Reclassification of existing CCPS to share premium without fresh

Reclassification of existing CCPS to share premium without fresh money receipt does not trigger Section 56(2)(viib).

Issue

Whether Section 56(2)(viib) can be invoked on accounting reclassifications of CCPS to share premium without fresh money receipt, and whether the Assessing Officer can reject a merchant banker’s DCF valuation merely due to variance between projections and actuals.

Facts

Accounting Reclassification: During FYs 2011-12 to 2019-20, the assessee-company issued Compulsorily Convertible Preference Shares (CCPS). Due to Ind-AS transition, CCPS with a buyback clause were classified as financial liabilities/borrowings. In November 2022, after deleting the buyback clause, these were reclassified back to share capital and securities premium (Rs. 814.40 crores) without receiving any fresh consideration during the year.
Section 56(2)(viib) Addition on Reclassification: The Assessing Officer (AO) invoked Section 56(2)(viib) and added Rs. 814.40 crores, treating the credit to the securities premium account arising from the accounting reclassification as taxable share premium.
Rejection of DCF Valuation: The assessee issued equity shares and CCPS to resident investors based on a DCF valuation report by a merchant banker under Rule 11UA (FMV Rs. 15,067 per share). The AO rejected the DCF method because actual financial performance fell short of projections, substituted the Net Asset Value (NAV) method, and added Rs. 9.59 lakhs under Section 56(2)(viib).

Decision

In Favor of Assessee (Reclassification): The addition of Rs. 814.40 crores was deleted. Section 56(2)(viib) requires actual receipt of consideration for share issuance during the relevant year, which was absent in a mere accounting reclassification.
In Favor of Assessee (DCF Valuation): The addition of Rs. 9.59 lakhs was deleted. The AO cannot arbitrarily discard a merchant banker’s DCF valuation or force the NAV method simply because business projections deviated from actual performance.

Key Takeaways

Receipt of Money is Mandatory for Section 56(2)(viib): Section 56(2)(viib) applies strictly to fresh considerations received upon share issuance; book adjustments or reclassifications of existing instruments do not trigger tax liability.
Merchant Banker’s Valuation Binding: When a recognized valuation method (DCF) under Rule 11UA is performed by an authorized merchant banker, the AO cannot unilaterally replace it with another method (NAV).
Hindsight Test Impermissible: DCF valuations are based on forward-looking business estimates at the time of issue; variance between projected revenues and actual historical results does not invalidate the valuation report.

IN THE ITAT DELHI BENCH ‘B’

Bright Lifecare (P.) Ltd.

Deputy Commissioner of Income-tax

Sudhir Kumar, Judicial Member
and M. Balaganesh, Accountant Member

IT Appeal No. 5198 (Delhi) of 2026
[Assessment year 2023-24]

SEPTEMBER 18, 2026

Ajay Vohra, Sr. Adv., Ms. Aditi Garg, CA and Aniket D. Aggarwal, Adv. for the Appellant. Om Prakash, CIT(DR) for the Respondent.

ORDER

M Balaganesh, Accountant Member.- The appeal in ITA No. 5198/Del/2026 for AY 2023-24, arises out of the order of the ld National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 09.04.2026 against the order of assessment passed u/s 143(3) r.w.s. 144B of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 27.03.2025 by the Assessing Officer, NFAC, Delhi (hereinafter referred to as ‘ld. AO’).

2. The Ground No. 1 raised by the assessee is general in nature.

3. The Ground Nos. 1.1 and 1.2 raised by the assessee were stated to be not pressed by the Learned AR at the time of hearing. The same is reckoned as a statement made from the bar and accordingly dismissed as not pressed.

4. The Ground Nos. 2 to 2.5 raised by the assessee are challenging the addition of Rs 814,40,00,000 made under section 56(2)(viib) of the Act on account of reclassification of Compulsorily Convertible Preference Shares (CCPS in short) issued in earlier years from borrowings to securities premium account.

