HERO FINCORP LIMITED,NEW DELHI V. ACIT, CIRCLE 11(1), DELHI, C.R. BUILDING

ITA 2542/DEL/2024

AI Insights

Hero Fincorp Ltd. appealed against the order of the National Faceless Appeal Center (NFAC) which upheld the addition of Rs. 418,66,34,625 to its income under Section 56(2)(viib) of the Income Tax Act for the assessment year 2017-18. The addition was based on the premium received from issuing shares at a price higher than their fair market value. The Tribunal found that the shares were issued to non-resident entities, and thus, the provisions of Section 56(2)(viib) did not apply. The Tribunal also noted that the rectification order passed by the Assessing Officer under Section 154 was valid and the issue was rendered academic and infructuous.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 828786 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 7 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-01-2026
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Delhi
• Assessment Year: misc
• Appeal Filed On: 20-05-2024
• Other Referred Cases: AgroPorfolio Pvt. Ltd. vs. ITO, Mc Dowell & Co Ltd vs CTO, Kesharwani Zarda Bhandar vs CIT, Jute Corporation of India Ltd vs CIT, Yogendra Prasad Santosh Kumar vs CIT, M.Loganathan vs ITO, Jagmondas Gokaldas vs CWT, Credit Suisse (Singapore) Ltd. vs. ITO
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: POOJA SWAROOP
• Assessee Lawyers: ROHIT JAIN
• Keywords: Set aside; Difference of opinion; Transfer pricing; Business expenditure; Depreciation; Fair market value; Rule of consistency; Capital Gains; Principle of natural justice; TDS; Valuation report; Rectification of order; Assessment record; Competent authority; Wholly owned subsidiary; Double taxation relief; Revision of order; Residential status
• Section: 143(3); 154; 263; 56; 56(2)(vii)(b); 56(2); 37(1)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “B”, DELHI BEFORE SHRI MAHAVIR SINGH, VICE PRESDIENT (THIRD MEMBER), SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI BRAJESH KUMAR SINGH, ACCOUNTANT MEMBER आ.अ.सं/.I.T.A No.2542/Del/2024 िनधाªरणवषª/Assessment Year:2017-18 Hero Fincop Ltd., 34 Community Centre, Basant Lok, Vasant Vihar, New Delhi-110057 बनाम Vs. Assistant Commissioner of Income Tax, Circle-11(1) C. R. Building, New Delhi-110002 अपीलाथê Appellant ÿÂयथê/Respondent PAN:AAACH0157J Assessee by Shri Rohit Jain, Adv., Shri Deepesh Jain, Adv. and Shri Himanshu Aggarwal Adv. Revenue by Ms . Pooja Swaroop, CIT(DR) सुनवाईकìतारीख/ Date of hearing: 14.01.2026 उĤोषणाकìतारीख/Pronouncement on 16.01.2026 आदेश /O R D E R PER BRAJESH KUMAR SINGH, AM, The assessee is engaged in the business of ‘Hire Purchase leasing and finance’. This appeal is filed by the assessee against the order of National Faceless Appeal Center (NFAC)/(First Appellate Authority hereinafter referred as “FAA”), Delhi dated 27.03.2024 arising out of assessment order u/s 143(3) of the Act dated 29.12.2019for the Assessment year 2017-18. 2. The assessee has raised following grounds of appeal: “Disallowance of provision for collection charges -Rs. 9,75,00,000/- Printed from counselvise.com ITA No. 2542/Del/2024 2 1. That the National Faceless Appeal Centre, Delhi ('the NFAC') erred on facts and in law in dismissing the ground challenging disallowance of provision for collection charges amounting to Rs.9.75,00,000 as not adjudicated', thereby abdicating the statutory mandate of section 251(1) of the Income tax Act, 1961 (\"the Act\"). 2. That the NFAC erred on facts and in law in not deleting the disallowance of provision for 'collection charges' amounting to sum Rs.9,75,00,000 (on net basis). 3. That the NFAC erred on facts and in law in not appreciating that the provision for 'collection charges' represented ascertained liability in respect of which provision is made at the end of the relevant previous year and hence allowable as deduction. 4. That the NFAC grossly erred on facts and in law in not appreciating that the appellant deducted tax at source (TDS) on the said provision for collection charges and thus, the same cannot be termed as contingent or notional in nature. 5. That the NFAC erred on facts and in law in not appreciating that the appellant had made similar provision in earlier year(s), which have always been accepted and allowed in the assessments completed in the past, and thus disregarding the principle of consistency. 6. That the NFAC erred on facts and in law in passing a self-contradictory order by returning finding, that too, ex-parte on conjectures and surmises, on certain alternative grounds, while at the same time ultimately concluding that the issue \"cannot be adjudicated\". 7. That the impugned order passed by the NFAC is in gross violation of sections 250(6)/ 251(1) of the Act. Disallowance of depreciation on car -Rs. 3,06,889/- 8. That the NFAC erred on facts and in not allowing depreciation of Rs. 3,06,889 on motor vehicle. 9. That the NFAC erred on facts and in not allowing depreciation on the ground that: (a) car was leased by T&T Motors Pvt. Ltd. and depreciation is admissible to the lessor and not the lessee; and (b) lessee of the car, in any case, was Hero MotoCorp Ltd. and not the appellant. 10. That the NFAC erred on facts and in law in disregarding the documentary evidence(s) submitted by the appellant substantiating that the purchase of motor vehicle and it being put to use on 31.03.2017. 11. That the NFAC erred on facts and in law in returning ex-parte findings, that too, on conjectures and surmises, without confronting the same to the appellant. Printed from counselvise.com ITA No. 2542/Del/2024 3 Addition of share premium received under section 56(2)(viib)- Rs.418,66,34,625/- 12. That the NFAC grossly erred on facts and in law in holding, that too, in appeal against the assessment order dated 29.12.2019 that the rectification order dated 09.05.2023 passed by the assessing officer under section 154 deleting the incorrect addition of Rs.418,66,34,625 made under section 56(2)(viib) of the Act, to be non- est and in restoring the additions made in the assessment order. 13. That the NFAC grossly erred on facts and in law in: (a) holding, exceeding its jurisdiction, that the rectification order dated 09.05.2023 was non-est; and (b) in thereafter, dismissing the ground raised as not adjudicated', rather than deleting the incorrect addition of Rs.418,66,34,625 made under section 56(2)(viib) of the Act. 14. That the impugned order passed by the NFAC is in gross violation of provisions of sections 250(6)/ 251(1) of the Act. 15. That the NFAC grossly erred on facts and in law in not appreciating that the assessing officer passed the rectification order under section 154 rectifying the assessment order wherein erroneous addition was made under section 56(2)(viib) of the Act despite the said section being not applicable to issuance of shares to non- resident investors. 16. That the NFAC grossly erred on facts and in law in not appreciating that, since the shares were issued to non-residents, the provisions of section 56(2)(viib) of the Act were not applicable thereto. 17. That the NFAC grossly erred on facts and in law in not appreciating that the complete details of subscribers i.e. non-resident allottees along with their addresses, number of shares issued, amount subscribed by each subscriber, Foreign Inward Remittance Certificates (FIRC), Tax Residency Certificates (TRC) were placed on already on record. 18. That the NFAC grossly erred on facts and in law in not appreciating that the certificates issued by (a) Inland Revenue Authority of Singapore; and (b) Mauritius Revenue Authority unequivocally certifies Credit Suisse (Singapore) Ltd and Otter limited were non-residents during the relevant assessment years and therefore, the provisions of section 56(2)(viib) had no application. 19. That the NFAC grossly erred on facts and in law in vaguely/ generally, that too, on mere conjectures and surmises, making various false/generic/ baseless observations/ allegations about the transaction of issuance of shares to non- residents. 20. That, without prejudice, the NFAC erred on facts and in law in not holding that the provisions of section 56(2)(viib) of the Act were, both on facts and in law, not Printed from counselvise.com ITA No. 2542/Del/2024 4 applicable and hence, there was no warrant to make addition of Rs.418,66,34,625.” 3. Ground nos. 1 to 7 of the appeal are against the disallowance of provisions for collection charges amounting to Rs.9,75,00,000/-. The AO noted that the assessee had debited the above amount on provision basis without actually accruing liability of payment. The assessee in its reply stated that as per agreement with collection agents, they are entitled to collection charges at pre fixed slabs for different buckets in respect of collection of overdue instalment made during the year which is based on inputs received from the collection department of the company. It was further submitted that at the end of the year, provisions of collection charges is made in respect of such collection of overdue amounts in respect of which bills will come in next year after the date of audit. It was further submitted that during financial year 2016-17, provision was created in books in respect of collection which has been made by collection agent and remitted to Hero Fin Corp before 31.03.2017 was Rs.15 crores and similar provisions created during last year was Rs.5.25 crores which was reversed and, therefore, net expenses claimed based on such provisions was Rs.9.75 Crs. (Rs.15.00 cr. – Rs.5.25 Cr.). The written explanation of the assessee is reproduced as under: “As per agreement with collection agents, they are entitled to collection charges, at pre fixed stabs for different buckets in respect of collection of overdue installments, made during the year (copy of such schedule is Enclosed as Enclosure). At the end of the year, provision of collection charges is made in respect of such collections of overdue amounts in respect of which bills will come in next year after the date of audit. This is based on inputs received from collection department of the company. During the financial year 2016-17, provision was created in books in respect of collection expenses, for which collection have been made by collection agent and remitted to HeroFincorp before March 31, 2017, was Rs. 15 crores. Similar provision created during last year was of Rs. 5.25 crores is reversed and therefore net Expenses claimed based such provision comes to Rs. 9.75 crores. Printed from counselvise.com ITA No. 2542/Del/2024 5 Further, the assessee has duly deducted tax on such provision. Party wise details of provision booked, TDS deducted on such provision along with TDS certificates issued for FY 16-17 on sample basis, are enclosed as Enclosure-IV. Thus, our submission is that, the entire collection expenditure, including provision made for the purpose of business and services rendered by collection vendors during the year 2016-17. is allowable as business expenditure to the assessee. Therefore, the question disallowance or making any addition to income does not arise.\" 3.1 The same was not accepted by the AO on the ground that the assessee itself had shown the said expenditure a provision for expenses which was not allowable under Section 37(1) of the Act and also the fact that the above expenditure has not crystallized during the year under consideration. 3.2 The assessee preferred an appeal before the Ld. CIT(A) who did not adjudicate this issue on the ground that in the instant case, the appellant has not demonstrated before the FAA if it offered the interest component embedded in the collection charges as income in the year under question and there cannot be a different yard stick to measure the certainty of interest income accrued out of collection charges, when the appellant-assessee concluded about the certainty incurring of expenses towards agents. The Ld. CIT(A) further held that on the contrary if the appellant-assessee has not offered the interest component of the collection charges as income, the provisions of expenses cannot be allowed as expense. Finally he held that the assessee has not demonstrated before the undersigned with full facts, figures and principles so as to enable the undersigned to give judgment on this issue and therefore, this issue cannot be adjudicated. The relevant finding of the Ld. CIT(A) in para nos. 8.5 to 8.5.3 on page nos. 53 & 54 of Ld. CIT(A)’s order are reproduced as under: “8.5 Decision: Printed from counselvise.com ITA No. 2542/Del/2024 6 8.5.1. The appellant vide its ground of appeal in no. 5.1 claims that the provision for collection charges was made for an ascertained liability of the appellant towards services provided by the collection agents for facilitating the recovery of outstanding dues from the customers of the appellant before the end of the previous year, for which invoices were pending to be received from such agents. 8.5.2. Let us understand the difference between expense incurred and expense not yet incurred. An expense is said to be incurred by an assessee (e.g., the appellant in this case) when it receives services from the other persons (agents, in this case) in which case a ledger account for the said expense would be created in the books of account and accordingly, the closing balance at the end of the year would be carried to the P&L A/c and also would be allowed as deduction as per I-T Act. 8.5.3. On the other hand, if the other persons have not yet rendered services to the appellant-assessee no ledger a/c can be created under the head of these expenses since expense has not yet been incurred and in such cases provisions at the end of the year (not during the year and not even on the last day of the year). Such provisions are not allowable expenses. In this case what is certain is the other persons (agents) would surely render services to the appellant-assessee but not that the agents have rendered services to the appellant in the year under consideration. The certainty of incurring expenses on account of agents depends upon the certainty of receiving collections from the appellant's customers. So certainty of expense depends upon the certainty of collections from the appellant's customers and in the same tone incurring of expenses on account of agents depends upon the accruing of collection charges from the customers. In the instant case, the appellant has not demonstrated before the FAA if it offered the interest component embedded in the collection charges as income in the year under question. There cannot be a different yard stick to measure the certainty of interest income accrued out of collection charges, when the appellant-assessee concluded about the certainty incurring of expenses towards agents. On the contrary if the appellant-assessee has not offered the interest component of the collection charges as income, the provisions of expenses cannot be allowed as expense. The appellant has not demonstrated before the undersigned with full facts, figures and principles so as to enable the undersigned to give judgment on this issue. Therefore, this issue cannot be adjudicated. Hence this ground is dismissed as not adjudicated.” 4. Against the above order, the assessee has filed the appeal before the Tribunal. 5. The Ld. AR reiterated its submissions made before the Ld. CIT(A). 6. The Ld. CIT-DR supported the orders of the authorities below. Printed from counselvise.com ITA No. 2542/Del/2024 7 7. We have considered the rival submission and the material available on records. The first appellate authority as per the provisions of section 251(1)(a) of the Act may confirm, reduce enhance or annul the assessment in respect of an appeal against the order of the assessment. Therefore, he has to decide the appeal on merits or annul the assessment. However, he cannot pass an order by stating that the issue cannot not be adjudicated since full facts, figures and principles needed for proper verification was not made available by the assessee before him and the Ld. CIT(A) cannot dismiss the ground as not adjudicated. The assessee also in its ground nos. 1 & 7 submits that order of the Ld. CIT(A) dismissing the appeal of the assessee was in violation of section 251(1) and 250(6) of the Act. The same has been carefully considered by us and found to be acceptable. In view of this fact, we are of the considered view that the above order of the Ld. CIT(A) cannot be sustained and the same is set aside to his file for passing a fresh order on merits in terms of the powers conferred on him u/s 251(1)(a) of the Act and in the manner as laid down in section 250(6) of the Act. In the result, ground nos. 1 & 7 of the appeal is allowed and the ground nos. 2 to 6 of the appeal are allowed for statistical purposes. 