Section 56(2)(viib) IT Act | Share Premium Taxable Only If Received in Assessment Year; Retrospective Application Invalid : ITAT Mumbai

The ITAT Mumbai has delivered a significant ruling clarifying the temporal applicability of section 56(2)(viib) of the Income Tax Act, 1961, holding that share premium received prior to the provision’s enactment in 2013 cannot be taxed merely because share allotment occurred later. The decision reinforces the principle that taxability hinges on the year of receipt, not allotment, and invalidates additions under section 68 where procedural safeguards are ignored.

Background & Facts

The Dispute

The appellant, Savera India Riding Systems Company Pvt. Ltd., was assessed for the financial year 2016-17. The dispute arose from the addition of Rs. 59,82,060 under section 56(2)(viib) of the Income Tax Act, 1961, representing the premium received on the issue of equity shares to three subscribers: Perfiles Especiales (a Spanish company), Mr. V.K. Kothari, and Mr. Girish Jain. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the premium was taxable as income from other sources, despite the fact that the share application money had been received in the financial years 2006-07 and 2007-08.

Key Facts

• The company issued a right issue offer on 29.12.2006 at Rs. 40 per share (face value Rs. 10, premium Rs. 30), based on a valuation report prepared by a Chartered Accountant on 28.12.2006 using the Discounted Cash Flow (DCF) method.
• The share application money of Rs. 1,64,55,199 was received between 15.01.2007 and 03.12.2007 from the three subscribers.
• Due to the foreign status of Perfiles Especiales, the company was required under FEMA to complete allotment within 180 days of receipt of application money. It failed to do so.
• The company sought and obtained approval from the Reserve Bank of India (RBI) for delayed allotment, with RBI’s approval dated 15.03.2016.
• Shares were finally allotted on 28.03.2016, during the assessment year 2016-17.
• The company disclosed the pending share application money of Rs. 1,64,55,099 in its balance sheets for FY 2007-08 to FY 2015-16, and reduced it to Nil in FY 2015-16 upon allotment.
• The AO, in his order dated 20.12.2018, rejected the DCF valuation as "unrealistic" due to subsequent losses in FY 2017-18 and made an addition of Rs. 59,82,060 under section 56(2)(viib), treating the premium as Rs. Nil.
• The CIT(A), in its order dated 27.11.2025, upheld the addition under section 56(2)(viib) and, alternatively, sustained it under section 68 as unexplained credit.

Procedural History

• 29.12.2006: Board resolution approving right issue at Rs. 40 per share
• 15.01.2007 to 03.12.2007: Receipt of share application money from three subscribers
• 28.12.2006: Valuation report prepared by Chartered Accountant using DCF method
• 15.03.2016: RBI approval granted for delayed allotment of shares
• 28.03.2016: Allotment of shares to subscribers
• 30.11.2016: Filing of return for AY 2016-17 declaring loss of Rs. 43,72,319
• 20.12.2018: AO’s assessment order making addition of Rs. 59,82,060 under section 56(2)(viib)
• 27.11.2025: CIT(A) order upholding addition under section 56(2)(viib) and section 68
• 07.04.2026: Hearing before ITAT Mumbai
• 22.04.2026: ITAT order issued

The Parties' Positions

For the Appellant

• The entire share application money was received in FY 2006-07 and 2007-08, well before the insertion of section 56(2)(viib) on 01.04.2013.
• The provision is not retrospective and cannot apply to receipts predating its enactment.
• The valuation was done using the DCF method, which is a prescribed method under Rule 11UA(2).
• The AO erred in rejecting the DCF valuation without applying any alternative prescribed method.
• The CIT(A) violated section 251(2) by making an addition under section 68 without issuing any notice.
• The identity, source, and creditworthiness of subscribers were fully disclosed to the AO through PAN, bank statements, FIRC, and income tax returns.
• The AO did not make any addition under section 68 despite receiving these documents, so the CIT(A) had no basis to do so.

For the Respondent

• The shares were allotted in AY 2016-17, and therefore the year of allotment governs taxability under section 56(2)(viib).
• The DCF projections were unrealistic as the company incurred losses in FY 2017-18, indicating the premium was excessive.
• The assessee failed to produce a valuation report and justification for the premium, warranting an addition under section 68.
• The CIT(A) was entitled to review the AO’s order and make an independent finding under section 68.

Relief Sought

The appellant sought deletion of the addition of Rs. 59,82,060 under section 56(2)(viib), deletion of the addition under section 68, and setting aside of the CIT(A)’s order. The appellant also sought deletion of interest under section 234B of Rs. 1,59,522, as it was consequential.

The Legal Issue

Can the premium on shares be taxed under section 56(2)(viib) of the Income Tax Act if the consideration was received before the provision came into force on 01.04.2013, even though the shares were allotted later? Further, can an appellate authority make an addition under section 68 as unexplained credit without issuing a notice to the assessee?

