DCIT 1(1), BHOPAL vs. M/S. DECORE THERMAL POWER (P) LTD., BHOPAL

आदेश / O R D E R

Per B.M. Biyani, A.M.:

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 for Assessment-Year [“AY”] 2016-17, the Revenue has filed this appeal on following grounds:

1. "Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in holding that provisions of section 56(2)(viib) would not apply in the case of the assessee as no consideration was received by the assessee, when the assessee had received consideration for issue of shares in the form of shares of DB Power (Madhya Pradesh) Limited

2. Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in holding that AO's contention that there is no condition that such consideration has to be received in the form of share premium only is against the legislative intent, when in the section 56(2)(viib), only the word consideration is mentioned and there is no mention of the word share premium.

3. Whether on facts and circumstances of the case, the Ld. CIT(A) was justified in holding that provisions of section 56(2)(vilb) would get attracted when the company receives unaccounted money by way of share capital and share premium from resident shareholders, when there is a specific section to deal with receipts of unaccounted money which is to be taxed as unexplained credits u/s 68 of the Act, and therefore, the provisions of section 56(2)(viib) are intended to tax excess consideration (benefit) received by the assessee

4. Whether on facts and circumstances of the case, the Ld. CIT(A) was justified in holding that in case of demerger there is a tripartite agreement and therefore, such transactions in case of demerger are not covered under section 56(2)(vib) of the Act, when all conditions of section 56(2)(viib) being applicable in the case of the assessee has been discussed in the assessment order.

5. Whether on facts and circumstances of the case, the Ld. CIT(A) was justified in holding that the assessee as well as DPPL have not got any benefit under the scheme of arrangement, when the assessee has received excess consideration in the form of shares of DB Power (Madhya Pradesh) Limited on account of issuance of shares and therefore, benefit has arisen in the hands of the assessee which is taxable u/s 56(2)(viib) of the Act.

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 6. Whether on facts and circumstances of the case, the Ld. CIT(A) was justified in deleting addition of Rs 3,92,20,30,008/- made u/s 56(2)(viib) of the Act, when all the conditions as per section 56(2)(viib) were squarely applicable in the case of the assessee and the addition was made in the hands of the assessee as per law.”

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 the submission of assessee; relied upon the phraseology of section 56(2)(viib); attempted to compute fair market value of shares issued by assessee in terms of Rule 11UA; and ultimately treated the amount of “Capital Reserve” of Rs. 3922.03 million as “excess consideration”. Accordingly, while completing assessment, the AO made addition of Rs. 3922.03 million (exact amount is Rs. 392,20,30,008/-) u/s 56(2)(viib) equivalent to the amount of “Capital Reserve”.

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 5. Now, aggrieved by order of CIT(A), the Revenue has now come in this appeal before us.

Revenue’s submission:

He opposed the order of CIT(A) and prayed to uphold the addition made by AO.

Assessee’s submission:

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 certain decisions and a Paper-Book running over 139 pages. We sum up the precise contentions/submissions made by Ld. AR:

(i) The first and foremost contention of Ld. AR is such that it is a case of demerger approved by Hon’ble High Court in terms of provisions of section 391 to 394 read with section 100 to 103 of the Companies Act, 1956 and section 52 of the Companies Act, 2013. The scheme of demerger was approved by Hon’ble High Court of Madhya Pradesh vide order dated 10.05.2016 and the approved scheme was also filed to Registrar of Companies on 26.05.2016. To give effect to approved scheme, the assessee has issued shares to the shareholders of DPPL at face value and not at a premium. Ld. AR submitted that when section 56(2)(viib) was brought in the statute, its purpose and objective was clearly stated in three documents, namely (i) Explanatory Memorandum to Finance Bill, 2012, (ii) Budget Speech of Hon’ble Finance Minister on 16.03.2012 in the floor of Parliament, and (iii) CBDT Circular No. 3/2012 dated 12.06.2012. Ld. AR submitted that all three documents clearly demonstrate that the section 56(2)(viib) was introduced to tax hefty or excessive share premium received by closely-held companies on issue of shares and thereby enriching themselves without paying any tax to Govt. It also appears that the issuance of shares at a premium was supposedly resorted to utilize unaccounted money. But in the present case, the shares are issued at face value and not at a premium which is a fact. Therefore, there is no question of application of section 56(2)(viib).