8. Ground nos. 8 to 11 of the appeal are against the disallowance on depreciation of car amounting to Rs.3,06,889/-. The AO on perusal of the invoice bill for the purchase of the car and the registration certificate noted that the registration certificate was issued on 18.04.2017 which was in the next financial year 2017-18. The AO further noted that though the invoice was issued on 31.03.2017 but as per records the insurance was issued after 17.00 hrs. which clearly shows that on the evening of 31.03.2017, the assessee was not using the vehicle and, therefore, it was not put to use. Accordingly, the AO disallowed the depreciation. 8.1 The Ld. CIT(A) noted that the vehicle for which the depreciation was claimed being Mercedes Benz was actually leased out by the dealer M/s. T&T Motors Pvt. Ltd. as lessor to the Printed from counselvise.com ITA No. 2542/Del/2024 8 assessee as the lessee. According to the Ld. CIT(A) in a lessor – lessee relationship, it is the lessor who owns the assets/car and it is the lessee which uses the car. According to the Ld. CIT(A), as per IT Act, it is the lessor being the owner of the assets was entitled to claim depreciation as it earns lease rental income from the lessee and at the same time, the lessee cannot claim depreciation since same depreciation cannot be claimed by both the entities. The Ld. CIT(A) further noted that in the particular case, the assessee was not the lessee but a group concern/company M/s. Hero Motor Corp Ltd. was the lessee and if at the depreciation can be claimed, it can be claimed by M/s Heto Motorcorp Ltd. and not by the assessee. 9. Against the above order, the assessee filed an appeal and reiterated the submissions made before the Ld. CIT(A). 10. The Ld. CIT DR supported the orders of the authorities below. 11. We have considered the rival submission and perused the materials on record. In view of the findings of the AO that insurance was issued after 17.00 hrs. which has not been disputed by the assessee, the action of the AO in denying the depreciation is justified and the same is confirmed. Ground nos. 8 to 11 of the appeal are dismissed. 12. Ground nos. 12 to 20 of the appeal are against the addition of Rs.418,66,34,625 under Section 56 (2)(viib) of the Act. 12.1 The AO noted that during the year the assessee had issued 13492216 no. of equity shares at the rate of Rs. 520.30 each at a premium of Rs. 510.30 per share. On query regarding the valuation of the shares, the assessee submitted that the assessee has the option to adopt the valuation under Rule 11UA(2)(a) or under Rule 11UA(2)(b) i.e. the fair market value of unquoted shares determined by a merchant broker or an accountant as per discounted free cash flow method. Printed from counselvise.com ITA No. 2542/Del/2024 9 Thereafter, as per the said method, the assessee furnished the basis of the valuation of equity per share at Rs. 520.30. 12.2 The AO did not accept the above basis and noted that the real figures as per audited financial statements are not at all in tune with projections taken for valuation of shares and there was a huge mismatch between the revenue and the profit after tax. The AO held it to be a self- serving projection having no basis to the reality of the finances of the company. The AO also noted the fact that the actual figures available shows that assessee had declared income of Rs.1332.69 crores as against shown in the valuation report to be of Rs. 1580.36 crores thereby, effectively having a difference of more than Rs. 200 crore. In view of these facts, the AO held that in the present case, the DCF method adopted by the assessee to value its shares was not correct. Further, the AO determined the value of the shares under Rule 11UA(2)(a) at the rate of Rs. 210 per share. Further, the AO relied upon the decision of ITAT Delhi in the case of AgroPorfolio Pvt. Ltd. vs. ITO (ITA No. 2189/Del/2018)(171 ITD 74 Delhi Tribunal)for the proposition that the AO had the jurisdiction to adopt a different method other than the assessee, if the facts and circumstances of the case warrants so. In view of the above findings, the AO taxed the difference of the premium of Rs. 310.30 per share against total shares issued of 1,34,92,216 and added a sum of Rs. 418,66,34,625 under Section 56(2)(viib) of the Act. 12.3 Aggrieved with the said order, the assessee filed an appeal before the CIT(A). 12.4 Before the Ld. CIT(A), the assessee submitted vide its letter dated 01.03.2021 that the 1,34,92,216 equity shares of face value of Rs.10/- per share at a premium of Rs.510.30 per share, on preferential basis, for raising funds were issued to non-resident companies and the details of the same was submitted as under: Printed from counselvise.com ITA No. 2542/Del/2024 10 Name Address of party No. of Shares issued Date of issuance of shares Paid up share capital (Rs.) Unpaid share capital (Rs.) Total share Capital/Premium (Rs.) Otter Ltd. IFS Court, Bank Street, 28 Cyber city Ebane Mauritius 72201 10,955,218 15.09.2016 4,199,999,999 1,499,999,926 5,699,999,925 Credit Suisse (Singapore Ltd.) 1, Raffles Link, 03- 01 South Lobby, Singapore 039393 2,536,998 15.09.2016 990,000,044 330,000,015 1,320,000,059 Total 13,492,216 5,190,000,044 1,829,999,941 7,019,999,985 12.5 The assessee submitted that the above two parties foreign companies with foreign address were non-resident companies and the amounts was remitted by the aforesaid Non-resident share holders to the Indian Companies in foreign currency under the foreign direct investment policy of the Reserve Bank of India. In this background, it was submitted that the AO erred in invoking the provisions of Section 56(2)(viib) of the Act because the said provision is applicable only when shares are issued by the company to a resident in India whereas in the present case, the entire share capital was issued to non-residents in India. It was submitted that in case the Ld. CIT(A) does not agree with the above contention of the assessee then the assessee may be allowed for an opportunity to make additional submission on the other aspects of the matter. 12.6 The Ld. CIT(A) noticed that the AO by an order u/s 154 dated 09.05.2023 gave relief of Rs. 418,66,34,625 on the entire addition of Rs. 418,66,34,625 made u/s 56(2)(viib) by simply saying that the subscribers of the above share capital were all non-residents on which provisions of section 56(2)(viib) were not applicable. In this regard, the Ld. CIT(A) asked the assessee to i. Prove that all these subscribers were non-resident with due reference to section 6 of the Act and ii. Upload the material placed before the AO based on which he gave relief to you 2. Further, the assessee was requested to submit the list of subscribers along with their addresses, no. of shares issued and amounts subscribed by each subscriber. Further, the assessee was requested to clarify if these subscribers were allotted the shares and if so, to furnish the said details. Printed from counselvise.com ITA No. 2542/Del/2024 11 12.7 The assessee submitted the above details vide letter dated 19.02.2024 and also stated that in view of the facts that the shares amounting to 1,34,92,216 were allotted to the non-residents and therefore the premium under section 56(2)(viib) was not applicable in the case of the assessee. It was further submitted that this being apparent from the record, the assessee filed an application under section 154 of the Act on 17.01.2020 stating that provisions of section 56(2)(viib) were not applicable to the assessee since the shares were issued to the non-residents. The assessee also informed that on 21.02.2020 a show cause notice under section 263 of the Act was issued for same Assessment Year i.e. AY 2017-18 where the Ld. PCIT-4 Delhi in his show cause notice stated that provisions of section 56(2)(viib) was not applicable to the assessee being non-residents and the addition should have been made by the AO under section 28(iv) of the Act. 12.8 It was further submitted by the assessee that vide order dated 03.03.2020 , the AO initially rejected the rectification application but the assessee further vide letter dated 11.03.2020 clarified the factual position and after considering the same, the AO vide order dated 09.05.2023 allowed the prayer for rectification of mistake apparent from record under section 154 and deleted the addition of Rs. 418,66,34,625, the amount that was added under section 56(2)viib) of the Act vide order under section 143(3) dated 29.12.2023 in assessee’s case for AY 2017-18. 12.9 Thereafter, the Ld. CIT(A) expanded the scope of his enquiry by asking the assessee to show cause why in the case of the non-resident, the place of effective management as envisaged under section 6(3) of the Act cannot be invoked in respect of M/s Otter Ltd. and M/s Credit Suisse (Singapore) Ltd. Regarding the third investor M/s Link Investment Trust it was stated that it was a Delhi based company and therefore, why the provisions of section 56(2)(viib) will not be applicable in its case. Printed from counselvise.com ITA No. 2542/Del/2024 12 12.10 Further, the Ld. CIT(A) informed the assessee that the power of the Commissioner of Income Tax Appeals (1st appellant authority, FAA) are co-terminus with the powers of AO and as per the provisions of section 251 (1)(a) of the Act the CIT(A) can enhance the assessment if it was found by him that the order under section 154 passed by the AO vide order dated 09.05.2023 was not proper. Further, the Ld. CIT(A) stated that the assessee had no right to withdraw the appeal without the permission of the appellate authority and asked the assessee to furnish all the queries raised by the Appellate Authority. The relevant extract of the Ld. CIT(A)’s questionnaire is reproduced as under: “1. Vide notice u/s 250 dated 31.01.2024 you have been asked specifically certain questions to be answered by 12.02.2024. Already 22 days have passed from the date of compliance. However, you have not bothered to give any answers to the questions asked. The questionnaire is now enlarged. 1. It is noticed from records that one of the subscribers to the shares is M/s. Otter Limited with investment of Rs.566,99,99,948 which has its associated enterprise in India, by the name M/s. Otter Controls India Pvt Ltd with the Directors, viz., Ukhas Krishna Joshi as MD, David Andrew Smith and William Ross Jolliffe as Directors. This Indian based company has a direct influence on M/s. Otter Limited through which funds have been received into your company. Please explain why the place of effective management as envisaged u/s.6(3) cannot be invoked in your case in respect of M/s. Otter Limited. 2. Similarly, another investor by the name, M/s. Credit Suisse (Singapore) Ltd has invested a sum of Rs.132,00,00,059 in your company. This entity has a number of Indian entities, such as M/s. Credit Suisse Consulting India Pvt Ltd, M/s. Credit Suisse Securities India Pvt Ltd, M/s. Credit Suisse Finance India Pvt Ltd and M/s. Credit Suisse Services India Pvt Ltd, etc., through which the M/s. Credit Suisse (Singapore) Ltd has been influenced to make investment in the appellant company. In view of this please explain why the place of effective management as envisaged u/s.6(3) cannot be invoked in your case in respect of M/s. Credit Suisse (Singapore) Ltd. 3. The third investor, M/s. Link Investment Trust is Delhi based entity in which case the provisions of Sec.56(2)(viib) are directly applicable. Please explain why and how the provisions of Sec.56(2)(viib) are not applicable in respect of M/s. Link Investment Trust. 2. In this regard it may be noted by you that the powers of the first appellant authority (FAA) are co-terminus with the powers of the AO as per the decision of Printed from counselvise.com ITA No. 2542/Del/2024 13 Hon'ble Supreme Court in Jute Corporation of India Ltd vs CIT [1991] 187 ITR 688. Further it was held in the case of Yogendra Prasad Santosh Kumar vs CIT [2014] 44 taxmann.com 299 (All HC) that \"there is no provision in Income Tax Act which will permit withdrawal of an appeal, once it is filed and registered\". Also it was held in \"M.Loganathan vs ITO [2012] 25 taxmann.com 174 (Mad HC)\" and in \"Jagmondas Gokaldas vs CWT [1963] 50 ITR 578 (Bom HC)\" that the appellant has no right to withdraw appeal without the permission of the appellate authority. It is therefore brought to your notice that it is your duty to clarify all the queries raised by FAA by duly furnishing the documentary evidences. 3. It may be noted by you that as per Sec. 251(1)(a) CIT (Appeals) may enhance the assessment if it is found by him that such order (154 Order in this case) is not proper. 12.11 The assessee submitted its details which is discussed on page no. 92 to 96 of the appellate order. 12.12 The Ld. CIT(A) noted on the perusal of the reply of the assessee that favourable projections for valuing the shares under DCF method was made only to justify the excess valuation of the share and to issue such overvalued shares whose addresses are in other countries to circumvent the provisions of section 56(2)(viib) of the Act. It was noted by the Ld. CIT(A) that M/s Otter Ltd. had immediately sold certain nos. of shares to an Indian based Indian Resident Entity M/s Link Investment Trust. It was noted by the Ld. CIT(A) that had these shares being bought by M/s Link Investment Trust from the assessee company directly then the excess premium per share of Rs. 310.30 would have been taxable u/s 56(2)(viib) of the Act. The Ld. CIT(A) observed that in order to avoid the taxation u/s section 56(2)(viib) of the Act in the hands of the assessee company it appeared that the assessee itself arranged a via route/round tripping of shares purchased through an intermediary company, M/s Otter Ltd. 12.13 It was further noted by the Ld. CIT(A) that during the pendency of the appeal proceeding before the FAA, the JAO has undone the addition of Rs. 418,66,34,625 through a rectification Printed from counselvise.com ITA No. 2542/Del/2024 14 order u/s 154 of the Act without examining the issue on hand and without establishing how it was a mistake apparent from record. 12.14 Thereafter, the Ld. CIT(A) discussed why the issue was not a mistake apparent from record. According to the CIT(A) in case of a company address alone of such companies cannot reveal the residency of those companies and it was further required to verify the place of effective management u/s 6(3) of the Act through proper verification of direct and indirect share holding pattern of the company and such other transactional details. It was noted by the CIT(A) that no such verification was done by JAO in the above rectification proceedings. 12.15 The Ld. CIT(A) also observed that even assuming the said amount was not taxable u/s section 56(2)(viib) of the Act, then despite such submission if the addition was made u/s section 56(2)(viib) by the FAO then it suggests that the FAO has applied his mind and taken a conscious decision making addition u/s section 56(2)(viib) of the Act. It was noted by the Ld. CIT(A) that in this case as opposed to the case in para 11.9.4 of his order, the claim of the assessee made before the FAO and/but ignored by the FAO cannot become a mistake apparent from record. 12.16 According to the Ld. CIT(A) that in either of these two cases i.e. (a) where the assessee did not make a claim before FAO as discussed in para 11.9.4, of his order or (b) where the assessee made a claim before FAO but ignored by FAO, as discussed in para 11.9.5 of his order) excess premium paid by M/s. Otter Ltd and M/s. Credit Suisse (Singapore) Ltd and assessed u/s.56(2)(viib) cannot be the subject matter of rectification proceedings before the JAO. 12.17 Thereafter, the Ld. CIT(A) discussed about entities having cross holdings. Further, he observed that it was required to be examined if the foreign residency principle of a company can be so arranged by issuing the shares first to a foreign registered company which thereafter issues Printed from counselvise.com ITA No. 2542/Del/2024 15 to an Indian resident entity. According to the Ld. CIT(A) that here what is to be seen is substance over form and spirit/intent of the legislation over the static letter/wording. The Ld. CIT(A) further observed that the substance and spirit of the legislation has been clearly violated by the appellant- assessee by arranging share transactions in such a way that the shares issued by the appellant- company at a huge premium are ultimately bought by Indian resident individuals and Indian resident companies at lesser prices and also bought back by the appellant-company itself at lesser prices while in the process the higher premium gets offloaded in the appellant-company's books of account under \"Securities Premium Account\" and some of the intermediary investing companies exited with losses to themselves (which of course would be artificially utilized for set off against the true incomes) while with compensatory gain to the appellant-assessee in the form of huge premium without undergoing taxation u/s.56(2)(viib). 