5. We have heard the rival submissions and perused the materials available on record. The assessee is engaged in the business of manufacturing as well as trading of health / sports supplements, vitamins and beauty and health care products. The return of income for the assessment year 2023-24 was filed by the assessee company on 28-12-2023 declaring loss of Rs 62,44,13,810. The assessee during the financial years 2011-12 to 201920 raised share capital inclusive of share premium from various investors predominantly non-residents by way of issuance of equity shares and Series A to Series G of Compulsorily Convertible Preference Shares (CCPS). The said CCPS were issued during financial years 2011-12, 2013-14, 2014-15, 2015-16, 2016-17, 2017-18, 2018-19 and 2019-20. The cumulative details of CCPS issued from financial years 2011-12 to 2019-20 along with securities premium are tabulated as under:-

Particulars	Resident	Non-resident	Total Amount
Face value of the CCPS issued	121.59	1,954.40	2,075.99
Securities Premium raised	461.50	3,261.20	3,722.70
Less: Adjustment on account of demerger	(45.16)		(45.16)
Total	537.94	5,215.59	5,753.53

6. It is not in dispute that the assessee had maintained its financial statements under the mandatory IGAAP till 31-03-2020 and in terms of IGAAP, the CCPS issued from financial years 2011-12 to 2019-20 were accounted for in the following manner:-

Particulars	Disclosure
Face Value of CCPS	Preference Share Capital Schedule of the Balance Sheet
Securities Premium received	Securities Premium Schedule of the Balance Sheet

The share premium received on issuance of CCPS was duly accounted for in the audited financial statements and appropriately disclosed in the return of income filed for the respective years. The Ministry of Corporate Affairs issued notification dated 16-2-2015 mandating adoption of Ind-AS for Indian companies satisfying certain specified criteria. The said notification as amended from time to time, inter alia, required all unlisted companies having net worth exceeding Rs. 250 crores to mandatorily prepare financial statements under Ind – AS. The assessee having satisfied the said net worth criteria on 31-03-2021 transitioned to Ind -AS and accordingly prepared its financial statements for financial year 2020-21 relevant to assessment year 2021-22 there under for the first time with restated financials for financial year 2019-20 relevant to assessment year 2020-21 for the purpose of comparison.

7. It is pertinent to mention that as per Ind- AS 32, a financial instrument is to be accounted as an equity instrument rather than a financial liability where such instrument, inter alia, has no contractual obligation to deliver or deliver cash or other financial to any other entity. In other words, in cases where a financial instrument has a contractual obligation to repay, it is required to be classified as a ‘financial liability.’ In the present case, since the CCPS agreements which were entered into between the assessee and the CCPS holders in respect of CCPS issued between financial years 2011-12 to 2019-20 (Series A to Series G) contained a ‘buyback obligation’ on the assessee, the issuance of CCPS was required to be classified as a ‘financial liability’. Consequently, the assessee in accordance with Ind-AS 32, reclassified the share capital inclusive of share premium which were earlier accounted under IGAAP as share capital and securities premium respectively as ‘financial liability’ reflected at fair value i.e. borrowings on 31-3-2020 and 31-3-2021 respectively. The income tax return filed by the assessee for assessment year 2021-22 duly reflected the transitional adjustment of Rs. 444,31,50,000 routed through “other equity” and the said treatment was duly accepted by the revenue. On account of transition to Ind-AS, the assessee was mandatorily required to restate the value of CCPS as on 31-32020 and 31-3-2021. Therefore, the opening balance of all CCPS issued in earlier years till 31-3-2020 was restated and the cumulative fair valuation amounting to Rs 444,31,50,000 was routed through ‘Other Equity’ in the balance sheet and not through profit and loss account and consequently no adjustment was required to be made in the tax computation. The resultant effect of transition from IGAAP to Ind-AS resulting in fair valuation of financial liability amounting to Rs 444,31,50,000 is reflected in Part C of Note 48 of the audited financial statements for financial year 2020-21 by the assessee company. These facts are reflected in Page 160 of the Paper Book.

8. While preparing the balance sheet as on 31-03-2021, the net impact of Ind-AS adjustment being fair valuation of borrowings was routed through profit and loss account and was suo moto disallowed in the tax computation while computing the taxable income for assessment year 2021-22. This fact is also reflected in the audited financial statements evidencing the routing of remeasurement of financial liability i.e. borrowings through profit loss account and computation of income and ITR form for assessment year 202122 wherein disallowance of Rs 189.95 million on account of loss on remeasurement of financial liability has been shown as a separate line item. The evidences in this regard are enclosed in pages 243 to 247 of the paper book.