(ii) It is true that section 56(2)(viib) does not prescribe any specific exemption or exclusion for the cases of demerger or amalgamation. But, Ld. AR contended, there is no necessity to prescribe any exemption or exclusion when section 56(2)(viib) per se is not applicable. This is also fortified by the reason that demerger is a mutual tri-parti arrangement approved by Court in which three parties are involved, namely the Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 resulting company [“assessee’’ in present case], (ii) the demerged company [“DPPL” in present case], and (iii) shareholders of demerged company. On the other hand, in an issue of shares, there is a bilateral agreement having two parties, namely (i) the company issuing shares, and (ii) shareholders to whom shares are issued. Ld. AR submitted that the section 56(2)(viib) is a deeming provision and it does not contemplate tri-parti arrangements in the nature of demerger (or amalgamation).

(iii) It is further submitted that in case of demerger, there is no gain or loss to any of the three parties, namely assessee, DPPL and shareholders of DPPL and even to the creditors/suppliers; their rights are carried intact. Basically, demerger is a simple case of business re-organisation to achieve the greater efficiency in operations and increased focus and management.

(iv) It is also contended that if the section 56(2)(viib) is applied to demerger (or amalgamation), it will shut the business re-organisations of corporates in all cases for the reason that no corporate would be able to undertake demerger (or amalgamation).

(v) Lastly, it is also submitted that the Rule 11UA itself cannot be applied in case of demerger. The AO has, for the sake of applying section 56(2)(viib), attempted to work out notional value on the basis of Rule 11UA but ultimately he had to conclude “The amount of such excess consideration is actually the capital reserve created amounting to Rs. 3992.03 million”. Thus, what the AO has taxed is the amount of “Capital Reserve” appearing in books of account. Notably, the “Capital Reserve” itself is created pursuant to undermentioned Para No. 2.4.1.4 (Page No. 60 of Paper-Book) of scheme of demerger approved by High Court:

“2.4.1.4. The difference between the net asset value of Demerged Undertaking of DPPL being transferred and recorded as per Clause 2.2, and the consideration discharged through issue of equity shares and compulsorily convertible

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 preference shares by DTPPL as per Clause 2.2 above, shall be adjusted/recorded as Capital Reserve or Goodwill as the case may be.” 9. Having contended so, Ld. AR carried us to a direct decision of Hon’ble ITAT, Ahmedabad Bench in DCIT Vs. M/s Ozone India Ltd., order dated 13.04.2021 (2021) 126 Taxmann.com 192. The facts and controversy involved in this case, as extracted from order of ITAT, are as follows:

“5. Briefly stated, the assessee company filed its return of income for AY 2013- 14 in question which was subjected to scrutiny assessment. In the course of assessment proceedings, it was gathered by the AO that one M/s. Kalavir Estate Pvt. Ltd. (KEPL) amalgamated with the assessee company under the scheme of amalgamation. The object of amalgamation was stated to achieve better utilization of resources, higher return on capital, economy of scale, optimum utilization of available resources and effective control for better profitability. The scheme of amalgamation of KEPL with assessee company was approved by the Hon’ble Gujarat High Court vide order dated 07.09.2012 effective from 01.04.2012 whereby all the assets and liabilities of M/s. KEPL were vested with the assessee company as per scheme placed before the Hon’ble Court. Hence, on coming into effect of the scheme on 01.04.2012, all the assets except land and all the liabilities of KEPL were taken in the books of assessee at book value and land parcels were taken at revalued price. As stated, the transaction of amalgamation has been accounted under the ‘pooling of interest’ method as prescribed by the Accounting Statndard-AS-14 issued by the Institute of Chartered Accountants of India (ICAI) consequent upon which the difference between net assets of KEPL vested with assessee company and value of shares of assessee company correspondingly issued was accounted for as capital receipts and treated as capital reserve. The excess value of net assets vis-à-vis corresponding value of shares issued towards consideration for amalgamation was thus credited in the books of assessee company as ‘capital reserve’. The assessee company has accounted for the land so acquired as ‘trading asset’ of the assessee company.”

