TaxTMI 
TaxTMI 
2018 (12) TMI 981
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.... without appreciating the fact that the valuation of shares is to be done prior to allotment of shares. . 2. Without prejudice to the above, the Learned CIT(A) has also erred in not considering the provisions of section 17 of the Act in the instant case in view of the fact that the assessee is the director of the company and was benefitted by allotment of shares at lower rates. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the Assessing Officer be restored. The appellant craves leave to amend or alter any ground and/or add new grounds which may be necessary." 3. As the facts and circumstances in the case of both the assessees are same, both the appeals were heard together and are now being decided by this consolidated order. ITA No.676/Mum/2015 4. The brief facts of the case, inter alia, are that the assessee is director of M/s. Dorf Ketal Group cases and derives income from salary, income from house property and income from other sources. The assessee filed his return of income on 31.07.2010 showing total income of Rs. 24,23,44,903/-. Subsequently the return was revised on 11.07.2011 declaring the ....
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....160/- cannot be assessed as income in the hands of the assessee on the ground of in adequate consideration". 14.2 Since the facts in the case of the appellant and the facts in the case of Sudhir Menon (HUF) are identical, the decision rendered by the Hon'ble ITAT Mumbai in the case of Sudhir Menon (HUF) is applicable mutatis mutandis in the case of the appellant. Some of the salient observations made by the Hon'ble ITAT vide para No. 4.2 in the case of Sudhir Menon (HUF) for the A.Y 2010-11 are reproduced as under: (1) Though the word property occurring in section 56(2)(vii) defined to mean capital assets which includes shares and securities but the shares come into existence only on their allotment. (2) Receipt of the property is only on the allotment on which date the shares, a specified property comes into existence. Till such allotment the shares do not exist. (3) The plea of the rights under reference being not a property specified under the provision or the provision being sought to be applied by the revenue to a non-existing property is without basis. (4) Section 56(2)(vii) never intended to cover a transaction of this nat....
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....s. As long as, therefore, there is no disproportionate allotment, i.e. shares are allotted pro-rate to the shareholders, based on their existing holdings, there is no scope for any property being received by them on the said allotment of shares; there is no scope for any property being received allotment of shares; there being only an apportionment of the value of their existing holding over a large number of shares". 14,4 In the light of the above observations, the IT AT in the case of Sudhir Menon (HUF) for the A.Y 2010-11 held that no addition u/s 56(2)(vii)(c) of the Act would thus arise in view of the undisputed facts in the instant case and the assessee succeeds. Considering the fact that the issue involved is identical in the case under consideration as well as in the case of Sudhir Menon (HUF) for the A.Y 2010-11, following the decision of Hon'ble ITAT, Mumbai, it is hereby held that the provisions of section 56(2)(vii)(c) of the Act is not applicable to the facts and circumstances of the appellant's case. 14.5 It is also the case of the A.O. that if the provisions of section 56(2)(vii)(c) of the Act is held to be not applicable, then the same shou....
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....itional shares are allotted to the shareholders including the appellant who happens to be the director in the said company. No shares have been allotted to the appellant under ESOP and in the appellant's case there is no admitted fact of allotted share value being lower than the market value as in the case of Smt. Tripti Sharma. In view of the above, the facts in the case of Smt. Tripti Sharma is distinguished. 14.7 While forwarding the remand report it is submitted by the Addl. CIT, Central Range-10, Mumbai that the department has not accepted the decision of the ITAT in the case of Sudhir Menon (HUF) and appeal against the order of ITAT is filed before the Hon'ble High Court of Mumbai. In this regard it is stated that though it is the right of the department to contest the orders of the appellate authorities in higher forum as in this case the order of the ITAT, Mumbai is contested before the Hon'ble High Court of Mumbai, however, till such time either the operation of the order ITAT, Mumbai is stayed or reversed by the Hon'ble High Court of Mumbai, the decision of the ITAT, Mumbai is binding on all lower authorities. It is important to note that the deci....
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.... Rs. 301, 25,58, 196/-. In view of the above, he contended that AO has justifiably made addition u/s.56(2). 8. On the other hand, learned AR relied on the order of the CIT(A) and placed on record, the order of the Tribunal in case of brother of the assessee. Shri Subhodh Menon HUF in ITA No.4887/Mum/2013 order dated 12/03/2014 wherein exactly similar issue was considered in detail by the Tribunal and issue was decided in favour of the assessee. He also invited our attention to the fact that CIT(A) has also relied on the order of Co-ordinate Bench in case of brother of the assessee, wherein facts were same. 9. We have considered rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of the hearing before us in the factual matrix of the case and found that issue under consideration is squarely covered by the order of the Tribunal in assessee's own case. The precise observation of the Tribunal was as under:- "4.3 We may next examine if the provision, being ostensibly applicable,....
