2018 (12) TMI 981 - AT - Income Tax

ITAT Upholds CIT(A)'s Order, Rejects Revenue Appeals on Section 56 & 17

The ITAT dismissed the Revenue's appeals, upholding the CIT(A)'s order. It was held that Section 56(2)(vii)(c) of the IT Act was not applicable as shares ... Addition u/s.56(2)(vii)(c) - income from transaction of shares - Held that:- The transaction of issue of shares was carried out to comply with a covenant in the loan agreement with the bank to fund the acquisition of the business by the subsidiary in USA, therefore, such a bonafide business transaction cannot be taxed under section 56(2)(vii) especially when there is not even a whisper about money laundering by the AO in the assessment order. Further, we observe that the consideration for the shares was received through banking channel. This object behind introduction of section 56(2)(vii) should be borne in mind. The provisions of section 56(2)(vii) cannot be applied to transaction under consideration. The provisions of section 56(2)(vii) are applicable only from 1st October, 2009. In the instant case, the offer was made by the company to the shareholders to subscribe for the shares on 7 September, 2009 pursuant to resolution passed by board of directors on the same date. Further, on 21st September, 2009, the company informed the shareholders about the acceptance of shares offered by the company. Therefore, the offer made by the company was accepted by the shareholders before 1st October, 2009 hence, the contract between the company and the shareholder for issue by the company of shares was completed before 1st October, 2009. The provisions of section 17 do not apply to the shares allotted by the company to the assessee as the shares were not allotted by the company to the assessee in his capacity of being an employee of the company. The shares were offered and allotted to the assessee by the company by virtue of the assessee being a shareholder of the company. Therefore the provisions of section 17 are not applicable. Circular No. 710 dated 24 July, 1995 also supports the assessee's stand that where shares are offered by company to a shareholder, who happens to be an employee of the company (as Mr. Subodh Menon indeed is), at the same price as have been offered to other shareholders or the general public, there will be no perquisite in the shareholder's hands. In the instant case, the shares were offered to the assessee and other shareholders at a uniform rate of ₹ 100 and therefore, the difference between the fair market value and issue price cannot be brought to tax as a perquisite under section 17 of the Act. - decided against revenue Issues Involved:1. Applicability of Section 56(2)(vii)(c) of the IT Act.2. Consideration of Section 17 of the IT Act.3. Credit for TDS on salary and interest.Issue-wise Detailed Analysis:1. Applicability of Section 56(2)(vii)(c) of the IT Act:The primary issue was whether the addition made under Section 56(2)(vii)(c) of the IT Act, amounting to Rs. 3,01,25,58,196/-, was justified. The Assessing Officer (A.O.) contended that the difference between the fair market value of shares (Rs. 1538.64 per share) and the subscribed value (Rs. 100 per share) should be taxed as income. The assessee argued that shares come into existence only upon allotment, hence Section 56(2)(vii)(c) should not apply. The CIT(A) referred to the ITAT's decision in Sudhir Menon (HUF) for A.Y. 2010-11, which held that Section 56(2)(vii)(c) does not apply to shares allotted on a rights basis at face value. The ITAT upheld this view, noting that the shares were allotted pro-rata to existing shareholders, and there was no disproportionate allotment. Therefore, the provisions of Section 56(2)(vii)(c) were not applicable.2. Consideration of Section 17 of the IT Act:The A.O. argued that if Section 56 was not applicable, the transaction should be considered under Section 17 of the IT Act, treating the shares as perquisites or profits in lieu of salary. The CIT(A) disagreed, stating that the ITAT in Sudhir Menon (HUF) held there was no inadequate consideration involved, hence Section 17 could not be applied. The ITAT concurred, noting that the shares were allotted uniformly to all shareholders, not specifically to the assessee as an employee. The shares were offered at the same price to all shareholders, thus not constituting a perquisite under Section 17.3. Credit for TDS on Salary and Interest:The assessee contended that the A.O. erred in not granting credit for TDS amounting to Rs. 7,43,13,801/- on salary and Rs. 2,529/- on interest. The CIT(A) directed the A.O. to rectify this issue, and the ITAT upheld this directive.Conclusion:The ITAT dismissed the Revenue's appeals, affirming the CIT(A)'s order. It was concluded that:- Section 56(2)(vii)(c) was not applicable as the shares were allotted pro-rata to existing shareholders.- Section 17 did not apply as the shares were not allotted as perquisites but were offered uniformly to all shareholders.- The A.O. was directed to grant credit for TDS on salary and interest as claimed by the assessee.Order Pronouncement:The order was pronounced in the open court on 07/12/2018. Both appeals filed by the Revenue were dismissed.