5.1 In this backdrop, the AO noted that on the date of amalgamation, the issued and paid up capital of assessee company stood at Rs.21,00,000/- divided into 2,10,000 equity shares of Rs.10/- each and that of KEPL stood at Rs.5,00,000/- divided into 50,000 equity-shares of Rs.10/- each. Pursuant to scheme of amalgamation, shareholders of KEPL got 300 equity shares of assessee company for each share of KEPL towards consideration for transfer of its assets and liabilities. The AO observed that the amalgamated company i.e. assessee received assets worth Rs. 60,26,55,864/- and liabilities worth Rs.6,05,39,708/- of the amalgamating company i.e. KEPL. Thus, assessee received net assets worth Rs.54,21,16,156/- against corresponding issue of shares having face value of Rs.15,00,00,000/- to the shareholders of KEPL. The AO thus observed that assessee has received excess net asset worth Rs.39,21,16,156/- on account of Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 amalgamation which was credited by it as capital reserve of the amalgamated company.

5.2 In the opinion of the AO, the excess value of assets so received by assessee company was liable for taxation in the hands of the assessee being excess consideration for issue of its share. A show cause was accordingly issued and reply thereon filed by the assessee was also recorded. However, the AO did not find merit in the defense propagated by the assessee in its reply. The AO observed that the accounting treatment given by the assessee is in departure with AS-14 issued by the ICAI. The AO simultaneously observed that the assessee is liable to tax on excess consideration received qua face value of shares issued under the head ‘income from other sources’ in terms of s.56(2)(viib) of the Act. It was thus essentially observed that the aggregate consideration in the form of net assets (i.e. total assets minus total liabilities acquired) received by the assessee company for issue of its shares which exceeds its fair value is liable to tax in terms of Section 56(2)(viib) of the Act. For determination of fair value of shares of issuing company i.e. assessee, the AO resorted to Rule 11UA of the Income Tax Rules. The fair value was computed at Rs.6.81 per share as against the face value of Rs.10/- per share issued to KEPL on amalgamation as noted above. The total fair market value of shares issued to shareholders of KEPL was consequently worked out at Rs.10,21,50,000/- (1,50,00,000 x 6.81). The AO thus concluded that on amalgamation, the assessee is benefitted by receiving net consideration worth Rs.54,21,16,156/- in the form of excess value of assets of KEPL against which shares carrying intrinsic value Rs.10,21,50,000/- (face value of Rs.15Crore) were issued to the shareholders of KEPL i.e. amalgamating company. Consequently, the AO was of the opinion that assessee is benefitted by surplus money worth numerically worked out at Rs.43,99,66,156/- on such amalgamation for which the assessee is susceptible to taxation under s.56(2)(viib) of the Act.”

Our analysis:

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 10. We have considered rival submissions of both sides and perused the material held on record including the orders of lower-authorities and the documents filed in Paper-Book. We have also carefully gone through the decision of ITAT, Ahmedabad cited before us. At first, we extract the operative paragraphs of the order of ITAT:

“10. We have dispassionately considered the rival submissions and perused the assessment order as well as first appellate order. The documents referred and relied upon has been taken cognizance in terms of Rule 18(6) of the Income Tax (Appellate Tribunal) Rules, 1963.

10.1 In the case in hand, the short question that arises in essence is whether the shares received by the amalgamating company in consideration of vesting of its assets, liabilities and undertaking in the amalgamated company pursuant to scheme of amalgamation is hit by the deeming provisions of Section 56(2)(viib) of the Act in the facts of the present case?

