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Tax Publishers 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)

Tax Publishers

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;

(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)