ITO, GURUGRAM V. EDUCOMP PROFESSIONAL EDUCTATION LIMITED, GURGAON

ITA 858/DEL/2024

AI Insights

The case revolves around the appeal by the Income Tax Officer, Gurugram against the order of the CIT(A) which had deleted the additions made by the AO on the grounds of share premium received by EPEL from ESL. The AO had reopened the case under section 147 of the Income Tax Act, questioning the valuation of shares issued at a high premium despite the company declaring losses. The CIT(A) found that EPEL, being a subsidiary of a publicly listed company, did not fall under the purview of section 56(2)(viib) which applies to companies not substantially interested by the public. The Tribunal agreed with the CIT(A)'s interpretation and application of the law, leading to the dismissal of the revenue's appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 126941 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2015-2016
• Other Referred Cases: Appollo Sugar Clinic Ltd Vs. DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR DHANESTA
• Assessee Lawyers: GAURAV JAIN
• Keywords: Fair market value; Valuation report; Wholly owned subsidiary; Capital Investment; Grounds of appeal; Dismissed; Commissioner; Bankruptcy; Commissioner of Income Tax; Corporate Insolvency; Nominee; Deleted; Listed company; Department; Hospital; Explanation; Venture capital undertaking; Voting power; Deletion of the addition; Companies Act; Insolvency and Bankruptcy Code, 2016; Issue of shares
• Section: 147; 148; 250; 139(1); 133(6)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘B’: NEW DELHI BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENT AND SHRI MANISH AGARWAL, ACCOUNTANT MEMBER ITA No.858/Del/2024 (ASSESSMENT YEAR 2015-16) Income Tax Officer, Gurugram. Vs. Educomp Professional Education Limited, 514, Udyog Vihar Phase-3, Gurgaon, Haryana-122001. PAN-AABCE9327L (Appellant) (Respondent) Assessee by Shri Gaurav Jain, Adv. Department by Shri Rajesh Kumar Dhanesta, Sr. DR Date of Hearing 25/03/2025 Date of Pronouncement 23/04/2025 O R D E R PER MANISH AGARWAL, AM: This appeal is filed by the revenue against the order of Ld. Commissioner of Income Tax (Appeals) [CIT(A) in short] National Faceless Appellate Centre (NFAC) in appeal No. NFAC/2015- 16/10054925 dated 10.11.2023 for AY 2016-17 passed u/s 250 of the Income Tax Act, 1961 [the Act]. 2. Brief facts of the case are that assessee Educomp Professional Education Ltd. (EPEL) is a closely held limited company and the return of income was e-filed on 20.09.21016 declaring loss of Rs. 2 ITA No.858/Del/2024 ITO vs. Educomp Professional Education Limited 2,62,763/-. The case of the assessee was reopened u/s 147 for the reason that assessee company has issued 1150772 equity shares valued at Rs. 26,99,82,619/- to M/s Educom Solutions Limited (ESL) having a face value of Rs. 10 each at a premium of Rs. 224.61 per share during financial year 2015-16. The AO observed that assessee declared losses and its future prospects are not promising however, it has charged huge premium on the shares issued. Therefore, the AO raised serious doubts about the valuation report submitted by the assessee obtained to determine the fair market value of shares before the of issue of shares. Accordingly, after recording reasons, case was reopened by issue of notice under section 148 of the Act. In response to the said notice, the assessee has filed the return of income on 23.02.21 declaring same income as was declared in the return filed u/s 139(1) of the act. Thereafter, the AO issued various notices which were either not complied with or partly complied with by the assessee. Finally a show cause notice was issued wherein AO rejected the DCF method adopted by assessee and on NAV method workout the amount of premium at Rs. 161.36 per share as against 224.61 declared by the assessee and proposed an addition of Rs. 7,27,86,329/-. In reply, it was submitted that assessee company is a subsidiary of its parent company M/s ESL who hold the 100% of its equity and since ESL is public limited company, therefore, in terms of Section 2(18)(b)(B)(c) of the Act, the assessee company is a company in which public is substantially interested and thus the provisions of section 56(2)(viib) of the Act are not applicable to it. However, AO has not accepted the contention of the assessee and 3 ITA No.858/Del/2024 ITO vs. Educomp Professional Education Limited issued notice under section 133(6) to the parent company namely M/s ESL who subscribed the shares of the assessee company. In reply, M/s ESL stated that it is under corporate insolvency resolution process under Insolvency and Bankruptcy Code, 2016 and it had no valuation report of working of EPS of shares of EPEL. The AO by observing that M/s ESL had not furnished the valuation report with respect to the working of Earning per share nor any justification for quantum of premium was filed, had made the additions of Rs. 7,27,86,329/- to the loss declared by the assessee and finally