DCIT Central Circle 16 New Delhi, Delhi V. Comptech Solutions Pvt Ltd, New Delhi

ITA 1773/DEL/2022

• Counselvise Citation: [2023] 102 COUNSELVISE.COM (IT) 0546 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 3 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-11-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 29-08-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 03-08-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Wholly owned subsidiary; Fair market value
• Section: 143(3)

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “B”: NEW DELHI BEFORE DR. BRR KUMAR, ACCOUNTANT MEMBER AND MS. ASTHA CHANDRA, JUDICIAL MEMBER ITA No. 1773/Del/2022 Asstt. Year: 2016-17 DCIT, Central Circle-16, New Delhi–110 055 Vs. Comptech Solutions Pvt. Ltd. Plot No. 8, Local Shipping Complex Vardhman Plaza Kalkaji Delhi – 110 019 PAN AAACC5402H (Appellant) (Respondent) O R D E R PER ASTHA CHANDRA, JM The appeal filed by the Revenue is directed against the order dated 19.05.2022 of the Ld. Commissioner of Income Tax (Appeals)-28, New Delhi (“CIT(A)”) pertaining to Assessment year (“AY”) 2016-17. 2. The Revenue has taken the following grounds:- “1. That the Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 4,49,35,344/- u/s 56(2)(viib) of the Income Tax, 1961 by holding M/s. Comptech Solutions Pvt. Ltd. as a public company and in stretching the scope of deeming provision us/ 2(71) of the Companies Act,2013 for further deeming and carrying deeming fiction beyond its originally intended purpose. Assessee by: None Department by: Shri Vivek Vardhan, Sr. DR Date of Hearing: 30.08.2023 Date of pronouncement: 17.11.2023 ITA No. 1773/Del/2022 2 2. (a) Whether in law and on facts of the case the order of the Ld. CIT(A) is erroneous and not tenable in law and on facts? (b) The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.” 3. Briefly stated, the facts are that the assessee is a wholly-owned subsidiary of M/s. Contech Transport Services Pvt. Ltd. (“Contech”). Contech is holding 48.2% shares of the assessee company but having 100% voting rights. Contech in turn is a wholly owned subsidiary of M/s. Allcargo Logistics Ltd. which is a widely held public limited company and is listed at the recognised stock exchanges in India. 3.1 The assessee company and Contech both are private limited companies under Companies Act, 1956 and under the Companies Act, 2013. 3.2 The assessee company had received loans and advances amounting to Rs. 4,11,67,925/- on various dates in Financial Year (“FY”) 2011-12 and earlier years from Contech. The said amount was converted to Share Application Money (“SAM”) by entry in the books of account of both the assessee company and Contech on 01.04.2012. The assessee company received further SAM of Rs. 45,00,000/- on various dates in FY 2012-13 from Contech. The total SAM received by the assessee company from Contech amounted in all to Rs. 4,56,67,925/-. The shares were issued to Contech for Rs. 4,56,66,000/- on 30.05.2015 i.e. in FY 2015-16 relevant to AY 2016-17 and the balance amount of Rs. 1,925/- was refunded. 4. The assessee e-filed its return for AY 2016-17 on 13.07.2016 declaring income of Rs. 83,55,634/-. The case was taken up for limited scrutiny under CASS. Statutory notice(s) along with questionnaire were issued and duly served. The assessee filed submissions through ITBA. ITA No. 1773/Del/2022 3 5. During assessment proceedings the Ld. AO raised the query regarding issue of 15222 preference shares of Rs. 10/- each fully paid up at Rs. 3000/- each i.e. at a premium of Rs. 2990/- by the assessee to Contech, its holding company and asked the assessee to furnish note on applicability of section 56(2)(viib) of the Income Tax Act, 1961 (the “Act”) and valuation of share as per Rule 11UA of Income Tax Rules, 1961 (the “Rules”). The assessee complied stating that section 56(2)(viib) r.w. Rule 11UA is not applicable backed by legal opinion of M/s. CNK & Associates LLP dated 30.3.2015 (summarised by the Ld. AO at page 2 of his order). 6. The contention of the assessee was not acceptable to the Ld. AO. According to him section 56(2)(viib) of the Act has to be strictly interpreted. Since preference shares were issued during the FY 2015-16 relevant to AY 2016-17, section 56(2)(viib) of the Act is enforceable in this year. The Ld. AO held that the assessee company is a company in which public are not substantially interested and hence section 56(2)(viib) of the Act is squarely applicable. The holding company of the assessee company is Contech which is a private company. The scope of deeming provision cannot be stretched for further deeming. 