TaxTMI 
TaxTMI 
2014 (3) TMI 534
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....the validity in law of the assessment as income of the difference between the value of the shares allotted to the assessee and the consideration paid by it in respect thereof. The facts 3. We may, to begin with, brief the facts, which are simple and undisputed. The assessee, holding 15,000 shares (as on 01.04.2009, the beginning of the relevant previous year) in a company by the name Dorf Ketal Chemicals Pvt. Ltd. ('DKCPL' for short), the entire (or almost the whole) capital in which is held by the family members of the assessee's karta's family, representing 4.98% of the share capital (3,01,316 shares), was offered 3,13,624 additional shares (which works to about 21 shares for each share held) at the face value rate of Rs.100/- each, on a proportionate basis. It subscribed to and was accordingly allotted 1,94,000 of those shares, on 28.01.2010, i.e., along with the other shareholders, who were allotted - on the same terms, not only the shares similarly offered to them but also that not subscribed to by the other shareholder/s, as 1,19,624 (313624 - 194000) shares by the assessee. The shares, as stated, were received by the assessee on 10.02.2010. As the book ....
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.... thousand rupees, the whole of the aggregate fair market value of such property; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that where the stamp duty value of immovable property ...... Provided further that this clause shall not apply to any sum of money or any property received-- (a) from any relative; or (b) on the occasion of the marriage of the individual; or (c) under a will or by way of inheritance; or (d) in contemplation of death of the payer or donor, as the case may be; or (e) from any local authority as defined in the Explanation to clause (20) of section 10; or (f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or (g) from any trust or institution registered under section 12AA. Explanation. - For the purposes of this clause, - (b) "fair market value" of a property, other than an immovable property, means the value d....
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....010 inserting clause (vii)(a) to section 56(2) (reported at [2010] 321 ITR (St.) 110 at pg.123); and CBDT Circular No.1 of 2011 dated 06.04.2011 explaining the said clause, which is effective from 01.06.2010. It was, according to him, a fit case for applying the ratio and the principles laid down by the hon'ble apex court in the case of K.P. Varghese vs. ITO [1981] 131 ITR 597 (SC) inasmuch as the apex court took into account all the relevant factors, including the purpose for which the relevant provision of section 52 was brought on the statute, as clarified by the official pronouncements preceding it or in this regard, invoking the rule of contemporanea expositio as well as the principles of construction. It, after noting, as pointed out by Lord Denning, that language is at best an imperfect instrument for the expression of human thought, referred to the words of Learned Hand that it must always be remembered that statutes have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning (at pg. 604). 4.2 We shall, before proceeding further, need to first resolve if the provision of section 56(2)(vii) includes the p....
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....(j) is the date of the receipt of the property. In our view though, the shares are received on their allotment. What stands received by the assessee subsequently on 10.02.2010 are the share certificates, i.e., the document evidencing its title thereto. The two are different, and the shares as well as the property therein vest in the assessee on the allotment of the shares, whereat the same stand constructively received; the payment of which has also been made by that date. Coming back to the question posed, i.e., as to how could a transaction as the present one be possibly covered by section 56(2)(vii)(c), in our view the correct and the proper question to be asked in the matter instead is: The transaction per se being ostensibly covered by the clear and unambiguous language of the provision, what is its import in a case as a present one? Does it, for example, lead to any unintended or absurd results which, though apparently should not arise, given the clear and precise mandate of the provision, i.e., to treat gains by way of receipt of property, which are not explicable in terms of normal human conduct, as income from other sources of the year of receipt (of the relevant asset)....
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....solved of proving, a formidable, if not an impossible task by any standards, that the shortfall in the consideration is sourced by or on behalf of the recipient of the property, and is thus his income. It is in fact not difficult to visualize situations where through the medium of additional shares the controlling interest in a company or business or interest in property - movable or immovable, is passed on to another at considerations far below the going rate of the relevant or the underlying assets/interest. Only a pro-rata allotment or, where not so, one that is adequately priced, would effectively ensure an exchange of the assets or interest therein at par values. The provision, thus premised, is on a firm, cogent and sound footing. We may, before we conclude our discussion on this aspect of the matter, dilate on the application of the provision to the transaction of the nature under reference. The provision, firstly, would not apply to bonus shares, and the argument alluding thereto arises only on account of misconception in respect thereof. Though the shares under reference are admittedly not bonus shares, we consider it relevant to dwell thereon, not only to meet the argu....
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....rtional to the existing share-holding. We may though, at the outset, clarify that the instant issue cannot be called a rights issue. Section 81 of the Companies Act, 1956 is not applicable to a private company (s.81(3)), so that it is firstly not obliged to issue shares to the existing shareholders only, and again, even so, on a proportionate basis. That apart, we state so as the scheme does not have a provision for the renunciation of rights by the existing shareholders. The same could thus at the option of the issuing company be offered for allotment to any other, i.e., whether existing shareholder or not. Thus, though the issue has elements of a right issue inasmuch as the offer is made in the first instance to the existing shareholders on the basis of their share- holding on proportional basis, the same cannot be strictly termed as one; the company appropriating that right, which could be offered to another. A rights issue, as informed by the ld. AR upon enquiry by the Bench, stands not defined either under the Companies Act or under the Securities Contracts (Regulation) Act, 1956. The company has, accordingly, correctly termed the issue, not satisfying all its parameters, as a....
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....the decline in the value of the existing holding. In the context of the example cited, by taking the difference at Rs.700/- per share for such shares. We emphasize equally on a uniform allotment as well. This is as a disproportionate allotment could also result on a proportionate offer, where on a selective basis, i.e., with some shareholders abstaining from exercising their rights (wholly or in part) and, accordingly, transfer of value/property. Take, for example, a case of a shareholding distributed equally over two shareholder groups, i.e., at 50% for each. A 1:1 rights issue, abstained by one group would result in the other having a 2/3rd holding. A higher proportion of 'rights' shares (as 2:1, 3:1, etc.) would, it is easy to see, yield a more skewed holding in favour of the resulting dominant group. We observe no absurdity or unintended consequences as flowing from the per se application of the provision of s. 56(2)(vii)(c) to right shares, which by factoring in the value of the existing holding operates equitably. It would be noted that the section, as construed, would apply uniformly for all capital assets, i.e., drawing no exception for any particular class or categ....
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....purpose of computing capital gains, which would arise on the subsequent transfer of such assets. We have already noted an internal consistency between the two sets of provisions in-as-much as section 49(4) stands simultaneously incorporated to deem the value adopted or taken for the purpose of section 56(2)(vii) (or (viia)) as the cost of acquisition of the relevant asset (refer para 4.1). In fact, the argument becomes irrelevant in view of our decision holding that section 56(2)(vii) shall not have effect, irrespective of the value at which the additional shares are allotted, where and to the extent they are so on the strength of and against the existing shareholdings, made uniformly or subject to adequate pricing. Much was made before us of the Revenue not treating the transaction as a rights issue of shares, as well as of the power of the tribunal in entertaining such a plea, even where taken before it for the first time, including qua the admission of additional evidence. We have already clarified the same to be not a rights issue, i.e., in the strict sense of the term, also stating our reasons, on the basis of admitted facts, therefor. The plea is also rendered inconsequential....
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....by the assessee (for any source of income), and in respect of acquisition or ownership of which he is unable to furnish a satisfactory explanation, i.e., as to the nature and source of acquisition, the value thereof or the excess (unrecorded) value, as the case may be, is deemed as the assessee's income. The apex court in Chuharmal vs. CIT [1988] 172 ITR 250 (SC) explained that the provision of section 110 of the Indian Evidence Act, 1872, raising a presumption of ownership in favour of the person in possession (in-as-much as possession is a prima facie proof of ownership) is applicable under tax jurisprudence as well, so that the onus to show that he was not the actual owner is upon such a person. It, accordingly, found nothing amiss in the charge to tax as income, the assets, properly valued, where unexplained (or not satisfactorily explained) in terms of the nature and source of their acquisition. The principle stands in fact dwelt with and explained at length by it over a number of decisions even prior thereto. The receipt of money, speaking in the context of a credit entry appearing in the assessee's books of account, even as there was no provision corresponding to sec....
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....eing a synonym for transfer, or of it as not flowing from its owner, is, thus, inconsistent, both in the context of the provision as well as its clear language. Reference in this context was also made by the ld. AR to section 122 of the Transfer of Property Act, 1882 and section 25 of the Indian Contract Act, 1872. A transaction could be either with or without consideration. Consideration signifies a price, so that it is a case of transfer, which the impugned transaction is not, while if considered as without consideration, the transaction is void in law, being not a gift in-as-much as the company is not the owner of its shares. The argument seeks to support the contention that the transaction in order to qualify as valid in law has to be a case of transfer in-as-much as the consideration implies price, so that the word 'receipt' occurring in section 56(2)(vii) has to be read as a synonym for or equated with 'purchase' or 'transfer'. The shares under question being not acquired through transfer, the transactions falls outside the ambit of section 56(2)(vii). We are completely unimpressed. The argument, attractive on its face, fails miserably the moment the n....
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.... on demerger), no property is being conveyed to the shareholder in-as-much as the property therein is comprised in the existing shareholding of the allottee. There is as such no case of a gift; the shareholder only receiving his own property, albeit in a different form. A 'right' share, on the other hand, is placed differently. To the extent it is allotted to a person not against his existing shareholding or, even so, albeit disproportionately, there is, depending on the terms of the allotment, which is the mode of acquisition and, thus, it's receipt, scope for value or property being passed on to him, which cannot be said to be in lieu of or as recompense of his existing property. The section would, as afore-stated, therefore, apply, though the extent of income, if any, chargeable there-under would depend on the actual allotment and its terms. Thus, considering the assessee's case from this angle also leads us to the same conclusion. We may at this stage advert to the erstwhile section 52 of the Act or, to put it more precisely, its interpretation as made by the apex court in K.P. Varghese (supra), on which heavy reliance was placed by the ld. AR before us. We h....
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.... present case, misconceived. This is as we have firstly pointed out a fundamental infirmity in the interpretation placed on or accorded to section 52(2) by the Revenue. Section 52(1), which again only enabled the A.O. to substitute the FMV as the consideration as against that declared by the assessee on transfer, subject to his having reason to believe that the transfer was effected with the object of evading or reducing the liability to tax u/s.45, was not adversely commented upon by the apex court. It is easy to see that all the official pronouncements notwithstanding, the apex court would or rather could not have opined in the manner it did but for the fundamental flaw observed by it in-as-much as the provision has to be read within its legal framework, giving a purposeful meaning to its clear words. No such infirmity inflicts the section under reference or has been shown to exist. We have already found receipt as a valid basis for deeming income, which is supported by the principles of common law jurisprudence. That 'income' under the Act is a word or term of wide import, and would include anything which comes in or results in gain is also well settled. The provision ca....
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.... case of K. P. Varghese (supra), also concluding the matter. The gist thereof, or atleast to a substantial extent, stands in fact already brought out in the earlier part of this order while discussing the several arguments urged before us. All that is logical relevant, yielding insight into the purpose and object for and toward which the amendment stands brought, should be admissible. A casus omissus cannot be readily inferred, and the courts eschew supplying the same except in the case of clear necessity. The court cannot read anything into a statutory provision which is plain and unambiguous; a statute being an edict of the Legislature. The language employed in a statue is a determinative factor of the legislative intent, the foundational basis of any interpretation, is to be found from the words used by the Legislature itself. The principle is in fact well settled and trite (refer Padmasundra Rao and others vs. State of Tamil Nadu [2002] 255 ITR 147 (SC); and Britannia Industries Ltd. vs. CIT [2005] 278 ITR 546 (SC). As explained in Surat Art Silk Cloth Mfrs. Assoc. (supra) (pg.17), the consequences cannot alter the meaning of a statutory provision where such meaning is plain an....