HERO FINCORP LIMITED,NEW DELHI vs. ACIT, CIRCLE 11(1), DELHI, C.R. BUILDING

4. The assessee next filed it’s section 154 rectification before the Assessing officer alleging an apparent mistake on records and claimed that once it issued shares to non-residents only; and, therefore, section 56(2)(vii)(b) would not get attracted. Learned Assessing Officer thereafter passed his rectification order dated 09.05.2023 accepting the same and allowing the necessary relief of Rs.418,66,34,625/- to the assessee (paper book 157-159) as under:

“Order u/s 154/ 143(3) of IT Act. The assessee filed the return of income on 30.10.2017 and further revised on 05.10.2018 at income of Rs. 280,18,34,380/- and claimed refund of Rs. 1,38,14,450/-. Subsequently, the case was selected for scrutiny and assessment was completed at an income of Rs. 715,27,29,060/- raising demand of Rs. 202,87,18,209/-.

2. The assessee has filed rectification application stating that the section 56(2)(viib) is applicable only in case of shares issued to a resident, whereas in the present case, the shares were issued to non-residents and hence addition u/s 56(2) (viib) of Rs. 418,66,34,625/- is not warranted and liable to be rectified being a mistake apparent from records. Further, it is also requested to allow the credit of DDT payment of Rs. 1,61,20,712/-made by the assessee which was not allowed during the assessment order.

3. From the assessment records it is seen that the assessee, during the course of assessment, has furnished the list of share capital issued during the year as under: Name Address No. of shares Face value Security Total amount PAN/Asst. issued premium Particulars Otter Limited IFS Court, 1,08,97,75,590 10,89,75,590 556,10,24,358 566,99,948 AACCO2689J Bank Street, 28 Cybercity Ebane, Mauritius 72201 Credit 1, Raffles 25,36,998 2,53,69,980 129,46,30,079/- 132,00,00,059 AACCC7328N Suissee Link, 03-01 (Singapore) South Lobby, Ltd. Singapore-- 039393 Link Q-8, Hauz 57,659 5,76,590 2,94,23,344 2,99,99,978 AABTL3833H Investment Khas Trust Enclave, New Delhi-110016 TOTAL 1,34,92,216 13,49,22,160 688,50,77,825 701,99,99,985

4. It is evident that the subscribers to the above-share capital were all non- residents on which provisions of section 56(2)(viib) is not applicable. Hence, as per the submission of the asseessee company and records available, the contention of the assessee is found to be in order. 4.1 It is further worthwhile to mention that assessee has filed show cause notice u/s 263 of the IT Act issued by PCIT-4 dated 21.02.2020 in which vide para 5, the following observation was given which is reproduced as under "The above section clearly indicates that the provision is applicable to a transaction of issuance of shares to resident shareholders. However, the shares were issued to M/s Otter Ltd, M/s Credit Suise (Singapore) Limited and M/s Link Investment Trust. Out of these three shareholders, M/s Otter Ltd and M/s Credit Suise (Singapore) Limited are foreign companies having foreign addresses and therefore non-resident. Since, provision of section 56(2)(viib) of the Act are not applicable to aforesaid issue of shares by the assessee to non- resident, the invocation of provision of section 56(2) (viib) of the Act is beyond the scope of statutory mandate……..” 05. In view of the above, it is evident that the mistake is apparent from record which comes under the purview of the section 154 of the Act, hence, rectification u/s 154 is being passed after allowing the credit of taxes paid and as available in system/Form 26-AS. The revised computation of income is as under:

Particular Income Total income assessed u/s 143(3) 715,27,29,060/- Relief allowed u/s 154 418,66,34,625/- Revised total income u/s 154/143(3) 296,60,94,435/- 06. Issue necessary forms.”

This section 154 rectification has admittedly attained finality as on date.

5. We now come to the learned CIT(A)/NFAC lower appellate proceedings. The assessee appears to have apprised him about all the foregoing developments that the impugned section 56(2)(viib) addition already stood deleted/rectified in above terms. The Revenue could hardly dispute that the learned CIT(A)/NFAC’s impugned lower appellate discussion has still upheld the impugned addition as under:

“11.9 Decision: 11.9.1 Ld. FAO, in the course of assessment proceedings, issued a show-cause on 21.12.2019 asking the assessee as to why the value of equity share @ Rs.210 per share should not be adopted by duly following the Rule 11UA and also why the difference of Rs.310.30 per share (Rs.520.30-Rs.210) should not be treated as excess premium chargeable to tax u/s. 56(2) (viib). The Id. FAO also compared the actuals achieved at the end of FYs 2017-18 & 2018-19 with the projections made in respect of turnover & PBT and found that there was a huge deviation between the projections and the actuals. The FAO also commented that such projections were self-serving projections. 11.9.2. In the course of appellate proceedings, it is noticed that such favourable projections were made by the appellant-assessee only to justify the excess valuation of the shares and to issue such overvalued shares to companies whose addresses are in other countries and also to circumvent the provisions of section 56(2)(viib). It is evidenced, during the appellate proceedings, by the fact that M/s. Otter Ltd has immediately sold certain no of shares to an India based Indian resident entity. M/s. Link Investment Trust. It is clearly evident that if M/s. Link Investment Trust had bought the shares of the appellant- company at such a huge premium of Rs.310.30 (Rs.520.30-Rs.210) then the excess premium per share of Rs.310.30 would/should have been taxable u/s. 56(2)(viib). In order to avoid the taxation u/s.56(2)(viib) in the hands of the appellant-assessee company, it appears the assessee itself arranged a via route/round tripping of share purchase through an intermediary company. M/s Otter Ltd. 11.9.3. While the appeal proceedings were pending before the FAA, the JAO has undone the addition made of Rs.418,66,34,625 through a rectification order u/s.154 without examining the issue on hand and without establishing how it is a mistake apparent from record. Now let us examine in paragraphs 11.9.4 and 11.9.5 as to how and why the issue is not a mistake apparent from record.

11.9.4. As seen from the assessment order, the assessee has nowhere stated before the FAO that the excess premium was not taxable u/s. 56(2)(viib) by advancing the reason that the two subscribers viz. namely M/s. Otter Ltd M/s. Credit Suisse (Singapore) Ltd were non-resident Indian companies. When this fact is not emerging from the assessment order it is not known how the fact of residency of these two entities can be treated as mistake apparent from record. Further, an individual's residence can be ascertained from the passport and residency of an individual can thus be verified and established in such simple verification process. However, in the case of companies address alone of such companies cannot reveal the residency of those companies. In addition to the address what more need to be verified for establishing the residency of a company is to check the place of effective management u / s * 0.6(3) of the mu*T Act through proper verification of the direct and Indirect shareholding pattern of the company and such other transactional dealings, etc. No such verification was done by the JAO in rectification proceedings u/s.

154. However, any fact which can be established through a long process of verification and inquiries, cannot be a simple mistake and mistake apparent from record. 11.9.5. For a moment let us presume that the assessee claimed before the FAO during assessment proceedings that the excess premium was not taxable u/s. 56(2) (viib) giving the reason that the subscribing companies are not Indian resident companies. Despite such submission if addition was made u/s. 56(2) (vinb) by the FAO then it suggests that the FAO has duly applied his mind and taken a conscious decision of making addition u/s. 56(2) (viib). Thus in this case also, as opposed to the case in para 11.9.4 the claim of the assessee made before the FAO and/but ignored by the FAO cannot become a mistake apparent from the record. Thus, in either of these two cases (i.e. (a) where the assessee did not make a claim before FAO as discussed in para 11.9.4, or (b) where the assessee made a claim before FAO but ignored by FAO, as discussed in para 11.9.5) excess premium paid by M/s. Otter Ltd and M/s. Credit Suisse (Singapore) Ltd and assessed u / s * 0.56(2) (viib) cannot be the subject matter of rectification proceedings before the JAO. 11.9.6. To know about the place of effective mariagement of the subscribers, viz., M/s. Otter Ltd and M/s. Credit Suisse (Singapore) Ltd, the shareholding pattern and share movements of not only the appellant-assessee but of the subscribing entities should be examined in right perspective. While examining the place of effective management of the subscribing companies, many entities having cross-holdings in relation to the appellant-assessee came to the fore. Before mentioning about such entities, let us examine the meaning of place of effective management in true spirit of the Act.

As per Sec.6, place of effective management is defined as follows.... Explanation. For the purposes of this clause "place of effective management" means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made. This definition should be seen in broader perspective. What if an MNC has its associate companies in India? For that purpose, the word, substance mentioned in the explanation above is the essence of it. Place of effective management does not simply mean a static place where key management and commercial decisions are made. In the modern world of technological advancements and in the era of Information-Communication-Technology (ICT) revolution it is not necessary that the key management and commercial decisions are physically taken in India. What is in substance to be seen is whether the decisions taken have any impact on the Indian operations and whether the decisions taken have any nexus to Indian operations or Indian companies in an indirect manner. Further, it is also to be examined if the foreign residency principle of a company can be so arranged by issuing the shares first to a foreign registered company which thereafter issues to an Indian resident entity. Here what is to be seen is substance over form and spirit/intent of the legislation over the static letter/wording. The substance and spirit of the legislation has been clearly violated by the appellant-assessee by arranging share transactions in such a way that the shares issued by the appellant-company at a huge premium are ultimately bought by Indian resident individuals and Indian resident companies at lesser prices and also bought back by the appellant-company itself at lesser prices while in the process the higher premium gets offloaded in the appellant-company's books of account under "Securities Premium Account" and some of the intermediary investing companies exited with losses to themselves (which of course would be artificially utilised for set off against the true incomes) while with compensatory gain to the appellant-assessee in the form of huge premium without undergoing taxation u/s.56(2)(viib). However, clear finding could not be made by the FAA from the appellant- assessee as it did not utilise the VC opportunity given to it even on its own request. 11.9.6.1. Shareholding pattern and share movement pattern in respect of the two initial subscribers, viz., M/s. Otter Ltd and M/s. Link Investment Trust have been prepared in the following tabular format.

Further, as per the details submitted by the appellant-assessee before the JAO in rectification proceedings M/s.Otter Ltd, claimed to be non-resident company, initially purchased 57,659 no of shares for a total consideration of Rs.2,99,99,978 from the appellant-company along with purchase of another of 1,08,97,559 no of shares for a total consideration of Rs.566,99,99,948. However, the subscriber M/s. Otter Ltd offloaded/sold 57.659 no of shares to the resident Indian entity, M/s. Link Investment Trust. The reason given by the appellant in rectification proceedings before the JAO was that all the investors were non-resident Indian companies. But M/s. Link Investment Trust is resident Indian entity only. It is found in the appellate proceedings that M/s.Otter Ltd acted only as an intermediary for purchasing the shares at a huge premium so as to escape from invocation of Sec.56(2) (viib) r.w.s.6(3) of the Act. Thereafter within a short span of time, the so called non-resident company sold the shares to the resident Indian entity only. This is round tripping adopted by the appellant-company to avoid the invocation of Sec.56(2)(viib). When M/s.Link Investment Trust only had to buy the shares of the appellant-company why should M/s Otter Ltd buy first and sell the shares to M/s.Link Investment Trust, later? This has been done only to escape from Sec.56(2)(viib). Further analysis of the details of Investments (received by the appellant) as furnished by the appellant-company in the ITRs has been made and it is found that M/s.Link Investment Trust disappeared from FY 2017- 18/FY 2018-19 onwards, meaning that M/s.Link Investment Trust further offloaded/sold 57,659 no of shares to the beneficiaries linked to the promoter's group or to the persons under the control of the promoter's group or even to the benamis of the promoter's group. The share transfers have been very diligently 29 made from one entity to another entity/person through intermediaries by way of round tripping and layering. But the crux of the whole transaction is that the promoter's group or even the persons controlled by the promoter's group only purchased the 57,659 no of shares issued by the appellant-company. Also, the details of sale value per share between M/s. Otter Ltd and M/s.Link Investment Trust are not on record and also the details of sale value per share between M/s.Link Investment Trust and other unknown entities/persons are also not on record. 11.9.6.2 Peculiarly, it is also seen that the shareholding (in terms of number and value) by M/s. Otter Ltd and M/s. Credit Suisse kept on increasing year after year with surprisingly Increasing premium per share in later years with shockingly decreasing performance of the appellant-assessee on all fronts vis- à-vis the projected performance in valuation report. In such a scenario these subscribers appear to be the holders of shares for the ultimate benefit of M/s. Hero Fincorp Ltd as per the mandate of M/s. Hero Fincorp Ltd. 11.9.6.3. It appears that the root of all these investments with such huge disproportionate premiums is a joint effort of the appellant-assessee (M/s.Hero Fincorp Ltd) and M/s.ChrysCapital VII LLC. M/s.ChrysCapital LLC has its Indian associate enterprises, viz., M/s.Chrys Capital Investment Advisors (India) Pvt Itd. M/s.ChrysCapital Advisors LLP, M/s.Chrys Capital Associates LLP, M/s.Nuvo ChrysCapital Advisors Pvt Ltd. The domestic entities involved in share transfers after making Initial private placement to the two foreign entities viz., M/s.Otter Ltd (Mauritius) are many, viz., M/s.ChrysCapital Investment Advisors (India) Pvt Itd. M/s.ChrysCapital Advisors LLP, M/s.ChrysCapital Associates LLP, M/s.Nuvo Chrys Capital Advisors Pvt Ltd. Some of the shareholders of M/s. Hero Fincorp Ltd are also shareholders in M/s.ChrysCapital Investment Advisors (India) Pvt ltd, M/s. ChrysCapital Advisors LLP. M/s.ChrysCapital Associates LLP, M/s.Nuvo ChrysCapital Advisors Pvt Ltd. Thus M/s. Otter Ltd though has tax residency certificate in Mauritius but its place of effective management is located in India only through the influence of the common shareholders. Since M/s.Otter Ltd with residency certificate in Mauritius does nol have any transactional operations in Mauritius and also since it is only an investing entity the place of effective management (POEM) is to be taken as India only. However, to come to a conclusion on POEM, more details regarding share movements among the promoters are required. 11.9.6.4 In order to lax the excess premium received by a company in which public are not substantially interested, it is depicted pictorially below how section 56(2)(viib) operates in case the investing company is a resident company…………..

As shown in the diagram, if the resident Indian company (B) purchases the shares issued by the company (A) in excess of the premium as determined under Rule 11UA, such excess premium is taxable in India.

However, to avoid taxation of excess premium in the hands of (A). A & B together can plan to introduce certain non-resident companies between (A) and (B) as shown below……………..

In the above example, one non-resident (NR) company and one resident (R) company are mentioned between (A) & (B) for purchase of the shares of A. for Illustrative purposes. In the instant case of the appellant-assessee the intermediate investing companies varied from one to many. In the time line, 31 initially the non-resident company, X buys the shares of (A) at a value much in excess of the premium determined as per Sec. 11UA so that on paper, such excess premium is not taxable in the hands of (A). Since the intention of the whole arrangement is not for the NR-company, X to hold the shares of (A) for eternity or for long, the intermediate NR-company. X offloads/transfers the shares of (A) either in favour of a R-company. Y or directly transfers the shares of (A) in favour of (B) either at a premium much less than or equal to the original premium charged by A. Finally, the promoters or their deputies (alternatively can be called as Benamis) buy some of the shares from the Resident Investing company. In the whole process the promoters and their deputies would acquire the shares at much lesser price than the initial issue price of (private placement). The final stroke of huge gains would be received by the issuing company when it issues IPO through bourses fixing the premium even in much excess of the private placement price. This whole episode as described in the preceding lines occurred in the case of the appellant-assessee company. These particulars are essential to adjudicate the grounds raised by the appellant. However, the details are not forthcoming from the appellant. 11.9.7. The appellant-assessee adopted colourable devices for circumventing the provisions of Sec.56(2) (viib) by organising the share issue first to M/s. Otter Ltd to the extent of 57,659 no of shares and thereafter organising the purchase transaction by M/s.Link Investment Ltd from M/s. Otter Ltd to the extent of 57,659 no of shares. The Hon'ble Supreme Court in the case of Mc Dowell & Co Ltd vs CTO, [1985] 154 ITR 148 (SC) held that it is not open to a taxpayer to so arrange his affairs as to reduce burden of taxation to minimum and such a process constitutes tax evasion and further held Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by restoring to dublous methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it. The Hon'ble Allahabad High Court held in the case of Kesharwani Zarda Bhandar vs CIT, [2013] 30 taxmann.com 387 that where disallowance of expenditure was a debatable issue, it was not a rectifiable mistake apparent from record so as to initiate rectification proceedings. In the instant case of the appellant also, the addition was made by the AO u/s.56(2)(viib) after elaborate discussion and after duly considering all the submissions of the appellant. An error of facts or figures only, in assessment can be rectified by the JAO later. However, even an error of judgment if exists in an assessment order cannot be rectified by the JAO u/s.154 because even such a judgment was made by the AO after following the due principles of natural justice and after confronting the assessee with so many facts and provisions of law. Following the ratio of Hon'ble High Court of 32

Allahabad in the case of Kesharwani Zarda Bhandar vs CIT, [2013] 30 taxmann.com 387 it is now held that the JAO committed a grave mistake of rectifying the Order passed by NFAC without allowing the natural process of appeal. The rectification order u/s.154 is non-est in law because the complex issues of assessing the share premium u/s.56(2)(viib) r.w.r.11UA can be fathomed and unwound only when the whole chain of share transactions is carefully perused, analysed and applied to the provisions of law; whereas no such exercise has been done by the JAO u/s.154 proceedings. The JAO cannot undo the whole assessment exercise through a simple 2 page rectification order. If the JAO had confronted the assessee on the submissions made u/s.154 before her/him, s/he could have easily understood that the issue was not simple as projected by the assessee. If confronted on facts and provisions of law, the issue of rectification as was projected in rectification petition would no more be a mistake apparent from record for the reasons discussed by the FAO in assessment order and for the reasons and arguments advanced by the FAA in this appeal order. 11.9.8. The powers of the first appellant authority (FAA) are co-terminus with the powers of the AO as per the decision of Hon'ble Supreme Court in Jute Corporation of India Ltd vs CIT [1991] 187 ITR 688. Further It was held in the case of Yogendra Prasad Santosh Kumar vs CIT [2014] 44 taxmann.com 299 (All HC) that "there is no provision in Income Tax Act which will permit withdrawal of an appeal, once it is filed and registered". Also it was held in "M.Loganathan vs ITO [2012] 25 taxmann.com 174 (Mad HC)" and in "Jagmondas Gokaldas vs CWT [1963] 50 ITR 578 (Bom HC) that the appellant has no right to withdraw appeal without the permission of the appellate authority. Moreover, the appellant has not specifically given any letter of withdrawal of this ground of appeal. However, the appellant-assessee in its letter dated 08- 03-2024 stated as follows... "It is respectfully reiterated that in view of rectification order dated 09.05.2023 passed by the assessing officer, grounds of appeal Nos. 8 to 8.6 raised by the appellant challenging the addition made under section 56(2)(viib) of the Act has been rendered infructuous. It is, therefore, respectfully submitted that there is no warrant whatsoever to make enquiries into the said issue.". There is no mention of the withdrawal of the ground of appeal. Even if it is presumed that the appellant wanted to convey about the withdrawal of appeal in an indirect manner, it is now held by the undersigned that the appellant has no right of withdrawal of appeal in view of many facts coming to light. The undersigned holds that the addition u/s.56(2)(vilb) made in the assessment order by FAO/NFAC with proper reasoning cannot be deleted summarily in the rectification order by the JAO purely based on the submissions of the appellant without carrying out any verification of the submissions. 33

The undersigned faces difficulty in expressing his opinion and giving judgment on merits as the appellant failed to furnish the full facts before the FAA and therefore the undersigned refrains from giving any judgment except to the extent that the Rectification Order passed u/s.154 by the JAO is inappropriate and against the law. In view of the foregoing discussion, the ground of appeal raised against the addition made u/s.56(2)(vilb) on this issue is not adjudicated since full facts are needed for proper adjudication. In other words, this ground is dismissed as not adjudicated. Therefore, the addition of Rs.418,66,34,625 u/s.56(2)(viib) made by the FAO/NFAC is fully restored in its entirety by treating the Rectification Order dated 17th Jan 2020 passed u/s.154 by the JAO as another mistake and thus as non-est while at the same time not adjudicating the grounds of appeal raised by the appellant against the addition u/s.56(2) (viib), for want of facts. The Id.JAO is directed to give appeal effect to this appeal order by considering the assessment order passed by FAO/NFAC and ignoring the rectification order passed by the JAO.”

This leaves the assessee aggrieved.

6. It is in this factual background that it would indeed be appropriate at this stage to refer to section 56(2)(viib) itself; as it read in the impugned assessment year 2017-18, as under:

“Where a company, not being a company in which the public are substantially interested in any previous year receives in any previous year, from any person being a non-resident.”

9. It is thus apparent that once the assessee had issued it’s shares to the non-resident companies only, learned CIT(A)’s action upholding the impugned section 56(2)(viib) addition; whether or not the Assessing Officer rectification is considered, could not be held as sustainable in law by any stretch of imagination.

10. The Revenue vehemently argues that the given fact that the CIT(A) was already seized of the matter, the Assessing Officer’s action accepting the assessee’s section 154 rectification application (supra) has rightly been ignored which has led him to confirm the impugned addition. It is noticed in this backdrop that there is no such bar in section 154 of the Act that no rectification would be permissible during the pendency of any appellate proceedings, going by the principles of stricter interpretation as per Commissioner Vs. Dilip Kumar & Co. (2018) 9 SCC 1 (SC) (FB). More particularly, in light of the fact that the revisional authority i.e. PCIT-4 (supra) had already treated the assessee’s investors as non-residents only.

11. The Revenue’s next argument places a very strong reliance on the CIT(A)/NFAC’s detailed discussion highlighting the assessee’s alleged “round-tripping” and other fraudulent malpractices (supra). The same hardly carries any substance once it is an addition made u/s 56(2)(viib) application in a case wherein the company concerned fails to justify it’s share-premiums, as per the prescribed twin methods under Rule 11UA of the Income Tax Rules. Case law CIT Vs. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC); CIT Vs. Sardari Lal & Co. (2001) 251 ITR 864 (Del.) and CIT Vs. Union Tyres (1999) 240 ITR 556 (Del.) have also settled the issue of “enhancement” jurisdiction u/s 251(1)(a) of the Act that any head of income cannot be changed in the lower appellate proceedings.

It is in the light of the preceding detailed discussion that I am of the considered view that restoring section 56(2)(viib) addition issue back to the CIT(A)/NFAC; for yet another round of proceedings., after the Assessing Officer has already passed the rectification in assessee’s favour, would be nothing but gross abuse of process of law, which could not be agreed upon. I accordingly deem it appropriate to accept the assessee’s instant substantive ground nos. 12 to 20 and delete section 56(2)(vii)(b) addition of Rs. 418,66,34,625/- confirmed by the CIT(A)/NFAC, in very terms. Ordered accordingly.

PER : MAHAVIR SINGH, VICE PRESIDENT

Order under Section 255(4) of the Income-tax Act, 1961

By the order of President, ITAT vide U.O. No.F.28-Cent.Jd(AT)/2025 dated 28th April, 2025, the undersigned has been nominated to adjudicate the difference of opinion between the learned Judicial Member and learned Accountant Member on the following question:-

“1. Whether, in the facts and circumstances of the case, learned CIT(A)/NFAC’s action upholding section 56(2)(vii)(b) addition of Rs.418,66,34,625/- in assessee’s hands, deserves to be reversed?”

Brief facts are that the assessee filed its return of income on 30th October, 2017, 2. which was revised on 5th October, 2018. The assessee’s case was selected for scrutiny through CASS by issuing notice under Section 143(2) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 2nd September, 2018. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has issued 1,34,92,216 number of equity shares at the rate of `520.30 each at a premium of `510.30 per share. The Assessing Officer required the assessee to explain vide show cause notice dated 21st December, 2019, the basis of premium charged and fair market value of unquoted equity shares determined by it. The Assessing Officer required the assessee to explain as to why as per Rule 11UA of the Income-tax Rules, 1962 (hereinafter referred to as ‘the Rules’), the value of equity shares issued at a price of `520.30 per share be not taken at `210.00 per share and why the difference of premium thus received should not be added back to the income of the assessee. The assessee explained that it has valued the fair market value of shares on the basis of DCF method but the Assessing Officer was not convinced and he carried out his valuation and determined the fair market value of the equity shares at `210 per share and thereby difference of premium of `310.30 per share was valued at `418,66,34,625/- and added back to the income of the assessee in terms of Section 56(2)(viib) of the Act. Learned CIT(A) also confirmed the action of the Assessing Officer. Aggrieved, the assessee came in appeal before the Tribunal.

Date Particulars 15.09.2016 During the relevant previous year, the appellant had issued 1,34,92,216 equity shares of face value of Rs.10 per share at a premium of Rs.510.30 per share, i.e. @ 520.30 per share to following non-residents: Shares Amount (Rs.) Otter Limited, Mauritius 1,09,55,218 569,99,99,925 Credit Suise (Singapore) Ltd. 25,36,998 132,00,00,059

03.10.2019 The assessee filed following details/documents before AO: & (a) Details of amounts received along with details of non- 06.12.2019 resident share applicants; (b) List of Allottees (c) Valuation Report as per Rule 11UA substantiating fair valuation of issuance of shares as per DCF method (d) Relevant extracts of the Tax Audit Report for AY 2017-18 indicating that nothing is taxable under section 56(2)(viib). 29.12.2019 In the assessment completed u/s 143(3), AO, inter alia, made addition of Rs.418,66,34,625/- u/s 56(2)(viib) as under: Issue price : Rs.520.30 per share - FMV determined by AO : Rs.210 per share -

Excess premium alleged : Rs.310.30 per share -

Pertinently AO: (a) failed to appreciate that section 56(2)(viib) is, per se, not applicable to receipt of share capital from non-residents; (b) made addition alleging that there is variation between projections for DCF valuation with actual results; (c) proceeded to apply Net Asset Value (‘NAV’) method. 17.01.2020 Assessee filed rectification application u/s 154, inter-alia, submitted that the provisions of section 56(2)(viib) are, per se, not applicable on non-residents along with following:

(a) Particulars/details of the non-resident subscribers, already on record; and (b) Foreign inward remittance certificates (FIRC), further substantiating remittances from outside India; 28.01.2020 Appeal filed before CIT(A) on various issues, including above issue [rectification application was pending] 21.02.2020 Show cause notice issued by the PCIT-04, Delhi u/s 263, inter-alia, observing as under:- CIT noted, “Out of these three shareholders, M/s Otter - Limited and M/s Credit Suisse (Singapore) Limited are foreign companies having foreign addresses and therefore non-resident.” CIT further observed, “Since, provisions of Section - 56(2)(viib) of the Act are not applicable to the aforesaid issue of shares by the assessee to non-residents, the invocation of provisions of Section 56(2)(viib) of the Act is beyond the scope of statutory mandate. Consequently, addition made u/s 56(2)(viib) is not sustainable……..” 09.05.2023 AO passed rectification order u/s 154 rectifying assessment order dated 29.12.2019 taking note of following: (a) Assessment record shows subscribers are non-residents; (b) Pr. CIT in 263 proceedings noted that section 56(2)(viib) has been wrongly applied; and (c) consequently, deleted addition made u/s 56(2)(viib).

Most importantly, as a consequence of rectification order: (a) assessment order stood rectified to the extent of merger of the rectification order and consequently, the addition u/s 56(2)(viib) of the Act stood deleted/became non-existent; (b) the ground raised by the assessee before CIT(A) challenging addition u/s 56(2)(viib) was rendered infructuous. Proceedings before CIT(A): 01.03.2021 Detailed written submissions filed 22.05.2023 Assessee pointed out that assessment order rectified 31.01.2024 Despite rectification order passed by AO, CIT(A) issued notices 05.03.2024 directing the assessee to: (a) upload documents basis which rectification order passed; (b) prove that subscribers are non-resident as per section 6; (c) explain how in view of alleged related entities of non- resident subscribers, POEM may of the non-resident subscribers may not be regarded to be in India. 09.02.2024 Assessee, under protest, filed following documents: & (a) Copy of SCN issued by PCIT u/s 263 noting that the 19.02.2024 subscribers are non-residents and section 56(2)(viib) is not applicable;

& (b) Detailed reply on non-applicability of section 6 [POEM test 08.03.2024 vis-a-vis DTAA]; (c) Tax Residency Certificates (TRCs) of Credit Suise (Singapore) Ltd. & Otter Limited, Mauritius; (d) ITAT Order in the case Credit Suise (Singapore) Ltd. for AY 2017-18, noting that the assessee is non-resident; (e) Intimation u/s 143(1) in the case of Otter Limited, Mauritius

4. I have heard learned Counsel for the assessee as well as learned CIT(DR). I have perused the case records including the assessment order, the order of the learned CIT(A), the rectification order passed by the AO, orders passed by the Learned Brother Members, Paper Book filed by the Assessee and the written Submissions filed by the learned Counsel for the assessee as well as learned CIT(DR). The above question raised is argued on three facets.

5. To adjudicate this question, the first facet argued by the Assessee is that once the assessment order passed by the AO is rectified under Section 154 of the Act deleting the addition made by the AO on account of share premium under Section 56(2)(viib) of the Act, is it open to CIT(A) to adjudicate on the same issue as the same was rendered infructuous?

5.1 Learned Counsel for the assessee, first of all, drew my attention to the assessment order framed wherein, the Assessing Officer has made the addition on differential premium of `310.30 per share against the total shares issued of 1,34,92,216 in numbers for a total amount of `418,66,34,625/- to the returned income of the assessee under Section 56(2)(viib) of the Act vide assessment order dated 29.12.2019 passed under Section 143(3) of the Act. The assessee filed rectification application dated 17.01.2020 under Section 154 of the Act submitting that the provisions of Section 56(2)(viib) of the Act are, per se, not applicable on non-residents. Assessee also filed appeal with the CIT(A) on 28.01.2020 against the assessment order passed under Section 143(3) of the Act. In this appeal filed before the CIT(A) on various issues including the above issue as raised in rectification application, which was pending adjudication. The AO rectified the assessment order vide his rectification order passed under Section 154 of the Act dated 09.05.2023 by taking note of the fact that the assessment record shows that subscribers are non-residents and also noted the fact recorded in the proceedings of PCIT in revision under Section 263 of the Act, whereby the PCIT noted that Section 56(2)(viib) of the Act is not applicable to the issue of shares to non-residents by the assessee and consequently, the addition made by the Assessing Officer under Section 56(2)((viib) of the Act is not sustainable. Accordingly, the Assessing Officer passed the rectification order under Section 154 of the Act and deleted the addition made under Section 56(2)(viib) of the Act.

6. Learned Counsel for the assessee drew my attention to the rectification order passed by the ACIT, Circle-11(1), Delhi dated 09.05.2023, whereby he deleted the addition by observing in para nos.3 to 5 as under: -

“03. From the assessment records, it is seen that the assessee during the course of assessment, has furnished the list of share capital issued during the year as under: -

Name Address No. of Face value Security Total amount PAN/Asstt. shares premium Particulars issued Otter IFS Court, 1,08,97,559 10,89,75,590 556,10,24,358 566,99,99,948 AACC02689J Limited Bank Street, 28, Cybercity Ebane Mauritius 72201 Credit 1, Raffles 25,36,998 2,53,69,980 129,46,30,079 132,00,00,059 AACCC7328B Suisse Link, 03-01, (Singapor South e Limited) Lobby, Singapore- 039393 Link Q-8, Hauz * 57,659 5,76,590 2,94,23,388 2,99,99,978 AABTL3833H Investmen Khas t Trust Enclave, New Delhi – 16 Total 1,34,92,216 13,49,22,160 688,50,77,825 7,01,99,99,985 * Originally issued by Otter Limited who subsequently sold it to Link Investment Trust.

4. It is evident that the subscribers to the above share capital were all non-residents on which provisions of section 56(2)(viib) is not applicable. Hence, as per the submission of the assessee company and records available, the contention of the assessee is found to be in order. 4.1 It is further worthwhile to mention that assessee has filed show cause notice u/s. 263 of the I.T. Act by PCIT-4, dated 21.02.2020 in which vide para 5, the following observation was given which is reproduced as under:- “The above section clearly indicates that the provision is applicable to a transaction of issuance of shares to resident shareholders. However, the shares were issued to M/s Otter Ltd, M/s Credit Suisse (Singapore) Limited and M/s Link Investment Trust. Out of these three shareholders, M/s Otter Ltd., M/s Credit Suisse (Singapore) Limited are foreign companies having foreign addresses and therefore non –resident. Since, provision of section 56(2)(viib) of the Act are not applicable to aforesaid issue of shares by the assessee to non-resident, the invocation of provision of section 56(2)(viib) of the Act is beyond the scope of statutory mandate…..”

5. In view of the above, it is evident that the mistake is apparent from record which comes under the purview of section 154 of the Act, hence, rectification u/s. 154 is being passed after allowing the credit of taxes paid and as available in system / form 26-AS. The revised computation of income is as under:- Particular Income Total income assessed u/s 143(3) 715,27,29,060/- Relief allowed u/s 154 418,66,34,625/- Revised total income u/s 154 / 299,60,94,435/- 143(3)

7. Subsequently, learned Counsel for the assessee also drew my attention to para 11.9.4 and 11.9.5 of the CIT(A)’s order, whereby he admitted that two subscribers namely, Otter Limited, Mauritius and Credit Suisse (Singapore) Ltd. were non-residents Indian Companies. But he contested on the issue that no such verification was done by the Jurisdictional Assessing Officer (JAO) in rectification proceedings under Section 154 of the Act i.e., establishing the residency of 44 the company to check the Place of Effective Management (POEM) u/s. 6(3) of the Act for proper verification. For this, he observed in para 11.9.4 and 11.9.5 as under:-

“11.9.4. As seen from the assessment order, the assessee has nowhere stated before the FAO that the excess premium was not taxable u/s. 56(2)(viib) by advancing the reason that the two subscribers viz. namely M/s. Otter Ltd., M/s. Credit Suisse (Singapore) Ltd were non-resident Indian companies. When this fact is not emerging from the assessment order it is not known how the fact of residency of these two entities can be treated as mistake apparent from record. Further, an individual's residence can be ascertained from the passport and residency of an individual can thus be verified and established in such simple verification process. However, in the case of companies address alone of such companies cannot reveal the residency of those companies. In addition to the address what more need to be verified for establishing the residency of a company is to check the place of effective management u/s.6(3) of the I-T Act through proper verification of the direct and indirect shareholding pattern of the company and such other transactional dealings, etc. No such verification was done by the JAO in rectification proceedings u/s.

7.1 Finally, the CIT(A) decided the issue on rectification carried out by the AO u/s. 154 of the Act vide para no.11.9.7 and 11.9.8 by holding that the addition u/s.56(2)(viib) made in the assessment order by FAO/NFAC with proper reasoning cannot be deleted summarily in the rectification order by the JAO purely based on the submissions of the assessee without carrying out any verification of the submissions as under:-

