ITAT: Section 56(2)(viib) IT Act Not Applicable to the consideration received from Issuance of Shares by Non Residents

ITAT: Section 56(2)(viib) IT Act Not Applicable to the consideration received from Issuance of Shares by Non Residents

The Income Tax Appellate Tribunal (ITAT), Indore bench in the case titled M/s. Ruchi J Oil Pvt. Ltd. (Appellant/ Assessee) v. PCIT (Respondent/ Revenue) held that Section 56(2)(viib) of the Income Tax Act (IT Act) does not apply to the consideration received from Non Residents on account of issuance of shares.

The ITAT bench comprising of Judicial Member Kul Bharat and Accountant Member Manish Borad quashed the order passed by PCIT under Sec. 263 of IT Act and the order of the Assessing Officer (AO) was restored.

It referred to the decisions of the cases CIT v. Nirav Modi [2017] 390 ITR 292 (Born), CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Born), and Micro Inks Ltd. v. Pr. CIT [2018] 407 ITR 681 (Guj) and held that where assessment under Section 143(3) of the IT Act was framed after detailed inquiries, it cannot be considered as erroneous and prejudicial to the interests of the Revenue.

It further stated that the AO has made an inquiry to his satisfaction and the question of jurisdiction u/s 263 of the Act cannot be assumed by the Principal Commissioner of Income Tax (PCIT) to again investigate or approach in a particular manner.

An appeal was filed by M/s Ruchi J Oil Pvt. Ltd. wherein it challenged the jurisdiction assumed by PCIT u/s 263 of the IT Act on the ground that the provisions of Section 56(2)(viib) of the IT Act do not apply to the Non-residents.

The factual background of the case is that the Appellant had issued equity shares to the resident and non-resident companies at Rs. 2061.35 per share and Rs. 2840.68 per share respectively.

The PCIT has referred to the above transactions and observed that as the value of each share computed by the DCF method is Rs 2061.35 and an excess premium of Rs 779.33 per has been charged to Non-Resident companies, the AO ought to have added the same to the income of appellant under Sec. 56(2)(viib) of the IT Act.

The PCIT opined that the AO had failed to do so and hence it set aside the order of the AO holding it to be erroneous and prejudicial to the interest of revenue.

The appellant contended that shares were issued at a premium to non-resident companies hence additional premium received was not covered within the scope of Section 56(2)(viib) of the IT Act.

The ITAT held that the wordings of Section 56(2)(viib) of the IT Act is very clear and it applies only to residents. The Appellate Tribunal held that the order of PCIT is factually incorrect and is not sustainable in law since the provisions of Section 56(2)(viib) of the Act do not apply to the consideration received from Non Residents for issuing of shares.