DCIT CORPORATE CIRCLE 1, COIMBATORE vs. KOVAI MEDIA P. LTD., COIMBATORE

PER G.MANJUNATHA, AM:

This appeal filed by the Revenue and Cross Objection

filed by the assessee are directed against the order of the

learned CIT(A)-1, Coimbatore dated 28.03.2019 and pertains

to assessment year 2016-17. Since, facts are identical and

issues are common, for the sake of convenience, the appeal

filed by the Revenue and Cross Objection filed by the assessee

were heard together and are being disposed off by this

consolidated order.

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appeal:-

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5 On the facts and circumstances of the case, since the assessee has not proved the genuineness of the transaction with the subscribers and their creditworthiness, the Hon’ble ITAT is requested to uphold the addition of Rs.2,72,80,664/- under section 68 of the IT Act,1961.

that the cross objection filed by the assessee is time barred by

20 days for which necessary petition for condonation of delay

along with affidavit explaining the reasons for the delay has

been filed. The AR further submitted that the assessee could

not file cross objection within the time allowed under the Act,

due to the fact the Authorized Representative was fell ill with

chicken pox. The delay in filing cross objection is neither

intentional nor willful but for the unavoidable reasons,

therefore, delay may be condoned in the interest of

advancement of substantial justice.

condonation of delay petition filed by the assessee submitted

that the reasons given by the assessee do not come within the

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ambit of reasonable and bonafide reasons, which can be

considered for condonation of delay and hence, cross

objection filed by the assessee may be dismissed as not

maintainable.

by the assessee for condonation of delay, we are of the

considered view that reasons given by the assessee for not

filing the cross objection within the time allowed under the

Act comes under reasonable cause as provided under the Act

for condonation of delay and hence, delay in filing of cross

objection is condoned and the cross objection filed by the

assessee is admitted for adjudication.

start up company engaged in the business of print and digital

media filed its return of income for the assessment year 2016-

17 on 28.09.2016 declaring loss of Rs.2,54,15,860/-. The

assessee has obtained certificate of recognition as a startup

from Department of Industrial Promotion and Partnership.

During the year under consideration, the assessee has issued

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equity shares at share premium of Rs.124.67 per share to 13

individuals. The case has been taken for scrutiny and during

the course of assessment proceedings, the Assessing Officer

called upon the assessee to justify issue of shares at premium

of Rs.124.67 per share. In response, the assessee submitted

that it is a startup company and has valued its shares on the

basis of discounted cash flow method and such valuation has

been determined by the registered valuer at Rs.125.7 per

equity share. The Assessing Officer vide his notice dated

08.11.2018 called upon the assessee to explain as to why

excess premium charged on issue of equity shares shall not

be brought to tax, as per provisions of section 56(2)(viib) of the

Income Tax Act, 1961, as evidences filed by the assessee in

support of value of shares is not in accordance with Rule

11UA(2)(b) of the Income Tax Rules, 1962. In response, the

assessee has submitted that it has obtained a certificate from

statutory auditor, as per which valuer has determined share

price on the basis of discounted cash flow method by

considering future prospective of the company . The assessee

further submitted that it has also obtained a certificate from

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independent auditor to support valuation fixed for issue of

shares. The Assessing Officer, however, not convinced with

explanation furnished by the assessee and according to him,

although, the assessee has filed valuation report in support of

issue of share capital at premium, but such valuation report is

not obtained as required under rule 11UA(2)(b) of the I.T.

Rules, 1962 and further projected figures adopted in the

discounted cash flow method is also without any basis.

Therefore, he opined that market value of equity shares as

worked out by the company is arbitrary and without any

justification and hence, he invoked provisions of section

56(2)(viib) of the Act and excess premium charged from

resident investors/subscribers totaling to Rs.2,72,80,664/- is

brought to tax as income of the assessee.

preferred an appeal before the learned CIT(A). Before the

learned CIT(A), the assessee reiterated its arguments taken

before the Assessing Officer and claimed that it is a start up

company and hence, provisions of section 56(2(viib) of the Act

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does not apply, where consideration for issue of shares is

received from class of persons notified by Central Government,

subject to such other conditions as may be specified. The

assessee further submitted that it has obtained a certificate of

recognition as a startup company from DIPP and as per

Gazette Notification dated 19.02.2019, startup companies are

outside the scope of section 56(2)(viib) of the Act.

