SUNNYDAY GREEN ENERGY PVT. LTD.,NEW DELHI vs. ITO, WARD- 5(2), DELHI
Income Tax Appellate Tribunal, DELHI BENCH ‘B’: NEW DELHI
Before: SHRI VIKAS AWASTHY & SHRI S.RIFAUR RAHMANSunnyday Green Energy Pvt. Ltd., vs.
PER S. RIFAUR RAHMAN, JM:
This appeal has been filed by the assessee against the order of ld. Commissioner of Income-tax (Appeals)-8, New Delhi dated 18.01.2019 for the Assessment Year 2015-16. 2. Brief facts of the case are, assessee filed its return of income declaring nil income on 30.09.2015. The case was selected for scrutiny under CASS (limited scrutiny). Accordingly, notices under section 143(2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) were issued and served
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on the assessee. In response, ld. AR of the assessee attended and submitted relevant information as called for.
3. During assessment proceedings, AO observed that assessee has issued
50,582 equity shares with huge premium @ Rs.990 per share and the share premium collected of Rs.5,00,76,180/-. He observed that reason for selection of this in scrutiny is receiving of large share premium during the year. When the assessee was asked to furnish necessary documents and valuation of shares as per Rule 11UA of the Income-tax Rules,1961 (for short ‘the Rules’), the assessee has submitted share valuation certificate dated 31.03.2015 from a Chartered Accountant wherein fair market value of the share was determined at Rs.10.20 and the relevant copy of the valuation is reproduced in the assessment order itself. The AO observed that in the valuation report, the assessee has determined the value of investment in Aftaab Solar Private Ltd. at Rs.12,28,21,000/ while the book value of the shares of Aftaab Solar Private Ltd. mentioned in the books of the assessee is of Rs.11,77,75,408/-. Therefore, the assessee has enhanced the value of Rs.50,45,592/- on its own and, therefore, the fair market value of Rs.10.20 per share is wrongly calculated by the assessee but in actual it should be lower than Rs.10.20 per share. With the above observation, a show cause notice was issued to the assessee vide letter dated 12.12.2017. In response, the assessee submitted vide letter dated
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15.12.2017 and the AO found it not tenable. Accordingly, he invoked the provisions of section 56(2)(vii)(b) of the Act and made the addition of the premium received by the assessee with the following observations :-
“7. The assessee company has issued Compulsorily Convertible
Preference Shares and, as per the submission of the assessee, the rights attached to CCPS, 'the compulsory convertible preference shares are convertible in equity shares within a period of 18 years from the date of its issue at .the option of the company or shareholders. The compulsory convertible preference shares are convertible into equity shares in the ratio of 100:1 (i.e 100 equity shares shall be issued in lieu of 1 CCPS) or as may be determined by the company at any time before such conversion and such share shall rank pari-passu with the equity shares outstanding as on the date of conversion. The entire lot of CCPS carries a dividend of Re.1/- and the same shall be paid in priority to any payment of dividend to equity share holders. Subject to the provisions of companies Act, 2013, the CCPS does not carry any voting rights.
2 In this case it is worthwhile to mention that the structure of the assessee company is designed in such a way that income or expense both are-pre-meditated and arranged as the funds are rotating among the holding and subsidiary companies.
3 From the PAS-3 furnished by the assessee, it is dear that the assessee has received premium @ Rs. 990 per share. The assessee in its support filed FMV of shares which is totally wrong as mentioned in Para 4 above: Further, the calculation of FMV on diluted basis is also not justified.
4 The entire, arrangement of conversion of' CCPS into equity shares within a period of 18 years is the prerogative of holding company or subsidiary company and this arrangement is internal arrangement of the company which may be altered at any time as per their feasibility or requirements and the assessee company for changing their internal arrangement of conversion of CCPS into Equity shares is not accountable to any outsiders. The assessee is trying to justify the receipt of share premium in A.Y. 2015-16 by citing projections but in actual the facts of the case .along with the financials of the company are not in commensurate with the argument of the assessee. Above all, the fact of the case is that the assessee has received premium in the year under consideration i.e. A.Y. 2015-16 which is, the way beyond 'than' FMV of the shares of the company.
Section 56(2)(viib) reads as under:
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8.1
Where a company, not being a company in which 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 share, the aggregate consideration received for such shares as exceeds the fair market value of the share.
Provided that this clause shall not apply where the consideration for issue of shares is received.
(i)
By venture capital undertaking from a venture capital company or venture capital fund or (ii)
By a company from class or classes of persons as may be notified by the Central Government in this behalf,
2 Clause (viib) of sub section (2) of section 56 was inserted vide finance act, 2013 w.e.f 01.04.2013 i.e. for A. Y. 2013-14 to provide that where a closely held company issues its shares' at a price which is more than its-fair market value then the amount received in excess of fair market value of shares will be charged to tax in the hand of the company as income from other sources. This amendment was made keeping in view the practice of closely held companies to brought In undisclosed money of promoters/directors by issuing shares at high premium which is normally over and above the book value of share of the company, and moreover which escaped the provisions of section 68. Moreover in case of many closely held companies and even in new companies promoters used to issue share at premium with the main purpose of keeping share capital low, yet capital base stronger so that breakup value and market value is high. This leads to advantage of low cost of servicing share capital-and also improved prospects to issue share at premium in future by way of initial issue of offering by promoters. One more practical advantage was to save on account of cost of fees payable on increase of authorized capital. When shares are issued at premium, number of shares and authorized capital increase lesser in comparison of capital raise by way of capital and premium.
3 With effect from A.Y. 2013-14 for closely held companies share premium or share capital is deemed to be normal income if shares are issued exceeding fair market value of shares.
4 Hence, the calculation furnished by the assessee regarding FMV of shares of M/s. Sunnyday Green Energy Pvt. Ltd. is hereby rejected and the correct valuation is as under :-
Particulars
No.
Shares
Total
Value of Investment in M/s. Aftaab
Solar Private Limited
11675000
117,775,408.00
Interest bearing unsecured loans
505,795,548.00
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Cash Balance
821,180.00
Interest Accrued on U/L
31,646,495.00
Other Current Assets
38,374,592.00
Total Assets Value (A)
694,413,223.00
Laiblities
Interest bearing Unsecured Loan
Received
459,527,890.00
Interest payable on Unsecured Loan
235,186,635.00
Other Current Liabilities
400,609.00
Short Term Provision
10,579.00
Total Liabilities (B)
695,125,713.00
Net
Amount available to Shareholder (A-B)
(712,490.00)
No. of Shares
100,000
Value per share
(7.1249)
From the above, it is clear that the net worth of the company is negative & the calculation provided under 11UA is after including premium amount in the balance sheet and it is apparent that before including premium amount, the valuation of the share is in negative figure.
2 Therefore, in view of above discussion, the premium received by the assessee company of Rs.5,00,76,180/- is added to the income of the assessee u/s 56(2)(viib) of the Income Tax Act, 1961,
Considering the facts discussed above, it is very much evident that the assessee has furnished inaccurate particulars of income, therefore, penalty u/s 271(1)(c) read with Explanation 1 of the provision is being initiated separately.”
Aggrieved with the above order, assessee preferred an appeal before the ld. CIT (A)-8, New Delhi and filed detailed submissions. After considering the detailed submissions of the assessee, ld. CIT (A) dismissed the ground raised by the assessee. 5. Aggrieved assessee is in appeal before us raising following grounds of appeal :-
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“1. Under the facts and circumstances of the case, the CIT (A) has grossly erred on facts as well as in law in partly confirming the order passed by the Ld. AO which is ex-facie illegal, arbitrary and without juri iction being against the principles of natural justice and against the provisions of IT Act, 1961. 2. The Ld. CIT (A) has grossly erred on facts as well as in law in confirming the addition of Rs.5,00,76,180/- u/s 56(2)(viib) of the IT Act,
1961. 3. The Ld. CIT (A) has grossly erred on facts as well as in law in supporting the rejection of the valuation report by the Ld. AO without appreciating the facts in proper perspective.
The Ld. CIT (A) has grossly erred on facts as well as in law in considering explanation (a)(ii) to sec 56(2) (viib) though explanation (a)(i) to sec 56 (2)(viib) is applicable.
The Ld. CIT (A) has grossly erred on facts as well as in law in relying upon the case laws having entirely different facts and not applicable in the case of appellant.”
At the time of hearing, ld. AR of the assessee submitted as under :- “Section-56(2)(viib) is not applicable between Holding Company and Subsidiary Company:
It is clearly mentioned in Note 0.21 to the Balance Sheet [ Page 58 of the PB] that M/s Hindustan Clean energy Limited is the holding company of the appellant. By now, it is judicially settled that the addition u/ s 56(2)(viib) cannot be made where the shares were issued to the existing shareholders and- that too the holding company of the assessee. Reliance is placed on the following case laws:
ITO V s Solitaire BTN Solar Pvt. Limited, [2024] IT A No.
1416/DEL/2020 (Delhi - Trib.) dated 12/06/2024:
"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 (Projects-1) Pvt. Ltd. reported in (2023) 151 iaxmann.com 47
(Del- Trib.) & DCIT vs. Kissandhan Agri Financial Services (P) Ltd.
