ITO vs. KBC India Pvt. Ltd.
The Income Tax Appellate Tribunal (ITAT), Delhi held that provisions of Section 56(2)(viib) do not apply where shares are issued by a company to its 100% holding company, thereby rejecting the Revenue’s appeal in the case of ITO vs. KBC India Pvt. Ltd. [ITA No. 3127/Del/2019].
Background of the Case
KBC India Pvt. Ltd., a wholly owned subsidiary of M/s Puran Associates Pvt. Ltd., issued 1,02,900 equity shares of ₹100 face value each at a premium of ₹1,799 per share during FY 2013–14 (AY 2014–15), valuing shares based on a report from an independent valuer.
The Assessing Officer (AO) disagreed with this valuation and held that the fair market value (FMV) of shares was ₹299 per share. Consequently, the AO made an addition of ₹16.46 crore under Section 56(2)(viib), alleging excessive share premium.
Arguments & Judicial Precedents Relied Upon
The assessee relied on multiple favorable decisions including:
-
FIS Payment Solutions & Services India Pvt. Ltd. v. UOI [2024] – Delhi High Court
-
Kissandhan Agri Financial Services (P.) Ltd. [2023] 150 taxmann.com 390
-
Dhruv Milkose Pvt. Ltd. [ITA No. 843/Del/2019]
-
Rugby Regency (P.) Ltd. [2024] 160 taxmann.com 1056
-
Solitaire BTN Solar (P.) Ltd. [2024] 164 taxmann.com 170
These rulings emphasize that Section 56(2)(viib), which creates a deeming fiction to tax excessive share premium, is inapplicable when:
-
The subscription is made by a 100% holding company, and
-
No benefit accrues to any outsider.
The courts held that the mischief intended to be addressed by this provision—unexplained capital or accommodation entries—does not arise in intra-group transactions.
⚖️ ITAT Delhi’s Verdict
The Tribunal noted:
-
The Delhi High Court in FIS Payment Solutions had affirmed the view taken in BLP Vayu Pvt. Ltd. and Kissandhan Agri, that the deeming fiction does not extend to transactions between a subsidiary and its holding company.
-
The Revenue had not challenged the Coordinate Bench rulings before the High Court, showing acquiescence.
-
In the present case, the transaction involved no outsider and the premium valuation was supported by a valuer’s report.
As a result, the Tribunal upheld the order of the CIT(A) and deleted the addition of ₹16.46 crores.
What is Section 56(2)(viib)?
Section 56(2)(viib) of the Income Tax Act is a deeming provision introduced to curb the practice of issuing shares at inflated premiums, especially in private companies. It allows the AO to tax the excess premium over FMV as “income from other sources.”
However, the ITAT emphasized that this fiction cannot override commercial realities and intra-group control, especially when the subscriber holds 100% shares of the issuing company.
Conclusion
This ruling by the Delhi ITAT reaffirms that Section 56(2)(viib) is not meant to target genuine capital infusions between group entities where no third-party interest is involved. It provides much-needed clarity for startups and group companies seeking to infuse capital without the fear of excessive taxation under deemed provisions.
Companies can take comfort that share premiums from 100% holding companies, when backed by valuation reports, are not taxable under Section 56(2)(viib).