9. For financial year 2021-22, the net impact of Ind-AS adjustment i.e. Rs. 2619.04 million was routed through the profit and loss account and was suo moto disallowed in the computation of taxable income for assessment year 2022-23. The evidences in this regard are enclosed in pages 248 to 253 of the paper book.

10. For assessment year 2023-24, the net impact of Ind – AS adjustment i.e. Rs 892.50 million was routed through profit and loss account and was suo moto disallowed in the computation of taxable income for assessment year 2023-24. The evidences in this regard are enclosed in pages 254 to 259 of the paper book.

11. During November 2022, the CCPS agreements entered into earlier between the assessee and CCPS holders were revised, resulting in deletion of the ‘Buyback’ clause. As a result, the buyback obligation of the assessee was extinguished. Consequently, the CCPS issued in earlier years i.e. financial years 2011-12 to 2019-20 were reclassified from ‘Borrowings’ to ‘Share Capital’ and ‘Securities Premium’ during the year under consideration. The movement in the borrowings schedule due to reclassification to share capital and securities premium is reflected in Note 15, Note 16A(iv) and Note 17 of the audited financial statements for financial year 2022-23 relevant to assessment year 2023-24. These facts are reflected in pages 170 to 172 of the paper book.

12. The Learned AO noted that even though the aforesaid amounts were never received by the assessee, still proceeded to invoke the provisions of Section 56(2)(viib) of the Act on account of reclassification of CCPS from ‘Borrowings’ to ‘Securities Premium’ account by making an addition of Rs 814,40,00,000 on the reasoning that the same had been credited based on some valuation adopted which is nothing but a colorable device to avoid payment of taxes. The breakup of the addition made under section 56(2)(viib) of the Act comprise of the following :-

(a)

Transitional adjustment of Rs 444,31,50,000 being restatement on account of fair valuation of opening balance of all CCPS issued in earlier years till 31-32020 which was routed through ‘other equity’ in the balance sheet as on 31-32021 and not through profit and loss account.

(b)

Fair valuation of CCPS of Rs 18,99,53,885 being the net impact of Ind-AS adjustment on account of fair valuation of borrowings which was routed through the profit loss account for financial year 2020-21 and suo moto disallowed in the tax computation while computing the income for assessment year 2021-22.

(c)

Fair valuation of CCPS of Rs 261,90,39,401 being the net impact of Ind-AS adjustment on account of fair valuation of borrowings which was routed through the profit loss account for financial year 2021-22 and suo moto disallowed in the tax computation while computing the income for assessment year 2022-23.

(d)

Fair valuation of CCPS of Rs 89,25,01,962 being the net impact of Ind-AS adjustment on account of fair valuation of borrowings which was routed through the profit loss account for financial year 2022-23 and suo moto disallowed in the tax computation while computing the income for assessment year 2023-24.

13. The Learned CITA observed that assessee had credited a massive sum of Rs 814,40,00,000 to its securities premium account based on purported fair valuation of securities issued in earlier years and assessee had hidden the transaction behind the veil of Ind-AS compliance and had failed to produce cogent documentary evidence or underlying valuation reports before the Learned AO to justify how the said astronomical fair value was arrived at. Further, the Learned CITA held that the act of routing a massive, unverified valuation surplus into the securities premium account without the actual backing of corresponding intrinsic asset value is an example of a colorable device designed to artificially inflate the company’s net worth while escaping the tax net. With these effective observations, the Learned CITA upheld the action of the Learned AO.

14. The main crux of the arguments of the Learned DR before us could be summarised as under:-

(a)

From the audited financial statements of the assessee company, the assessee reflected securities premium aggregating to approximately Rs 1706.316 crores.

(b)

The Learned AO noted that substantial amount stood credited to the securities premium account during the year under consideration.

(c)

The assessee had explained that the amount represented reclassification of CCPS, pursuant to change in terms of CCPS and mandatory accounting treatment under Ind AS, which explanation of the assessee was not accepted by the Learned AO.

(d)

The Learned AO observed that although the assessee described the credit as a mere accounting adjustment, the financial statements disclosed a substantial increase in securities premium. According to the Learned AO, the amount stood credited to securities premium account and such credit enhanced shareholders funds and accounting treatment adopted by the assessee could not by itself determine the tax consequences.