12.18 Thereafter, the Ld. CIT(A) observed that clear finding could not be made by the FAA from the assessee as it did not utilize the VC opportunity given to it even its own request. Thereafter, the Ld. CIT(A) discussed about the various aspects of the transaction and held that addition made u/s section 56(2)(viib) of the Act made in assessment order by the FAO/NFAAC with proper reasoning could not be deleted summarily in the rectification order by the JAO purely based on the submissions of the assessee without carrying out any verification of the submissions. 12.19 Thereafter, the Ld. CIT(A) observed that it felt difficulty in expressing his opinion and giving judgment on merits as the assessee failed to furnish the full facts before the FAA and therefore, he refrained from giving any judgement except to the extent that the rectification order passed u/s 154 by the JAO was inappropriate and against the law. It was further held by him that the ground of appeal raised against the order against the addition made under section 56(2)(viib) of the Act was not adjudicated since full facts are needed for proper adjudication. Finally, he Printed from counselvise.com ITA No. 2542/Del/2024 16 dismissed the appeal of the assessee as non-adjudicated. The relevant finding of the Ld. CIT(A) in para no. 11.9.8 which is as reproduced as under: “11.9.8. The powers of the first appellant authority (FAA) are co-terminus with the powers of the AO as per the decision of Hon'ble Supreme Court in Jute Corporation of India Ltd vs CIT [1991] 187 ITR 688. Further it was held in the case of Yogendra Prasad Santosh Kumar vs CIT [2014] 44 taxmann.com 299 (All HC) that \"there is no provision in Income Tax Act which will permit withdrawal of an appeal, once it is filed and registered\". Also it was held in \"M. Loganathan vs ITO [2012] 25 taxmann.com 174 (Mad HC)\" and in \"Jagmondas Gokaldas vs CWT [1963] 50 ITR 578 (Bom HC)\" that the appellant has no right to withdraw without the permission of the appellate authority. Moreover, the appellant has not specifically given any letter of withdrawal of this ground of appeal. However, the appellant-assessee in its letter dated 08-03-2024 stated as follows... \"It is respectfully reiterated that in view of rectification order dated 09.05.2023 passed by the assessing officer, grounds of appeal Nos. 8 to 8.6 raised by the appellant challenging the addition made under section 56(2)(viib) of the Act has been rendered infructuous. It is, therefore, respectfully submitted that there is no warrant whatsoever to make enquiries into the said issue.\". There is no mention of the withdrawal of the ground of appeal. Even if it is presumed that the appellant wanted to convey about the withdrawal of appeal in an indirect manner, it is now held by the undersigned that the appellant has no right of withdrawal of appeal in view of many facts coming to light. The undersigned holds that the addition u/s.56(2)(viib) made in the assessment order by FAO/NFAC with proper reasoning cannot be deleted summarily in the rectification order by the JAO purely based on the submissions of the appellant without carrying out any verification of the submissions. The undersigned faces difficulty in expressing his opinion and giving judgment on merits as the appellant failed to furnish the full facts before the FAA and therefore the undersigned refrains from giving any judgment except to the extent that the Rectification Order passed u/s.154 by the JAO is inappropriate and against the law. In view of the foregoing discussion, the ground of appeal raised against the addition made u/s.56(2)(viib) on this issue is not adjudicated since full facts are needed for proper adjudication. In other words, this ground is dismissed as not adjudicated. Therefore, the addition of Rs.418,66,34,625 u/s.56(2)(viib) made by the FAO/NFAC is fully restored in its entirety by treating the Rectification Order dated 17th Jan 2020 passed u/s.154 by the JAO as another mistake and thus as non-est while at the same time not adjudicating the grounds of appeal raised by the appellant against the addition u/s.56(2)(viib), for want of facts. The Ld. JAO is directed to give appeal effect to this appeal order by considering the assessment order passed by FAO/NFAC and ignoring the rectification order passed by the JAO.” Printed from counselvise.com ITA No. 2542/Del/2024 17 13. During the appellate proceedings before the Ld. AR reiterated the submissions made before the Ld. CIT(A) and submitted that in view of the rectification order dated 09.05.2023 passed by the AO u/s 154 of the Act allowing relief in respect of the addition of Rs.418,66,34,625/- made u/s 56(2)(viib) of the Act, the dispute on this issue was no longer before the Ld. CIT(A) and his decision in not adjudicating the matter was bad in law. 14. The DR supported the order of the authorities below. 15. We have considered the rival submissions and the materials available on records. The first appellate authority as per the provisions of section 251(1)(a) of the Act may confirm, reduce enhance or annul the assessment in respect of an appeal against the order of the assessment. Therefore, he has to decide the appeal on merits or annul the assessment. However, he cannot pass an order by stating that the issue cannot be adjudicated since full facts needed for proper adjudication are not available and thereby dismissing the ground as not adjudicated. The assessee has also in its ground nos. 14 submitted that order of the Ld. CIT(A) dismissing the appeal of the assessee was in violation of section 251(1) and 250(6) of the Act. The same has been carefully considered by us and found to be acceptable. In view of this fact, we are of the considered view that the above order of the Ld. CIT(A) cannot be sustained and the same is set aside to his file for passing a fresh order on merits in terms of the powers conferred on him u/s 251(1)(a) of the Act and in the manner as laid down in section 250(6) of the Act. In the result, ground no. 14 of the appeal is allowed and the ground nos. 12, 13 & 15 to 20 of the appeal are allowed for statistical purposes. 16. In the result, the appeal is partly allowed. Printed from counselvise.com ITA No. 2542/Del/2024 18 PER: SATBEER SINGH GODARA, JUDICIAL MEMBER ORDER I have given my thoughtful consideration to the very well- reasoned order passed by my learned brother/Accountant Member partly allowing the assessee’s instant main appeal and restoring the issue of section 56(2)(vii)(b) addition amounting to Rs.418,66,34,625/; made in the course of assessment framed on 29.12.2019 and upheld in the lower appellate discussion back to the CIT(A)/NFAC for yet another round of lower proceedings. I am unable to express my agreement to the same on the above sole issue of section 56(2)(vii) addition. Faced with this situation, I hereby pen my “dissent” as follows. A few basic relevant facts be noticed. 2. The assessee/company, namely, M/s. Hero Fincorp Limited is admittedly engaged in the business of hire-purchase, leasing and finance business. It had filed it’s return on 30th October, 2017 declaring total income of Rs.280,18,34,380/-. This followed it’s “revised” return on 05.10.2018 reiterating the very income. Learned Assessing Officer thereafter took up scrutiny and framed his Printed from counselvise.com ITA No. 2542/Del/2024 19 assessment dated 29.12.2019 making section 56(2)(vii)(b) addition of Rs.418,66,34,625/- in the assessee’s hands. He rejected the assessee’s valuation of shares declared as per the Discount Cash- flow Method “DCF” and adopted the Fair Market Value “FMV” thereof allegedly going by Rule 11UA of the Act. The assessee filed it’s appeal before the CIT(A)/NFAC on 28.01.2020 against the Assessing Officer’s foregoing addition which stands upheld in the lower appellate findings vide order dated 27.03.2024, forming subject matter of challenge herein. 3. Next come all the intervening developments in the time span between the above assessment framed on 29.12.2019 and the impugned lower appellate order dated 27.03.2024. A perusal of the case file indicates that the learned PCIT-4, New Delhi had issued his section 263 revision show-cause dated 21.02.2020 to the assessee that the above statutory provision i.e. section 56(2)(vii)(b) itself would apply in an instance of issuance of shares to resident shareholders as against it’s non-resident investors herein. 4. The assessee next filed it’s section 154 rectification before the Assessing officer alleging an apparent mistake on records and Printed from counselvise.com ITA No. 2542/Del/2024 20 claimed that once it issued shares to non-residents only; and, therefore, section 56(2)(vii)(b) would not get attracted. Learned Assessing Officer thereafter passed his rectification order dated 09.05.2023 accepting the same and allowing the necessary relief of Rs.418,66,34,625/- to the assessee (paper book 157-159) as under: “Order u/s 154/ 143(3) of IT Act. The assessee filed the return of income on 30.10.2017 and further revised on 05.10.2018 at income of Rs. 280,18,34,380/- and claimed refund of Rs. 1,38,14,450/-. Subsequently, the case was selected for scrutiny and assessment was completed at an income of Rs. 715,27,29,060/- raising demand of Rs. 202,87,18,209/-. 02. The assessee has filed rectification application stating that the section 56(2)(viib) is applicable only in case of shares issued to a resident, whereas in the present case, the shares were issued to non-residents and hence addition u/s 56(2) (viib) of Rs. 418,66,34,625/- is not warranted and liable to be rectified being a mistake apparent from records. Further, it is also requested to allow the credit of DDT payment of Rs. 1,61,20,712/-made by the assessee which was not allowed during the assessment order. 03. From the assessment records it is seen that the assessee, during the course of assessment, has furnished the list of share capital issued during the year as under: Name Address No. of shares issued Face value Security premium Total amount PAN/Asst. Particulars Otter Limited IFS Court, Bank Street, 28 Cybercity Ebane, Mauritius 72201 1,08,97,75,590 10,89,75,590 556,10,24,358 566,99,948 AACCO2689J Credit Suissee (Singapore) Ltd. 1, Raffles Link, 03-01 South Lobby, Singapore-- 039393 25,36,998 2,53,69,980 129,46,30,079/- 132,00,00,059 AACCC7328N Link Investment Trust Q-8, Hauz Khas Enclave, New Delhi-110016 57,659 5,76,590 2,94,23,344 2,99,99,978 AABTL3833H TOTAL 1,34,92,216 13,49,22,160 688,50,77,825 701,99,99,985 Printed from counselvise.com ITA No. 2542/Del/2024 21 04. It is evident that the subscribers to the above-share capital were all non- residents on which provisions of section 56(2)(viib) is not applicable. Hence, as per the submission of the asseessee company and records available, the contention of the assessee is found to be in order. 4.1 It is further worthwhile to mention that assessee has filed show cause notice u/s 263 of the IT Act issued by PCIT-4 dated 21.02.2020 in which vide para 5, the following observation was given which is reproduced as under \"The above section clearly indicates that the provision is applicable to a transaction of issuance of shares to resident shareholders. However, the shares were issued to M/s Otter Ltd, M/s Credit Suise (Singapore) Limited and M/s Link Investment Trust. Out of these three shareholders, M/s Otter Ltd and M/s Credit Suise (Singapore) Limited are foreign companies having foreign addresses and therefore non-resident. Since, provision of section 56(2)(viib) of the Act are not applicable to aforesaid issue of shares by the assessee to non- resident, the invocation of provision of section 56(2) (viib) of the Act is beyond the scope of statutory mandate……..” 05. In view of the above, it is evident that the mistake is apparent from record which comes under the purview of the section 154 of the Act, hence, rectification u/s 154 is being passed after allowing the credit of taxes paid and as available in system/Form 26-AS. The revised computation of income is as under: Particular Income Total income assessed u/s 143(3) 715,27,29,060/- Relief allowed u/s 154 418,66,34,625/- Revised total income u/s 154/143(3) 296,60,94,435/- 06. Issue necessary forms.” This section 154 rectification has admittedly attained finality as on date. 5. We now come to the learned CIT(A)/NFAC lower appellate proceedings. The assessee appears to have apprised him about all the foregoing developments that the impugned section 56(2)(viib) Printed from counselvise.com ITA No. 2542/Del/2024 22 addition already stood deleted/rectified in above terms. The Revenue could hardly dispute that the learned CIT(A)/NFAC’s impugned lower appellate discussion has still upheld the impugned addition as under: “11.9 Decision: 11.9.1 Ld. FAO, in the course of assessment proceedings, issued a show-cause on 21.12.2019 asking the assessee as to why the value of equity share @ Rs.210 per share should not be adopted by duly following the Rule 11UA and also why the difference of Rs.310.30 per share (Rs.520.30-Rs.210) should not be treated as excess premium chargeable to tax u/s. 56(2) (viib). The Id. FAO also compared the actuals achieved at the end of FYs 2017-18 & 2018-19 with the projections made in respect of turnover & PBT and found that there was a huge deviation between the projections and the actuals. The FAO also commented that such projections were self-serving projections. 11.9.2. In the course of appellate proceedings, it is noticed that such favourable projections were made by the appellant-assessee only to justify the excess valuation of the shares and to issue such overvalued shares to companies whose addresses are in other countries and also to circumvent the provisions of section 56(2)(viib). It is evidenced, during the appellate proceedings, by the fact that M/s. Otter Ltd has immediately sold certain no of shares to an India based Indian resident entity. M/s. Link Investment Trust. It is clearly evident that if M/s. Link Investment Trust had bought the shares of the appellant- company at such a huge premium of Rs.310.30 (Rs.520.30-Rs.210) then the excess premium per share of Rs.310.30 would/should have been taxable u/s. 56(2)(viib). In order to avoid the taxation u/s.56(2)(viib) in the hands of the appellant-assessee company, it appears the assessee itself arranged a via route/round tripping of share purchase through an intermediary company. M/s Otter Ltd. 11.9.3. While the appeal proceedings were pending before the FAA, the JAO has undone the addition made of Rs.418,66,34,625 through a rectification order u/s.154 without examining the issue on hand and without establishing how it is a mistake apparent from record. Now let us examine in paragraphs 11.9.4 and 11.9.5 as to how and why the issue is not a mistake apparent from record. Printed from counselvise.com ITA No. 2542/Del/2024 23 11.9.4. As seen from the assessment order, the assessee has nowhere stated before the FAO that the excess premium was not taxable u/s. 56(2)(viib) by advancing the reason that the two subscribers viz. namely M/s. Otter Ltd M/s. Credit Suisse (Singapore) Ltd were non-resident Indian companies. When this fact is not emerging from the assessment order it is not known how the fact of residency of these two entities can be treated as mistake apparent from record. Further, an individual's residence can be ascertained from the passport and residency of an individual can thus be verified and established in such simple verification process. However, in the case of companies address alone of such companies cannot reveal the residency of those companies. In addition to the address what more need to be verified for establishing the residency of a company is to check the place of effective management u / s * 0.6(3) of the mu*T Act through proper verification of the direct and Indirect shareholding pattern of the company and such other transactional dealings, etc. No such verification was done by the JAO in rectification proceedings u/s. 154. However, any fact which can be established through a long process of verification and inquiries, cannot be a simple mistake and mistake apparent from record. 