ITAT: Premium on Issue Of Shares To Existing Shareholders Not Deemed Income If Beneficiary Derives No Revenue

ITAT: Premium on Issue Of Shares To Existing Shareholders Not Deemed Income If Beneficiary Derives No Revenue

Cites the decision in a previous case to make its point

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has reiterated that an unjustified premium charged on the issue of shares as taxable income under Section 56(2)(viib) of the Income Tax Act, 1961 is inapt for transactions between the holding company and its subsidiary. That is when no income is accrued to the holding company, the ultimate beneficiary.

The bench of Kul Bharat (judicial member) and Pradip Kumar Kedia (accountant member) observed, “The premium charged is supportable by the valuation report and the premium has been charged from the existing shareholder. Thus effectively, the benefit if any arising to the company in turn benefits the subscriber having pre-existing right in the company.”

The assessee filed an Income Tax Return (ITR) declaring a total loss of Rs.1,30,40,430. During the scrutiny, the assessing officer (AO) noted that the assessee allotted 9223 equity shares of Rs.10 each. This was at a premium of Rs.4435.76 per share amounting to Rs.4,09,11,014 to SunEdison Solar Power India Pvt Ltd, the existing shareholder and the assessee’s 100 percent holdings company.

The AO disputed the amount of share premium received per share stating that it exceeded the Fair Market Value (FMV) of shares under Section 56(2)(viib) read with Rule 11UA. He rejected the Discounted Cash Flow (DCF) method adopted by the assessee and accepted the Net Asset Liability (NAL) method as per Rule 11UA to ascertain the value of shares. On deciding that no share premium was justified, he added Rs.4,09,11,014 as deemed income under Section 56(2)(viib) to the loss returned by the assessee.

The tax department refuted the action of the Commissioner of Income Tax (Appeals) on the premise of Sec 56(2)(viib) towards the allotment of shares to SunEdition, the existing shareholder.

The ITAT noted that the matter issuing shares to the holding company at a premium was examined by the co-ordinate bench of the tribunal in the case of BLP Vayu (Projects-I) Pvt Ltd. [(2023) 151 taxmann.com 47(Del-Trib) case. Therein, it was clarified that the chargeability of deemed income arising from transactions between the holding and the subsidiary company or vice versa, militated against the solemn object of Section 56(2)(viib).

The bench noted that the assessee supported the premium determined on the issue of shares by the DCF method. Since the purpose for which the provision of Section 56(2)(viib) was inserted, but not achieved, the appeal of the tax department was rejected.