(e)

The Learned AO held that the assessee failed to satisfactorily establish that the impugned credit did not represent consideration received for issue of shares. The Learned AO observed that the reclassification resulted in credit to securities premium ; the assessee had failed to demonstrate that the amount represented only book adjustment having no tax implication and the accounting treatment adopted by the assessee could not override the charging provisions of the Act.

(f)

The assessee has not produced convincing commercial reasons for such substantial increase in securities premium during the relevant year.

(g)

The accounting treatment materially altered the financial position of the company.

(h)

The Learned AO was therefore justified in examining whether the arrangement has been adopted to avoid incidence of tax.

(i)

The finding regarding colorable device is based upon surrounding circumstances and not merely suspicion.

(j)

The Learned AO had correctly appreciated the substance of the transaction of amount of Rs 814.40 crores credited to securities premium account during the year under consideration.

(k)

Hence the premium credited has been rightly added by the Learned AO by applying the provisions of section 56(2)(viib) of the Act.

15. It is not in dispute that the assessee had issued shares to resident shareholders, specified funds and non-resident shareholders. The entire break up of issuance of shares is reproduced at page 14 of the assessment order in a tabular form. It is pertinent to note that the shares were issued at a premium and such premium has been justified by the assessee by submitting a valuation report using DCF method. The said valuation report has been accepted by the revenue for issuance of shares but the same has been rejected for CCPS. At the outset, we find that there was no receipt of any consideration for issuance of shares by the assessee during the year. The provisions of section 56(2)(viib) of the Act clearly mandates receipt of consideration for issue of shares at a price exceeding the fair market value of the shares. Hence, we hold that the provisions of section 56(2)(viib) of the Act applied by the revenue in the instant case are not applicable per se for the transactions carried out by the assessee. In this regard, the Learned AR before us placed reliance on the decision of Hon’ble Himachal Pradesh High Court in the case of Pr. CIT v. I.A. Hydro Energy (P.) Ltd [2025] 477 ITR 344 (Himachal Pradesh) wherein it was categorically held that when assessee did not receive any consideration for allotment of shares in previous year, the provisions of Section 56(2)(viib) of the Act would not be applicable to such transaction.

16. In the instant case, the revenue had merely sought to shift the complete onus on the assessee to prove the negative inasmuch as the assessee had clearly stated that no consideration was received during the year and that the amounts credited to securities premium had emanated merely on account of accounting treatment which has been explained in detail supra. When the assessee had pleaded that there was no receipt of any consideration at all on the impugned transaction which fact also could be cross verified from the bank statements of the assessee, the expectation of the revenue on the assessee to prove the negative cannot be construed as just and fair. Such an action cannot be countenanced or appreciated in the eyes of law. The assessee had clearly explained the transaction by taking into account the history of the transaction and the circumstances which prompted the assessee to credit the amount of Rs 814.40 crores in the securities premium account pursuant to reclassification of value of CCPS from borrowings to securities premium account. These transactions were not properly appreciated and even understood by the lower authorities in the instant case. The suo moto disallowance made by the assessee in various years on account of reclassification as detailed supra, has not been appreciated by the revenue in the instant case, thereby resulting in double addition. There is absolutely no colorable device adopted by the assessee. On the contrary, the assessee had made full and true disclosure in its financial statements on the subject mentioned transaction by giving a detailed note in its audited financial statements and the purpose of amount getting credited to securities premium account.

17. In view of the aforesaid observations and respectfully following the judicial precedent relied upon hereinabove and also considering the fact that there was no receipt of money at all so as to invoke the provisions of section 56(2)(viib) of the Act for the subject mentioned transaction, we have no hesitation to delete the addition made by the lower authorities under section 56(2)(viib) of the Act in the sum of Rs 814.40 crores in the facts and circumstances of the instant case. Accordingly the Ground Nos. 2 to 2.5 raised by the assessee are allowed.

18. The Ground Nos. 3 to 3.5 raised by the assessee are challenging the addition made under section 56(2)(viib) of the Act in the sum of Rs 9,58,701.

