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Income Tax Appellate Tribunal, DELHI “A” BENCH: NEW DELHI
Before: SHRI YOGESH KUMAR U.S & SHRI MANISH AGARWAL
The present appeal is filed by the assessee against the order dated 28.11.2024 by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld.CIT(A)”] in Appeal No. CIT(A), Delhi-1/10741/2016-17 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 21.12.2016 passed u/s 143(3) of the Act pertaining to assessment year 2014-15.
Brief facts of the case are that the assessee is a company and during the year under appeal, filed its return of income at INR 4,55,600/- on 27.09.204. The case of the assessee was selected for limited scrutiny under CASS and various notices were issued which are replied by the assessee. During the year under appeal, assessee has received share premium of INR 8,64,22,208/- on the issue of 17093 equity shares at a premium of INR 5,056/- per share to M/s. Gyan Enterprises Pvt. Ltd. For valuation of the shares, the assessee has followed the “Valuation under Net Asset Value Method Adjusted by value of asset on valuation date” and submitted the report of valuer. The AO based on the report earlier submitted by the assessee of the valuer according to which the shares was valued at INR 274/-, held the excess amount of INR 8,19,09,656/- as income of the assessee u/s 56(2)(viib) of the Act.
Against the said order, the assessee preferred appeal before Ld.CIT(A) who has confirmed the order of AO therefore, the assessee is in appeal before the Tribunal by taking following grounds of appeal:- 1. “That the addition of Rs.8, 19,09,656/- u/s 56(2)(viib) of the Income- tax Act, 1961 (the Act) on account of issuance of shares at a premium to the holding company M/s Gyan Enterprises Pvt. Ltd. is arbitrary, unjust and at any rate very excessive. 2) That the addition of Rs.8,19,09,656/- u/s 56(2)(viib) of the Act by invoking the provision of Rule 11-UA of the Income Tax Rules, 1962 instead of working out the value of its assets as defined in Explanation (a)(ii) to Section 56(2) (viib) of the Act is arbitrary, unjust and at any rate very excessive.
2. That the Assessing Officer and CIT (Appeals) both ought not to have rejected the market value of the shares worked out by the registered valuer based on the value of assets owned by the company in spite of the fact that the DVO vide his report dated 26th December 2016 had worked out the value of land owned by the company at Rs.20 crore (much higher) and consequently the addition of Rs.8,19,09,656/- u/s 56(2)(viib) as made by the Assessing Officer and sustained by CIT (Appeals) is arbitrary, unjust and very excessive.
3. That the above grounds of appeal are independent and without prejudice to one another. Your appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal at the time of hearing.”
4. Before us, Ld.AR for the assessee submits that the assessee has valued its shares on net asset value method prescribed under Rule 11UA of the Income Tax Rules, 1962 (“the Rules”) and accordingly, value of share was calculated the premium at INR 5,056/- per share. Ld. AR submits that shares were allotted to its holding company M/s. Gyan Enterprises Pvt. Ltd. and therefore, there is no error in taking extra value for this. He placed reliance on the judgements of Hon’ble Delhi High Court in the case of FIS Payment Solutions and Services Pvt. Ltd. vs Union of India & Ors. Writ Petition (C) 10289/2024 & CM Appeal No.42097/2024 vide order dated 29.07.2024. He further placed reliance on the decision of Co- ordinate Bench in the case of BLP Vayu (Project-1) (P.) Ltd. vs PCIT 2023 SCC OnLine ITAT 397-Delhi ITAT 2023 No.4895/Del/2019 vide order dated 31.05.2023 wherein Co-ordinate Bench has held that object of deeming an unjustified premium on charges of issue of shares as taxable income u/s 56(2)(viib) of the Act is wholly inapplicable for transaction between holding and its subsidiary company where no income can be said to be accrued to the ultimate beneficiary i.e. the holding company. He, therefore, prayed that the addition made deserves to be deleted on this account.
5. On merits of the issue, Ld.AR for the assessee submits that subject land was valued by the DVO in terms of its report dated 26.12.2016 wherein DVO has valued the said property at INR 20.74 crores as against INR 13.00 crores taken by the assessee for the purpose of valuation of the shares. As per Ld.AR, if valuation done by DVO is substituted as against the value taken by the assessee, the value per share would be increased. This further established that the shares were issued by the assessee on fair market value and accordingly, addition sustained at INR 8,19,09,656/- deserves to be deleted. Ld.AR for the assessee filed synopsis in support of his claim. The relevant contents of the synopsis are reproduced as under:-
6. On the other hand, Ld. Sr. DR for the Revenue supports the order of the lower authorities and submits that the assessee has not followed the method of valuation prescribed under Rule 11UA and therefore, the lower authorities has rightly made the additions which orders deserves to be uphold.
7. Heard the contentions of both the parties and perused the material available on record. In the instant case, the shares were issued by the assessee company to its holding company M/s. Gyan Enterprises Pvt. Ltd. for a premium of INR 5,056/- per share. The AO alleged that this valuation was done based on the fair market value of land as on the date of valuation though the said land was purchased and disclosed in the balance sheet at INR 7,89,17,962/- and the same was valued at INR 13.00 crores as on the date of valuation for the purpose of determination of the fair market value of the shares. The AO accordingly, applied the valuation of INR 274/- per share for making the addition u/s 56(2)(viib) of the Act which report was also filed by the assessee for which it was claimed that in the said report incorrect figure were taken inadvertently. It is not in dispute that shares were allotted to the holding company.
