: Shri Manjunatha G. & Shri Ravish Sood
(िनधा�रण वष�/Assessment Year: 2016-17) Proton Positive Health Vs. Assistant Commissioner Care India Private Limited, of Income Tax, Hyderabad. Circle-16(2), PAN: AAFCP6862K Hyderabad. (Appellant) (Respondent) िनधा��रती �ारा/Assessee by: Shri M.V. Prasad, CA राज� व �ारा/Revenue by: Dr. Sachin Kumar, Sr. AR सुनवाई की तारीख/Date of Hearing: 19/11/2025 घोषणा की तारीख/Date of 03/12/2025 Pronouncement: आदेश / ORDER PER. RAVISH SOOD, J.M: The present appeal filed by the assessee company is directed against the order passed by the Commissioner of Income Tax (Appeals) (for short, “CIT(A)”) dated 07/03/2025, which in turn arises from the order passed by the Assessing Officer (for short, “AO”) under Section 271(1)(c) of the Income-tax Act, 1961 (for short, “Act”) dated 28/06/2019 for AY 2016-17. The assessee has assailed the impugned order passed by the CIT(A) on the following grounds of appeal before us:
“1. The learned CIT (Appeals) is erred in facts and law while passing the order.
Proton Positive Healthcare India Pvt Ltd vs. ACIT 2. The learned CIT (Appeals) ought to have afforded further opportunity to the appellant instead of dismissing the appeal on mere reason that there was no compliance.
The Learned CIT (A) ought to have finalised the appeal basing on the merits of the case instead of dismissing the appeal on pure technical ground that there was no compliance.
On the facts and circumstances of the case, the Assessing Officer has made the addition with respect to trade creditors which is already recorded in the Books of accounts, and it does not tantamount to furnishing inaccurate particulars of income which leads to penalty U/s 271(1).
5. The Assessing Officer is not justified in levy of penalty without recording any proper satisfaction in the Assessment order ie., whether for furnishing inaccurate particulars of income or for concealment of income and hence invalid.
6. The Assessing Officer erred in levying penalty for furnishing inaccurate particulars with regard to addition under Section 56(2)(viib) being a deemed income.
The appellant craves leave to add, amend, alter, vary and/or withdraw any or all the above grounds of appeal.”
Succinctly stated, the assessee company, which is engaged in the business of running speciality hospitals, had filed its return of income for AY 2016-17 on 16/10/2016, declaring an income of Rs. NIL. Thereafter, the income of the assessee company was processed as such under section 143(1) of the Act. Subsequently, the case of the assessee company was selected for “limited scrutiny” for verifying, viz., (i) large scale increase in sundry creditors and reduction in business income as compared to preceding year; and (ii) large scale share premium received during the subject year with respect to applicability of section 56(2)(viib) of the Act.
Proton Positive Healthcare India Pvt Ltd vs. ACIT 3. During the course of the assessment proceedings, the AO observed that there was a substantial increase in the sundry creditors of the assessee company during the year under consideration, which as on 31/03/2016 stood reflected at Rs. 1,79,28,777/-, as against the opening balance on 01/04/2015 of Rs. 99,23,137/-. Accordingly, the AO to verify the veracity of the sundry creditors of Rs. 80,05,640/- called upon the assessee company to furnish the requisite details along with copies of the party-wise ledger accounts etc. In compliance, the assessee company though furnished the names of the sundry creditors but failed to provide their addresses, PAN etc. However, the assessee company had, thereafter, on being called upon by the AO to explain that, in the absence of the requisite details, why the said creditors may not be added to its income by treating the same as unexplained cash credits, furnished the details of the sundry creditors along with their complete postal addresses, PAN etc. The AO observed that the details placed on record by the assessee company revealed that it had failed to furnish the complete postal addresses, PAN etc., of 48 creditors amounting to Rs. 6,53,613/-. Accordingly, the AO, in the absence of the requisite details, made an addition of the sundry creditors of Rs. 6,53,613/- to the returned income of the assessee company.