(2023) 150 taxmann.com 390 (Del-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.
The Co-ordinate Bench has essentially observed that where the allotment has been made to existing shareholders, the deeming provisions of sect ion 56(2)(viib) would not ordinarily be applicable. In consonance with the view expressed, the addition under section 56(2) (viib) on the 7 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."
DCIT Vs Kissandhan Agri Financial Services (P.) Ltd.; [2023] 150
taxmann.com 390 (Delhi - Trib.)
"12. This apart, as pointed out behalf of the assessee, the shares have been subscribed by the holding company, i.e., the existing shareholders only. Pertinent to say, section 56(2)(viib) creates a legal fiction whereby the scope and ambit of expression 'income' has been enlarged to artificially tax a capital receipt earned by way of premium as taxable revenue receipt. Hence, such a deeming fiction ordinarily requires to be read to meet its purpose of taxing unaccounted money and thus needs to be seen in context of peculiar facts of present case. The legal fiction has been created for definite purpose and its application need not be extended beyond the purpose for which it has been created. Bringing the premium received from holding company to tax net under these deeming fictions would tantamount to stretching provision to an illogical length and will lead to some kind of absurdity in taxing own money of shareholders without any corresponding benefit.
In totality, governed by the view taken by the Hon'ble Delhi High Court as well as the Co-ordinate Bench in similar fact situation coupled with the fact of the issue of shares to its holding company, we are unable to see any infirmity in the first appellate order on the point under determination. We thus decline to interfere with the order of the CIT(A)."
BLP Vayu (Project-I] (P.) Ltd. Vs PCIT; [2023] 151 taxmann.com 47
(Delhi - Trib.)
“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 Dy. CIT v. Ozone India Ltd. [2021]
126 taxmann.com 192/189 ITD 476 (Ahd. - Trib.) 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 analysed in Ozone
India Ltd.'s case (supra) 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 8
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 charge ability 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
(P.) Ltd. v. ITO [IT Appeal No. 9710/Delj2019, dated 2.11.2022] 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."
Valuation of Compulsorily Convertible Preference Shares (CCPS):
The appellant has filed valuation report from a qualified chartered accountant who has determined the value of each CCPS @ 1020/-. Annexure-1 to the valuation report [Page 64 & 65 of the PB] prepared after considering the financials, clearly indicates the value of equity shares on conversion @ 10.52 per share. Note No.2 to the balance sheet [Page 54 of the PB] lays down that each CCPS is convertible into equity shares within a period of 18 years in the ratio of 1:100, i.e 100 equity shares for each CCPS. Therefore the valuer determined value of each CCPS @ 1020/ - (10.20 *100).
The valuer has determined the value of each CCPS at Rs. 1020/-. The Ld. AO has raised the following two objections to his support:
i.
Value of Investment in M/ s Aftab Solar Pvt. Ltd. is taken at Rs.12,28,21,000/- while the book value is Rs.11,77,75,408/ - only as per the books of the assessee. [Para 4 of the Assessment Order]
ii.
The valuer has taken the number of shares at 71,10,000 as against
6,05,820 in the financial statements. [Page 5 of the Assessment Order]
5(i)
If the first objection is taken as correct, the value of assets as considered by the valuer will be as under:
Total Asset Value as determined
661084223 [Page 64 of the PB]
by the Valuer
LESS: Value of Investment in 122821000 [Page 64 of the PB]
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M/ s Aftaab Solar Pvt. Ltd. as taken by the valuer
Balance
538263223
ADD: Value as considered by 11,77,75,408 [Page 12 of The Ld. Assessing Officer
Asstt. Order]
Total Assets available
65,60,38,631
5(ii)
The valuer has taken the liabilities at Rs.58,85,40,972/- [Pg.64 of the PB] for which the Ld. AO has not raised any objection. Therefore, the net asset available would be Rs.6,74,97,659/
-(65,60,38,631-
58,85,40,972).
5(iii) Even if the second objection is accepted, the Ld. AO has committed an error in considering the number of shares at 605820. Infact the figure of 605820 does not represent the number of shares but the total value of 10000 equity shares at Rs.1,00,000/- and the value of 50582 CCPS at Rs.
5,05,820/ -. It is obvious that CCPS and equity shares are entirely different and cannot be added together unless they are equalised either in the form of equity shares or CCPS. Since 1 CCPS is to be converted in 100
Equity Shares, the total number of equity shares will be+5068200
(5058200+10000). Similarly, if they are equalised in the form CCPS, the number of CCPS would be 50682 (50582+100). Accordingly, the value of each CCPS would be Rs.1331 (6,74,97,659/50682). Similarly, the value of each equity share would be Rs.13.31 (67497659/5068200)
Therefore, if both the objections of the Ld. A.O are accepted as correct, the valuation per CCPS comes to Rs.1331/ - as against the issue price of 1000/ - only. Hence there was no case for making any addition.