10.2 The AO has made impugned additions towards excess consideration solely under S. 56(2)(viib) in terms of approval granted by the Addl. CIT on reference made under S. 144A of the Act. Hence, no other point such as cursory allegation of violation of AS-14 of ICAI etc. needs our indulgence in isolation for adjudication of controversy. To address the issue, it may be pertinent to reproduce the provision of section 56(2)(viib) for an easy reference:

“(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:

Provided that this clause shall not apply where the consideration for issue of shares is received—

(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 (ii)by a company from a class or classes of persons as may be notified by the Central Government in this behalf,

Explanation.—For the purposes of this clause,—

(a) the fair market value of the shares shall be the value—

(i) as may be determined in accordance with such method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know- how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;

(b) “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of [Explanation] to clause (23FB) of section 10;]”

10.3 In the instant case, pursuant to amalgamation, all assets, liabilities, undertaking of the amalgamating company (KEPL) are agreed to be vested in the amalgamated company (the Assessee) as a going concern. The amalgamated company has issued 300 equity shares of its company at face value for each shares of amalgamating company in consideration of such vesting of assets, liabilities etc. as per the scheme of amalgamation duly approved by the Jurisdictional High Court. As a result, shares worth Rs. 15 crore of the amalgamated co. (assessee co.) were issued against the vesting of assets etc. The assessing officer observed that the value of net assets (assets less liabilities) vested in the amalgamated company under the scheme stands at Rs. 54,21,16,156 against which shares worth Rs. 15 crore were issued by it for such acquisition. The difference between the value of assets and corresponding shares issued amounting to Rs. 39,21,16,156/- credited by the assessee co.( amalgamated co.) to its capital reserve without any payment of taxes triggered the cause of action for the AO. In the course of assessment, the AO further found Page 34 of 42

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 on a incisive verification that the intrinsic value of share of amalgamated co. issued at face value of Rs. 10 stands at Rs. 6.81 per shares only. The AO accordingly noted that the share of amalgamated co. so issued carries worth Rs. 10.22 crores only (1,50,00,000 *6.81= 10,21,50,000) as against the net assets acquired Rs. 54.21 crore. The AO after making reference to Addl. CIT under S. 144A has brought the difference of Rs. 43.99 crore within the ambit of taxable income with the aid of deeming provision of S. 56(2)(viib) of the Act and increased the assessed income to that extent.

10.4 In the backdrop of facts capsuled above, it is the contention of the assessee that impugned transaction of vesting of assets of amalgamated co. in exchange of issue of shares of assessee co. at face value neither matches the essential ingredients of S. 56(viib) of the Act nor is the transaction carried out pursuant to approved scheme, in conformity of the objects and purposes of insertion of section 56(viib) of the Act. It is further contended that applicability of deeming clause is unfounded on giving schematic interpretation to the language employed. The revenue on the other hand seeks to support the action of AO and essentially contends that newly inserted S. 56(2)(viib) was introduced with an object to inter alia plug the present situation where consideration received in kind (by way of vesting of assets of amalgamated co.) is far higher than the face value of corresponding shares issued in lieu of such excess value of assets vested.

10.5 The interpretation of S. 56(viib) qua the facts of the present case is in controversy. S. 56(2) deems certain income chargeable to income tax under the head ‘income from other sources’. Finance Act 2012 has, understandably, inserted clause (viib) with effect from 1- 4-2013(assessment year 2013-14) to include consideration received in excess of face value of shares issued i.e. ‘share premium’ received by an issuing company as it exceeds the fair market value of shares as its income chargeable under the head ‘income from other sources’. On a plain reading, two things immediately emerges from the newly inserted provision (i) consideration which is taxable is the one which exceeds face value of shares issued (ii) in the event of shares issued at consideration above face value, the same need to be compared with fair market value to be determined as per sub- clause(a) appended thereto. The Assessee in the present case, is not found to Page 35 of 42

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 have issued shares at value more than face value at the first instance as repeatedly exhorted on behalf of the assessee.

