Section 56(2)(viib) Addition Struck Down by ITAT Delhi: Share Allotment to Existing Shareholders and the 10% Safe Harbour Under Rule 11UA

Background and Overview

The Income Tax Appellate Tribunal, Delhi Bench, recently pronounced a significant ruling in the case of Suri Agro Fresh Private Limited Vs DCIT (ITAT Delhi) for Assessment Year 2017-18, setting aside an addition of ₹9,00,000 made by the Assessing Officer under Section 56(2)(viib) of the Income-tax Act, 1961. The Tribunal's decision touches upon two important legal positions — first, the inapplicability of the angel tax provisions when shares are issued to existing shareholders, and second, the retrospective application of the 10% safe harbour introduced via CBDT Notification No. 81/2023 under Rule 11UA of the Income Tax Rules, 1962.

This ruling adds to a growing line of coordinate bench decisions that have progressively curtailed the over-expansive application of Section 56(2)(viib), reinforcing that its deeming fiction must be applied with reference to its underlying legislative purpose.

Facts of the Case

Suri Agro Fresh Private Limited, the assessee, is a private limited company maintaining audited books of account under the Companies Act, 2013 and the Income-tax Act, 1961. The shareholding structure of the company comprised a non-resident foreign body corporate holding 50% of the shares, while the remaining 50% was equally split between two resident individual shareholders — Mr. Hiten Suri and Mr. Sudhir Suri, each holding 25%.

During the relevant assessment year, the company issued equity shares at ₹3 per share. A valuation report was obtained which placed the fair market value of each share at ₹2.91. The assessee's position was straightforward — the issue price of ₹3 was simply a rounding up of ₹2.91 to the nearest whole rupee, a standard and practically necessary adjustment in share pricing.

The total number of shares allotted was one crore equity shares. These were allotted to Mr. Hiten Suri and Mr. Sudhir Suri — both being existing shareholders — in their existing proportionate shareholding ratio. There was no change in the ownership pattern, the control structure, or the ratio of shareholding following the fresh allotment.

The Assessing Officer's Addition

The Assessing Officer did not accept the assessee's explanation regarding rounding off. He proceeded on the basis that since equity shares having a fair market value of ₹2.91 were allotted at ₹3 per share — a price exceeding the fair market value — the conditions for invoking Section 56(2)(viib) of the Income-tax Act, 1961 were satisfied.

Accordingly, the differential amount of ₹0.09 per share was treated as income chargeable to tax. On one crore shares, this translated into a total addition of ₹9,00,000, which was incorporated in the assessment order.

First Appellate Proceedings Before CIT(A)

The assessee challenged the addition before the Commissioner of Income Tax (Appeals). However, the CIT(A) upheld the Assessing Officer's reasoning, observing that the assessee had itself acknowledged issuing shares with a fair market value of ₹2.91 at a price of ₹3 per share to resident shareholders. The CIT(A) held that Section 56(2)(viib) was "clearly attracted" in such circumstances and confirmed the addition of ₹9,00,000.

The CIT(A) did not engage with the assessee's substantive argument that the allotment was made exclusively to pre-existing shareholders in their existing ratio, nor did it address the economic and legal implications of such a fact on the applicability of the deeming provision.

Grounds Raised Before the ITAT

The assessee filed an appeal before the ITAT Delhi against the CIT(A)'s order dated 09.02.2024. The following grounds were raised: