Section 56(2)(viib)

Section 56(2)(viib) — the law in short

What the courts have decided on section 56(2)(viib), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Sapphire Foods India Ltd v ACIT High CourtHelps taxpayerNo later treatment found
  The officer has reopened my scrutiny assessment because the audit party disagreed with what he allowed. Is that a fresh look or a change of opinion?
  On this decision, a change of opinion. Where the Assessing Officer had all the relevant material during the original scrutiny assessment, a reassessment driven by an audit objection on that same material is an impermissible review, and reopening on the same material is not permitted. The Court also held the notice barred by limitation because the extended period was unavailable in the absence of a failure to disclose material facts.
• PCIT v Cinestaan Entertainment P Ltd High CourtHelps taxpayer
  The department says my DCF projections never came true. Is that enough to tax my share premium?
  No. Valuation is a question of fact and is not an exact science, so a forecast cannot be rejected by comparing it with actual revenues in hindsight. The Revenue must show the methodology adopted was demonstrably wrong.
• Vodafone M-Pesa Ltd v PCIT High CourtHelps taxpayer
  Can the AO switch my valuation from DCF to NAV because the NAV figure suits him better?
  No. The officer may scrutinise the valuation report and may even call for a fresh valuation from an independent valuer, but he cannot change the method the assessee opted for under Rule 11UA — any fresh valuation must stay on the DCF basis.
• Vodafone India Services P Ltd v Union of India High CourtHelps taxpayer
  We issued shares to our foreign parent at a premium the Transfer Pricing Officer says is too low. Can he tax the shortfall as income under the transfer pricing provisions?
  No. The Bombay High Court held that the issue of equity shares at a premium by an Indian company to its non-resident holding company is a capital account transaction that gives rise to no income, so Chapter X cannot be applied at all. Chapter X is a machinery provision for arriving at the arm's length price; the charge must be found in sections 4 and 5 and in one of the heads of income. There being no charge, express or implied, on the premium not received, the reference to the Transfer Pricing Officer, his order, the draft assessment order and the Dispute Resolution Panel's order were quashed as without jurisdiction.
• SPL Infrastructure Pvt. Ltd. v ITO — the choice of method is the assessee's, but a DCF report first produced during assessment does not displace the officer's NAV computation, and Rule 11UA(3) does not help ITATHelps departmentNo later treatment found
  The Assessing Officer rejected our DCF valuation and computed fair market value on net asset value under Rule 11UA. Doesn't the Delhi High Court say the choice of method belongs to the company?
  It does, but the choice is not the end of the enquiry. The Chennai Bench read the Delhi High Court in Agra Portfolio as holding both that the option and choice vest solely in the assessee on a conjoint reading of section 56(2)(viib) with Rule 11UA(2), and that it remains open to the Assessing Officer to doubt or reject a DCF valuation submitted for his consideration. On the facts — a premium fixed on a board resolution and a chartered accountant's opinion, with a DCF report unsigned and undated obtained only during the assessment three years after the issue, and no supporting material — the Bench held the officer rightly adopted the Rule 11UA(2) method and dismissed the appeal.
• DCIT v Chiripal Poly Films Ltd ITATHelps taxpayerSuperseded by amendment
  The share premium came from an overseas investor. Does s.56(2)(viib) reach it at all?
  For the years before the Finance Act 2023 took effect, no. As it then stood the clause caught consideration received 'from any person being a resident', and the Mumbai bench held that on a plain reading it therefore applies only where the subscriber is a resident; the subscriber here was a Mauritius company, so the clause did not apply. Two things follow. The point is a short jurisdictional one that does not require any valuation argument. And it does not close the file: the same subscription was separately attacked under s.68, and that attack failed only because the assessee could establish identity, creditworthiness and genuineness, here with information obtained from the Mauritius Revenue Authority under Article 26 of the treaty.
• DCIT v Ozone India Ltd ITATHelps taxpayer
  On amalgamation we issued shares at face value against net assets worth far more. The AO has taxed the excess under s.56(2)(viib). Does that provision apply to a scheme of amalgamation at all?
  The Ahmedabad Tribunal held it does not. Section 56(2)(viib) contemplates a bilateral transaction in which a company receives consideration from a resident person for the issue of shares to that person; an amalgamation is a tripartite arrangement between the amalgamated company, the amalgamating company and the amalgamating company's shareholders — the vesting comes from one and the shares go to the others — and such arrangements are not contemplated by the deeming clause.
• Cinestaan Entertainment P Ltd v ITO ITATHelps taxpayer
  The AO threw out my DCF valuation and taxed the whole share premium. Can he do that?
  No. Rule 11UA(2) gives the assessee the option to value by DCF or NAV, and once a prescribed expert has valued by a prescribed method the officer has no jurisdiction to tinker with it, reject it or substitute his own figure.
• TUV Rheinland NIFE Academy P Ltd v ITO ITATHelps department
  The officer says our projections were nowhere near what happened and that we never showed him how we built them. Does the 'method is our choice' argument still save the DCF report?
  Not on these facts, and this is the decision the Department will cite against you. The Bangalore bench upheld the addition because the assessee produced no basis for the estimates fed into the DCF working, either before the Assessing Officer or before the Tribunal. The point of the case is evidential rather than legal: the choice of method may be the assessee's, but the assessee still has to be able to show where the numbers came from, and where it cannot, the officer's finding that the valuation is unrealistic stands.
