2023 (9) TMI 1162 - HC - Income Tax

Tribunal Rules on Applicability of Section 56 for Rights Shares, Upholds Share Valuation, Dismisses Appeals.

The Principal Commissioner Of Income Tax 1, Ahmadabad Versus Jigar Jashwantlal Shah

The Principal Commissioner Of Income Tax 1, Ahmadabad Versus Jigar Jashwantlal Shah - [2024] 460 ITR 628 (Guj) Issues Involved:1. Applicability of Section 56(2)(vii)(c) of the Income-tax Act, 1961.2. Valuation of shares for tax purposes.Summary:Issue 1: Applicability of Section 56(2)(vii)(c) of the Income-tax Act, 1961The primary issue was whether Section 56(2)(vii)(c) of the Income-tax Act, 1961, could be invoked for the allocation of shares to the assessee. The Tribunal considered three scenarios:1. 1,03,000 Rights Shares Proportionate to Shareholding: The Tribunal held that Section 56(2)(vii)(c) could not be invoked as the shares were allotted proportionate to the existing shareholding. The shares were not 'received from any person,' which is a fundamental requirement for invoking this section. The Tribunal relied on the decisions in Sudhir Menon (HUF) vs. A.C.I.T, Mumbai, and Ms. Dhun Dadabhoy Kapadia vs. CIT, among others, to conclude that there was no disproportionate allotment of shares, thus no addition under Section 56(2)(vii)(c) would arise.2. 82,200 Shares from Renunciation by Wife and Father: The Tribunal held that Section 56(2)(vii)(c) could not be invoked for the additional shares received due to the renunciation by the assessee's wife and father. Both are classified as 'relatives,' which are excluded from the purview of this section. The Tribunal relied on the principle that what cannot be done directly cannot be done indirectly, referencing cases like Kumar Pappu Singh v. Deputy Commissioner of Income-tax.3. 14,800 Shares from Third-Party Renunciation: The Tribunal held against the assessee, stating that the renunciation of rights by third parties who are not related leads to a disproportionate allocation of shares, thus invoking Section 56(2)(vii)(c).Issue 2: Valuation of Shares for Tax PurposesThe Tribunal upheld the CIT(A)'s decision to value the shares at Rs. 205.55 per share, instead of Rs. 255 per share as determined by the Assessing Officer. The valuation was based on the book value as of 31.03.2012 and the additional consideration received from the issuance of new shares. The Tribunal referenced cases like ACIT Vs. Y. Venkanna Choudary and Sadhvi Securities (P) Ltd v. Asstt. CIT to support this valuation method.Conclusion:The Tribunal concluded that Section 56(2)(vii)(c) does not apply to the proportionate allocation of rights shares or to shares received from relatives. However, it does apply to shares received from third-party renunciations. The valuation of shares at Rs. 205.55 per share was upheld. Consequently, no substantial question of law arose from the Tribunal's judgment, and the appeals were dismissed.