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....n. To exemplify, shares in the ratio (say) 1:1 are offered for subscription at the face value of Rs. 100/- as against the current book value of Rs. 1,500/- (say). The moment a right share is allotted, the book value shall fall to Rs. 800/- per share. It is easy to see that the new share partakes a part of the value of the existing share, which is only on the basis of the underlying assets on the company‟s books. The excess (over face value), or s.1,400/-, gets apportioned over two shares as against one earlier, which is already the shareholders‟ property. This is also the basis and the premise of the decisions in the case of Dhun Dadabhoy Kapadia vs. CIT [1967] 63 ITR 651 (SC) and H. Holck Larsen vs. CIT [1972] 85 ITR 285 (Bom), relied upon and referred to by the parties before us. As long as, therefore, there is no disproportionate allotment, i.e., shares are allotted pro-rata to the shareholders, based on their existing holdings, there is no scope for any property being received by them on the said allotment of shares; there being only an apportionment of the value of their existing holding over a larger number of shares. There is, accordingly, no question of section ....
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....cable, i.e., even in principle, so that the said decline would be of no consequence in view of the specific provisions being since incorporated under section 55 of the Act, providing for the cost of shares under such situations, as for example a nil cost for bonus shares. The capital asset received by the assessee (shares in the present case), it may be appreciated, are to be valued as on the date of its receipt. That is, it is only the asset received that is to be valued. In-as-much as therefore the value of the additional shares is derived - if only in part - from that of the existing shares, the decline in the value thereof cannot be excluded or ignored - though only by following the valuation method prescribed under the rules - in arriving at the property by way of additional shares received by the assessee. The provision of section 55(2)(aa) provides for the cost of a capital asset, being a share or security, which the assessee becomes entitled to subscribe to by virtue of his holding such a capital asset. In our view, the same, on the contrary, provides statutory support, i.e., in principle, to our decision in-as-much as it clarifies that the values of the two, i.e., the orig....
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...., clause (vii), together with clauses (v) and (vi) preceding it, and clauses (viia) and (viib) following it, of section 56(2), exclude transactions of business reorganization, merger, demerger, etc. (refer para 4.2). As shall be noted, it is only the shares or interest in a company in which public is not substantially interested, arbitrage or leveraging of interest in which, being largely outside the public domain, that the provision/s seek to capture for tax purposes. A demerger stands, further, also specifically excluded from the definition of dividend per clause (v) of section 2(22). 4.5 We may next meet the various arguments advanced by either side. The assessee claims of section being not per se applicable as neither is there any transfer in its favour nor is the issuer-company the owner of the shares, which stand acquired by way of subscription. We are unable to appreciate the argument. How else, we wonder, is the issued capital in a company supposed to be acquired? The section nowhere stipulates „transfer‟ as the prescribed mode of acquisition. The transfer of a capital asset is even otherwise a relevant consideration in respect of income by way of capit....
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....r or in possession of the relevant asset. In fact, even this is to be regarded as discharged where it is able to exhibit circumstances that lead to the inference of the assessee being the owner, even as clarified by the apex court in K.P. Varghese (supra) (also refer C.K. Sudhakaran vs. ITO [2005] 279 ITR 533 (Ker)). The receipt of an asset by the assessee, and in his own right, is, on the other hand, the very basis or the edifice on which the provision of section 56(2)(vii) rests, so that it proceeds on the basis or the footing of the burden of the Revenue being satisfied. The receipt of a capital asset is accordingly made the basis or the condition for the charge to tax as income, unless falling under any of the excepted categories, and which it would be noted is a valid basis u/s. 2(45) r/w s.5 of the Act. It is this in fact that had led us to state earlier of the receipt (of an asset) as having been adopted as the basis or the condition of deeming as income u/s. 56(2)(vii) (or clauses (v) and (vi)), and of the provision as being on a firm footing. What the provision essentially does is to widen the scope of the afore-referred provisions of Chapter VI, which is essentially a sta....
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....at sense comes into existence only on its allotment. Allotment of a share is only the appropriation of the authorized share capital, being un-appropriated, to a particular person. In nutshell, the difference between the issue of a share to a subscriber and a purchase of a share from an existing shareholder is the difference between the creation and transfer of a chose in action (refer pgs.865, 866). How could, therefore, purchase be equated with allotment? In fact, the purchase or transfer implies existence of a property, while the shares, where out of un-appropriated capital, come into existence only on their allotment. It becomes, thus, in the context of the provision, completely irrelevant and of no consequence that the shares in the issuing company are not its property, and that it does not become, therefore, any poorer as a result of the allotment of shares therein. „Receipt‟ is a word or term of wide import, and would include acquisition of the subject matter of receipt - defined capital assets in the present context, by modes other than by way of transfer as well. We find no reason to limit or restrict the scope of the word „receipt‟ in the provision ....
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....ion received by the assessee as against the consideration declared or disclosed by him. Accordingly, once it is established that the consideration actually received by the assessee is more than what is declared or disclosed by him, the Revenue is not required to show the precise extent of the understatement or the exact consideration received by the assessee - an impossible task in most cases. That is to say that unless, therefore, the primary condition of an inaccurate or incorrect disclosure or declaration; rather, an understatement thereof, was satisfied, the section, which again provided a surrogate measure in the form of the FMV of the relevant asset, as does section 56(2)(vii), could not be invoked. Not doing so would, in its words, would be to read into the statutory provision something which is not there. It is not difficult to see that the Revenue, in applying the provision of section 52(2) in the manner it did, i.e., without establishing the condition of its invocation, was putting the cart before the horse. The process led to a fundamental flaw in-as-much as it proceeded to estimate - which is a process integral to assessment - something (consideration) that could not be....