11.9.5. For a moment let us presume that the assessee claimed before the FAO during assessment proceedings that the excess premium was not taxable u/s. 56(2) (viib) giving the reason that the subscribing companies are not Indian resident companies. Despite such submission if addition was made u/s. 56(2) (vinb) by the FAO then it suggests that the FAO has duly applied his mind and taken a conscious decision of making addition u/s. 56(2) (viib). Thus in this case also, as opposed to the case in para 11.9.4 the claim of the assessee made before the FAO and/but ignored by the FAO cannot become a mistake apparent from the record. Thus, in either of these two cases (i.e. (a) where the assessee did not make a claim before FAO as discussed in para 11.9.4, or (b) where the assessee made a claim before FAO but ignored by FAO, as discussed in para 11.9.5) excess premium paid by M/s. Otter Ltd and M/s. Credit Suisse (Singapore) Ltd and assessed u / s * 0.56(2) (viib) cannot be the subject matter of rectification proceedings before the JAO. 11.9.6. To know about the place of effective mariagement of the subscribers, viz., M/s. Otter Ltd and M/s. Credit Suisse (Singapore) Ltd, the shareholding pattern and share movements of not only the appellant-assessee but of the subscribing entities should be examined in right perspective. While examining the place of effective management of the subscribing companies, many entities having cross-holdings in relation to the appellant-assessee came to the fore. Before mentioning about such entities, let us examine the meaning of place of effective management in true spirit of the Act. Printed from counselvise.com ITA No. 2542/Del/2024 24 As per Sec.6, place of effective management is defined as follows.... Explanation. For the purposes of this clause \"place of effective management\" means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made. This definition should be seen in broader perspective. What if an MNC has its associate companies in India? For that purpose, the word, substance mentioned in the explanation above is the essence of it. Place of effective management does not simply mean a static place where key management and commercial decisions are made. In the modern world of technological advancements and in the era of Information-Communication-Technology (ICT) revolution it is not necessary that the key management and commercial decisions are physically taken in India. What is in substance to be seen is whether the decisions taken have any impact on the Indian operations and whether the decisions taken have any nexus to Indian operations or Indian companies in an indirect manner. Further, it is also to be examined if the foreign residency principle of a company can be so arranged by issuing the shares first to a foreign registered company which thereafter issues to an Indian resident entity. Here what is to be seen is substance over form and spirit/intent of the legislation over the static letter/wording. The substance and spirit of the legislation has been clearly violated by the appellant-assessee by arranging share transactions in such a way that the shares issued by the appellant-company at a huge premium are ultimately bought by Indian resident individuals and Indian resident companies at lesser prices and also bought back by the appellant-company itself at lesser prices while in the process the higher premium gets offloaded in the appellant-company's books of account under \"Securities Premium Account\" and some of the intermediary investing companies exited with losses to themselves (which of course would be artificially utilised for set off against the true incomes) while with compensatory gain to the appellant-assessee in the form of huge premium without undergoing taxation u/s.56(2)(viib). However, clear finding could not be made by the FAA from the appellant- assessee as it did not utilise the VC opportunity given to it even on its own request. 11.9.6.1. Shareholding pattern and share movement pattern in respect of the two initial subscribers, viz., M/s. Otter Ltd and M/s. Link Investment Trust have been prepared in the following tabular format. Printed from counselvise.com ITA No. 2542/Del/2024 25 Printed from counselvise.com ITA No. 2542/Del/2024 26 Printed from counselvise.com ITA No. 2542/Del/2024 27 Printed from counselvise.com ITA No. 2542/Del/2024 28 Printed from counselvise.com ITA No. 2542/Del/2024 29 Further, as per the details submitted by the appellant-assessee before the JAO in rectification proceedings M/s.Otter Ltd, claimed to be non-resident company, initially purchased 57,659 no of shares for a total consideration of Rs.2,99,99,978 from the appellant-company along with purchase of another of 1,08,97,559 no of shares for a total consideration of Rs.566,99,99,948. However, the subscriber M/s. Otter Ltd offloaded/sold 57.659 no of shares to the resident Indian entity, M/s. Link Investment Trust. The reason given by the appellant in rectification proceedings before the JAO was that all the investors were non-resident Indian companies. But M/s. Link Investment Trust is resident Indian entity only. It is found in the appellate proceedings that M/s.Otter Ltd acted only as an intermediary for purchasing the shares at a huge premium so as to escape from invocation of Sec.56(2) (viib) r.w.s.6(3) of the Act. Thereafter within a short span of time, the so called non-resident company sold the shares to the resident Indian entity only. This is round tripping adopted by the appellant-company to avoid the invocation of Sec.56(2)(viib). When M/s.Link Investment Trust only had to buy the shares of the appellant-company why should M/s Otter Ltd buy first and sell the shares to M/s.Link Investment Trust, later? This has been done only to escape from Sec.56(2)(viib). Further analysis of the details of Investments (received by the appellant) as furnished by the appellant-company in the ITRs has been made and it is found that M/s.Link Investment Trust disappeared from FY 2017- 18/FY 2018-19 onwards, meaning that M/s.Link Investment Trust further offloaded/sold 57,659 no of shares to the beneficiaries linked to the promoter's group or to the persons under the control of the promoter's group or even to the benamis of the promoter's group. The share transfers have been very diligently Printed from counselvise.com ITA No. 2542/Del/2024 30 made from one entity to another entity/person through intermediaries by way of round tripping and layering. But the crux of the whole transaction is that the promoter's group or even the persons controlled by the promoter's group only purchased the 57,659 no of shares issued by the appellant-company. Also, the details of sale value per share between M/s. Otter Ltd and M/s.Link Investment Trust are not on record and also the details of sale value per share between M/s.Link Investment Trust and other unknown entities/persons are also not on record. 11.9.6.2 Peculiarly, it is also seen that the shareholding (in terms of number and value) by M/s. Otter Ltd and M/s. Credit Suisse kept on increasing year after year with surprisingly Increasing premium per share in later years with shockingly decreasing performance of the appellant-assessee on all fronts vis- à-vis the projected performance in valuation report. In such a scenario these subscribers appear to be the holders of shares for the ultimate benefit of M/s. Hero Fincorp Ltd as per the mandate of M/s. Hero Fincorp Ltd. 11.9.6.3. It appears that the root of all these investments with such huge disproportionate premiums is a joint effort of the appellant-assessee (M/s.Hero Fincorp Ltd) and M/s.ChrysCapital VII LLC. M/s.ChrysCapital LLC has its Indian associate enterprises, viz., M/s.Chrys Capital Investment Advisors (India) Pvt Itd. M/s.ChrysCapital Advisors LLP, M/s.Chrys Capital Associates LLP, M/s.Nuvo ChrysCapital Advisors Pvt Ltd. The domestic entities involved in share transfers after making Initial private placement to the two foreign entities viz., M/s.Otter Ltd (Mauritius) are many, viz., M/s.ChrysCapital Investment Advisors (India) Pvt Itd. M/s.ChrysCapital Advisors LLP, M/s.ChrysCapital Associates LLP, M/s.Nuvo Chrys Capital Advisors Pvt Ltd. Some of the shareholders of M/s. Hero Fincorp Ltd are also shareholders in M/s.ChrysCapital Investment Advisors (India) Pvt ltd, M/s. ChrysCapital Advisors LLP. M/s.ChrysCapital Associates LLP, M/s.Nuvo ChrysCapital Advisors Pvt Ltd. Thus M/s. Otter Ltd though has tax residency certificate in Mauritius but its place of effective management is located in India only through the influence of the common shareholders. Since M/s.Otter Ltd with residency certificate in Mauritius does nol have any transactional operations in Mauritius and also since it is only an investing entity the place of effective management (POEM) is to be taken as India only. However, to come to a conclusion on POEM, more details regarding share movements among the promoters are required. 11.9.6.4 In order to lax the excess premium received by a company in which public are not substantially interested, it is depicted pictorially below how section 56(2)(viib) operates in case the investing company is a resident company………….. Printed from counselvise.com ITA No. 2542/Del/2024 31 As shown in the diagram, if the resident Indian company (B) purchases the shares issued by the company (A) in excess of the premium as determined under Rule 11UA, such excess premium is taxable in India. However, to avoid taxation of excess premium in the hands of (A). A & B together can plan to introduce certain non-resident companies between (A) and (B) as shown below…………….. In the above example, one non-resident (NR) company and one resident (R) company are mentioned between (A) & (B) for purchase of the shares of A. for Illustrative purposes. In the instant case of the appellant-assessee the intermediate investing companies varied from one to many. In the time line, Printed from counselvise.com ITA No. 2542/Del/2024 32 initially the non-resident company, X buys the shares of (A) at a value much in excess of the premium determined as per Sec. 11UA so that on paper, such excess premium is not taxable in the hands of (A). Since the intention of the whole arrangement is not for the NR-company, X to hold the shares of (A) for eternity or for long, the intermediate NR-company. X offloads/transfers the shares of (A) either in favour of a R-company. Y or directly transfers the shares of (A) in favour of (B) either at a premium much less than or equal to the original premium charged by A. Finally, the promoters or their deputies (alternatively can be called as Benamis) buy some of the shares from the Resident Investing company. In the whole process the promoters and their deputies would acquire the shares at much lesser price than the initial issue price of (private placement). The final stroke of huge gains would be received by the issuing company when it issues IPO through bourses fixing the premium even in much excess of the private placement price. This whole episode as described in the preceding lines occurred in the case of the appellant-assessee company. These particulars are essential to adjudicate the grounds raised by the appellant. However, the details are not forthcoming from the appellant. 11.9.7. The appellant-assessee adopted colourable devices for circumventing the provisions of Sec.56(2) (viib) by organising the share issue first to M/s. Otter Ltd to the extent of 57,659 no of shares and thereafter organising the purchase transaction by M/s.Link Investment Ltd from M/s. Otter Ltd to the extent of 57,659 no of shares. The Hon'ble Supreme Court in the case of Mc Dowell & Co Ltd vs CTO, [1985] 154 ITR 148 (SC) held that it is not open to a taxpayer to so arrange his affairs as to reduce burden of taxation to minimum and such a process constitutes tax evasion and further held Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by restoring to dublous methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it. The Hon'ble Allahabad High Court held in the case of Kesharwani Zarda Bhandar vs CIT, [2013] 30 taxmann.com 387 that where disallowance of expenditure was a debatable issue, it was not a rectifiable mistake apparent from record so as to initiate rectification proceedings. In the instant case of the appellant also, the addition was made by the AO u/s.56(2)(viib) after elaborate discussion and after duly considering all the submissions of the appellant. An error of facts or figures only, in assessment can be rectified by the JAO later. However, even an error of judgment if exists in an assessment order cannot be rectified by the JAO u/s.154 because even such a judgment was made by the AO after following the due principles of natural justice and after confronting the assessee with so many facts and provisions of law. Following the ratio of Hon'ble High Court of Printed from counselvise.com ITA No. 2542/Del/2024 33 Allahabad in the case of Kesharwani Zarda Bhandar vs CIT, [2013] 30 taxmann.com 387 it is now held that the JAO committed a grave mistake of rectifying the Order passed by NFAC without allowing the natural process of appeal. The rectification order u/s.154 is non-est in law because the complex issues of assessing the share premium u/s.56(2)(viib) r.w.r.11UA can be fathomed and unwound only when the whole chain of share transactions is carefully perused, analysed and applied to the provisions of law; whereas no such exercise has been done by the JAO u/s.154 proceedings. The JAO cannot undo the whole assessment exercise through a simple 2 page rectification order. If the JAO had confronted the assessee on the submissions made u/s.154 before her/him, s/he could have easily understood that the issue was not simple as projected by the assessee. If confronted on facts and provisions of law, the issue of rectification as was projected in rectification petition would no more be a mistake apparent from record for the reasons discussed by the FAO in assessment order and for the reasons and arguments advanced by the FAA in this appeal order. 11.9.8. The powers of the first appellant authority (FAA) are co-terminus with the powers of the AO as per the decision of Hon'ble Supreme Court in Jute Corporation of India Ltd vs CIT [1991] 187 ITR 688. Further It was held in the case of Yogendra Prasad Santosh Kumar vs CIT [2014] 44 taxmann.com 299 (All HC) that \"there is no provision in Income Tax Act which will permit withdrawal of an appeal, once it is filed and registered\". Also it was held in \"M.Loganathan vs ITO [2012] 25 taxmann.com 174 (Mad HC)\" and in \"Jagmondas Gokaldas vs CWT [1963] 50 ITR 578 (Bom HC) that the appellant has no right to withdraw appeal without the permission of the appellate authority. Moreover, the appellant has not specifically given any letter of withdrawal of this ground of appeal. However, the appellant-assessee in its letter dated 08- 03-2024 stated as follows... \"It is respectfully reiterated that in view of rectification order dated 09.05.2023 passed by the assessing officer, grounds of appeal Nos. 8 to 8.6 raised by the appellant challenging the addition made under section 56(2)(viib) of the Act has been rendered infructuous. It is, therefore, respectfully submitted that there is no warrant whatsoever to make enquiries into the said issue.\". There is no mention of the withdrawal of the ground of appeal. Even if it is presumed that the appellant wanted to convey about the withdrawal of appeal in an indirect manner, it is now held by the undersigned that the appellant has no right of withdrawal of appeal in view of many facts coming to light. The undersigned holds that the addition u/s.56(2)(vilb) made in the assessment order by FAO/NFAC with proper reasoning cannot be deleted summarily in the rectification order by the JAO purely based on the submissions of the appellant without carrying out any verification of the submissions. Printed from counselvise.com ITA No. 2542/Del/2024 34 The undersigned faces difficulty in expressing his opinion and giving judgment on merits as the appellant failed to furnish the full facts before the FAA and therefore the undersigned refrains from giving any judgment except to the extent that the Rectification Order passed u/s.154 by the JAO is inappropriate and against the law. In view of the foregoing discussion, the ground of appeal raised against the addition made u/s.56(2)(vilb) on this issue is not adjudicated since full facts are needed for proper adjudication. In other words, this ground is dismissed as not adjudicated. Therefore, the addition of Rs.418,66,34,625 u/s.56(2)(viib) made by the FAO/NFAC is fully restored in its entirety by treating the Rectification Order dated 17th Jan 2020 passed u/s.154 by the JAO as another mistake and thus as non-est while at the same time not adjudicating the grounds of appeal raised by the appellant against the addition u/s.56(2) (viib), for want of facts. The Id.JAO is directed to give appeal effect to this appeal order by considering the assessment order passed by FAO/NFAC and ignoring the rectification order passed by the JAO.” This leaves the assessee aggrieved. 6. It is in this factual background that it would indeed be appropriate at this stage to refer to section 56(2)(viib) itself; as it read in the impugned assessment year 2017-18, as under: “Where a company, not being a company in which the public are substantially interested in any previous year receives in any previous year, from any person being a non-resident.” 7. It next transpires that the legislature has subsequently omitted the above statutory expression “being a non-resident” from the statute itself vide Finance Act, 2023 w.e.f. 01.04.2024, whereas, the Printed from counselvise.com ITA No. 2542/Del/2024 35 impugned assessment before is 2017-18 only. The Revenue could further not dispute that the Explanatory Memorandum to Finance Act, 2023 has made it clear that the above statutory omission is effective from the 1st day of April, 2024 and to be applied in relation to assessment year 2024-25 and subsequent assessment years. 9. It is thus apparent that once the assessee had issued it’s shares to the non-resident companies only, learned CIT(A)’s action upholding the impugned section 56(2)(viib) addition; whether or not the Assessing Officer rectification is considered, could not be held as sustainable in law by any stretch of imagination. 10. The Revenue vehemently argues that the given fact that the CIT(A) was already seized of the matter, the Assessing Officer’s action accepting the assessee’s section 154 rectification application (supra) has rightly been ignored which has led him to confirm the impugned addition. It is noticed in this backdrop that there is no such bar in section 154 of the Act that no rectification would be permissible during the pendency of any appellate proceedings, going by the principles of stricter interpretation as per Commissioner Vs. Dilip Kumar & Co. (2018) 9 SCC 1 (SC) (FB). More particularly, in light of Printed from counselvise.com ITA No. 2542/Del/2024 36 the fact that the revisional authority i.e. PCIT-4 (supra) had already treated the assessee’s investors as non-residents only. 11. The Revenue’s next argument places a very strong reliance on the CIT(A)/NFAC’s detailed discussion highlighting the assessee’s alleged “round-tripping” and other fraudulent malpractices (supra). The same hardly carries any substance once it is an addition made u/s 56(2)(viib) application in a case wherein the company concerned fails to justify it’s share-premiums, as per the prescribed twin methods under Rule 11UA of the Income Tax Rules. Case law CIT Vs. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC); CIT Vs. Sardari Lal & Co. (2001) 251 ITR 864 (Del.) and CIT Vs. Union Tyres (1999) 240 ITR 556 (Del.) have also settled the issue of “enhancement” jurisdiction u/s 251(1)(a) of the Act that any head of income cannot be changed in the lower appellate proceedings. 12. There is yet another equally important aspect of the matter as well. I am of the considered view that the given the fact that the Assessing Officer has himself found merit in the assessee’s case; going by section 263 revision proceedings and rectified the impugned addition (supra), the Revenue could not even be treated as an Printed from counselvise.com ITA No. 2542/Del/2024 37 aggrieved party as per case law CIT Vs. D.M. Prunesh (2020) 426 ITR 169 (Kar)(HC) and Smt. B. Jayalakshmi vs. ACIT (2018) 96 taxmann.com 486 (Mad.). It is in the light of the preceding detailed discussion that I am of the considered view that restoring section 56(2)(viib) addition issue back to the CIT(A)/NFAC; for yet another round of proceedings., after the Assessing Officer has already passed the rectification in assessee’s favour, would be nothing but gross abuse of process of law, which could not be agreed upon. I accordingly deem it appropriate to accept the assessee’s instant substantive ground nos. 12 to 20 and delete section 56(2)(vii)(b) addition of Rs. 418,66,34,625/- confirmed by the CIT(A)/NFAC, in very terms. Ordered accordingly. 13. This assessee’s appeal is partly allowed to the extent indicated hereinabove. Printed from counselvise.com ITA No. 2542/Del/2024 38 PER : MAHAVIR SINGH, VICE PRESIDENT Order under Section 255(4) of the Income-tax Act, 1961 By the order of President, ITAT vide U.O. No.F.28-Cent.Jd(AT)/2025 dated 28th April, 2025, the undersigned has been nominated to adjudicate the difference of opinion between the learned Judicial Member and learned Accountant Member on the following question:- “1. Whether, in the facts and circumstances of the case, learned CIT(A)/NFAC’s action upholding section 56(2)(vii)(b) addition of Rs.418,66,34,625/- in assessee’s hands, deserves to be reversed?” 2. Brief facts are that the assessee filed its return of income on 30th October, 2017, which was revised on 5th October, 2018. The assessee’s case was selected for scrutiny through CASS by issuing notice under Section 143(2) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 2nd September, 2018. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has issued 1,34,92,216 number of equity shares at the rate of `520.30 each at a premium of `510.30 per share. The Assessing Officer required the assessee to explain vide show cause notice dated 21st December, 2019, the basis of premium charged and fair market value of unquoted equity shares determined by it. The Assessing Officer required the assessee to explain as to why as per Rule 11UA of the Income-tax Rules, 1962 (hereinafter referred to as ‘the Rules’), the value of equity shares issued at a price of `520.30 per share be not taken at `210.00 per share and why the difference of premium thus received should not be added back to the income of the assessee. The assessee explained that it has valued the fair market value of shares on the basis of DCF method but the Assessing Officer was not convinced and he carried out his valuation and determined the fair market value of the equity shares at `210 per share and thereby difference of premium of `310.30 per share was valued at `418,66,34,625/- and added back to the income of the assessee in terms of Printed from counselvise.com ITA No. 2542/Del/2024 39 Section 56(2)(viib) of the Act. Learned CIT(A) also confirmed the action of the Assessing Officer. Aggrieved, the assessee came in appeal before the Tribunal. 3. The question reproduced above has been referred to the Third Member on a difference of opinion between learned Judicial Member and learned Accountant Member. To decide the question referred above, first of all, I want to list out the dates and events which are important for adjudication of the question referred:- Date Particulars 15.09.2016 During the relevant previous year, the appellant had issued 1,34,92,216 equity shares of face value of Rs.10 per share at a premium of Rs.510.30 per share, i.e. @ 520.30 per share to following non-residents: Shares Amount (Rs.) Otter Limited, Mauritius 1,09,55,218 569,99,99,925 Credit Suise (Singapore) Ltd. 25,36,998 132,00,00,059 03.10.2019 & 06.12.2019 The assessee filed following details/documents before AO: (a) Details of amounts received along with details of non- resident share applicants; (b) List of Allottees (c) Valuation Report as per Rule 11UA substantiating fair valuation of issuance of shares as per DCF method (d) Relevant extracts of the Tax Audit Report for AY 2017-18 indicating that nothing is taxable under section 56(2)(viib). 29.12.2019 In the assessment completed u/s 143(3), AO, inter alia, made addition of Rs.418,66,34,625/- u/s 56(2)(viib) as under: - Issue price : Rs.520.30 per share - FMV determined by AO : Rs.210 per share Printed from counselvise.com ITA No. 2542/Del/2024 40 - Excess premium alleged : Rs.310.30 per share Pertinently AO: (a) failed to appreciate that section 56(2)(viib) is, per se, not applicable to receipt of share capital from non-residents; (b) made addition alleging that there is variation between projections for DCF valuation with actual results; (c) proceeded to apply Net Asset Value (‘NAV’) method. 17.01.2020 Assessee filed rectification application u/s 154, inter-alia, submitted that the provisions of section 56(2)(viib) are, per se, not applicable on non-residents along with following: (a) Particulars/details of the non-resident subscribers, already on record; and (b) Foreign inward remittance certificates (FIRC), further substantiating remittances from outside India; 28.01.2020 Appeal filed before CIT(A) on various issues, including above issue [rectification application was pending] 21.02.2020 Show cause notice issued by the PCIT-04, Delhi u/s 263, inter-alia, observing as under:- - CIT noted, “Out of these three shareholders, M/s Otter Limited and M/s Credit Suisse (Singapore) Limited are foreign companies having foreign addresses and therefore non-resident.” - CIT further observed, “Since, provisions of Section 56(2)(viib) of the Act are not applicable to the aforesaid issue of shares by the assessee to non-residents, the invocation of provisions of Section 56(2)(viib) of the Act is Printed from counselvise.com ITA No. 2542/Del/2024 41 beyond the scope of statutory mandate. Consequently, addition made u/s 56(2)(viib) is not sustainable……..” 09.05.2023 AO passed rectification order u/s 154 rectifying assessment order dated 29.12.2019 taking note of following: (a) Assessment record shows subscribers are non-residents; (b) Pr. CIT in 263 proceedings noted that section 56(2)(viib) has been wrongly applied; and (c) consequently, deleted addition made u/s 56(2)(viib). Most importantly, as a consequence of rectification order: (a) assessment order stood rectified to the extent of merger of the rectification order and consequently, the addition u/s 56(2)(viib) of the Act stood deleted/became non-existent; (b) the ground raised by the assessee before CIT(A) challenging addition u/s 56(2)(viib) was rendered infructuous. Proceedings before CIT(A): 01.03.2021 Detailed written submissions filed 22.05.2023 Assessee pointed out that assessment order rectified 31.01.2024 05.03.2024 Despite rectification order passed by AO, CIT(A) issued notices directing the assessee to: (a) upload documents basis which rectification order passed; (b) prove that subscribers are non-resident as per section 6; (c) explain how in view of alleged related entities of non- resident subscribers, POEM may of the non-resident subscribers may not be regarded to be in India. 09.02.2024 & 19.02.2024 Assessee, under protest, filed following documents: (a) Copy of SCN issued by PCIT u/s 263 noting that the subscribers are non-residents and section 56(2)(viib) is not applicable; Printed from counselvise.com ITA No. 2542/Del/2024 42 & 08.03.2024 (b) Detailed reply on non-applicability of section 6 [POEM test vis-a-vis DTAA]; (c) Tax Residency Certificates (TRCs) of Credit Suise (Singapore) Ltd. & Otter Limited, Mauritius; (d) ITAT Order in the case Credit Suise (Singapore) Ltd. for AY 2017-18, noting that the assessee is non-resident; (e) Intimation u/s 143(1) in the case of Otter Limited, Mauritius 4. I have heard learned Counsel for the assessee as well as learned CIT(DR). I have perused the case records including the assessment order, the order of the learned CIT(A), the rectification order passed by the AO, orders passed by the Learned Brother Members, Paper Book filed by the Assessee and the written Submissions filed by the learned Counsel for the assessee as well as learned CIT(DR). The above question raised is argued on three facets. 5. To adjudicate this question, the first facet argued by the Assessee is that once the assessment order passed by the AO is rectified under Section 154 of the Act deleting the addition made by the AO on account of share premium under Section 56(2)(viib) of the Act, is it open to CIT(A) to adjudicate on the same issue as the same was rendered infructuous? 5.1 Learned Counsel for the assessee, first of all, drew my attention to the assessment order framed wherein, the Assessing Officer has made the addition on differential premium of `310.30 per share against the total shares issued of 1,34,92,216 in numbers for a total amount of `418,66,34,625/- to the returned income of the assessee under Section 56(2)(viib) of the Act vide assessment order dated 29.12.2019 passed under Section 143(3) of the Act. The assessee filed rectification application dated 17.01.2020 under Section 154 of the Act submitting that the provisions of Section 56(2)(viib) of the Act are, per se, not applicable on non-residents. Assessee also filed appeal with the CIT(A) on 28.01.2020 against the assessment order passed under Section 143(3) of the Act. In this appeal filed before the CIT(A) on various issues including the above issue as raised in rectification application, which was pending adjudication. The AO Printed from counselvise.com ITA No. 2542/Del/2024 43 rectified the assessment order vide his rectification order passed under Section 154 of the Act dated 09.05.2023 by taking note of the fact that the assessment record shows that subscribers are non-residents and also noted the fact recorded in the proceedings of PCIT in revision under Section 263 of the Act, whereby the PCIT noted that Section 56(2)(viib) of the Act is not applicable to the issue of shares to non-residents by the assessee and consequently, the addition made by the Assessing Officer under Section 56(2)((viib) of the Act is not sustainable. Accordingly, the Assessing Officer passed the rectification order under Section 154 of the Act and deleted the addition made under Section 56(2)(viib) of the Act. 6. Learned Counsel for the assessee drew my attention to the rectification order passed by the ACIT, Circle-11(1), Delhi dated 09.05.2023, whereby he deleted the addition by observing in para nos.3 to 5 as under: - “03. From the assessment records, it is seen that the assessee during the course of assessment, has furnished the list of share capital issued during the year as under: - Name Address No. of shares issued Face value Security premium Total amount PAN/Asstt. Particulars Otter Limited IFS Court, Bank Street, 28, Cybercity Ebane Mauritius 72201 1,08,97,559 10,89,75,590 556,10,24,358 566,99,99,948 AACC02689J Credit Suisse (Singapor e Limited) 1, Raffles Link, 03-01, South Lobby, Singapore- 039393 25,36,998 2,53,69,980 129,46,30,079 132,00,00,059 AACCC7328B Link Investmen t Trust Q-8, Hauz Khas Enclave, New Delhi – 16 * 57,659 5,76,590 2,94,23,388 2,99,99,978 AABTL3833H Total 1,34,92,216 13,49,22,160 688,50,77,825 7,01,99,99,985 Printed from counselvise.com ITA No. 2542/Del/2024 44 * Originally issued by Otter Limited who subsequently sold it to Link Investment Trust. 04. It is evident that the subscribers to the above share capital were all non-residents on which provisions of section 56(2)(viib) is not applicable. Hence, as per the submission of the assessee company and records available, the contention of the assessee is found to be in order. 4.1 It is further worthwhile to mention that assessee has filed show cause notice u/s. 263 of the I.T. Act by PCIT-4, dated 21.02.2020 in which vide para 5, the following observation was given which is reproduced as under:- “The above section clearly indicates that the provision is applicable to a transaction of issuance of shares to resident shareholders. However, the shares were issued to M/s Otter Ltd, M/s Credit Suisse (Singapore) Limited and M/s Link Investment Trust. Out of these three shareholders, M/s Otter Ltd., M/s Credit Suisse (Singapore) Limited are foreign companies having foreign addresses and therefore non –resident. Since, provision of section 56(2)(viib) of the Act are not applicable to aforesaid issue of shares by the assessee to non-resident, the invocation of provision of section 56(2)(viib) of the Act is beyond the scope of statutory mandate…..” 05. In view of the above, it is evident that the mistake is apparent from record which comes under the purview of section 154 of the Act, hence, rectification u/s. 154 is being passed after allowing the credit of taxes paid and as available in system / form 26-AS. The revised computation of income is as under:- Particular Income Total income assessed u/s 143(3) 715,27,29,060/- Relief allowed u/s 154 418,66,34,625/- Revised total income u/s 154 / 143(3) 299,60,94,435/- 7. Subsequently, learned Counsel for the assessee also drew my attention to para 11.9.4 and 11.9.5 of the CIT(A)’s order, whereby he admitted that two subscribers namely, Otter Limited, Mauritius and Credit Suisse (Singapore) Ltd. were non-residents Indian Companies. But he contested on the issue that no such verification was done by the Jurisdictional Assessing Officer (JAO) in rectification proceedings under Section 154 of the Act i.e., establishing the residency of Printed from counselvise.com ITA No. 2542/Del/2024 45 the company to check the Place of Effective Management (POEM) u/s. 6(3) of the Act for proper verification. For this, he observed in para 11.9.4 and 11.9.5 as under:- “11.9.4. As seen from the assessment order, the assessee has nowhere stated before the FAO that the excess premium was not taxable u/s. 56(2)(viib) by advancing the reason that the two subscribers viz. namely M/s. Otter Ltd., M/s. Credit Suisse (Singapore) Ltd were non-resident Indian companies. When this fact is not emerging from the assessment order it is not known how the fact of residency of these two entities can be treated as mistake apparent from record. Further, an individual's residence can be ascertained from the passport and residency of an individual can thus be verified and established in such simple verification process. However, in the case of companies address alone of such companies cannot reveal the residency of those companies. In addition to the address what more need to be verified for establishing the residency of a company is to check the place of effective management u/s.6(3) of the I-T Act through proper verification of the direct and indirect shareholding pattern of the company and such other transactional dealings, etc. No such verification was done by the JAO in rectification proceedings u/s. 154. However, any fact which can be established through a long process of verification and inquiries, cannot be a simple mistake and mistake apparent from record. 11.9.5. For a moment let us presume that the assessee claimed before the FAO during assessment proceedings that the excess premium was not taxable u/s. 56(2)(viib) giving the reason that the subscribing companies are not Indian resident companies. Despite such submission if addition was made u/s. 56(2)(viib) by the FAO then it suggests that the FAO has duly applied his mind and taken a conscious decision of making addition u/s. 56(2)(viib). Thus in this case also, as opposed to the case in para 11.9.4 the claim of the assessee made before the FAO and/but ignored by the FAO cannot become a mistake apparent from the record. Thus, in either of these two cases (i.e. (a) where the assessee did not make a claim before FAO as discussed in para 11.9.4, or (b) where the assessee made a claim before FAO but ignored by FAO, as discussed in para 11.9.5) excess premium paid by M/s. Otter Ltd and M/s. Credit Suisse (Singapore) Ltd and assessed u/s.56(2)(viib) cannot be the subject matter of rectification proceedings before the JAO.” 7.1 Finally, the CIT(A) decided the issue on rectification carried out by the AO u/s. 154 of the Act vide para no.11.9.7 and 11.9.8 by holding that the addition u/s.56(2)(viib) made in the assessment order by FAO/NFAC with proper reasoning cannot be deleted summarily in the Printed from counselvise.com ITA No. 2542/Del/2024 46 rectification order by the JAO purely based on the submissions of the assessee without carrying out any verification of the submissions as under:- “11.9.7. The appellant-assessee adopted colourable devices for circumventing the provisions of Sec.56(2)(viib) by organising the share issue first to M/s. Otter Ltd to the extent of 57,659 no of shares and thereafter organising the purchase transaction by M/s. Link Investment Ltd from M/s. Otter Ltd to the extent of 57,659 no of shares, The Hon'ble Supreme Court in the case of Mc Dowell & Co Ltd vs CTO, [1985] 154 ITR 148 (SC) held that it is not open to a taxpayer to so arrange his affairs as to reduce burden of taxation to minimum and such a process constitutes tax evasion and further held Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by restoring to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it. The Hon'ble Allahabad High Court held in the case of Kesharwal Zarda Bhandar vs CIT, [2013] 30 taxmann.com 387 that where disallowance of expenditure was a debatable issue, it was not a rectifiable mistake apparent from record so as to initiate rectification proceedings. In the instant case of the appellant also, the addition was made by the AO u/s.56(2)(viib) after elaborate discussion and after duly considering all the submissions of the appellant. An error of facts or figures only, in assessment can be rectified by the JAO later, However, even an error of judgment If exists in an assessment order cannot be rectified by the JAO u/s.154 because even such a judgment was made by the AQ after following the due principles of natural justice and after confronting the assessee with so many facts and provisions of law. Following the ratio of Hon'ble High Court of Allahabad in the case of Kesharwani Zarda Bhandar vs CIT, [2013] 30 taxmann.com 387 it is now held that the JAO committed a grave mistake of rectifying the Order passed by NFAC without allowing the natural process of appeal. The rectification order u/s. 154 is non-est in law because the complex Issues of assessing the share premium u/s.56(2)(viib) r.w.r. 11UA can be fathomed and unwound only when the whole chain of share transactions is carefully perused, analysed and applied to the provisions of law; whereas no such exercise has been done by the JAO u/s. 154 proceedings. The JAO cannot undo the whole assessment exercise through a simple 2 page rectification order. If the JAO had confronted the assessee on the submissions made u/s.154 before her/him, s/he could have easily understood that the issue was not simple as projected by the assessee. If confronted on facts and provisions of law, the issue of rectification as was projected in rectification petition would no more be a mistake apparent from record for the reasons discussed by the Printed from counselvise.com ITA No. 2542/Del/2024 47 FAO in assessment order and for the reasons and arguments advanced by the FAA in this appeal order. 11.9.8. The powers of the first appellant authority (FAA) are co-terminus with the powers of the AO as per the decision of Hon'ble Supreme Court in Jute Corporation of India Ltd vs CIT [1991] 187 ITR 688. Further It was held in the case of Yogendra Prasad Santosh Kumar vs CIT [2014] 44 taxmann.com 299 (All HC) that \"there is no provision in Income Tax Act which will permit withdrawal of an appeal, once it is filed and registered. Also it was held in \"M.Loganathanvs ITO [2012] 25 taxmann.com 174 (Mad HC)\" and in \"Jagmondas Gokaldas vs CWT [1963) 50 ITR 578 (Bom HC) that the appellant has no right to withdraw appeal without the permission of the appellate authority. Moreover, the appellant has not specifically given any letter of withdrawal of this ground of appeal. However, the appellant-assessee in its letter dated 08-03-2024 stated as follows... \"It is respectfully reiterated that in view of rectification order dated 09.05.2023 passed by the assessing officer, grounds of appeal Nos. 8 to 8.6 raised by the appellant challenging the addition made under section 56(2)(viib) of the Act has been rendered infructuous. It is, therefore, respectfully submitted that there is no warrant whatsoever to make enquiries into the said issue.\". There is no mention of the withdrawal of the ground of appeal. Even if it is presumed that the appellant wanted to convey about the withdrawal of appeal in an indirect manner, it is now held by the undersigned that the appellant has no right of withdrawal of appeal in view of many facts coming to light. The undersigned holds that the addition u/s.56(2)(viib) made in the assessment order by FAO/NFAC with proper reasoning cannot be deleted summarily in the rectification order by the JAO purely based on the submissions of the appellant without carrying out any verification of the submissions. The undersigned faces difficulty in expressing his opinion and giving judgment on merits as the appellant failed to furnish the full facts before the FAA and therefore the undersigned refrains from giving any judgment except to the extent that the Rectification Order passed u/s.154 by the JAO is inappropriate and against the law. In view of the foregoing discussion, the ground of appeal raised against the addition made u/s.56(2)(vilb) on this Issue is not adjudicated since full facts are needed for proper adjudication. In other words, this ground is dismissed as not adjudicated. Therefore, the addition of Rs.418,66,34,625 u/s.56(2)(viib) made by the FAO/NFAC is fully restored in Its entirety by treating the Rectification Order dated 17th Jan 2020 passed u/s.154 by the JAO as another mistake and thus as non-est while at the same time not adjudicating the grounds of appeal raised by the appellant against the addition u/s.56(2)(viib), for want of facts. Printed from counselvise.com ITA No. 2542/Del/2024 48 The Id.JAO is directed to give appeal effect to this appeal order by considering the assessment order passed by FAO/NFAC and ignoring the rectification order passed by the JAO.” 8. In view of the above facts, Learned Counsel for the assessee made arguments that there is no bar in AO passing the rectification order under Section 154 of the Act during pendency of the appeal before the learned CIT(A) and once the Assessing Officer accepted the position by deleting the addition by exercising the jurisdiction u/s 154 of the Act, Revenue no longer can be treated as aggrieved party. He argued that once the rectification order is passed by the Assessing Officer by putting a closure of the matter, learned CIT(A) does not have any jurisdiction to decide the said issue particularly neither party i.e., the assessee or the Revenue are aggrieved. Undisputedly, the two subscribers i.e., Otter Limited, Mauritius and Credit Suisse (Singapore) Ltd. were foreign companies who remitted money in foreign currency which is supported by certificate issued by the (a) Inland Revenue Authority of Singapore and (b) Mauritius Revenue Authority. He argued that the rectification order got merged with the assessment order and as a result thereof, grounds raised by the assessee before the learned CIT(A) ceased to exist on the date of adjudication of this appeal. Accordingly, he argued, that grounds raised before the learned CIT(A) in respect to this issue was rendered infructuous and hence, the learned CIT(A) had no jurisdiction whatsoever to deal with this issue. He further stated that undisputedly the rectification order has attained finality and there is no change to the same as on date by way of any provisions under the Act. He further argued that even the PCIT, vide show cause notice dated 21.02.2020 while initiating the revision proceedings under Section 263 of the Act, issued show cause notice and noted that these two firms are non-residents, the assessment framed under Section 143(3) of the Act is erroneous limited to the addition under Section 56(2)(viib) of the Act. The relevant contents of the show cause referred by the learned Counsel for the assessee vide para no.3 to 6 read as under:- “3. During the course of the assessment proceeding, it was found that the assessee have issued 13491116 number of equity shares at the rate of Rs.520.30 each at a premium of Rs.510.30 per share. On the other side, as per Rule 11UA of the Income Tax Rule, the value of equity shares turns out be Rs.210 per share. The projections used by the assessee company in computing FMV of share as per DCT Printed from counselvise.com ITA No. 2542/Del/2024 49 method were contradictory to the actual achieved by the assessee in subsequent year. Hence, the DCF method adopted by the assessee was rejected by the AO and the difference of premium of Rs. 310.30 per share against local shares issued of 13492216 in number i.e. Rs.418,66,34,625/- was added to the income of the assessee as per the provisions of Section 56(2)(viib) of the Act. 4. Section 56(2)(viib) states as under:- “In particular and without prejudice to the generally of the provisions of sub- section (1), the following income shall be chargeable to income tax under the head “income from other source”, namely: “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 shares as exceeds the fair market of the shares. 5. The above section clearly indicates that the provision is applicable to a transaction of issuance of shares to resident shareholders. However, the shares were issued to M/s Otter Limited, M/s Credit Suisse (Singapore) Limited and M/s Link Investment Trust. Out of these shareholders, M/s Otter Limited and M/s Credit Suisse (Singapore) Limited are foreign companies having foreign addresses and therefore non-resident. Since, provision of Section 56(2)(viib) of the Act are not applicable to the aforesaid issue of shares by the assessee to non-existent, the invocation of provisions of Section 56(2)(viib) of the Act is beyond the scope of statutory mandate. Consequently, addition made u/s. 56(2)(viib) is not sustainable. The addition made by the AO u/s. 56(2)(viib) of the Act. 6. In view of the facts and circumstances as narrated above, I consider that the assessment order dated 29.12.2019 passed u/s. 143(3) of the Income Tax Act, 1961 passed is erroneous limited to the addition u/s. 56(2)(viib) of the Income Tax Act, 1961 in so far as prejudicial to the interest of revenue, to the above extent for which action u/s. 263 of the Act is warranted. You are, therefore, directed to show cause as to why the assessment order dated 29.12.2019 should not be revised on the issue discussed above.” 9. Hence, learned Counsel for the assessee argued that only on this facet, the order of the CIT(A) be set aside and appeal on this issue be allowed. 10. On the other hand, learned CIT(DR) argued that the addition made by the AO under Section 56(2)(viib) of the Act is after elaborate discussions and after duly considering the Printed from counselvise.com ITA No. 2542/Del/2024 50 submissions of the assessee, and the rectification order passed by the Assessing Officer under Section 154 of the Act is non-est in law, because the complex issue of receipt of share premium under Section 56(2)(viib) of the Act read with Rule 11UA by the assessee can only be analyzed by chain of transactions and after carefully perused, analyzed and considered after application of mind, whereas in the proceedings under Section 154 of the Act, Assessing Officer has not carried out any exercise of verification. He argued that the JAO, while exercising power under Section 154 of the Act, cannot undo the whole assessment proceedings simplicitor on the basis that the addressees of the assessee are in foreign territory. The learned CIT(DR) also argued that the appeal once filed by the Assessee has to be decided on merits because the duty cast upon the appellate authority to consider not only the question of interest of assessee, but also interest of Revenue. She argued that the assessee cannot, as a matter of right, claim to withdraw the appeal or argue and the issue has become infructuous in view of the rectification carried out by the AO under Section 154 of the Act. She argued that the power of withdrawal of appeal is linked with the power of enhancement with the result that neither the withdrawal by the assessee nor ex-parte dismissal in default is available to the CIT(A). In this case, she argued that learned CIT(A) has rightly adjudicated the issue on this aspect and considered that the relevant details were not available before the AO in regard to the status of the assessee and hence, held that the rectification proceedings are invalid. She relied upon the decision of the Hon’ble Madras High Court dated 29.04.2025 in the case of Prima Urban Development India Ltd. Vs. ACIT (2025) 174 taxmann.com 201 (Madras). 11. Learner DR further took me through the submissions filed by the AO and argued that no verification has at all been carried out in this case. She argued that in this case, relief was granted under Section 154 of the Act and as such, if factual verification was not possible, then the rectification is totally vitiated. She contended that admittedly, no verification was, and could have been done in the proceedings under Section 154 of the Act as in the present case. When asked as to what is the nature of the verification, the AO would like to carry out, she argued that the basic facts relating to these two subscribers, namely, Otter Limited and Credit Suisse (Singapore) Limited that these two parties are non-residents or not, cannot be verified from the Printed from counselvise.com ITA No. 2542/Del/2024 51 assessment records. She argued that simplicitor from the addresses that these are situated out of India does not infer that these companies are non-residents. 12. I have gone through the entire rectification order and the order of the CIT(A) as substantially reproduced by me above. I am of the view that the rectification order passed under Section 154 of the Act and the original assessment framed under Section 143(3) of the Act were for all practical purposes, and also for all legal purposes stood merged and the addition made by the AO in the assessment order passed under Section 143(3) of the Act in respect of the share premium under Section 56(2)(vii) of the Act stands extinguished in terms of order passed under Section 154 of the Act. To this extent, the grievance raised by the assessee in appeal before the CIT(A), against the deletion on the said addition, in rectification proceedings, becomes academic and infructuous. I noted that the CIT(A) disposed of this appeal and he proceeded to adjudicate this very issue, which was subject matter of rectification under Section 154 of the Act, the course of action of the CIT(A), in my considered view, was not permissible under the provisions of the Act. Further, I note that once the rectification order is passed under Section 154 of the Act, the grievance of the assessee does not survive because rectification order has been passed giving relief on that account by some other authority i.e., the Assessing Officer, it is not open for the CIT(A) to adjudicate that grievance. Once the addition on share premium, doubted by the AO under Section 56(2)(viib) of the Act has been deleted by the AO while acting under Section 154 of the Act which stood merged in the assessment order, it is not open for the CIT(A) to examine the merits of such addition and declare his opinion on the same. This view of mine is supported by the identical adjudication of issue and principle laid down by the Mumbai ‘E’ Bench of ITAT in the case of Tata Education and Development Trust Vs. ACIT (2020) 117 Taxmann.com 946 (Mumbai-Trib.), wherein it is held as under:- “23. The rectification order so passed and the original assessment order were, for all practical and for all legal purposes, stood merged, and the disallowance thus ceased to exist as on 8th December 2015. To this extent, grievances raised in the appeals before the CIT(A), against the aforesaid disallowances, became wholly academic and infructuous. Yet, on 29th December 2017, when learned CIT(A) disposed of these appeals, he proceeded to adjudicate on these issues. That course Printed from counselvise.com ITA No. 2542/Del/2024 52 of action, in our considered view, was not permissible. When the very disallowance of exemption, which was agitated in appeal, stood deleted, it was not open to the learned CIT(A) to adjudicate on the correctness of the disallowance. While on this aspect of the matter, we may usefully refer to the following observations made by Hon'ble Gujarat High Court, in the case of Nitin Babubhai Rohit v Dharmendra Vishnubhai Patel [(2018) 409 ITR 276 (Guj.)] wherein Their Lordships have, inter alia, observed as follows: “.......we find it somewhat unusual to note that the Commissioner (Appeals) even after the revisional authority had set aside the order of penalty, proceeded to decide the appeal of the assessee. Even if the Commissioner of Income-tax (Appeals) was personally of the opinion that the revisional order should not have been passed, once such order was passed, he must abide by the discipline of a quasi-judicial structure and respect the order as it stands. Unless the order of the revisional authority was set aside by competent authority or Court, its effect must be allowed to be felt on record with full force. The only effect of the order was that the order of penalty passed by the Assessing Officer does not survive. If the penalty order was thus set aside by revisional authority, it was thereafter not open for the appellate Commissioner to still examine the merits of such an order and declare his legal opinion on the same.....” 24. Clearly, therefore, once a grievance does not survive because of some other order having been passed giving relief, on that count, having been given by some other authority, it is not open to the CIT(A) to adjudicate on that grievance. Once the disallowance of exemption was thus deleted by the Assessing Officer, by way of a rectification order which stood merged with the assessment order, it was not open to the CIT(A) to still examine the merits of such a disallowance of exemption and declare his legal opinion on the same. In our considered view, therefore, even if the CIT(A) was personally of the opinion that the rectification order should not have been passed, as he apparently was, once such a rectification order was passed, he must abide by the discipline of a quasi-judicial structure and respect the order as it stands. Even if learned CIT(A)'s reservations, on the correctness of rectification order passed by the Assessing Officer under section 154 and thus deleting the disallowance of exemption, had any merits, the remedy was not with him. He was not seized of the matter regarding correctness of relief granted by the Assessing Officer under section 154, and, at the game time, legal effect of the order under section 154 was that the issue, which he was called upon to adjudicate on, was rendered academic. As held by Hon'ble Calcutta High Court in the case of PCIT v. KPC Medical College and Hospital [(2018) 95 taxmann.322 (Cal)], in view of the scope of Explanation to Section 251, the CIT (A) can deal with \"any matter arising out of the proceedings in which the order appealed against was passed\" but then when different sub clauses of section 251(1) provide for different appeals for the orders, while dealing with appeal against one order, the CIT(A) cannot deal with the subject matter of the other order. This is evident from Their Lordships' observations Printed from counselvise.com ITA No. 2542/Del/2024 53 to the effect that \"As would be evident from Section 251(1) of the Act, an appeal against an order of assessment is covered by clause (a) thereof and an appeal against an order imposing a penalty is covered by clause (b) thereof. In other words, independent appeals arise out of orders of assessment and orders imposing any penalty. In this case, the order that was before the Commissioner (Appeals) was an order imposing a penalty and not an assessment order. If the assessment order that resulted in the penalty proceedings being instituted was before the Commissioner (Appeals), the direction may have been justified. However, in the appeal arising out of the order imposing the penalty, the matter pertaining to some other income escaping assessment did not fall within the purview of the expression \"any matter arising out of proceedings in which the order appealed against was passed\". It is only elementary in law that what cannot be done directly cannot be done indirectly either. If authority is needed even for this fundamental legal proposition, the same is contained in numerous judgments of Hon'ble Supreme Court of India, including in the rather recent cases of Ram Jethmalani v. Union of India [(2011) 13 taxmann.com 189 (SC)land CIT v. Paharpur Cooling Towers Pvt Ltd. [(1996) 219 ITR 618 (SC)].The rectification order under section 154 could have been at best subjected to revision under section 263, and the time limit under section 263(2) was very well available at that point of time, but then such a revision could only have been done by the Principal Commissioner of Income-tax concerned, and not by the CIT(A); as we have noted earlier in these discussions, it is only elementary in law that what cannot be done directly, cannot be done indirectly either. As long as such a revision does not take place, and that has not happened till now, and as long as the rectification orders passed under section 154 are set aside by any other mechanism provided under the law, it was not open to the CIT(A) to ignore the effect of the rectification order, on the order impugned in appeal before him, and thus proceed to adjudicate on a question which was wholly academic and infructuous at that point of time. 25. In our considered view, therefore, the very adjudication on denial of exemption, in respect of monies spent on application of charitable objectives of the appellant trust outside India, by the Ld. CIT(A) was incorrect in law, and is, accordingly, liable to be set aside for that short reason alone.” 13. In view of the above discussions, facts of the present case as noted above and judicial precedence cited above, I am of the view that the rectification order passed by the AO under Section 154 of the Act is in existence and original assessment order passed under Section 143(3) of the Act for all practical and for all legal purposes stood merged, the order of the CIT(A) ignoring the effect of rectification order and thus proceeds to adjudicate on a question which has become academic and infructuous is liable to be set aside. Accordingly, the order of CIT(A) is reversed on Printed from counselvise.com ITA No. 2542/Del/2024 54 this issue and the ground of this appeal is allowed. For this purpose, I agree with the view expressed by learned Judicial Member. 14. The second facet of argument of the learned Counsel for the assessee is as regards to applicability of the provisions of Section 56(2)(viib) on issuance of shares to non-resident subscribers. The learned Counsel argued whether the provision of Section 56(2)(viib) of the Act applies to non-resident subscribers of shares or not in term of Section 6(3) of the Act? 15. ⁠ Learned Counsel for the assessee stated the facts that the assessee during the previous year 2016-17, relevant to this year assessment year 2017-18, issued 13492216 equity shares of face value of ₹10 per share at a premium of ₹510.30 per share, on preferential allotment basis, for raising the funds to non-residents company namely, Otter Ltd and Credit Suisse (Singapore) Limited. The Assessing Officer added the differential premium of ₹310.30 per share against the total shares issued and added back the same at ₹4186634625 under Section 56(2)(viib) of the Act. Learned Counsel for the assessee argued that the amount against the said equity shares was remitted by the aforesaid non-residents shareholders to India in foreign currencies under the foreign direct investment policy of Reserve Bank of India. In support of this, assessee filed copy of Foreign Inward Remittance Certificate (FIRC) from Credit Suisse (Singapore) Ltd. and Otter Limited (Mauritius), which are enclosed in assessee’s paper book page number 119 and 120. Learned Counsel argued that the provisions of Section 56(2)(viib) of the Act are applicable only when shares are issued by the company to a resident in India. Whereas in the present case, as pointed out above, the entire share capital was issued to non-resident in India. Learned Counsel also argued that the aforesaid parties were foreign companies incorporated outside India having foreign addresses and were non-residents in India in terms of provision of Section 6 of the Act. He argued that even the PCIT-4, Delhi in his show cause notice dated 21.02.2020 also noted the fact that these two companies are non-residents shareholders and in his show cause notice observed in paragraph 5 as under. “5. The above section clearly indicates that the provision is applicable to a transaction of issuance of shares to resident shareholders. However, the shares Printed from counselvise.com ITA No. 2542/Del/2024 55 were issued to M/s Otter Limited, M/s Credit Suisse (Singapore) Limited and M/s Link Investment Trust. Out of these three shareholders, M/s Otter Limited and M's Credit Suisse (Singapore) Limited are foreign companies having foreign addresses and therefore non-resident. Since. provisions of Section 56(2)(viib) of the Act are not applicable to the aforesaid issue of shares by the assessee to non-residents, the invocation of provisions of Section 56(2)(viib) of the Act is beyond the scope of statutory mandate Consequently addition made u/s 56(2)(viib) is not sustainable. The addition made by the A.O. u/s 56(2)(viib) in the assessment order should have been made u/s 28(iv) or any other relevant section deemed suitable instead of u/s. 56(2)(viib) of the Act.” 16. ⁠ Learned Counsel for the assessee further argued that CIT(A) asked for clarification vide show cause notice dated 21.02.2020 and also vide notice under Section 250 of the Act dated 31.01.2024 and further vide questionnaire dated 05.03.2024, asked the following questions:- “1. It is noticed from records that one of the subscribers to the shares is Ms. Otter Limited with investment of Rs.566.99.99.948 which has its associated enterprise in India, by the name M/s. Otter Controls India Pvt Ltd with the Directors, viz, Ukhas Krishna Joshi as MD, David Andrew Smith and Wilam Ross Joliffe as Directors. This Indian based company has a direct influence on M/s. Otter Limited through which funds have been received into your company. Please explain why the place of effective management as envisaged u/s.6(3) cannot be invoked in your case in respect of M/s Otter Limited. 2. Similarly, another investor by the name, M/s. Credit Suisse (Singapore) Lid has invested a sum of Rs.132,00,00,059 in your company. This entity has a number of Indian entities, such as M/s. Credit Suisse Consulting India Pvt Ltd, M/s, Credit Suisse Securities India Pvt Ltd, M/s. Credit Suisse Finance India Pvt Ltd and M/s, Credit Suisse Services India Pvt Ltd, etc., through which the M/s. Credit Suisse (Singapore) Ltd has been influenced to make investment in the appellant company. In view of this please explain why the place of effective management as envisaged u/s.6(3) cannot be invoked in your case in respect of M/s. Credit Suisse (Singapore) Ltd. 3. The third investor, M/s. Link Investment Trust is Delhi based entity in which case the provisions of Sec 56(2)(viib) are directly applicable. Please explain why and how the provisions of Sec. 56(2)(viib) are not applicable in respect of M/s. Link Investment Trust.” Printed from counselvise.com ITA No. 2542/Del/2024 56 17. ⁠ The assessee replied by filing complete details of subscribers i.e. of non-resident allottees along with their addresses, number of shares issued, amount subscribed by each subscriber, FIRC, Tax Residency Certificate of both the companies, namely, Credit Suisse (Singapore), a foreign company incorporated in Singapore and Otters Limited, a foreign Company incorporated in Mauritius. It was contended by the Ld. Counsel for the assessee that the certificates were issued by Inland Revenue authorities of Singapore and Mauritius revenue authorities as non-residents for the purpose of income tax for the relevant assessment years. Learned Counsel further argued that a bare perusal of the shareholding of Otters Limited for the relevant assessment year, clears the doubt that Otters Controls India Private Limited is not an assessee’s shareholder. Even the assessee is not aware of Otter Controls India Pvt. Ltd. and/or relationship between the Otter Control India Private Limited and Otters Limited. It was argued that a mere fact that there is an associated Enterprises of a non-resident based in India does not, by itself in any manner, lead to the conclusion that the non-resident has place of effective management in India (POEM). The inference of the revenue that the assessee has a direct influence on Otters Limited through which funds have been received by assessee company is only on presumptions, conjectures and surmises. He argued that in case the same is shown that information is available in public domain, which too is unverified/unauthenticated which cannot be the basis of doubting the legitimate inward investment, more so, investment is supported by the requisite documents, TRC, FIRC, etc., which were part of record. He argued that the concept of POEM under section 6(3) of the Act, in any case, subject to benefit of the overriding provisions of the DTAA. This is precisely the reason for the purpose of tax withholding under Section 195 of the Act. TRC is regarded as sufficient. This fortifies the assessee’s contention that for an investee company, that is the assessee, TRC of the non-resident investor is sufficient and therefore, once the non-resident investor furnishes TRC, the Assessing Officer is not required to further investigate and, in law, to accept non- resident status of the investor. Mostly identical arguments were made in regard to Credit Suisse (Singapore) Ltd., which is a foreign company incorporated in Singapore and is holding a valid tax certificate. Learned Counsel for the assessee submitted that Credit Suisse Singapore is wholly owned subsidiary of Credit Suisse AG (UK entity) age, UK entities and related party disclosure in the audited consolidated financial statements of Credit Suisse (Bank) for the relevant assessment Printed from counselvise.com ITA No. 2542/Del/2024 57 year is made and also placed before the CIT(A). Learned Counsel for the assessee further stated that the presumption of the Department, that this entity has a number of Indian entities, such as Credit Suisse Consulting India Pvt. Ltd., Credit Suisse Securities India Pvt., Credit Suisse Finance Pvt. Ltd. And Credit Suisse Services Ltd. through which Credit Suisse (Singapore) Ltd. has been influenced to make investment in the assessee company, is based on presumption, conjectures and surmises. There is no evidence qua this. 18. ⁠ As regards to 3rd investor Link Investment Trust, which is Delhi-based entity, but originally the shares were allotted and subscribed by only two companies i.e., Credit Suisse Singapore and Otters Ltd. Mauritius. Subsequently, Link Investment, a resident Indian had purchased shares from Otters Limited, as noted above, but that does not make the original allotment as non-est rather these are transaction of sale and purchase between the two parties. It was argued that since the shares were initially allotted to non-residents, the provision of Section 56(2)(viib) of the Act are not applicable to such transaction. In view of the above, learned Counsel for the assessee stated that even on merits, since the shares were allotted to non-residents, the provision of Section 56(2)(viib) of the Act will not apply. 