6.1 For valuation of the shares under Rule 11UA the assessee submitted report of a CA firm wherein yield method was used. It was not acceptable to the Ld. AO. By adopting Net Asset Value method, the Ld. AO calculated the fair market value of the shares at Rs.48/- each and held that the assessee received the amount of Rs. 4,49,35,344/- in excess of fair market value which he added to the income of the assessee under section 56(2)(viib) of the Act and completed the assessment on total income of Rs. 5,32,90,978/- on 24.12.2018 under section 143(3) of the Act. 7. Aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A). During appellate proceedings the assessee made submissions which the Ld. CIT(A) incorporated in para 4 of the appellate order. The Ld. CIT(A) held that the assessee company is deemed to be public company and it ITA No. 1773/Del/2022 4 would not come within the ambit of section 56(2)(viib) of the Act and deleted the impugned addition by observing and recording his findings as under:- “6. In the light of the aforesaid facts, the question for determination in the present appeal is: whether the appellant company is a company in which public are substantially interested? The phrase "company in which public are substantially interested" is defined in sec. 2(18) of the I.T. Act, 1961 a relevant portion of which is as under: "Company in which public are substantially interested" Company is said to be a Company in which public are substantially interested - ..... (b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely:- (A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder; (B) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquire unconditionally by, and were throughout the relevant previous year beneficially held by- (a) the Government, or (b) a corporation established by a Central, State or Provincial Act, or (c) any company to which this clause applies or any subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year." 6.1 Sub-clause (c) of item (B) of clause (b) of sec. 2(18) of the Act is required to be explained in detail to comprehend it. The plain reading of the aforesaid relevant portion of sec. 2(18) provides that a company in which the public are ITA No. 1773/Del/2022 5 substantially interested if it is a company which is not a private company as defined in the Companies Act, 1956 and the conditions specified in item (B) are fulfilled namely, the shares of the said company carrying not less than 50% of the voting power have been allotted unconditionally and were throughout the relevant previous year beneficially held by any company to which this clause applies, or any subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year. 6.2 In this case, the appellant company, namely, Comptech, is a wholly owned subsidiary of Contech and Contech in turn is a wholly owned subsidiary of Allcargo Logistics Limited, a widely held listed company. Therefore, the conditions specified in item (B) are fully satisfied. The only issue that remains to be considered is the condition specified in clause (b) of sec. 2(18) which provides that any in which the public are substantially interested should not be a company which is a private company as defined in the Companies Act, 1956. It is undisputed that the appellant company, namely, M/s. Comptech Solutions Pvt. Ltd., is a private limited company within the meaning of sec. 2(68) of the Companies Act, 2013. At this juncture one needs to see the definition of "public company as given in sec. 2(71) of the Companies Act, 2013 which reads as under: "(71) "public company" means a company which - (a) is not a private company and; (b) has a minimum paid-up share capital as may be prescribed: "Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles." Proviso to sec.2(71) provides an exception in the definition of "public company". It provides that a company which is a subsidiary of a company which is not a private company, shall be deemed to be "public company" even though such subsidiary company is a private company in its articles. In the present case, Contech Transport Services Pvt. Ltd. is a wholly owned subsidiary of Allcargo Logistics Limited, which is a widely held company listed at the Stock Exchanges. Therefore, Contech Transport Services Pvt. Ltd., being a subsidiary of a widely held company, is deemed to be public company for the purposes of Companies Act, 2013. Now the assessee company, Comptech Solutions Pvt. Ltd., is a subsidiary of Contech Transport Services Pvt. Ltd., a deemed to be public company as per sec. 2(71) of the Companies Act, 2013, so, whether the ITA No. 1773/Del/2022 6 assessee company also becomes deemed to be public company under the Companies Act, 2013. 