assessed the income of the assessee at Rs. 7,25,23,566/-. Against this order, assessee preferred an appeal before ld. CIT (A) where despite of various opportunities, no reply was furnished by the assessee. However, ld. CIT(A) based on the statement of facts and other information available on record, was of the view that assessee (EPEL) is a subsidiary of a public limited company (ESL) and in view of section 2(18)(b)(B)(c), the provisions of section 56(2)(viib) are not applicable and deleted the additions made by AO. Against such order, the revenue is in appeal before us by taking following grounds of appeals: “Because the decision of the Ld. CIT(A)'s order regarding deletion of the addition of Rs. 7,27,86,339/- considering that the provisions of section 2(18)(b) of the Income Tax Act and the provisions of section 56(2)(viiib) of the Income Tax Act is not applicable in the instant case, is not acceptable as the assessee company in its balance sheet had shown an amount of Rs. 26,99,82,678/- as share application money pending for allotment which had been sold during financial year 2015-16 i.e. A.Y. 2016-17 and the assessee, company did not provide the Valuation Report with respect to the working of Earning Per Share (EPS) and justification for the quantum of premium as well as the source of investment in shares with bank statement where transaction was made. Appellate is prays to add/delete the grounds” 4 ITA No.858/Del/2024 ITO vs. Educomp Professional Education Limited 3. Before us, the ld. Sr. DR vehemently supported the order of the AO and submitted that the assessee company had not provided requisite details during the course of assessment proceedings. Ld DR further submitted that the assessee has not filed details of earning per share and further failed to file justification for hefty amount of premium charged at the time of issue of shares. He further submitted that the AO has made the additions by correctly applying the net asset value method for determination of share price as the assessee was showing losses and further had not provide the basis of estimations made for determining the fair market value of the shares under DCF method. Ld. DR further submitted that the ld. CIT (A) has failed to appreciate these facts and deleted the additions without there being any submissions on the part of the assessee and merely on the basis of statement of facts filed and, therefore, he requested for the restoration of the additions made by the AO. 4. Per contra, the ld. AR vehemently supported the order of the ld. CIT(A) and submitted that the assessing officer has on its own change the method of determination of Fair market value of the shares from DCF method to NAV method. He further submitted that the assessee has followed the due procedure as prescribed in section 56(2)(viib) of the Act according to which the fair market of the shares could be determined by following any of the Two methods prescribed i.e. the DCF method or NAV method and the assessee had opted for one of the method i.e. DCF method. He further submitted that section 56(2)(viib) of the Act provided that addition could only be made where 5 ITA No.858/Del/2024 ITO vs. Educomp Professional Education Limited the consideration was received in excess of fair market value of such shares. The fair market value of the shares is to be determined in terms of the rule 11UA(2) where the fair market value of unquoted equity shares would be determined in the manner provided however, the choice of the method is at the option of the assessee. The assessee had submitted the report of the accountant before the Assessing Officer of the valuation of fair market value of shares by DCF method but the same is rejected arbitrarily and without obtaining the alternative report from the specified person, has substituted his own valuation based on NAV method which is not permitted. 5. He further submitted that the provisions of section 56(2)(viib) are not applicable to the company in which public are substantially interested. Further in Section 2(18) of the I.T. Act, the definition of companies in which public are substantially interested is provided. If both the sections are read together it is clear that the provisions of section 56(2)(viib) are not applicable to a company which is a company in which public is substantially interested in terms of section 2(18)(b)(B)(c) of the Act. For this, ld. AR drew over attention to the copy of the Balance Sheet of the assessee company available in paper book, wherein at notes no. 2, shareholding pattern is appearing according to which 100% shares of the assessee company are subscribed by M/s ESL. He, therefore, prayed that the assessee company is 100% subsidiary of M/s ESL which is a public limited company listed on BSE and NSE and, therefore, the provisions of sections 56(2)(viib) are not applicable in its case. The ld. CIT(A) after 6 ITA No.858/Del/2024 ITO vs. Educomp Professional Education Limited duly considering these provisions has deleted the additions and he prayed for the confirmation of the order of ld. CIT(A). 