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....the basis for the transfer pricing legislation, which is by now an integral part of the tax law of most countries. That the provision may operate harshly in some cases is no reason for it to be not read in the manner it ought to be, i.e., given its clear mandate. The proposition, apart from being well settled, has been sought to be advanced before us by the Revenue by relying on the decision in the case of Turner Morrison & Co. Ltd. vs. CIT [1953] 23 ITR 152 (SC). In fact, even the assessee‟s case is limited to right shares only, and does not speak of any other capital asset covered by the provision, including shares and securities. We have already explained that to the extent the shares subscribed to are right shares, i.e., allotted pro-rata on the basis of the existing share-holding (as on a cutoff date), the provision, though per se applicable, does not operate adversely. A disproportionate allotment, which cannot, therefore, strictly be regarded as right shares, though could be allotted under a rights issue, would however invite the rigor of the provision, i.e., to that extent. It is to be noted that the fresh shares rank parri passu with the existing holding and, therefo....
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.... provisions of Chapter VI of the Act, laying down the statutory rules of evidence, incorporating the principles of common law jurisprudence. In sum, as also in fine, the provision, brought as an abuse measure, only seeks to tax the understatement in consideration as the income in the hands of the recipient (of the corresponding asset) as against the donor in the case of Gift Tax Act, since no longer in force, particularly considering the burden that the Revenue would otherwise be called upon to discharge, i.e., to prove otherwise, even as the receipt of the asset by the assessee is established. No ambiguity or absurdity or unintended consequence has been either observed by us or brought to our notice, even as we have endeavoured to examine the provision from all angles; it being well excepted, also excluding cases of business reorganization. The provision is well founded, even as it is settled that hardship in a case would not by itself lead to supplying casus omissus or reading down the provision. In fact, we have also observed the same to be in accord with the trend in the legislative field in the recent past where in view of the increasing complexity of business or economic tran....
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...., the subsidiary entered into a loan agreement. The loan agreement required the promoters of the company to increase the total net worth of the company to Rs. 150 crores by 31 March 2010. 13. In order to comply with this covenant in the loan agreement, the board of directors of the company passed a resolution on 7 September, 2009 to issue 63,00,000 shares at the face value of Rs. 100 to the existing shareholders in proportion to their holding in the company so as to increase the share capital by Rs. 63 Crores. On the same day, i.e. 7 September, 2009 an offer letter was circulated by the company to the existing shareholders. Based on the existing shareholding of 34.57%, the assessee was offered 21,78,204 shares at face value of Rs. 100. The assessee accepted the part offer of the shares of only to the extent of 20,94,032 shares. On 21st September, 2009 the company informed its shareholders about the acceptance by them of the shares offered by the company. 14. From the record we also found that the shares were formally allotted by the company on 28 January, 2010 pursuant to the acceptance by the shareholders of the offer made to them in September, 2009. As the assessee only par....
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....ment of the value of the existing holding over a larger number of shares. There is accordingly no question of section 56(2)(vii)(c) though per se applicable to the transaction i. e., all this genre getting attracted in such a case. A higher than proportionate or non-uniform allotment though would and on the same premise attract the rigour of the provision. It is clear that as per the Tribunal it is only when a higher than a proportionate allotment is received by a shareholder the provisions of section 56(2)(vii) get attracted. In the instant case, the assessee applied for and was allotted a lesser than the proportionate shares offered to him. It is clear that earlier reference to "disproportionate allotment" means disproportionate to the extent the allotment is higher than the proportion offered. 16. We had carefully gone through the order of the Tribunal in case of Subhodh Menon HUF, wherein the shareholding of the assessee reduced from 4.98 to 3.17% has held that no property is received by the assessee in as much as the assessee and assessee has become poorer as the value of his shareholding declined. The shareholding of Sudhir Menon (HUF) had reduced by virtue of rights issue....
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....on for the transfer was correctly disclosed by the assessee but to bring within the net of taxation those transactions where the consideration in respect of the transfer was shown at a lesser figure than that actually received by the assessee, so that they do not escape the charge of tax on capital gains by understatement of the consideration. This was real object and purpose of the enactment of sub-section (2) and the interpretation of this sub-section must fall in line with the advancement of that object and purpose. We must, therefore, accept as the underlying assumption of sub-section (2) that there is understatement of consideration in respect of the transfer and sub-section (2) applies only where the actual consideration received by the assessee is not disclosed and the consideration declared in respect of the transfer is shown at a lesser figure than that actually received." 19. In view of the above, the provisions of section 56(2)(vii)cannot be applied to transaction under consideration. 20. Moreover, 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 ....