Proton Positive Healthcare India Pvt Ltd vs. ACIT 4. Apart from that, the AO observed that the assessee company during the subject year had received share premium. On being queried, it was submitted by the assessee company that it had, during the subject year, allotted 49,97,989 equity shares of Rs. 10/- each with a premium of Rs. 1.55/- per share to its holding company, viz., M/s. RHEA Health Care Pvt Ltd, Chennai. Elaborating on the nature of the transaction, it was submitted by the assessee company that, as it was suffering operational losses, therefore, the holding company, viz., M/s. RHEA Health Care Pvt Ltd had advanced an amount of Rs. 5,77,26,774/- over a period of time, i.e., from April 2013 to August 2015. Subsequently, the assessee company, in lieu of the aforesaid interest-free amounts that were advanced by its holding company, had on 26/05/2015 and 03/08/3015 allotted shares at Rs. 11.55/- per share (including Rs. 1.55/- premium per share) to its holding company. The assessee company, to substantiate the aforesaid transaction, had filed before the AO a copy of its bank account, copy of the share premium account, copy of the ledger account of M/s. RHEA Heal Care Pvt Ltd, copies of PAS-3 towards allotment of shares etc. However, as the assessee company had failed to furnish the basis for valuation of the share premium etc., therefore, the AO, in absence of the Valuation Certificate made an addition of the entire amount of share premium of Rs.77,46,883/- (49,97,989 shares X Proton Positive Healthcare India Pvt Ltd vs. ACIT Rs.1.55/- per share) under section 56(2)(viib) of the Act. Accordingly, the AO vide his order under section 143(3) of the Act, dated 18/12/2018, determined the income of the assessee company after making the aforementioned additions.
The Ld. AR has brought to our notice that the assessee company had not carried the assessment order passed in its case under section 143(3) of the Act, dated 18/12/2018, any further in appeal.
Thereafter, the AO vide his order under section 271(1)(c) of the Act, dated 28/06/2019, imposed upon the assessee company a penalty of Rs. 25,95,753/- for furnishing of inaccurate particulars of income with respect to the aforesaid additions that were made in its case
7. Aggrieved, the assessee company assailed the order passed by the AO under Section 271(1)(C) of the Act, dated 28/06/2019, in appeal before the CIT(A) but without success. For the sake of clarity, we deem it apposite to cull out the observations of the CIT(A), as under: “6. Decision 6.1 It is clear from the above facts that the appellant did not make any submissions in spite of availing sufficient time and opportunities during this appellate proceeding From the fact of appellant's non- response to various notices, it is clear that apparently, appellant has no specific reasons not to file to pursue the pending appeal. As appellant failed comply to the notices on various occasions from time to time, it is understood that appellant is not keen to pursue the appeal as per law and accordingly, appeal filed by the appellant is liable to be dismissed for non-prosecution by the appellant.
6.2 As referred in the Para 6 above during the appellate proceedings, so many opportunities have been given to the appellant, however, none of the notices were responded to. The appellant has not even bothered to answer/submit any details in response to the last notice issued on 21.02.2025, by which the appellant was to respond by 27.02.2025. Thus, the appellant's case does not hold good on merits too. 6.3. The issue of non-compliance by appellant (assessee) at appellate stage has been considered and decided by the Hon'ble Supreme Court and Various High Courts as discussed below: The decision of the Hon'ble High Court of Mumbai in the case of M/s Chemipol vis. Union of India [Central Excise Appeal No.62 of 2009] clearly states, that every court judicial body or authority, which has a duty to decide a matter between two parties, inherently possesses the power to dismiss the case in default. For the sake of reference, the relevant extract of the judicial pronouncement rendered by the Hon'ble High Court of Mumbai quoting decision of Hon'ble Supreme Court in case of Nandramdas v Dwarkadas. AIR 1958 MP 260, is reproduced below: "Now the Act does not give any power of dismissal. But it is axiomatic that no court or tribunal is supposed to continue a proceeding before it when the party who has moved it has not appeared nor cared to remain present. The dismissal, therefore, is an inherent power which every tribunal possesses." The principle that every Court that is to decide on a matter of dispute, inherently possesses the power to dismiss the case for default, has been upheld by the Hon'ble Supreme Court in case of Dr. P. Nalla Thampy Vs. Shankar (1984 (Supp) SCC 63 and the case of New India Assurance vs. Srinivasan (2000) 3 SCC 242. In the latter case, the Apex Court has held as under- "That every court or judicial body or authority, which has a duty to decido a list between two parties, inherently possesses the power to dismiss a case in default. Where a case is called up for hearing and the party is not present, the court or the judicial or quasi-judicial body is under no obligation to keep the matter pending before it or to pursue the matter on behalf of the complainant who had instituted the proceedings. That is not the function of the court or, for that matter of a judicial or quasi judicial body. In the absence of the complainant, therefore, the court will be will without its jurisdiction to dismiss the complaint for non prosecution. So also, it would have the inherent power and jurisdiction to restore the complaint on good cause being shown for the non appearance of the complainant."
