Tribunal overturns CIT(A)'s decision, ruling Section 56(2)(vii)(c) inapplicable to share allotments.

The Tribunal allowed the appeal, setting aside the CIT(A)'s order and deleting the addition of Rs. 4,56,000. It held that Section 56(2)(vii)(c) was not applicable to the allotment of shares to existing shareholders, especially when the majority of shares were held by relatives. The Tribunal emphasized the distinction between allotment and receipt of shares and the non-taxability of transactions between close relatives.

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Issues Involved:
1. Condonation of delay in filing the appeal.
2. Applicability of Section 56(2)(vii)(c)(ii) of the Income Tax Act, 1961.
3. Distinction between allotment of shares and receipt of shares.
4. Definition and applicability of "relative" under Section 56(2)(vii)(c) of the Income Tax Act.
5. Taxability of shares allotted to existing shareholders.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The assessee filed an appeal with a delay of 180 days due to the lockdown and non-functioning of the income tax side. The assessee submitted a condonation application, supported by an affidavit from the Chartered Accountant, explaining the reasons for the delay. The Revenue had no objection to the condonation. The Tribunal, after hearing both parties and considering the circumstances, condoned the delay, finding merit in the assessee's explanation.

2. Applicability of Section 56(2)(vii)(c)(ii) of the Income Tax Act, 1961:
The core issue was whether the addition of Rs. 4,56,000 under Section 56(2)(vii)(c)(ii) was justified. The Assessing Officer (AO) held that the Fair Market Value (FMV) of the shares, as per Rule 11UA, was Rs. 11.52 per share, whereas the shares were allotted at Rs. 10 per share, leading to an addition of Rs. 4,56,000. The AO rejected the assessee's argument that Section 56(2)(vii)(c)(ii) applies only to the receipt of shares, not their allotment. The CIT(A) upheld this view, stating that the distinction between initial allotment and secondary sale of shares was irrelevant for the purpose of the section.

3. Distinction Between Allotment of Shares and Receipt of Shares:
The assessee argued that Section 56(2)(vii) applies to the receipt of shares, not their allotment. The Tribunal agreed, noting that allotment of shares results in their creation, whereas receipt implies the transfer of existing shares. The Tribunal emphasized that Section 56(2)(vii) is a deeming provision and must be construed literally. Therefore, allotment of shares does not fall under the ambit of Section 56(2)(vii)(c).

4. Definition and Applicability of "Relative" under Section 56(2)(vii)(c):
The assessee contended that 95.35% of the shares were held by relatives as defined under Explanation (e) to Section 56(2)(vii). The Tribunal noted that transactions between close relatives are not taxable under Section 56(2). The Tribunal found that the shares were allotted to the assessee instead of all existing shareholders, implying a transfer of rights among relatives. Hence, the provisions of Section 56(2)(vii)(c) were not applicable.

5. Taxability of Shares Allotted to Existing Shareholders:
The Tribunal examined whether the shares allotted to the assessee were taxable. It concluded that since the shares were allotted to an existing shareholder and the majority of the shares were held by relatives, the transaction was not taxable under Section 56(2)(vii)(c). The Tribunal relied on a similar case (ACIT vs. Venkanna Choudhary), where it was held that transactions between close relatives are exempt from taxation under this section.

Conclusion:
The Tribunal allowed the appeal, setting aside the CIT(A)'s order and deleting the addition of Rs. 4,56,000. The Tribunal held that Section 56(2)(vii)(c) was not applicable to the allotment of shares to existing shareholders, especially when the majority of the shares were held by relatives. The Tribunal emphasized the distinction between allotment and receipt of shares and the non-taxability of transactions between close relatives.

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