The Delhi Tribunal has granted relief to Bright Lifecare Private Limited. It ruled that reclassifying Compulsorily Convertible Preference Shares (CCPS) from borrowings to share capital and securities premium doesn’t trigger taxation under section 56(2)(viib) of the Income-tax Act, 1961.
The case involved reclassifying CCPS issued by Bright Lifecare Private Limited from FY 2011-12 to FY 2019-20. These were initially accounted for as ‘Share Capital’ and ‘Securities Premium’ under Indian Generally Accepted Accounting Principles (IGAAP).
However, upon transition to Indian Accounting Standards (Ind-AS), the CCPS were classified as ‘financial liability/Borrowings’ due to a ‘Buyback’ obligation in the agreement between the company and CCPS holders.
During FY 2022-23 relevant to the AY 2023-24, the CCPS agreements were revised, resulting in the deletion of the ‘Buyback’ clause, and the CCPS were reclassified from ‘Borrowings’ to ‘Share Capital’ and ‘Securities Premium’.
Tax Implications
The Assessing Officer (AO) made an addition under section 56(2) (viib). This was due to reclassifying CCPS from ‘Borrowings’ to ‘Securities Premium’ account. Another addition was made for share premium received from issuing equity shares to resident shareholders.
The Commissioner (Appeals) affirmed the assessment, leading to an appeal before the Tribunal, which relied on the decision of the Himachal Pradesh High Court in PCIT vs. IA Hydro Energy (P.) Ltd.
The Tribunal held that the provisions of section 56(2)(viib) clearly mandate the receipt of consideration for the issue of shares at a price exceeding the fair market value of the shares, and that the provisions applied by the Revenue were not applicable in this case.
Valuation Method
The Tribunal also addressed the issue of share valuation, relying on the decision of the Delhi Tribunal in Cinestaan Entertainment (P.) Ltd. vs. ITO, which was affirmed by the Delhi High Court.
The Tribunal held that the assessee justified the share premium. They furnished a valuation report from a merchant banker using the discounted cash flow (DCF) method, which is one of the prescribed methods under Rule 11UA of the Income Tax Rules, 1962.
The Tribunal further held that the Assessing Officer cannot substitute the valuation report. They cannot use the net asset value (NAV) method. The valuation report cannot be rejected solely because projections did not match actual financial performance.
This granted substantial relief to the assessee. It reiterated that deviation from actual financial results does not result in rejection of valuation under Rule 11UA.
DCIT, dated 18.09.2026, has significant implications for companies that issue CCPS and face similar tax implications.
In this context, it is worth noting that the Tribunal’s decision is consistent with the principles of taxability under the Act, which prioritize the actual receipt of consideration over accounting treatment.
According to the Tribunal, the assessee had made full and true disclosure in its financial statements regarding the reclassification of CCPS, and the purpose of the amount getting credited to the securities premium account.
The ruling granted substantial relief to the assessee. It held that actual receipt of consideration during the relevant year is mandatory for invoking section 56 (2) (viib). The assessee’s addition of Rs.814.40 crores was deleted.
Implications of the Tribunal’s Decision
IA Hydro Energy (P.) Ltd. It also relied on the Delhi Tribunal in Cinestaan Entertainment (P.) Ltd. vs. ITO. This provides clarity on applying section 56 (2) (viib) and valuation methods under Rule 11UA of the Income Tax Rules, 1962.
Conclusion of the Case
The decision is reported as ITA No. 5198/Del/2026, with an order dated 18.09.2026.