Arguments Presented

For the Appellant

The appellant relied on the principle of prospective application of tax statutes and cited SLS Energy (P.) Ltd. v. ITO [2023] 154 taxmann.com 400 (Bom.), which held that section 56(2)(viib) applies only from AY 2013-14. It argued that the receipt of consideration, not the allotment, triggers taxability. The appellant further submitted that the DCF valuation was conducted in accordance with Rule 11UA(2), and the AO’s rejection of the valuation without applying any prescribed alternative method was legally invalid, as held in PNP Maritime Services (P.) Ltd. v. DCIT [2024] 204 ITD 810 (Mumbai). It also emphasized that the identity, source, and creditworthiness of subscribers were fully disclosed to the AO, and no addition was made under section 68 at that stage, rendering the CIT(A)’s subsequent addition procedurally invalid.

For the Respondent

The Revenue contended that the year of allotment governs the applicability of section 56(2)(viib), citing the logic that the income arises when shares are issued. It argued that the DCF projections were speculative and contradicted by the company’s actual financial performance. It further maintained that the CIT(A) had the authority to independently assess the sufficiency of evidence and make an addition under section 68, even if the AO had not done so, and that the absence of a notice was a procedural irregularity that did not vitiate the order.

The Court's Analysis

The ITAT undertook a detailed analysis of the statutory framework and judicial precedents. It first examined the language of section 56(2)(viib), which states that the provision applies when a company "receives, in any previous year," consideration exceeding the fair market value of shares. The Tribunal held that the term "receives" clearly refers to the year of receipt of funds, not the year of allotment. Since the entire share application money was received between January and December 2007 - years before the provision came into force on 01.04.2013 - the addition under section 56(2)(viib) was legally unsustainable.

"The amendments, inter alia, incorporating section 56(2)(viib) of the Act were amendments which were to apply only from 01/04/2013, i.e. assessment year 2013-14."

The Tribunal further held that the AO’s rejection of the DCF valuation was arbitrary. The AO did not apply any alternative method prescribed under Rule 11UA(2), such as the Net Asset Value (NAV) method, nor did he appoint an independent valuer. Instead, he merely compared projected profits with actual losses in a later year, which the Tribunal found legally flawed, relying on Pr. CIT v. Cinestaan Entertainment (P.) Ltd. [2021] 433 ITR 82 (Delhi), which held that valuation is not an exact science and projections may not materialize due to unforeseen circumstances.

Regarding the addition under section 68, the Tribunal found a clear violation of section 251(2) of the Act, which mandates that the CIT(A) must give the assessee an opportunity to be heard before making any adverse finding. The CIT(A) made an independent addition under section 68 without issuing any notice, thereby denying natural justice. The Tribunal emphasized that since the AO had already examined the same evidence and declined to make an addition under section 68, the CIT(A) had no legal basis to reverse that conclusion without following due process.

"Once the AO did not make any addition under section 68 of the Act on this issue, the remedy doesn't lie with the learned CIT(A) by making an addition vide order passed under section 250 of the Act and lies elsewhere in the statute."

The Tribunal also noted that the documents submitted by the assessee - including bank statements, FIRC, PAN, income tax returns, and the valuation report - were sufficient to discharge the burden under section 68, as confirmed by the AO’s own non-action.

The Verdict

The appeal was allowed. The ITAT set aside the order of the CIT(A) dated 27.11.2025 and deleted the addition of Rs. 59,82,060 under section 56(2)(viib) and the alternative addition under section 68. The levy of interest under section 234B of Rs. 1,59,522 was also deleted as consequential. The Tribunal directed that the assessment for AY 2016-17 be completed without the impugned additions. No further directions were issued as the matter was fully resolved.

What This Means For Similar Cases

Receipt Year Governs Taxability Under Section 56(2)(viib)

• Practitioners must argue that section 56(2)(viib) applies only if share application money is received in or after AY 2013-14, regardless of when shares are allotted.
• If funds were received pre-2013, no addition can be made even if allotment occurs later - the timing of receipt is decisive.
• Valuation reports prepared before 2013 remain valid for determining FMV if the method was prescribed under Rule 11UA(2).

Section 68 Additions Require Procedural Compliance

• Appellate authorities cannot make additions under section 68 without issuing a show-cause notice under section 251(2).
• If the AO has examined evidence and declined to make an addition under section 68, the CIT(A) cannot override that conclusion without giving the assessee a fresh opportunity to respond.
• Submission of PAN, bank statements, FIRC, and income tax returns constitutes sufficient proof of identity, source, and creditworthiness under section 68.

Valuation Method Must Be Respected Unless Properly Challenged

• The AO cannot reject a DCF valuation merely because actual profits differ from projections.
• Any challenge to the valuation must be based on a prescribed alternative method under Rule 11UA(2), not on hindsight or financial performance in later years.
• Courts and tribunals consistently hold that valuation is a technical exercise and not an exact science - deviations from projections do not invalidate the method.