10.6 To decipher the true purport of iteration of law in the context and object for insertion of the provision, it may be useful to refer to the explanations given at the time of enactment of the provision.

Explanatory Memorandum to Finance Bill, 2012

Share premium in excess of the fair market value to be treated as income

Section 56(2) provides for the specific category of incomes that shall be chargeable to income-tax under the head “Income from other sources”.

It is proposed to insert a new clause in section 56(2).

The new clause will apply where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares. In such a case if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income tax under the head “Income from other sources.

However, this provision shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund. Further, it is also proposed to provide the company an opportunity to substantiate its claim regarding the fair market value. Accordingly, it is proposed that the fair market value of the shares shall be the higher of the value—

(i) as may be determined in accordance with the method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets, including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 10.7 The budget speech of the Hon’ble Finance Minister Mr. Pranab Mukherjee on 16/03/2012 in para 155 concerning Section 56(2)(viib) may also be quoted to understand the object behind the insertion.

“I propose a series of measures to deter the generation and use of unaccounted money. To this end, I propose

X

X - increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value.”

10.8 The Circular of the Department being a contemporaneous exposition may also serve as useful guide to understand the true intent of S. 56(2)(viib) of the Act. The relevant text of CBDT circular no, 3/2012 dated 12-6-2012 in this regard is reproduced hereunder:

“Share premium in excess of fair market value to be treated as income

In the Finance Bill, 2012, it had been proposed [section 56(2), as sub-clause [(viib)] that in case of a company, not being a company in which the public are substantially interested, which receives, in any previous year, from any person being a resident, any consideration for issue of shares and the consideration received for issue of such shares exceeds the face value of such shares, then the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income tax. An exemption was provided in a case where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund.

(i) It has now been further provided that such excess share premium is included in the definition of "income" under sub-clause (xvi) of clause (24) of section 2.

(ii) Considering that the proposed amendment may cause avoidable difficulty to investors who invest in start-ups where the fair market value may not be determined accurately, it is proposed to provide an exemption to any other class of investors as may be notified by the Central Government.

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 These amendments will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years.”

10.9 When the clause in Section 56(2)(viib) of the Act is read in tandem with elucidations provided in CBDT Circular; Finance Ministers’ speech in Parliament disclosing his intentions behind such insertion and also Memorandum explaining Finance Bill, it appears that whole thrust for such insertion is to bring measures to tax hefty or excessive share premium received unjustifiably by private companies on issue of shares without carrying underlying value to support such uncalled for premium and thereby enriching itself without paying taxes legitimately due to them. It also seems that subscription to the shares issued by a company at a substantial premium (not necessarily backed by a valuation justifying the premium) was supposedly resorted to convert unaccounted money. The extant framework of law were not found sufficient by the legislature to curb such practices. Earlier attempts to tax such excessive receipts in the garb of share premium by private cos. did not arguably fructify. The provision was inserted to change the landscape for charging premium to tax of capital nature.

10.10 Section 56(2)(viib) creates a deeming fiction to imagine and fictionally convert a capital receipt into revenue income. It is well entrenched by the body of case laws that while giving effect to such legal fictions, all facts and circumstances thereto and inevitable corollaries thereof have to be assumed. In CIT vs. Mother India Refrigeration (P) Ltd. (1985) 155 ITR 711, the Hon’ble Supreme Court has held that the legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond the legitimate field. Thus, a deeming fiction cannot be stretched beyond its purpose and import another fiction in it.

10.11 In the light of understanding developed on object and purpose of the deeming clause, as discussed above, the provisions of Section 56(viib), would not come to motion where the Assessee company as admittedly not charged any premium at all and the shares were issued at face value.

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 11. However, We have examined the issue from yet another perspective discussed below.

11.1 It may be possibly argued that Section 56(2)(viib) does not oust its applicability in the event of shares issued pursuant to amalgamation. The amalgamation is a compromise or arrangement between the parties, which inter alia includes the amalgamated company issuing the shares and the shareholders of the amalgamating company, which is supervised by the Court, in terms of the Companies Act. In other words, there is an agreement or arrangement between the amalgamated company issuing the shares and the shareholders of the amalgamating company. The clause contemplates the issue of shares and the receipt of consideration from a resident person and it is fulfilled on amalgamation. This perspective seeks to cover the issue of shares arising from amalgamation with equal measure.

11.2 In contrast, the applicability of the clause in the case of amalgamation may be equally looked from a little different perspective as well. In amalgamation, the issue of shares is made by inviting subscription from the persons to whom offer is made. The issue of shares is to give effect to the amalgamation, as per mutual agreement and the Court order. In other words, it may be argued that the issue of shares does not trigger any consideration and in converse, the obligation to give consideration, triggers issue of shares. Secondly, the clause contemplates ‘receipt’ of the consideration for the shares from a resident person. In other words, it contemplates a transaction between a resident person and the company issuing shares. In the case of an amalgamation, the consideration, which would be undertaking along with all its assets and liabilities is in the form of vesting by the amalgamating company, whereas the shares are issued to its shareholders. Thus, it is, in effect, a tripartite arrangement between (i) amalgamated co. (ii) amalgamating co. (iii) the shareholders of amalgamating co.. Such tripartite arrangements in amalgamation cases are not contemplated in the deeming clause in question.

11.3 There is yet another perspective to dwell upon. As per the proviso to the clause, it does not apply ‘to the consideration for issue of shares by a venture

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 capital undertaking(VCU) from a venture capital company(VCC) or a venture capital fund(VCF)’. The proviso implies that there should issue of shares directly by the company to the subscriber, obviously, for a consideration. In other words, it contemplates a bilateral transaction. Further, it also contemplates a transaction in the nature of issue of shares at the instance of the company on its own and it does not contemplate a transaction in the nature of issue of shares for discharging the consideration or issue of shares obligated pursuant amalgamation etc. If a view is adopted that the transaction can also apply to amalgamation etc. then, in that case, if there is amalgamation by and between venture capital undertakings, the provision would possibly apply inconsistent with the intent of the legislature to exclude VCUs etc. If the shareholders are regarded as the persons providing consideration in the context, they could include VCC or VCF or even notified persons or non-residents along with other resident persons. Such a situation contradicts in the intent of the legislature expressed in the clause. Hence, in terms of proviso, the clause cannot apply in the case of amalgamation etc.

11.4 We may also look at the scheme of the Act in totality for contextual understanding of the issue. The Legislature has contemplated that there arises ‘transfer’ of shares by the shareholders of amalgamating company in consideration of the allotment of shares by the amalgamated company and consequently with a view to neutralize tax effect, the Act provides for suitable exclusion/exemption, from the ambit of expression ‘transfer’, under section 47(vii) which is also of deeming nature. In other words, as per the provisions of the Act, the consideration for issue of shares by the amalgamated company, in so far as the shareholder is concerned, is the shares held in the amalgamated company by way of transfer (except for the saving clause in s.47(vii) of the Act). A bare issue of shares contemplated in S. 56(viib) thus cannot be equated with a situation of transfer gathered from an intent implicit in S. 47(vii). Thus, the consideration and the issue of shares envisaged by section 56(2)(viib) is not found compatible with scheme enacted, when seen from the perspective of revenue.

12. To summarise, in our view, the issue of shares at ‘face value’ by the amalgamated company (assessee) to the shareholders of amalgamating company Page 40 of 42

Decore Thermal Power P. Ltd. Bhopal I.T.A.No. 15/Ind/2020 – A.Y.2016-17 in pursuance of scheme of amalgamation legally recognized in the Court of Law neither falls with scope & ambit of clause (viib) to S. 56(2), when tested on the touchstone of objects and purpose of such insertion i.e. to deem unjustified premiums charged on issue of shares as taxable income; nor does it fall in its sweep when such deeming clause is subjected to interpretative process having regard to the scheme of the Act.

Order pronounced in the open court on 31.07.2023.