“11.9.7. The appellant-assessee adopted colourable devices for circumventing the provisions of Sec.56(2)(viib) by organising the share issue first to M/s. Otter Ltd to the extent of 57,659 no of shares and thereafter organising the purchase transaction by M/s. Link Investment Ltd from M/s. Otter Ltd to the extent of 57,659 no of shares, The Hon'ble Supreme Court in the case of Mc Dowell & Co Ltd vs CTO, [1985] 154 ITR 148 (SC) held that it is not open to a taxpayer to so arrange his affairs as to reduce burden of taxation to minimum and such a process constitutes tax evasion and further held Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by restoring to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it. The Hon'ble Allahabad High Court held in the case of Kesharwal Zarda Bhandar vs CIT, [2013] 30 taxmann.com 387 that where disallowance of expenditure was a debatable issue, it was not a rectifiable mistake apparent from record so as to initiate rectification proceedings. In the instant case of the appellant also, the addition was made by the AO u/s.56(2)(viib) after elaborate discussion and after duly considering all the submissions of the appellant. An error of facts or figures only, in assessment can be rectified by the JAO later, However, even an error of judgment If exists in an assessment order cannot be rectified by the JAO u/s.154 because even such a judgment was made by the AQ after following the due principles of natural justice and after confronting the assessee with so many facts and provisions of law. Following the ratio of Hon'ble High Court of Allahabad in the case of Kesharwani Zarda Bhandar vs CIT, [2013] 30 taxmann.com 387 it is now held that the JAO committed a grave mistake of rectifying the Order passed by NFAC without allowing the natural process of appeal. The rectification order u/s. 154 is non-est in law because the complex Issues of assessing the share premium u/s.56(2)(viib) r.w.r. 11UA can be fathomed and unwound only when the whole chain of share transactions is carefully perused, analysed and applied to the provisions of law; whereas no such exercise has been done by the JAO u/s. 154 proceedings. The JAO cannot undo the whole assessment exercise through a simple 2 page rectification order. If the JAO had confronted the assessee on the submissions made u/s.154 before her/him, s/he could have easily understood that the issue was not simple as projected by the assessee. If confronted on facts and provisions of law, the issue of rectification as was projected in rectification petition would no more be a mistake apparent from record for the reasons discussed by the FAO in assessment order and for the reasons and arguments advanced by the FAA in this appeal order. 11.9.8. The powers of the first appellant authority (FAA) are co-terminus with the powers of the AO as per the decision of Hon'ble Supreme Court in Jute Corporation of India Ltd vs CIT [1991] 187 ITR 688. Further It was held in the case of Yogendra Prasad Santosh Kumar vs CIT [2014] 44 taxmann.com 299 (All HC) that "there is no provision in Income Tax Act which will permit withdrawal of an appeal, once it is filed and registered. Also it was held in "M.Loganathanvs ITO [2012] 25 taxmann.com 174 (Mad HC)" and in "Jagmondas Gokaldas vs CWT [1963) 50 ITR 578 (Bom HC) that the appellant has no right to withdraw appeal without the permission of the appellate authority. Moreover, the appellant has not specifically given any letter of withdrawal of this ground of appeal. However, the appellant-assessee in its letter dated 08-03-2024 stated as follows... "It is respectfully reiterated that in view of rectification order dated 09.05.2023 passed by the assessing officer, grounds of appeal Nos. 8 to 8.6 raised by the appellant challenging the addition made under section 56(2)(viib) of the Act has been rendered infructuous. It is, therefore, respectfully submitted that there is no warrant whatsoever to make enquiries into the said issue.". There is no mention of the withdrawal of the ground of appeal. Even if it is presumed that the appellant wanted to convey about the withdrawal of appeal in an indirect manner, it is now held by the undersigned that the appellant has no right of withdrawal of appeal in view of many facts coming to light. The undersigned holds that the addition u/s.56(2)(viib) made in the assessment order by FAO/NFAC with proper reasoning cannot be deleted summarily in the rectification order by the JAO purely based on the submissions of the appellant without carrying out any verification of the submissions. The undersigned faces difficulty in expressing his opinion and giving judgment on merits as the appellant failed to furnish the full facts before the FAA and therefore the undersigned refrains from giving any judgment except to the extent that the Rectification Order passed u/s.154 by the JAO is inappropriate and against the law. In view of the foregoing discussion, the ground of appeal raised against the addition made u/s.56(2)(vilb) on this Issue is not adjudicated since full facts are needed for proper adjudication. In other words, this ground is dismissed as not adjudicated. Therefore, the addition of Rs.418,66,34,625 u/s.56(2)(viib) made by the FAO/NFAC is fully restored in Its entirety by treating the Rectification Order dated 17th Jan 2020 passed u/s.154 by the JAO as another mistake and thus as non-est while at the same time not adjudicating the grounds of appeal raised by the appellant against the addition u/s.56(2)(viib), for want of facts.

The Id.JAO is directed to give appeal effect to this appeal order by considering the assessment order passed by FAO/NFAC and ignoring the rectification order passed by the JAO.”

“3. During the course of the assessment proceeding, it was found that the assessee have issued 13491116 number of equity shares at the rate of Rs.520.30 each at a premium of Rs.510.30 per share. On the other side, as per Rule 11UA of the Income Tax Rule, the value of equity shares turns out be Rs.210 per share. The projections used by the assessee company in computing FMV of share as per DCT 48 method were contradictory to the actual achieved by the assessee in subsequent year. Hence, the DCF method adopted by the assessee was rejected by the AO and the difference of premium of Rs. 310.30 per share against local shares issued of 13492216 in number i.e. Rs.418,66,34,625/- was added to the income of the assessee as per the provisions of Section 56(2)(viib) of the Act.

5. The above section clearly indicates that the provision is applicable to a transaction of issuance of shares to resident shareholders. However, the shares were issued to M/s Otter Limited, M/s Credit Suisse (Singapore) Limited and M/s Link Investment Trust. Out of these shareholders, M/s Otter Limited and M/s Credit Suisse (Singapore) Limited are foreign companies having foreign addresses and therefore non-resident. Since, provision of Section 56(2)(viib) of the Act are not applicable to the aforesaid issue of shares by the assessee to non-existent, the invocation of provisions of Section 56(2)(viib) of the Act is beyond the scope of statutory mandate. Consequently, addition made u/s. 56(2)(viib) is not sustainable. The addition made by the AO u/s. 56(2)(viib) of the Act.

10. On the other hand, learned CIT(DR) argued that the addition made by the AO under Section 56(2)(viib) of the Act is after elaborate discussions and after duly considering the submissions of the assessee, and the rectification order passed by the Assessing Officer under Section 154 of the Act is non-est in law, because the complex issue of receipt of share premium under Section 56(2)(viib) of the Act read with Rule 11UA by the assessee can only be analyzed by chain of transactions and after carefully perused, analyzed and considered after application of mind, whereas in the proceedings under Section 154 of the Act, Assessing Officer has not carried out any exercise of verification. He argued that the JAO, while exercising power under Section 154 of the Act, cannot undo the whole assessment proceedings simplicitor on the basis that the addressees of the assessee are in foreign territory. The learned CIT(DR) also argued that the appeal once filed by the Assessee has to be decided on merits because the duty cast upon the appellate authority to consider not only the question of interest of assessee, but also interest of Revenue. She argued that the assessee cannot, as a matter of right, claim to withdraw the appeal or argue and the issue has become infructuous in view of the rectification carried out by the AO under Section 154 of the Act. She argued that the power of withdrawal of appeal is linked with the power of enhancement with the result that neither the withdrawal by the assessee nor ex-parte dismissal in default is available to the CIT(A). In this case, she argued that learned CIT(A) has rightly adjudicated the issue on this aspect and considered that the relevant details were not available before the AO in regard to the status of the assessee and hence, held that the rectification proceedings are invalid. She relied upon the decision of the Hon’ble Madras High Court dated 29.04.2025 in the case of Prima Urban Development India Ltd. Vs. ACIT (2025) 174 taxmann.com 201 (Madras).

12. I have gone through the entire rectification order and the order of the CIT(A) as substantially reproduced by me above. I am of the view that the rectification order passed under Section 154 of the Act and the original assessment framed under Section 143(3) of the Act were for all practical purposes, and also for all legal purposes stood merged and the addition made by the AO in the assessment order passed under Section 143(3) of the Act in respect of the share premium under Section 56(2)(vii) of the Act stands extinguished in terms of order passed under Section 154 of the Act. To this extent, the grievance raised by the assessee in appeal before the CIT(A), against the deletion on the said addition, in rectification proceedings, becomes academic and infructuous. I noted that the CIT(A) disposed of this appeal and he proceeded to adjudicate this very issue, which was subject matter of rectification under Section 154 of the Act, the course of action of the CIT(A), in my considered view, was not permissible under the provisions of the Act. Further, I note that once the rectification order is passed under Section 154 of the Act, the grievance of the assessee does not survive because rectification order has been passed giving relief on that account by some other authority i.e., the Assessing Officer, it is not open for the CIT(A) to adjudicate that grievance. Once the addition on share premium, doubted by the AO under Section 56(2)(viib) of the Act has been deleted by the AO while acting under Section 154 of the Act which stood merged in the assessment order, it is not open for the CIT(A) to examine the merits of such addition and declare his opinion on the same. This view of mine is supported by the identical adjudication of issue and principle laid down by the Mumbai ‘E’ Bench of ITAT in the case of Tata Education and Development Trust Vs. ACIT (2020) 117 Taxmann.com 946 (Mumbai-Trib.), wherein it is held as under:-

“23. The rectification order so passed and the original assessment order were, for all practical and for all legal purposes, stood merged, and the disallowance thus ceased to exist as on 8th December 2015. To this extent, grievances raised in the appeals before the CIT(A), against the aforesaid disallowances, became wholly academic and infructuous. Yet, on 29th December 2017, when learned CIT(A) disposed of these appeals, he proceeded to adjudicate on these issues. That course of action, in our considered view, was not permissible. When the very disallowance of exemption, which was agitated in appeal, stood deleted, it was not open to the learned CIT(A) to adjudicate on the correctness of the disallowance. While on this aspect of the matter, we may usefully refer to the following observations made by Hon'ble Gujarat High Court, in the case of Nitin Babubhai Rohit v Dharmendra Vishnubhai Patel [(2018) 409 ITR 276 (Guj.)] wherein Their Lordships have, inter alia, observed as follows: “.......we find it somewhat unusual to note that the Commissioner (Appeals) even after the revisional authority had set aside the order of penalty, proceeded to decide the appeal of the assessee. Even if the Commissioner of Income-tax (Appeals) was personally of the opinion that the revisional order should not have been passed, once such order was passed, he must abide by the discipline of a quasi-judicial structure and respect the order as it stands. Unless the order of the revisional authority was set aside by competent authority or Court, its effect must be allowed to be felt on record with full force. The only effect of the order was that the order of penalty passed by the Assessing Officer does not survive. If the penalty order was thus set aside by revisional authority, it was thereafter not open for the appellate Commissioner to still examine the merits of such an order and declare his legal opinion on the same.....”

24. Clearly, therefore, once a grievance does not survive because of some other order having been passed giving relief, on that count, having been given by some other authority, it is not open to the CIT(A) to adjudicate on that grievance. Once the disallowance of exemption was thus deleted by the Assessing Officer, by way of a rectification order which stood merged with the assessment order, it was not open to the CIT(A) to still examine the merits of such a disallowance of exemption and declare his legal opinion on the same. In our considered view, therefore, even if the CIT(A) was personally of the opinion that the rectification order should not have been passed, as he apparently was, once such a rectification order was passed, he must abide by the discipline of a quasi-judicial structure and respect the order as it stands. Even if learned CIT(A)'s reservations, on the correctness of rectification order passed by the Assessing Officer under section 154 and thus deleting the disallowance of exemption, had any merits, the remedy was not with him. He was not seized of the matter regarding correctness of relief granted by the Assessing Officer under section 154, and, at the game time, legal effect of the order under section 154 was that the issue, which he was called upon to adjudicate on, was rendered academic. As held by Hon'ble Calcutta High Court in the case of PCIT v. KPC Medical College and Hospital [(2018) 95 taxmann.322 (Cal)], in view of the scope of Explanation to Section 251, the CIT (A) can deal with "any matter arising out of the proceedings in which the order appealed against was passed" but then when different sub clauses of section 251(1) provide for different appeals for the orders, while dealing with appeal against one order, the CIT(A) cannot deal with the subject matter of the other order. This is evident from Their Lordships' observations 52 to the effect that "As would be evident from Section 251(1) of the Act, an appeal against an order of assessment is covered by clause (a) thereof and an appeal against an order imposing a penalty is covered by clause (b) thereof. In other words, independent appeals arise out of orders of assessment and orders imposing any penalty. In this case, the order that was before the Commissioner (Appeals) was an order imposing a penalty and not an assessment order. If the assessment order that resulted in the penalty proceedings being instituted was before the Commissioner (Appeals), the direction may have been justified. However, in the appeal arising out of the order imposing the penalty, the matter pertaining to some other income escaping assessment did not fall within the purview of the expression "any matter arising out of proceedings in which the order appealed against was passed". It is only elementary in law that what cannot be done directly cannot be done indirectly either. If authority is needed even for this fundamental legal proposition, the same is contained in numerous judgments of Hon'ble Supreme Court of India, including in the rather recent cases of Ram Jethmalani v. Union of India [(2011) 13 taxmann.com 189 (SC)land CIT v. Paharpur Cooling Towers Pvt Ltd. [(1996) 219 ITR 618 (SC)].The rectification order under section 154 could have been at best subjected to revision under section 263, and the time limit under section 263(2) was very well available at that point of time, but then such a revision could only have been done by the Principal Commissioner of Income-tax concerned, and not by the CIT(A); as we have noted earlier in these discussions, it is only elementary in law that what cannot be done directly, cannot be done indirectly either. As long as such a revision does not take place, and that has not happened till now, and as long as the rectification orders passed under section 154 are set aside by any other mechanism provided under the law, it was not open to the CIT(A) to ignore the effect of the rectification order, on the order impugned in appeal before him, and thus proceed to adjudicate on a question which was wholly academic and infructuous at that point of time.

25. In our considered view, therefore, the very adjudication on denial of exemption, in respect of monies spent on application of charitable objectives of the appellant trust outside India, by the Ld. CIT(A) was incorrect in law, and is, accordingly, liable to be set aside for that short reason alone.”

13. In view of the above discussions, facts of the present case as noted above and judicial precedence cited above, I am of the view that the rectification order passed by the AO under Section 154 of the Act is in existence and original assessment order passed under Section 143(3) of the Act for all practical and for all legal purposes stood merged, the order of the CIT(A) ignoring the effect of rectification order and thus proceeds to adjudicate on a question which has become academic and infructuous is liable to be set aside. Accordingly, the order of CIT(A) is reversed on this issue and the ground of this appeal is allowed. For this purpose, I agree with the view expressed by learned Judicial Member.

“5. The above section clearly indicates that the provision is applicable to a transaction of issuance of shares to resident shareholders. However, the shares 54 were issued to M/s Otter Limited, M/s Credit Suisse (Singapore) Limited and M/s Link Investment Trust. Out of these three shareholders, M/s Otter Limited and M's Credit Suisse (Singapore) Limited are foreign companies having foreign addresses and therefore non-resident. Since. provisions of Section 56(2)(viib) of the Act are not applicable to the aforesaid issue of shares by the assessee to non-residents, the invocation of provisions of Section 56(2)(viib) of the Act is beyond the scope of statutory mandate Consequently addition made u/s 56(2)(viib) is not sustainable. The addition made by the A.O. u/s 56(2)(viib) in the assessment order should have been made u/s 28(iv) or any other relevant section deemed suitable instead of u/s. 56(2)(viib) of the Act.”

“1. It is noticed from records that one of the subscribers to the shares is Ms. Otter Limited with investment of Rs.566.99.99.948 which has its associated enterprise in India, by the name M/s. Otter Controls India Pvt Ltd with the Directors, viz, Ukhas Krishna Joshi as MD, David Andrew Smith and Wilam Ross Joliffe as Directors. This Indian based company has a direct influence on M/s. Otter Limited through which funds have been received into your company. Please explain why the place of effective management as envisaged u/s.6(3) cannot be invoked in your case in respect of M/s Otter Limited.

2. Similarly, another investor by the name, M/s. Credit Suisse (Singapore) Lid has invested a sum of Rs.132,00,00,059 in your company. This entity has a number of Indian entities, such as M/s. Credit Suisse Consulting India Pvt Ltd, M/s, Credit Suisse Securities India Pvt Ltd, M/s. Credit Suisse Finance India Pvt Ltd and M/s, Credit Suisse Services India Pvt Ltd, etc., through which the M/s. Credit Suisse (Singapore) Ltd has been influenced to make investment in the appellant company. In view of this please explain why the place of effective management as envisaged u/s.6(3) cannot be invoked in your case in respect of M/s. Credit Suisse (Singapore) Ltd.

3. The third investor, M/s. Link Investment Trust is Delhi based entity in which case the provisions of Sec 56(2)(viib) are directly applicable. Please explain why and how the provisions of Sec. 56(2)(viib) are not applicable in respect of M/s. Link Investment Trust.”

S.No. Particulars 1. Details of amounts received along with details of non-resident share applicants.

From the above details, it is clear that these two parties viz., Credit Suisse Singapore and Otters Ltd. Mauritius are non-residents and all the details were available before the Assessing Officer during rectification proceedings and also before learned CIT(A) in appellate proceedings.