• Innoviti Payment Solutions (P) Ltd v ITO ITATCuts both ways
  The Assessing Officer threw out my DCF valuation because the actual results fell far short of the projections and taxed the premium under section 56(2)(viib) — can he do that?
  It depends, and the Tribunal split the point. The Bangalore Bench held that where the assessee opts for the discounted cash flow method under rule 11UA(2), the Assessing Officer cannot switch to the net asset value method; following the Bombay High Court in Vodafone M-Pesa, he may scrutinise the report and make his own fresh valuation, but the basis must stay DCF. He must also judge the report on facts available at the valuation date, not on actual later results. But the onus of showing the projections were a reliable estimate rests on the assessee. The matter went back to the Assessing Officer.
• DCIT v Varsity Education Management P Ltd ITATHelps taxpayerNo later treatment found
  The officer accepted part of my share premium as justified by the valuation certificate and taxed the rest. Can he split it like that?
  No. The premium worked out in a valuation certificate filed for exchange control purposes is the minimum the company may collect, not a ceiling, and there is no bar on collecting more. The premium is settled between the parties on commercial considerations and the tax authorities cannot question it; once identity, creditworthiness and genuineness are accepted, the excess cannot be assessed under s.68.
• Rameshwaram Strong Glass P Ltd v ITO ITATHelps taxpayer
  The Assessing Officer has discarded our DCF report and valued the shares on net asset value instead. Is the choice of method his or ours?
  It is the assessee's. Rule 11UA(2) offers two routes - book value under clause (a) and discounted cash flow under clause (b) - and the Jaipur bench held the option lies wholly with the assessee, so the officer cannot substitute a method of his own. He may look into the working: arithmetical errors can be corrected, and where the chartered accountant's computation is erroneous or self-contradictory he may propose modifications, provided his reasons are sound. What he cannot do is change the method. The Tribunal also refused to let the projections be tested against what actually happened afterwards, DCF being an exercise in estimation, and deleted the addition.
• Statutory position — section 56(2)(viib) was NOT omitted: the Finance (No. 2) Act 2024 inserted a third proviso switching the clause off from 1 April 2025 CBDT Circulars & InstructionsCuts both ways
  I have read that angel tax was abolished. Is section 56(2)(viib) gone from the statute book, and from which year does it stop applying?
  The clause has not been omitted. It remains printed in section 56(2), and the Finance (No. 2) Act 2024 inserted a third proviso reading: 'Provided also that the provisions of this clause shall not apply on or after the 1st day of April, 2025.' A consolidation of 2024 vintage records the insertion as being made by the Finance (No. 2) Act, 2024 with effect from 1 April 2025, and a consolidation of 2025 vintage prints the third proviso as part of the enacted text.
• Statutory position — Rule 11UA(2) to (4) as substituted with effect from 25 September 2023: five further methods for non-resident subscriptions, price matching, and a ten per cent safe harbour CBDT Circulars & InstructionsCuts both waysNo later treatment found
  My client's start-up took money from an overseas investor. Which valuation methods are open under Rule 11UA, and is there any tolerance if the issue price is a little above the valuation?
  Sub-rules (2) to (4) of Rule 11UA were substituted for the old sub-rule (2) by the Income-tax (Twenty-first Amendment) Rules, 2023, with effect from 25 September 2023. For consideration received from a resident, the fair market value of unquoted equity shares may be taken at the assessee's option under sub-clause (a) (the adjusted book-value formula), (b) (merchant banker's Discounted Free Cash Flow), (c) (venture-capital price matching) or (e) (price matching against a notified entity); where the consideration is from a non-resident, sub-clauses (a) to (e) are all available, and sub-clause (d) opens five further merchant-banker methods — Comparable Company Multiple, Probability Weighted Expected Return, Option Pricing, Milestone Analysis and Replacement Cost. Sub-rule (4) is a safe harbour: where the issue price exceeds the value so determined by not more than ten per cent of the valuation price, the issue price is deemed to be the fair market value.
• CBDT Notifications 29 & 30/2023 CBDT Circulars & InstructionsHelps taxpayer
  Which investors are outside angel tax after the 2023 notifications, and does the section still apply at all?
  Two carve-outs, and the charge is on its way out. Notification 29/2023 exempts specified classes of non-resident investor; Notification 30/2023, deemed effective from 1 April 2023, supersedes that relief and preserves the exemption for companies meeting the DPIIT conditions, for resident and non-resident investors alike. Section 56(2)(viib) itself was not omitted: a third proviso inserted by the Finance (No. 2) Act 2024 disapplies the clause to consideration received on or after 1 April 2025, and the rest of the clause, the earlier provisos included, remains in force.
• Statutory position — section 49(4): the amount charged under section 56(2)(x) becomes the cost of acquisition on a later sale CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer has charged my client under section 56(2)(x) on the stamp-duty difference. When he sells the property, does he pay capital gains on that same amount all over again?
  No. Section 49(4) provides that where the capital gain arises from the transfer of a property the value of which has been subjected to income-tax under clause (vii), clause (viia) or clause (x) of section 56(2), the cost of acquisition of that property is deemed to be the value taken into account for the purposes of that clause. The amount already taxed as income from other sources therefore comes back as cost, and is not taxed a second time as capital gain.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.