6.3 Section 2(87) of the Companies Act, 2013 defines subsidiary company as under: "section 2(87) of the Companies Act, 2013 defines a subsidiary Company as under: "subsidiary company" or "subsidiary", in relation to any other company (that is to say the holding company), means a company in which the holding company- (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies: Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. Explanation. -For the purposes of this clause,- (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub- clause (i) or sub- clause (ii) is of another subsidiary company of the holding company; (b) the composition of a company's Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors; (c) the expression "company" Includes any body corporate; (d) "layer" in relation to a holding company means its subsidiary or subsidiaries;" In view of the aforesaid provisions, it is apparent that the appellant company would be regarded as a subsidiary company of Allcargo Logistics Ltd. by virtue of clause (a) of the Explanation of Section 2(87) of the Companies Act, 2013 and as per proviso of Section 2(71) of the Companies Act 2013, a company which is a subsidiary of a Public Company, is deemed to be a public company. Therefore, the Appellant company qualifies as a subsidiary of Allcargo Logistics Ltd. and will be regarded as deemed to be public company and therefore. And hence, it would not come within the ambit of section 56(2)(viib) of the Act. However, according to the AO such benefit is not available to the subsidiary of the subsidiary company. In coming to such ITA No. 1773/Del/2022 7 conclusion, the AO has overlooked the provisions of sections 2(71) and 2(87) of the Companies Act, 2013. The AO has not given any reason to hold that a subsidiary of a subsidiary would not be regarded as a deemed public company. 6.4 In this respect a reference can be made to the judgment of the Bombay High Court in the case of Petrosil Oil Co. Ltd. v. CIT (236 ITR 220) wherein the assessee-company incorporated under the Companies Act, 1956 in India was a wholly owned subsidiary of a company Incorporated in United Kingdom (UK company) which itself was also a subsidiary of another company based and registered in United States of America holding its 100 percent share (US Company). The Bombay High Court held thatthe Income-tax Act nowhere defines what is a 'subsidiary company. The Finance (No. 2) Act also does not define what is a 'subsidiary company'. There would be a dichotomy if the assessee- company were to be a subsidiary company of the U.S. company for the purposes of the Companies Act, but were deemed not to be a subsidiary of the U.S. company for the purposes of the Act. The meaning given to the term 'subsidiary company' under section 4(1)(c) of the Companies Act must be imported into section 108. Of course, the further condition laid down under section 108(b) must also be fulfilled, Thus, a sub-subsidiary would be a subsidiary under section 108(b) if the whole of its share capital has been held by the parent company or its nominees throughout the previous year. If that meaning was incorporated, then it was very clear that the assessee was a subsidiary within the meaning of section 108(b). This was so because, admittedly, the U.S. company was a company in which the public are substantially interested and fell within section 108(a). A 100 per cent owned sub-subsidiary of a 100 per cent owned subsidiary would be a subsidiary within the meaning of section 4(1)(c) of the Companies Act and also within the meaning of section 108(b). The assessee fulfilled the condition of section 108(b) inasmuch as throughout the previous year 100 per cent of its share capital was held by the U.K. company. Throughout the previous year 100 per cent of the share capital of the U.K. company was held by the U.S. company. The U.K. company was, thus, a nominee of the U.S. company. The assessee would, thus, be a subsidiary within the meaning of section 108(b). Further, The ITAT Ahmedabad Bench 'A' (Special Bench) in the case of Assistant Commissioner of Income-tax v. Ajax Investment Ltd. [2003] 85 ITD 154 (AHD.)