6. We have heard the rival submissions and perused the material available on record. Before dwelling upon the issue, we first consider the provisions of section 56(2)(viib) which is as under: “56 (1)... (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head \"Income from other sources\", namely. (viib) 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 face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund or a specified fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf: 7. Further in Section 2(18) of the I.T. Act, the definition of companies in which public are substantially interested is provided, which is as under: 2(18)\"company in which the public are substantially interested\"—a company is said to be a company in which the public are substantially interested— (a) … (aa) … (ab) … Provided … (ac) … (ad) … (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 7 ITA No.858/Del/2024 ITO vs. Educomp Professional Education Limited 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 acquired 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. Explanation.—In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words \"not less than fifty per cent\", the words \"not less than forty per cent\" had been substituted ; 8. From the perusal clause (b) item (B) sub item (c) to Section 2(18) where the shares of the company, carrying not less than 50% of the voting power have been held by and were throughout the relevant previous year beneficially held by a widely held company or a wholly owned subsidiary of such widely held company, is a company in which public are substantially interested. 8 ITA No.858/Del/2024 ITO vs. Educomp Professional Education Limited 9. In the instant case, M/s ESL is a parent company which is a public company listed on the BSE and NSE platform. From the perusal of Note No.2 to the Balance Sheet as at 31.3.2016, as available in paper book page 14, 100% of the shareholding of the assessee EPEL is held by M/s ESL thus the assessee M/s EPEL is wholly owned subsidiary of M/s ESL. Since EPEL is a 100% subsidiary of ESL (a listed company), EPEL is also a company in which public are substantially interested within the meaning of Section 2(18)(b)(B)(c) of the Act. Accordingly, the provisions of Section 56(2)(viib) of the Act which are applicable to the unquoted equity shares of a company in which public is not substantially interested are not applicable to the case of EPEL where the shares are issued at premium. 10. The co-ordinate bench of Hyderabad Tribunal in case of Appollo Sugar Clinic Ltd Vs. DCIT reported in [2019] 105 Taxmann.com 254 (Hyd, ITAT) dealt with the same issue wherein the Hon’ble Bench has held as under: “11. Considered the rival submissions and material on record. We noticed that assessee -company is step-down subsidiary of Apollo Hospitals Enterprises Ltd., The AHEL is a listed company in Stock Exchange in India with the Securities Contracts (Regulations) Act, 1956. Therefore, this company falls under the category of the company in which public are substantially interested. The subsidiary companies viz. AHLL and assessee-company come under the definition of Section 2(18)(b)(B) of the Act, as per which public are substantially interested. This fact was also acknowledged by the Assessing Officer in his order at Pg. 6, para 3.2 as it was agreed that the assessee's case does not fall u/s. 56(2)(viib). In order to invoke the provisions of Section 56(2)(viib), the assessee - company should be a company in which public are not substantially interested. 11.1 …. 9 ITA No.858/Del/2024 ITO vs. Educomp Professional Education Limited 11.2 In the given case, the fact is clear that assessee has received share premium and Assessing Officer has mandate to invoke only Section 56(2)(viib) and no other section. This transaction will never fall in any of the heads of income as per Section 14 of the Act. Therefore, in our considered view, Assessing Officer is not correct in bringing this capital investment as income of the assessee after satisfying himself that assessee's case does not fall u/s. 56(2)(viib) of the Act. Therefore, the addition made by Assessing Officer is deleted.” 11. In view of the above discussion, and by respectfully following the decision of coordinate bench in the case of Appollo Sugar Clinic (supra) we find no infirmity in the order of ld. CIT(A) in holding that the assessee is 100% subsidiary of M/s ESL and, therefore, is a company in which public is substantially interested and thus the provisions of section 56(2)(viib) of the Act are not applicable. Accordingly, we uphold the order of ld. CIT(A) deleting the additions of Rs. 7,27,86,239/- made by AO. 12. In the result, appeal of the revenue is dismissed. Order pronounced on 23/04/2025. Sd/- Sd/- (MAHAVIR SINGH) (MANISH AGARWAL) VICE PRESIDENT ACCOUNTANT MEMBER Dated: 23/04/2025 PK/Sr. Ps Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "