Applicability of section 56(2)(viib) to a
"deemed" public company as per Companies Act, 2013
Facts:
Assessee was a two level downstream subsidiary of All
Cargo Logistics Ltd. a listed Company. It had borrowed money from its
parent a private company and also a wholly owned subsidiary All Cargo
Logistics Ltd. for Rs. 4.11 crores during FY 2011-12. Further Rs. 45 lakhs
was also received during FY 2012-13. Subsequently, these were converted
into share application money and 15,222 preference shares were
issued @ Rs. 3000 each with par value Rs. 10 and Rs. 2990 as share premium
during FY 2015-16. When questioned under section 56(2)(viib) valuation was
shared on yield method. This was rejected by the AO who applied NAV method and
valued shares at Rs. 48 and thus sustained additions under section 56(2)(viib)
for Rs. 4.49 crores. On appeal the CIT(A) reversed the order of AO after giving
a reading of section 2(18) of the IT Act, 1961 which defines "company in
which public are substantially interested" along with section 2(71) of the
Companies Act, 2013 which defines "public company" to include a
private company as a deemed public company especially if the control and
management is with a public limited company. Aggrieved revenue went in appeal
to ITAT -
Held against the revenue that section 56(2)(viib) will not
apply to the assessee company as it is a deemed public company.
Company in which public are substantially interested"
is defined in section 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 section
2(18) of the Act is required to be explained in detail to comprehend it. The
plain reading of the aforesaid
relevant portion of section 2(18) provides that a company in which the public
are 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.
At this juncture one needs to see the definition of
"public company as given in section 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 section 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 section 2(71) of the Companies Act, 2013, so, whether the
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 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.
Applied:
Bombay High Court in the case of Petrosil Oil Co. Ltd.
v. CIT (1999) 236 ITR 220 (Bom) : 1999 TaxPub(DT) 0722 (Bom-HC)
Assistant Commissioner of Income-tax v. Ajax Investment
Ltd. (2003) 85 ITD 154 (Ahd.)(SB) : 2003 TaxPub(DT) 0904 (Ahd-Trib)
Case: DCIT v.
Comptech Solutions (P) Ltd. 2023 TaxPub(DT) 7112 (Del-Trib)