(SB) held that the second subsidiary company of first subsidiary company (parent company listed in the recognized stock exchange of India) falls within the term "wholly owned subsidiary company" notwithstanding the fact that neither the parent company is holding any shares (or requisite shares) in the second subsidiary company nor is the first subsidiary company holding 100 percent shares in the second subsidiary company. ITA No. 1773/Del/2022 8 6.5 In the light of the aforesaid interpretation of the relevant provisions, both of the Income-tax Act, 1961, and the Companies Act, 2013, It becomes clear that as per proviso to sec. 2(71) of the Companies Act, 2013 which carves out the exception in the definition of public company by providing that a subsidiary of a company which is not a private company shall be deemed to be publiccompany even though such subsidiary company continues to be a private company in its articles. Further, the appellant company would be regarded as a subsidiary company of Allcargo Logistics Ltd. by virtue of clause (a) of the Explanation of Section 2(87) of the Companies Act, 2013 and as per proviso of Section 2(71) of the Companies Act 2013, a company which is a subsidiary of a Public company, is deemed to be a public company. So, it is concluded that the Appellant company is a subsidiary of Allcargo Logistics Ltd. a public limited company and will be regarded as deemed to be public company in which public are substantially interested. Therefore, under the facts and circumstances of the case, it is held that Comptech Solutions Private Ltd. is deemed to be public company and it would not come within the ambit of Section 56(2)(viib) of the Income Tax Act 1961 and therefore, the addition made by the A.O. is not sustainable hence deleted.” 8. Dissatisfied, the Revenue is in appeal before the Tribunal and ground No. 1 and 2 (a) relate thereto. 9. The matter came up for hearing on 6.4.2023, 21.6.2023 and finally on 30.8.2023. None attended the hearing on any of the above dates for and/or on behalf of the assessee, though the Revenue was represented by the Ld. Sr. DR. We, therefore proceeded to decide the Revenue’s appeal after hearing the Ld. Sr. DR. 10. The Ld. Sr. DR vehemently supported the order of the Ld. AO and took the stand as taken by the Revenue in its ground. 11. We have carefully considered the submissions of the Ld. Sr. DR and perused the records. It is observed that the Ld. CIT(A) framed the question for determination before him as to whether the assessee company is a company in which public are substantially interested. On examination and consideration of the definition of “company in which public are substantially interested” as per section 2(18) of the Act, the definition of “public company” as given in section 2(71) of the Companies Act, 2013 and the definition of “subsidiary company” as per section 2(87) of the Companies Act, 2013, the ITA No. 1773/Del/2022 9 Ld. CIT(A) reached the conclusion, with which we agree that the assessee company is a subsidiary company of Allcargo Logistics Ltd. by virtue of clause (a) of the Explanation of section 2(87) of the Companies Act, 2013 and as per proviso of section 2(71) of the Companies Act, 2013 a company which is a subsidiary of a pubic company, is deemed to be a public company. Therefore, the assessee company qualifies as a subsidiary of Allcargo Logistics Ltd. and will be regarded as deemed to be public company. Therefore it will not come within the ambit of section 56(2)(viib) of the Act. 12. The only grievance of the Revenue is that the Ld. CIT(A) has stretched the scope of deeming provision under section 2(71) of the Companies Act, 2013 for further deeming which is beyond its originally intended purpose. In our humble opinion this stand of the Revenue is not legally tenable as the provisions of section 2(87) of the Companies Act, 2013 cannot be overlooked. It is well settled that full effect must be given to the statutory fiction and it should be carried to its logical conclusion. 13. We, therefore, endorse the findings of the Ld. CIT(A). Consequently, there being no legal substance in the appeal of the Revenue, we hereby reject it. 14. Ground No. 2(b) relating to additional ground etc. is dismissed as no such ground is taken. 15. In the result, appeal of the Revenue is dismissed. Order pronounced in the open court on 17 th November, 2023. sd/- sd/- (DR. BRR KUMAR) (ASTHA CHANDRA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 17/11/2023 Veena ITA No. 1773/Del/2022 10 Copy forwarded to - 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr. PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order