submissions of the assessee and has also taken note of

circular issued by CBDT vide Notification

No.F.45/2016/F.No.173/103/2016 dated 14.06.2016 and also

Gazette Notification GSR No. 127(E) dated 19.02.2019 held

that provisions of section 56(2)(viib) of the Act would not be

applicable where the assessee is a recognized startup

company from DIPP. He further held that the assessee being a

recognized startup company is covered by Gazette Notification

GSR No. 127(E) dated 19.02.2019 and hence, it is clearly

outside the scope of section 56(2)(viib) of the Act in respect of

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share premium collected on issue of shares .The relevant

findings of the learned CIT(A) are as under:-

“5.0. On going through the submissions of the appellant and the assessment order, I find that the Assessing Officer has not addressed the issue whether the provisions of section 56(2)(viib) is applicable to the appellant. The AC has proceeded to assess the premium as income on a technical ground that the Valuation has not been done as per the provisions contained in Rule 11UA(2)(b) of the IT Rules 1962. Before we proceed to analyse whether the provisions contained in the Rules are satisfied or not, it is necessary to see whether the section 56(2)(viib) is applicable to the appellant. To analyse the same the following facts are relevant. 1. The appellant has obtained a certificate of Recognition as a ‘Start Up’ from the DIPP. 2. The aggregate amount of paid up share capital and share premium of start up after issue is less than 25 crores as required under notifications. 3. The provisions of section 56(2)(viib) does not apply where consideration for issue of shares is received by a company from class of persons notified by the Central Government subject to such other conditions as may be specified. Accordingly, the CBDT vide notification No.45/2016/F.No.173/103/2016, notified the persons to be the persons defined u/s.2(31), being a resident, who is making an investment at premium in case of a “start-up” company. 4. This company is one in which the public are not substantially interested and fulfills the conditions specified in

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the Gazette notification number GSR 180(E) dated 17.02.2016. 5. Gazette notification GSR 127(E) dated 19.02.2019 clearly exempts start up from the ambit of section 56(2)(viib) of the Income Tax in section 4 of the said notification. Section 4 is reproduced below: “4. A Startup shall be eligible for notification under clause (ii) of the proviso to clause (viib) of sub-section (2) of section 56 of the Act and consequent exemption from the provisions of that clause if it fulfils the following conditions: (i) It has been recognized by DPHT under para 2(iii)(a) or as per any earlier notification on the subject (ii) aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue of share, if any, does not exceed, twenty five crore rupees”.

5.1. The AO has at no point of time questioned and doubted that the appellant is a startup company. Proceeding on the assumption that the company is a startup company and one which satisfied all conditions given in the relevant notifications referred above, I hold that the provisions of section 56(2)(viib) would not be applicable in the light of CBDT notification No.45/2016 (supra) and section 4 of the Gazette notification GSR 127(E) dated 19.2.2019. The issue of non applicability of Rule 114A(2)(b) of the IT Rules is therefore becomes infructuous. Since the AO has not given any finding on the satisfaction about the genuineness of the credit which could be assessed u/s.68, the issue is not adjudicated.”

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erred in deleting additions made by the Assessing Officer

towards excess share premium charged on issue of shares by

invoking the provisions of section 56(2)(viib) of the Act, by

holding that the assessee is outside scope of provisions of

section 56(2)(viib) of the Act, without considering the fact that

as per Gazette Notification GSR No. 127(E) dated 19.02.2019

vide para no.6, if the assessee issues shares at premium

before the date of notification i.e 19.2.2019, then para 4 of said

Notification is not applicable, hence the assessee is not outside

the scope of section 56(2)(viib) of the Act. The learned DR

further submitted that assuming for a moment, the assessee is

covered by Gazette Notification GSR No. 127(E) dated

19.02.2019, but fact remains that whether it has satisfied

conditions prescribed in para 4 of said Notification or not has

to be seen. Since the assessee has not bought out evidence

before the Assessing Officer at the time of assessment

proceedings, matter may be set aside to the file of the

Assessing Officer to verify facts with reference to CBDT

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circular No. 45/2016/F.No.173/103/2016 and Gazette

Notification GSR No. 127(E) dated 19.02.2019.

strongly supporting the order of learned CIT(A) submitted that

the learned CIT(A) has rightly appreciated the facts by

considering certificate issued by DIPP to recognize the

assessee as a startup company and held that the provisions

of section 56(2)(viib) of the Act does not apply where

consideration for issue of shares received by the company

from class of persons notified by the Central Government,

subject to other such conditions as may be specified. The

assessee has satisfied all conditions prescribed to recognize as

a startup company and after considering relevant facts, the

Department of Industrial Policy and Promotion, Ministry of

Commerce and Industry, Govt. of India has issued a certificate

recognizing the assessee as a startup company. Therefore, the

learned CIT(A) has rightly held that the assessee is outside

the scope of provisions of section 56(2)(viib) of the Act. The

learned AR further referring to paper book filed by the assessee

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submitted that the CBDT vide its notification No.173/354/2019 dated 9th August, 2019 has clarified applicability of para 6 of

Gazette Notification No.127E dated 19.02.2019, after

considering hardships considered by startup companies involving application of section 56(2)(viib) of the Act and

clarified that said notification will be applicable to those startup

companies also, where addition u/s. 56(2)(viib) of the Act has

been made in assessment order under the Income Tax Act before 19th February,2019, provided the assessee has

specifically submitted declaration in Form No.2 that it fulfilled

conditions mentioned in para 4 of the above referred

notification. The assessee thereafter, has filed Form No.2 in pursuance of para 5 of Notification dated 19.02.2019 on 23rd

August, 2019 and in response, the CBDT vide its notification F.No.173/147/2019-ITA-1 dated 28th August, 2019 has clarified

that assessee is a recognized startup as per DPIIT and hence,

is outside scope of provisions of section 56(2)(viib) of the Act.