Proton Positive Healthcare India Pvt Ltd vs. ACIT iii) The Hon'ble Bombay High Court has also laid down the proposition that where the appellant in spite of notice is persistently absent and the Tribunal on facts of the case is of the view that the appellant is not interested in prosecuting the appeal, it can in exercise its inherent power to dismiss the appeal for non-prosecution. In the case of CIT Vs. B. N. Bhattacharya reported at 118 ITR 461, it was held that appeal does not mean merely filing of appeal but effectively pursuing it. iv) The Hon'ble ITAT Delhi (ITR No.2006/Del/2011 dt. 19.12.2001) in the case of Whirlpool of India Ltd. v. DCIT had dismissed appeal for non attendance at hearings, inferring that assessee was not interested in prosecuting of appeal. v) In the case of Chadha Finlease Ltd. V. ACIT (ITA No.3013/Del/2011 date of order 20.12.2011) the Hon'ble ITAT Delhi had dismissed the appeal for non-attendance at hearings. vi) In a decision in the case of CIT v. Gold Leaf Capital Corporation Ltd on 02.09.2011 (ITA No.798 of 2009), the Hon'ble High Court of Delhi had hold that a negligent assessee should not be given many opportunities just because that quantum of amount involved is high. Necessary course of action is to draw adverse inference; otherwise it would amount to give premium to the assessee for his negligence. When the assessee is non-cooperative, it can naturally be safely concluded that the assessee did not want to adduce evidence as it would expose falsity and non genuineness." 6.4 As can be seen from the above that the continuous non- compliance on the part of the appellant only leads to the conclusion that the appellant is not interested in pursuing the appeal. The appeal cannot be decided merely on the basis of grounds of appeal and the statement of facts as no corroborative evidence of any kind is submitted. Hence the above appeal of the appellant is dismissed and the order of the AO is confirmed. 6.5 Even on merit it is a fit case for dismissal for the reason that the appellant had failed to substantiate the genuineness of sundry creditors to the tune of Rs.6,53,613/-Also the appellant could not provide Share Valuation Certificate with respect to share allotment made to M/s Rhea Healthcare Pvt. Ltd of Rs. 77,46,883/-. As the appellant failed to produce the documentary evidence in support of its claim, the addition made by the AO is justified. "Whereas the appellant was not able to defend his case by making any written submission/ evidence in support of its case. In absence of any material made available to contradict the view taken by the Ld. AO, the appellant's case also dismissed on merit". Accordingly, considering all the above facts and the consistent non-compliance by the appellant, I conclude that the appellant is not serious to pursue the appeal and 8. The assessee company aggrieved with the order of the CIT(A) has carried the matter in appeal before us.
We have heard the Learned Authorised Representatives of both parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the Ld. AR to drive home his contentions.
As observed herein above, the present appeal filed by the assessee company is directed against the penalty imposed by the AO under section 271(1)(c) of the Act for furnishing of inaccurate particulars of income in respect of, viz., (i) addition made on account of sundry creditors which the assessee company had failed to substantiate; and (ii) addition made under section 56(2)(viib) of the Act in relation to allotment of shares by the assessee company to its holding company against adjustment of its interest free outstanding loans.
Apropos, the imposition of penalty with respect to the unproved sundry creditors, we find that though the assessee company had Proton Positive Healthcare India Pvt Ltd vs. ACIT furnished the complete details of the sundry creditors along with the copy of their ledger accounts, but had failed to provide their complete postal addresses, PAN etc. Accordingly, the AO, by treating the aforementioned outstanding liabilities as unexplained, had imposed the penalty under section 271(1)(c) of the Act on the ground that the assessee company had furnished inaccurate particulars of income.