19. On the other hand, learned CIT(DR) argued that the CIT(A) has rightly held that it is not possible to give clear finding on the issue of round tripping and on the status in view of the provisions of Section 6(3) of the Act on the concept of Place of Effective Management of these two shareholders namely, Credit Suisse Singapore and Otters Ltd. Mauritius. She argued that the CIT(A) has rightly remitted the matter back to the file of the AO on the issue of addition u/s. 56(2)(viib) of the Act as in the absence of the details in respect to these two subscribers. She argued that CIT(A) rightly sought to examine the determination of residency status of non- residents subscribers, that too, by applying the principle of Place Of Effective Management in terms of Section 6(3) of the Act. Similarly, she also supported the order of the learned Accountant Member holding that the First Appellate Authority has power to confirm, reduce and enhance the assessment, but cannot order stating that the issue cannot be adjudicated and hence, learned Accountant Member has rightly set aside the issue of adjudication on merits under Section Printed from counselvise.com ITA No. 2542/Del/2024 58 56(2)(viib) of the Act to the file of the CIT(A) for passing afresh appellate order on merits, in terms of powers conferred under Section 250(1) read with Section 250(6) of the Act. 20. I have gone through the facts and circumstances of the case on this very issue and noted the fact that Credit Suisse Singapore Ltd. and Otters Ltd. Mauritius were foreign companies incorporated outside India having foreign addresses and were non-residents. It is pertinent to note that assessee has filed all the relevant information in regard to two subscribers namely, Credit Suisse Singapore and Otters Ltd. Mauritius that these were foreign companies who remitted money in foreign currency which is supported by the certificates issued by (a) Inland Revenue Authority Singapore and, (b) Mauritius Revenue Authority. It is a matter of record that the assessee filed substantial documents/evidences before the learned CIT(A), which undisputedly proves that the subscribers to the share capital were non-residents and clearly ousting applicability of Section 56(2)(viib) of the Act. To detail out, I noted that the assessee filed the following details:- S.No. Particulars 1. Details of amounts received along with details of non-resident share applicants. 2. List of Allottees 3. Foreign Inward Remittance Certificates (FIRC) 4. Valuation Report as per Rule 11UA substantiating fair valuation of issuance of shares as per DCF method 5. Relevant extracts of the Tax Audit Report for AY 2017-18 indicating that nothing is taxable under section 56(2)(viib) 6. Copy of SCN issued by PCIT u/s. 263 nothing that the subscribers are non-residents and section 56(2)(viib) is not applicable 7. Detailed reply on non-applicability of section 6 [POEM test vis-a-vis DTAA] 8. Tax Residency Certificates (TRCs) of Credit Suisse (Singapore) Ltd. & Otters Limited, Mauritius 9. ITAT Order in the case of Credit Suisse (Singapore) Ltd. for AY 2017-18, noting that the assessee is non-resident. 10. Intimation u/s. 143(1) in the case of Otter Limited, Mauritius. Printed from counselvise.com ITA No. 2542/Del/2024 59 From the above details, it is clear that these two parties viz., Credit Suisse Singapore and Otters Ltd. Mauritius are non-residents and all the details were available before the Assessing Officer during rectification proceedings and also before learned CIT(A) in appellate proceedings. 21. It is a fact that these two subscribers were foreign companies who remitted money in foreign currency supported by FIRC Certificates and also Tax Residency Certificates. These Tax Residency Certificates were issued by the tax authorities of the non-residents investors and the TRC is sufficient to prove the non-residency status of the non-resident investor and this issue has been considered by CBDT vide its Circular No.682/1994 issued on 30.03.1994 and Circular No.789/2000 issued on 13.04.2000 in the context of India Mauritius Treaty. Further, Hon’ble Supreme Court of India in the case of UOI & Anr. Vs. Azadi Bachao Andolan and Another vide judgement dated 07.10.2003 - (2003) 132 Taxman 373 (SC), while interpreting the powers of Income Tax Authorities under Section 119 of the Act, examined the CBDT’s Circular No.682 dated 30.03.1994, and held as under:- “The income-tax authorities were seeking to examine as to whether the assessees were actually residents of a third country on the basis of alleged control of management therefrom. We have already extracted the relevant provisions of article 4 which provide that, for the purposes of the agreement, the term \"resident of a contracting State\" means any person who under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of similar nature. The term \"resident of India\" and \"the rest-dent of Mauritius\" are to be construed accordingly. Article 13 of the DTAC lays down detailed rules with regard to taxation of capital gains. As far as capital gains resulting from alienation of shares are concerned, article 13(4) provides that the gains derived by a \"resident\" of a contracting State shall be taxable only in that State. In the instant case, such capital gains derived by a resident of Mauritius shall be taxable only in Mauritius. Article 4, which we have already referred to, declares that the term resident of Mauritius means any person who under the laws of Mauritius is \"liable to taxation\" therein by reason, inter alia, of his residence. Clause (2) of article 4 enumerates detailed rules as to how the residential status of an individual resident in both Contracting States has to be determined for the purposes of DTAC. Clause (3) of article 4 provides that if, after application of the detailed rules provided in article 4, it is found that a person other than an individual is a resident of both Б Printed from counselvise.com ITA No. 2542/Del/2024 60 the Contracting States, then it shall be deemed to be a resident of this Contracting State in which its place of effective management is situated. The DTAC requires the test of \"place of effective management\" to be applied only for the purposes of the tie-breaker clause in article 4(3) which could be applied only when it is found that a person other than an individual is a resident both of India and Mauritius. We see no purpose or justification in the DTAC for application of this test in any other situation. The High Court has held, and the respondents so contend, that the Assessing Officer under the Income-tax Act is entitled to lift the corporate veil, but the circular effectively bars the exercise of this quasi-judicial function by reason of a presumption with regard to the certificate issued by the competent authority in Mauritius ; conclusiveness of such a certificate of residence granted by the Mauritius tax authorities is neither contemplated under the DAC, nor under the Income-tax Act a provision as to conclusiveness of a certificate is a matter of legislative action and cannot form the subject matter of a circular issued by a delegate of legislative power. As early as on March 30, 1994, the Central Board of Direct Taxes had issued Circular No. 682 (see [1994) 207 ITR (St.) 7) in which it had been emphasized that any resident of Mauritius deriving income from alienation of shares of an Indian company would be liable to capital gains tax only in Mauritius as per Mauritius tax law and would not have any capital gains tax liability in India. This circular was a clear enunciation of the provisions contained in the DTAC, which would have overriding effect ever the provisions of sections 4 and 5of the Income- tax Act, 1961, by virtue of section 90(1) of the Act. If, in the teeth of this clarification, the Assenting Officers chose to ignore the guidelines and spent their time, talent and energy on inconsequential matters, we think that the Central Board of Direct Taws was justified in issuing \"appropriate” direction vide Circular No. 789 (see [2000] 243ITR (St.)57), under its powers under section 119, to set things on course by eliminating avoidable wastage of time, talent and energy of the Assessing Officers discharging, the onerous public duty of collection of revenue. Circular No. 789 (see [2000] 243 ITR (St.) 57) does not in any way all crib, cabin or confine the powers of the Assessing Officer with regard to any particular assessment. It merely formulates broad guidelines to be applied in the matter of assessment of assessee covered by the provisions of DTAC. We do not think the circular in any way takes away on curtails the jurisdiction of the Asserting Officer to assess the income of the assessee before him. In our view, therefore, it is erroneous to say that the impugned Circular No. 789 dated April 3, 200 (see [2000] 243 ITR (St.) 57) is ultra vires the provisions of section 119 of the Act. In our judgement, the powers conferred upon Printed from counselvise.com ITA No. 2542/Del/2024 61 the Central Board of Direct Taxes by sub-sections (1) and (2) of section 119 are wide enough to accommodate such a circular.” And, finally, in the aforesaid case, the Hon’ble Supreme Court further held as under:- “If the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intervening legal steps as non est based upon some hypothetical assessment of the \"real motive\" of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot G afford to chase a will- o'-the-wisp. The judgment of the Privy Council in Bank of Chettinad's case [1940] 8 ITR 522, wholeheartedly approving the dicta in the passage from the opinion of Lord Russel in Westminster's case [1936] AC 1 (HL) ; [1935) 19 TC 490, was the law in this country when the Constitution came into force. This was the law in force then, which continued by reason of article 372. Unless abrogated by an Act of Parliament, or by a clear pronouncement of this court, we think that this legal principle would continue to hold good. Having anxiously scanned McDowell's case (1985] 154 ITR 148 (SC), we find no reference therein to having dissented from or overruled the decision of the Privy Council in Bank of Chettinad's case [1940] 8 ITR 522 (PC). If any, the principle appears to have been reiterated with approval by the Constitutional Bench of this court in Mathuram's case [1999] 8 SCC 667 at page 12. We are, therefore, unable to accept the contention of the respondents that there has been a very drastic change in the fiscal jurisprudence, in India, as would entail a departure. In our judgment, from Westminster's case (1936) AC 1 (HL) ; 19 TC 490 to Bank of Chettinad's case [1940] 8 ITR 522 (PC) to Mathuram's case [1999] 8 SCC 667, despite the hiccups of McDowell's case [1985] 154 ITR 148 (SC), the law has remained the same. We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents.” 22. In the present case, in my view, the applicability of the provisions of Section 6(3) of the Act for the purpose of POEM, the Revenue could not bring any evidence that these two subscribers have place of effective management in India and the entire basis of CIT(A) is just based on presumptions, conjectures and surmises. Hence, the order of the CIT(A) and that of the AO on this issue cannot be sustained. Printed from counselvise.com ITA No. 2542/Del/2024 62 23. I noted that learned Judicial Member has clearly held that in the given facts and circumstances of the case, once two subscribers are non-residents, the provisions of Section 56(2)(viib) of the Act are not applicable to the shares issued to non-residents. Since in the case of the assessee, subscribers to share capital were non-residents, the provisions of Section 56(2)(viib) of the Act are not applicable and therefore, irrespective of whether the rectification order is to be considered or not, the addition made under Section 56(2)(viib) of the Act is not sustainable in law. I noted that there is no expressed dispute or dissent between learned Members on the fundamental issues decided on (a) since in the case of assessee subscribers to share capital were non-residents and the provisions of Section 56(2)(viib) of the Act are not applicable and, (b) once the AO accepted the position by deleting the addition made by the AO by exercising jurisdiction under Section 154 of the Act, Revenue can no longer be treated as aggrieved party. In terms of the above, on merits also, the provisions of Section 56(2)(viib) of the Act do not apply to the assessee’s case, as subscribers to share capital were non-residents and therefore, the provisions of Section 56(2)(viib) of the Act are not applicable in the given facts and circumstances of the case. In view of the above discussion, I delete the addition in dispute on merits also on this second facet of the arguments. 24. The third facet argued by the assessee on merits is that the impugned addition under Section 56(2)(viib) of the Act is not sustainable for the reason that the action of the Assessing Officer in applying NAV method to determine FMV in contradiction to DCF method adopted by the assessee’s valuer is grossly incorrect. According to the learned Counsel, the valuer’s report along with management’s estimate to arrive at various indices adopted to compute future growth of the company were submitted before the Assessing Officer as well as before learned CIT(A). It was contended that the management’s estimate contained the entire rationale for the projections adopted by the valuer while arriving at the FMV of the shares issued. Accordingly, it would be appropriate that the shares were issued at FMV of the respective shares and therefore, no part of the share premium received during the year under consideration falls within the purview of Section 56(2)(viib) of the Act. However, I have considered the question referred to Printed from counselvise.com ITA No. 2542/Del/2024 63 me on the above two facets and, as none of the Members i.e., either the learned Judicial Member or learned Accountant Member have adjudicated the issue on merits, I refrain from adjudicating the same. Even otherwise, this issue has become academic as the question was answered on above two facets. 25. Now, in view of the above discussion and legal position, I answer the question referred to me as under: - Question framed by the Bench Answer to the Question “1. Whether, in the facts and circumstances of the case, learned CIT(A)/NFAC’s action upholding section 56(2)(vii)(b) addition of Rs.418,66,34,625/- in assessee’s hands, deserves to be reversed?” In the given facts and circumstances of the case and discussion carried above, I am of the view that this question is answered in affirmative and accordingly, action of CIT(A) upholding addition under Section 56(2)(vii)(b) of Rs.418,66,34,625/- in assessee’s hands, deserves to be reversed. 25. The matter shall now be placed before the regular Bench for passing appropriate order in accordance with the majority opinion. PER: BRAJESH KUMAR SINGH, AM This appeal was filed by the assessee assailing the order of ld. Commissioner of Income Tax (Appeals) / NFAC, New Delhi (hereinafter referred to as the ‘the CIT(A)’) dated 27.03.2024 for AY 2017-18 inter alia upholding the addition of Rs. 418,66,34,625/- u/s 56(2)(vii)(b) of the Act, which was contested by the assessee in ground nos. 12 to 20 of the appeal before us. 2. After hearing the appeal, the Accountant Member on this issue had allowed the ground no. 14 of the appeal but had set aside this issue to the file of the Ld. CIT(A) for passing a fresh order on merits in terms of the powers conferred Printed from counselvise.com ITA No. 2542/Del/2024 64 on him u/s 251(1)(a) of the Act and in the manner as laid down in section 250(6) of the Act and allowed the ground nos. 12, 13 & 15 to 20 of the appeal for statistical purposes. 3. However, the ld. Judicial Member opined otherwise and wrote a separate order stating that he was of the considered view that the addition of Rs. 418,66,34,625/- u/s 56(2)(vii)(b) of the Act, was not sustainable and accepted the ground nos. 12 to 20 of the appeal and deleted the addition of Rs. 418,66,34,625/- confirmed by the Ld. CIT(A) / NFAC. 4. On account of difference of opinion between the Members constituting the Bench, a reference was made to the Hon’ble President, ITAT u/s 255(4) of the Act. The Hon’ble President vide order dated 28.04.2025 vide U.O No. F-28- Cent.jd(AT)/2025 nominated Third Member to decide the reference. The Ld. Third Member concurred with the view of Ld. Judicial Member in deleting the addition of Rs. 418,66,34,625/- confirmed by the Ld. CIT(A) / NFAC and accordingly, consequent to the opinion of Ld. Third Member, appeal of the Assessee stands allowed and ground nos. 12 to 20 of the appeal are allowed. 5. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on 16th January, 2026 Sd/- Sd/- [SATBEER SINGH GODARA] [BRAJESH KUMAR SINGH] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated 16.01.2026. Pooja Printed from counselvise.com ITA No. 2542/Del/2024 65 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi Printed from counselvise.com "