Therefore, he submitted that there is no merit in the arguments

of the learned DR that the assessee’s case is not covered

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under Gazette Notification dated 19.02.2019 and is very much

covered under the provisions of section 56(2)(viib) of the Act.

available on record and gone through orders of the authorities

below. The Assessing Officer has charged excess premium

collected on issue of equity shares from resident individuals

u/s.56(2)(viib) of the Act, as income of the assessee. The

provisions of section 56(2)(viib) of the Act, deals with cases

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 shall be chargeable to tax as income of the

assessee. The proviso provided to section 56(2(viib) has

excluded certain category or class of companies from application

on fulfillment of certain conditions. Further, for this purpose

notified class of persons has been notified by CBDT vide its

circular No.173/147/2018-ITA I dated 06.02.2018, as per which

any startup company as recognized by DPIIT, Ministry of

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Commerce & Industry, Govt. of India is outside the scope of

provisions of section 56(2(viib) of the Act. In this case, the

assessee has filed necessary evidences to prove that it is a

recognized startup from DPIIT. Further, the Gazette Notification

No.GSR 127(E) dated 19.02.2019 has exempted startup

companies from application of provisions of section 56(2(viib) of

the Act, provided said startup companies are satisfied conditions

prescribed in para 4 of said notification. The assessee has

furnished a notification issued by CBDT vide reference No.230819001348 dated 28th August, 2019 u/s. 56(2(viib) of the

Act, as per which the assessee has satisfied conditions

prescribed in para 4 of said notification and further, the assessee

is exempted from application of the provisions of section

56(2(viib) of the Act, on the amount received on consideration for

issue of shares. The learned CIT(A), after considering relevant

facts and also by taking note of circular issued by CBDT vide

notification No.45/2016/F.No.173/103/2016 and also Gazette

Notification No.GSR 127(E) dated 19.02.2019, has categorically

stated that the assessee is exempt from ambit of section

56(2(viib) of the Act and hence, consideration received for issue

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of share capital and share premium is outside scope of section

56(2(viib) of the Act. He further observed that since the assessee

is outside ambit of section 56(2(viib) of the Act, issue of non-

applicability of Rule 11UA(2)(b) of the Income Tax Rules, 1962,

therefore, become infructuous and hence, the question of

substantiating value of shares does not arise. Therefore, we are of

the considered view that the learned CIT(A) has rightly held that

share premium collected by the assessee for issue of share

capital is outside scope of the provisions of section 56(2(viib) of

the Act.

of Gazette Notification GSR 127(E) dated 19.02.2019, we find

that the CBDT, after considering hardships faced by startup

companies with regard to application of section 56(2(viib) of the

Act, as per Gazette Notification dated 19.02.2019, has issued clarificatory notification dated 9th August, 2019 and clarified that

said notification will be applicable to startup companies also

where addition u/s. 56(2(viib) of the Act has been made in an

assessment order before 19.02.2019, provided the assessee has

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subsequently submitted declaration in Form No.2 that it has

satisfied conditions mentioned in para 4 of the above referred

notification. In this case, the assessee has filed Form No.2 in pursuance of para 5 of Notification dated 19.02.2019 on 23rd

August, 2019 and in response, the CBDT vide its notification dated 28th August, 2019 has clarified that assessee is a

recognized startup from DPIIT and further, the provisions of

section 56(2(viib) of the Act shall not apply to the assessee on

the amounts received as consideration for issue of shares.

Therefore, we are of the considered view that there is no merit in

arguments of the learned DR that the assessee is outside scope

of Gazette Notification dated 19.02.2019 and hence, share

premium issued on issue of shares is covered u/s. 56(2(viib) of

the Act. In this view of the matter and considering facts and

circumstances of the case, we are of the considered view that

assessee is a recognized startup from DPIIT, Ministry of

Commerce & Industry, Govt. of India and hence, it is outside

scope of the provisions of section 56(2(viib) of the Act, in respect

of consideration received for issue of shares at premium. The

learned CIT(A), after considering relevant facts has rightly

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deleted additions made by the Assessing Officer. Hence, we are

inclined to uphold findings of the learned CIT(A) and dismiss appeal filed by the Revenue.

of the learned CIT(A). Since we have dismissed appeal filed by

the Revenue, cross objection filed by the assessee becomes

infructuous and hence, the same is dismissed as not

maintainable.

objection filed by the assessee are dismissed. Order pronounced in the open court on 24th June, 2021 Sd/- Sd/- (धु�वु� आर.एल रे�डी) (जी.मंजुनाथ) (Duvvuru RL Reddy) (G.Manjunatha) �या$यक सद&य /Judicial Member लेखा सद&य / Accountant Member चे�नई/Chennai, (दनांक/Dated 24th June, 2021 DS

आदेशक��$त+ल,पअ-े,षत/Copy to: Appellant 2. Respondent 3. आयकर आयु.त (अपील)/CIT(A) 4. आयकरआयु.त/CIT 5. ,वभागीय�$त$न�ध/DR 6. गाड3फाईल/GF.