In our view, although the assessee company was unable to furnish the confirmations, PAN etc., but the transactions were duly recorded in its books of account, and copies of the ledger accounts of the respective creditors were furnished before the AO. Although, the AO while framing the assessment observed that the assessee could not substantiate the aforesaid outstanding liabilities, i.e., sundry creditors by placing on record the documentary evidence as were called for by him, i.e., confirmations, PAN etc., but it is a matter of fact that he had failed to place on record any material which would irrefutably evidence that the details furnished by the assessee company with respect to the said outstanding liabilities were either found to be incorrect or bogus. In fact, we find that the penalty had been imposed by the AO only for the reason that the assessee company could not substantiate the outstanding liability towards the said sundry creditors. We are of a firm conviction that a mere inability to substantiate a claim cannot amount to furnishing of Proton Positive Healthcare India Pvt Ltd vs. ACIT inaccurate particulars of income. Our aforesaid view is fortified by the judgment of the Hon’ble Supreme Court in the case of CIT vs. Reliance Petroproducts (P) Limited (2010) 322 ITR 158 (SC), wherein it was, inter alia, observed that a mere inability to substantiate a claim does not tantamount to furnishing of inaccurate particulars of income. Also, we find that the Hon’ble High Court of Bombay in CIT vs. Upendra V. Mithani [ITA (L) No.1860 of 2009] dated 05.08.2009, had upheld the view taken by the Tribunal wherein it was observed that if the assessee gives an explanation which is unproved but not disproved, i.e. it is not accepted but circumstances do not lead to the reasonable and positive inference that the assesse's case is false, then no penalty under Section 271(1)(c) could be validly imposed. For the sake of clarity, we deem it apposite to cull out the observations of Hon’ble High Court, as under: “The issue involved in the appeal revolves around deletion of penalty under Section 271(1)(c) of the I.T.Act. The Tribunal has concurred with the view taken by the Commissioner of Income Tax (A). The Commissioner of Income Tax (A) has rightly taken a view that no penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does. If the assessee gives an explanation which is unproved but not disproved, i.e. it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee's case is false. The view taken by the Tribunal is a reasonable and possible view. The appeal is without an substance. The same is dismissed in limine with no order as to costs.”
Proton Positive Healthcare India Pvt Ltd vs. ACIT 13. In the present case before us, though the assessee company had not been able to prove the outstanding liability towards the subject unsecured creditors, but, at the same time, as its explanation has not been disproved by the Department, therefore, in our view, considering the totality of the facts involved in the said case no penalty under section 271(1)(c) could have been validly imposed.
Apropos the penalty imposed by the AO regarding the addition of the premium received by the assessee company on allotment of shares to its holding company under section 56(2)(viib) of the Act, we find that it is a matter of fact borne from the record that the assessee had not furnished a valuation report regarding the valuation of the subject shares under Rule 11UA of the Income Tax Rules, 1962. However, it is a matter of fact discernible from the record that all primary particulars relating to the aforesaid transaction, viz., the allotment of shares, the number of shares allotted, the consideration and the adjustment of the same against the outstanding loans of the holding company were fully disclosed by the assessee company in its books of accounts. At this stage, it is pertinent to point out that the AO had not recorded any finding which would reveal that any fact declared by the assessee company on the subject issue was found to be incorrect. In fact, the penalty had been imposed by the AO for the simpliciter reason that the assessee company
We may herein observe that though the assessee company in order to avoid protracted litigation has not assailed the assessment order any further in appeal, but for the limited purpose of adjudicating the present appeal, we may herein observe, that as per the judicial pronouncements the addition made by the AO under section 56(2)(viib) of the Act is itself unsustainable in law, because section 56(2)(viib) of the Act does not apply to allotment of shares by a subsidiary company to its holding company. Our aforesaid view is supported by the order of the ITAT, Delhi Bench “G” in ITO Vs. Solitaire BTN Solar (P) Ltd. (2024) 164 taxmann.com 170 (Delhi), wherein it has been held that the deeming provision of Section 56(2)(viib) is not applicable to subscriptions by holding companies. For the sake of clarity, we deem it apposite to cull out the observations of the Tribunal, as under: “7. We have weight the rival submissions and perused case records. 8. The legal effect of issue of shares to holding company at a premium has been examined by the Co-ordinate Bench of Tribunal in the case of BLP Vayu (Project-1) (P.) Ltd. v. Pr. CIT [2023] 151 taxmann.com 47/201 ITD 283 (Delhi - Trib.) & Dy. CIT v. Kissandhan Agri Financial Services (P.) Ltd. [2023] 150 taxmann.com 390/201 ITD 159 (Delhi - Trib.) The ITAT in such cases, it was essentially observed that legal fiction of S. 56(2)(viib) do not extend to subscription by holding co. 9. The relevant operative paragraph of the decision rendered in BLP Vayu (Project-1) (P.) Ltd. (supra) is reproduced hereunder:
"11.1 As per case records, it is an undisputed fact that the shares have been allotted at a premium to its 100% holding company. Thus, applicability of Section on 56(2)(viib) has to be seen in this perspective. The Co-ordinate Bench of Tribunal in DCIT v. Ozone India Ltd. in order dated 13.04.2021 in the context of Section 56(2)(viib) has analyzed the deeming provisions of Section 56(2)(viib) of the Act threadbare and inter alia observed that the deeming clause requires to be given a schematic interpretation. The transaction of allotment of shares at a premium in the instant case is between holding company and it is subsidiary company and thus when seen holistically, there is no benefit derived by the assessee by issue of shares at certain premium notwithstanding that the share premium exceeds a fair market value in a given case. Instinctively, it is a transaction between the self, if so to say. The true purport of Section 56(2)(viib) was analyzed in Ozone case and it was observed that the objective behind the provisions of Section 56(2)(viib) is to prevent unlawful gains by issuing company in the garb of capital receipts. In the instant case, 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 under Section 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. In this backdrop, the extent of inquiry on the purported credibility of premium charged does not really matter as no prejudice can possibly result from the outcome of such inquiry. Thus, the condition for applicability of Section 263 for inquiry into the transactions between to interwoven holding and subsidiary company is of no consequence. We also affirmatively note the decision of SMC Bench in the case of KBC India Pvt. Ltd. v. ITO in order dated 02.11.2022 (SMC) where it was observed that 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. "
Proton Positive Healthcare India Pvt Ltd vs. ACIT 10. The Co-ordinate Bench has essentially observed that where the allotment has been made to existing shareholders, the deeming provisions of section 56(2)(viib) would not ordinarily be applicable. In consonance with the view expressed, the addition under s.56(2)(viib) on the ground of FMV allegedly lesser than the premium charged on allotment of OCPS to parent co. i.e. holding co. is a damp squib. The addition is thus unsustainable in law on this ground alone.”
We find that the Tribunal in its aforesaid order had after drawing support from the order of the co-ordinate Bench of Tribunal in DCIT v. Ozone India Ltd. in dated 13.04.2021, had observed that the deeming provisions of Section 56(2)(viib) in the said case were analyzed threadbare and, it was, inter alia, observed that the deeming clause requires to be given a schematic interpretation. The Tribunal observed that the transaction of allotment of shares at a premium in the case before them was between the holding company and it is subsidiary company, and thus, when seen holistically, there was no benefit derived by the assessee company by issuing shares at certain premium notwithstanding that the share premium exceeded the fair market value, as instinctively, it was a transaction between the self, if so to say.
We, thus, in the backdrop of our aforesaid observations, are of a firm conviction that once the very charging provision is in itself inapplicable, and the addition made invoking section 56(2)(viib) lacks legal foundation, therefore, the penalty imposed regarding such Proton Positive Healthcare India Pvt Ltd vs. ACIT underlined addition itself is unsustainable and contrary to law. Accordingly, we are of the considered view that the allegation of furnishing of inaccurate particulars of income by the assessee company regarding the allotment of shares to its holding company has no legs to stand upon and thus, cannot be sustained.
We thus, in terms of our aforesaid deliberations, are unable to persuade ourselves to concur with the penalty imposed by the AO under Section 271(1)(c) of the Act w.r.t the addition made by him under Section 56(2)(viib) of the Act and thus, direct him to vacate the same.
Resultantly, the order passed by the CIT(A) is set aside, and the penalty imposed by the AO under section 271(1)(c) of the Act is herein vacated.
In the result, the appeal filed by the assessee company is allowed in terms of our aforesaid observations.
Order pronounced in the open court on 03rd December, 2025.
Sd/- Sd/- (MANJUNATHA G.) (RAVISH SOOD) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated 03rd December, 2025 Proton Positive Healthcare India Pvt Ltd vs. ACIT *OKK / SPS Copy to: S.No Addresses 1 Proton Positive Health Care India Private Limited, Plot No.8-2-686/B/1/A, Vengalarao Building, Road No.12, Banjara Hills, Hyderabad-500034. 2 Assistant Commissioner of Income Tax, Circle-16(2), IT Towers, AC Guards, Masab Tank, Hyderabad-500004. 3 The Pr.CIT, Hyderabad 4 The DR, ITAT Hyderabad Benches 5 Guard File By Order
Sr. Private Secretary, ITAT, Hyderabad.