In view of the facts and law as discussed above, it is very humbly requested that the addition made by Ld. A.O may kindly be deleted.”
On the other hand, ld. DR of the Revenue relied on the orders of the authorities below and submitted that the basic transaction of issue of shares and Compulsorily Convertible Preference Share (CCPS) are different. Therefore, the case law relied by the ld. AR are distinguishable. He brought to our notice page 8 of the ld. CIT (A)’s order and page 12 of the assessment order.
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8. Considered the rival submissions and material placed on record. We observed that the assessee has issued 50,582 CCPS of Rs.1000 per share with a premium of Rs.990. We observed that the abovesaid shares were issued to its holding company, Hindustan Clean Energy Ltd. and were holding 100% share in its subsidiary company i.e. in assessee company.
We observed that assessee has submitted a valuation report justifying the issuance of CCPS @ Rs.1000 per share. We observed that the AO rejected the valuation report submitted by the assessee and invoked the provisions of section 56(2)(viii)(b) to bring to tax share premium received by the assessee. After careful consideration of the facts on record, we observed that CCPS were issued to the existing shareholders i.e. to its holding company, therefore, there is no change of shareholding in this company. We observed that the issue under consideration is squarely covered in favour of the assessee and in the case of Dy. CIT v. Ozone
India Ltd. 189 ITD 476 (Ahd. - Trib.), ITAT Ahmedabad has considered similar issue and held 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. Further we observed that coordinate Bench in the case of ITO vs. Solitaire BTN Solar Pvt. Ltd. in ITA No.1416/Del/2020 dated
12.06.2024 in which similar issue was considered and held as under :-
“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 (Projects-1) Pvt. Ltd. reported in (2023) 151
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taxmann.com 47 (Del-Trib.) & DC1T vs. Kissandhan Agri Financial
Services (P) Ltd. (2023) 150 taxmann.com 390 (Del-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.
The relevant operative paragraph of the decision rendered in BPL Vayu (supra) is reproduced hereunder:
"11.1 As per case records, it is (In 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 vs.
Ozone India Ltd. in ITA NO.2081IAhd12018 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 10 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 call be said to accrue 10 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. vs. ITO in ITA No.9710/Del/20I9 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
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and wholly owned subsidiary in the absence of any benefit occurring to any outsider.”
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.
Notwithstanding, we also address ourselves to the alternate plea with regard to correctness of FMV determined by the AO on the strength of NAV method. As noted, the NAV method is permissible only in the case of issue of equity shares as per Rule 11 UA(2) of the IT Rules. The converted equity shares on conversion of OCPS, when taken as a base for calculation of NAV, the premium charged would, stately, be negligible or NIL as essentially found by the CIT(A) in paras 4.4 and 4.5 of its order. The CIT(A) has endorsed this line of reasoning. We do find traction in such plea of the assessee that the FMV arrived at by the assessee is apparently justifiable when the calculation of the NAV is calculated with reference to the equity shares to be allotted on conversion. We do not see any cogent reason to discard the calculation of FMV with reference to quantity of equity share to arise on exercise of option relatable to issue of OCPS. Otherwise, the provisions of Rule 11UA(l)(c)(c) would be applicable which permits the Valuer to apply DCF method. Thus, seen from any angle, it is difficult to fault the valuation assigned for determination of FMV. Hence, action of the CIT(A) calls for no interference in terms of Rule 11 UA(2) of the Rules.
In summation, the instant case where the convertible shares have been allotted to wholly owned 100% holding company, the benefit if any arising to the assessee company on account alleged excess premium, In turn, effectively benefits the subscribers themselves having pre-existing rights in the company. Thus, on a common sense approach, no purpose will be achieved by obtaining benefit by way of excess premium by the assessee from its own shareholder. The avowed purpose behind the insertion of deeming fiction under Section 56(2)(viib) of the Act to the charge so called excess premium as deemed income of the assessee, would not be achieved when the shares are allotted to the same set of shareholders. Thus in our view, the conclusion drawn by the CIT(A) cannot be faulted either on facts or in law. Hence, we decline to interfere.
In the result, the appeal of the Revenue is dismissed.”
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9. Respectfully following the above decision, we observed that facts in the present case are exactly similar to the above case, hence we are inclined to allow the grounds raised by the assessee.
10. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on this 7th day of February, 2025. (VIKAS AWASTHY)
ACCOUNTANT MEMBER
Dated:
TS