“The income-tax authorities were seeking to examine as to whether the assessees were actually residents of a third country on the basis of alleged control of management therefrom. We have already extracted the relevant provisions of article 4 which provide that, for the purposes of the agreement, the term "resident of a contracting State" means any person who under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of similar nature. The term "resident of India" and "the rest-dent of Mauritius" are to be construed accordingly. Article 13 of the DTAC lays down detailed rules with regard to taxation of capital gains. As far as capital gains resulting from alienation of shares are concerned, article 13(4) provides that the gains derived by a "resident" of a contracting State shall be taxable only in that State. In the instant case, such capital gains derived by a resident of Mauritius shall be taxable only in Mauritius. Article 4, which we have already referred to, declares that the term resident of Mauritius means any person who under the laws of Mauritius is "liable to taxation" therein by reason, inter alia, of his residence. Clause (2) of article 4 enumerates detailed rules as to how the residential status of an individual resident in both Contracting States has to be determined for the purposes of DTAC. Clause (3) of article 4 provides that if, after application of the detailed rules provided in article 4, it is found that a person other than an individual is a resident of both Б the Contracting States, then it shall be deemed to be a resident of this Contracting State in which its place of effective management is situated. The DTAC requires the test of "place of effective management" to be applied only for the purposes of the tie-breaker clause in article 4(3) which could be applied only when it is found that a person other than an individual is a resident both of India and Mauritius. We see no purpose or justification in the DTAC for application of this test in any other situation. The High Court has held, and the respondents so contend, that the Assessing Officer under the Income-tax Act is entitled to lift the corporate veil, but the circular effectively bars the exercise of this quasi-judicial function by reason of a presumption with regard to the certificate issued by the competent authority in Mauritius ; conclusiveness of such a certificate of residence granted by the Mauritius tax authorities is neither contemplated under the DAC, nor under the Income-tax Act a provision as to conclusiveness of a certificate is a matter of legislative action and cannot form the subject matter of a circular issued by a delegate of legislative power. As early as on March 30, 1994, the Central Board of Direct Taxes had issued Circular No. 682 (see [1994) 207 ITR (St.) 7) in which it had been emphasized that any resident of Mauritius deriving income from alienation of shares of an Indian company would be liable to capital gains tax only in Mauritius as per Mauritius tax law and would not have any capital gains tax liability in India. This circular was a clear enunciation of the provisions contained in the DTAC, which would have overriding effect ever the provisions of sections 4 and 5of the Income- tax Act, 1961, by virtue of section 90(1) of the Act. If, in the teeth of this clarification, the Assenting Officers chose to ignore the guidelines and spent their time, talent and energy on inconsequential matters, we think that the Central Board of Direct Taws was justified in issuing "appropriate” direction vide Circular No. 789 (see [2000] 243ITR (St.)57), under its powers under section 119, to set things on course by eliminating avoidable wastage of time, talent and energy of the Assessing Officers discharging, the onerous public duty of collection of revenue. Circular No. 789 (see [2000] 243 ITR (St.) 57) does not in any way all crib, cabin or confine the powers of the Assessing Officer with regard to any particular assessment. It merely formulates broad guidelines to be applied in the matter of assessment of assessee covered by the provisions of DTAC. We do not think the circular in any way takes away on curtails the jurisdiction of the Asserting Officer to assess the income of the assessee before him. In our view, therefore, it is erroneous to say that the impugned Circular No. 789 dated April 3, 200 (see [2000] 243 ITR (St.) 57) is ultra vires the provisions of section 119 of the Act. In our judgement, the powers conferred upon the Central Board of Direct Taxes by sub-sections (1) and (2) of section 119 are wide enough to accommodate such a circular.”

And, finally, in the aforesaid case, the Hon’ble Supreme Court further held as under:- “If the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intervening legal steps as non est based upon some hypothetical assessment of the "real motive" of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot G afford to chase a will- o'-the-wisp. The judgment of the Privy Council in Bank of Chettinad's case [1940] 8 ITR 522, wholeheartedly approving the dicta in the passage from the opinion of Lord Russel in Westminster's case [1936] AC 1 (HL) ; [1935) 19 TC 490, was the law in this country when the Constitution came into force. This was the law in force then, which continued by reason of article 372. Unless abrogated by an Act of Parliament, or by a clear pronouncement of this court, we think that this legal principle would continue to hold good. Having anxiously scanned McDowell's case (1985] 154 ITR 148 (SC), we find no reference therein to having dissented from or overruled the decision of the Privy Council in Bank of Chettinad's case [1940] 8 ITR 522 (PC). If any, the principle appears to have been reiterated with approval by the Constitutional Bench of this court in Mathuram's case [1999] 8 SCC 667 at page 12. We are, therefore, unable to accept the contention of the respondents that there has been a very drastic change in the fiscal jurisprudence, in India, as would entail a departure. In our judgment, from Westminster's case (1936) AC 1 (HL) ; 19 TC 490 to Bank of Chettinad's case [1940] 8 ITR 522 (PC) to Mathuram's case [1999] 8 SCC 667, despite the hiccups of McDowell's case [1985] 154 ITR 148 (SC), the law has remained the same. We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents.”

25. Now, in view of the above discussion and legal position, I answer the question referred to me as under: - Question framed by the Bench Answer to the Question “1. Whether, in the facts and In the given facts and circumstances of the circumstances of the case, learned case and discussion carried above, I am of the CIT(A)/NFAC’s action upholding section view that this question is answered in 56(2)(vii)(b) addition of Rs.418,66,34,625/- in affirmative and accordingly, action of CIT(A) assessee’s hands, deserves to be reversed?” upholding addition under Section 56(2)(vii)(b) of Rs.418,66,34,625/- in assessee’s hands, deserves to be reversed.

PER: BRAJESH KUMAR SINGH, AM

This appeal was filed by the assessee assailing the order of ld. Commissioner of Income Tax (Appeals) / NFAC, New Delhi (hereinafter referred to as the ‘the CIT(A)’) dated 27.03.2024 for AY 2017-18 inter alia upholding the addition of Rs. 418,66,34,625/- u/s 56(2)(vii)(b) of the Act, which was contested by the assessee in ground nos. 12 to 20 of the appeal before us.

2. After hearing the appeal, the Accountant Member on this issue had allowed the ground no. 14 of the appeal but had set aside this issue to the file of the Ld. CIT(A) for passing a fresh order on merits in terms of the powers conferred on him u/s 251(1)(a) of the Act and in the manner as laid down in section 250(6) of the Act and allowed the ground nos. 12, 13 & 15 to 20 of the appeal for statistical purposes.

3. However, the ld. Judicial Member opined otherwise and wrote a separate order stating that he was of the considered view that the addition of Rs. 418,66,34,625/- u/s 56(2)(vii)(b) of the Act, was not sustainable and accepted the ground nos. 12 to 20 of the appeal and deleted the addition of Rs. 418,66,34,625/- confirmed by the Ld. CIT(A) / NFAC.

4. On account of difference of opinion between the Members constituting the Bench, a reference was made to the Hon’ble President, ITAT u/s 255(4) of the Act. The Hon’ble President vide order dated 28.04.2025 vide U.O No. F-28- Cent.jd(AT)/2025 nominated Third Member to decide the reference. The Ld. Third Member concurred with the view of Ld. Judicial Member in deleting the addition of Rs. 418,66,34,625/- confirmed by the Ld. CIT(A) / NFAC and accordingly, consequent to the opinion of Ld. Third Member, appeal of the Assessee stands allowed and ground nos. 12 to 20 of the appeal are allowed.