19. We have heard the rival submissions and perused the materials available on record. It is not in dispute that assessee during the year had issued equity shares and CCPS to various resident investors at a premium and prior to the issue of shares the assessee had obtained valuation report dated 28-02-2022 from Merchant Banker wherein the valuation was done using Discounted Cash Flow (DCF) method which is a recognized method prescribed under Rule 11UA of the Income Tax Rules, 1962. As per the said valuation report, the fair market value of the equity shares was determined at Rs. 15,067 per share. Out of such issuance, the assessee suo moto offered to tax an amount of Rs. 2,41,33,758 under Section 56(2)(viib) of the Act in the return in respect of shares and CCPS issued to resident investors at a price exceeding the fair market value as determined by the Merchant Banker as evident from the return filed by the assessee. The Learned AO rejected the valuation report of the Merchant Banker as being based on incorrect / unrealistic projections thereby concluding that no premium could have been charged by the assessee on the issuance of equity shares to resident investors. The Learned AO thus made an addition of Rs. 9,58,701 under Section 56(2)(viib) of the Act on account of share premium received by the assessee from issue of equity shares to resident shareholders i.e. Shri Sameer Maheshwari, Shri Rahul Agarwal, Shri Vaibhav Adalkha and M/s Kae Capital Fund IIA Scheme (Trust).

20. The Learned AO observed that during the relevant previous year, the assessee had issued equity shares to resident shareholders at a premium. The assessee justified the premium by furnishing a valuation report from a merchant banker. The merchant banker applied DCF method which is a prescribed method under Rule 11UA of the Income Tax Rules 1962. The assessee contended that the issue price was lower than the fair market value determined by the merchant banker and therefore the provisions of Section 56(2)(viib) of the Act per se would not be attracted. The Learned AO observed that the valuation report was based upon projected future revenues and profitability of the company and that the projections contained were sought to be compared with the actual financial performance of the assessee which resulted in significant deviations thereon and accordingly, the Learned AO observed that the projected revenues adopted by the valuer were substantially higher than the revenues actually earned by the assessee and that the assumptions adopted in the valuation report were unrealistic and unsupported by the actual financial performance of the assessee company. Accordingly, the Learned AO held that the valuation report could not be accepted for determining the fair market value of the shares. The Learned AO substituted the valuation by adopting the Net Asset Value (NAV) of equity shares and concluded that no premium could be legitimately charged on the issue of shares by the assessee and made an addition of Rs. 9,58,701 on account of excess premium under Section 56(2)(viib) of the Act. This action of the Learned AO was upheld by the Learned CITA.

21. At the outset, we find that assessee had justified the share premium by furnishing the valuation report obtained from a merchant banker who had valued the fair market value of the shares using DCF method. It is pertinent to note that DCF method is one of the prescribed methods under Rule 11UA of the Income Tax Rules, 1962. The Learned AO cannot substitute the said valuation report by adopting NAV method which is also another recognized method prescribed under Rule 11UA of the Income Tax Rules, 1962. What is relevant to be seen is as to whether the valuation report obtained by the assessee is based on one of the prescribed methods under Rule 11UA of the Income Tax Rules and whether it has been obtained from a competent person as prescribed in the rules. This has been duly satisfied by the assessee in the instant case. Obviously, for the purpose of valuation under DCF method, the merchant banker had to rely on the projections given by the management which would be on estimation basis only. Merely because the projections used in the valuation report does not match with the actual financial performance of the assessee, the said valuation report cannot be rejected at once which would amount to questioning the wisdom of an independent professional. The assessee in the instant case had rightly placed reliance on the decision of Hon’ble Jurisdictional Delhi High Court in the case of Pr. CIT v. Cinestaan Entertainment Pvt. Ltd. [2021] 433 ITR 82 (Delhi) in this regard. Respectfully following the same, we direct the Learned AO to delete the addition made under Section 56(2)(viib) of the Act in the sum of Rs. 9,58,701. Accordingly, the Ground Nos. 3 to 3.5 raised by the assessee are hereby allowed.

22. The Ground No. 4 raised by the assessee is challenging the initiation of penalty proceedings under Section 270A of the Act which would be premature for adjudication at this stage and hence dismissed.

23. The Ground No. 5 raised by the assessee is with regard to chargeability of interest under Section 234B and 234D of the Act, which would be consequential in nature.

24. In the result, the appeal of the assessee is partly allowed.