The Co-ordinate Bench of the Tribunal in the case of BLP Vayu 8. (Project-1) (P.) Ltd. vs PCIT 2023 SCC OnLine ITAT 397-Delhi ITAT 2023 No.4895/Del/2019 vide order dated 31.05.2023 has observed that the deeming faction provided u/s 56(2)(viib) of the Act are not applicable to the shares allotted to holding company at a premium. The relevant observations as contained in Para 11.1 of the said order are reproduced as under:- 11.1 “As per case records, it is an undisputed fact that the shares have been allotted at a premium to its 100% holding company. Thus, applicability of Section on 56(2)(viib) has to be seen in this perspective. The Co-ordinate Bench of Tribunal in DCIT vs. Ozone India Ltd. in order dated 13.04.2021 in the context of Section 56(2)(viib) has analyzed the deeming provisions of Section 56(2)(viib) of the Act threadbare and inter alia observed that the deeming clause requires to be given a schematic interpretation. The transaction of allotment of shares at a premium in the instant case is between holding company and it is subsidiary company and thus when seen holistically, there is no benefit derived by the assessee by issue of shares at certain premium notwithstanding that the share premium exceeds a fair market value in a given case. Instinctively, it is a transaction between the self, if so to say. The true purport of Section 56(2)(viib) was analyzed in Ozone case and it was observed that the objective behind the provisions of Section 56(2)(viib) is to prevent unlawful gains by issuing company in the garb of capital receipts. In the instant case, not only that the fair market value is supported by independent valuer report, the allotment has been made to the existing shareholder holding 100% equity and therefore, there is no change in the interest or control over the money by such issuance of shares. The object of deeming an unjustified premium charged on issue of share as taxable income under Section 56(2)(viib) is wholly inapplicable for transactions between holding and its subsidiary company where no income can be said to accrue to the ultimate beneficiary, i.e., holding company. The chargeability of deemed income arising from transactions between holding and subsidiary or vice versa militates against the solemn object of Section 56(2)(viib) of the Act. In this backdrop, the extent of inquiry on the purported credibility of premium charged does not really matter as no prejudice can possibly result from the outcome of such inquiry. Thus, the condition for applicability of Section 263 for inquiry into the transactions between to interwoven holding and subsidiary company is of no consequence. We also affirmatively note the decision of SMC Bench in the case of KBC India Pvt. Ltd. vs. ITO in order dated 02.11.2022 (SMC) where it was observed that Section 56(2)(viib) could not be applied in the case of transaction between holding company and wholly owned subsidiary in the absence of any benefit occurring to any outsider.”
It is further seen that DVO has valued the said property at INR 20.75 crores as against the valuation done by the assessee at INR 13 crores. Moreover, the AO had relied upon the circle rate of the land based on the notification issued by Revenue Department of Government of NCT of Delhi, according to which the valuation of the said property would be around INR 4.69 crores. Thus, there are four figures available towards the fair market value of the land owned by the assessee company, they are as under:- (i) The value at which the asset is recorded in the books of accounts i.e. INR 78917962/-;
(ii) The valuation as per the circle rate i.e. INR 46958000/-;
(iii) The valuation of fair market value as done by the assessee based on the valuation report submitted by the approved valuer at INR 13.00 crores; and (iv) The valuation done by DVO in terms of its report dated 26.12.2016 wherein the said land was valued at INR 20.75 crores.
It is seen that AO has taken the value at INR 274/- per share while taking the value of the other land i.e. agricultural land which is shown as INR 31,64,430/- in the Balance Sheet which is not correct.
Further, once the assessee has filed the valuation report based on the one of the method as prescribed in Rule 11UA of the Rules, there is no power with the AO to tinker in the said report as has been held by the Jurisdictional High Court in the case of PCIT Vs. Cinestaan Entertainment Pvt. Ltd. in reported in 433 ITR 82 wherein it is held as under:- 13. “From the aforesaid extract of the impugned order, it becomes clear that the learned ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of fair market values as per prescribed methodology. The Appellant- Revenue had the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method. The Respondent- Assessee being a start-up company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent-Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then Appellant-Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the Respondent-Assessee, accepted by the learned ITAT, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the Courts for interfering with the findings of a valuer is not satisfied in the present case, as the Respondent-Assessee adopted a recognized method of valuation and Appellant-Revenue is unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process.
In view of the foregoing, we find that the question of law urged by the Appellant-Revenue is purely based on facts and does not call for our consideration as a question of law.”
In view of the above facts and by respectfully following the judgement of Hon’ble High Court in the case of Cinestaan Entertainment Pvt. Ltd. (supra) and the decision of the Co-ordinate Bench of the Tribunal in the case of BLP Vayu (Project-1) (P.) Ltd. vs PCIT (supra), in our considered view, the AO has wrongly made the additions on account of the share premium charged from the holding company where there would be no deeming fiction applicable if the shares are allotted to the holding company. Accordingly, we hereby direct the AO to delete the addition made on this score. All the grounds of appeal taken by the assessee are allowed.
In the result, appeal of the assessee is allowed.
Order pronounced in the open Court on 15.10.2025.