ITAT Deletes Section 56(2)(viib) Addition on Share Premium Between Holding Company and Wholly-Owned Subsidiary

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has deleted an addition made under Section 56(2)(viib) of the Income-tax Act, holding that the anti-abuse provision cannot be invoked where shares are issued by a wholly-owned subsidiary to its holding company, as no third party benefits from such a transaction.

The assessee challenged the order of the Commissioner of Income Tax (Appeals), which had upheld the addition made under Section 56(2)(viib) on the ground that shares were issued at a premium exceeding their fair market value (FMV).

Before the Tribunal, the assessee submitted that the issue had already been decided in its favour by the Delhi ITAT in its own case for an earlier year (ITA No. 9710/Del/2019 dated 02.11.2022). The Revenue relied on the orders of the lower authorities.

The Tribunal observed that the earlier coordinate bench had already examined the identical issue and held that the transaction involved the allotment of shares by the assessee, a wholly-owned subsidiary, to its holding company. The genuineness of the transaction had never been questioned, and the only dispute related to the determination of the fair market value of the shares.

Referring to its earlier decision, the Tribunal noted that Section 56(2)(viib) was introduced as an anti-abuse measure to curb the introduction of unaccounted money through excessive share premium. In the present case, however, the transaction was entirely between a holding company and its wholly-owned subsidiary, with no outsider or third party deriving any benefit. Therefore, the very object of the provision was not attracted.

The Tribunal further observed that the assessee had obtained a valuation report from a registered valuer, who adopted the Net Asset Value (NAV) method by considering the value of the company’s Delhi land based on the applicable circle rate. It held that the Commissioner (Appeals) had wrongly rejected the valuation merely because it exceeded the book value of the land, observing that book value cannot be equated with fair market value. Since the registered valuer’s estimate was based on the circle rate and was, in fact, lower than the prevailing circle rate, there was no justification for discarding it.

The Tribunal also noted that the Explanation to Section 56(2)(viib) permits valuation either under Rule 11UA or based on the value of the company’s assets, including intangible assets, whichever is higher. It held that the assessee had adequately substantiated the fair market value of its shares by relying on the underlying value of its land assets.

The Tribunal further observed that in Assessment Year 2014-15, the assessee had issued shares to the same holding company at an even higher premium, and the first appellate authority had accepted the valuation after considering the market value of the land.

Following its earlier decision in the assessee’s own case, the Tribunal held that no addition under Section 56(2)(viib) was sustainable and deleted the addition.

Thus, the appeal of the assessee was allowed.