TaxTMI 
TaxTMI 
TaxTMI 
2020 (1) TMI 1012
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....2014 as per the details given under:- Date of acquisition Number of shares Face value Purchase price 05/04/2013 4,25,000 Rs. 10 Rs. 10 26/03/2014 9,05,000 Rs. 10 Rs. 10 The cost of acquisition of the shares of M/s. Sardar Projects Pvt. Ltd. appeared to be much lesser than the Fair Market Value (FMV), therefore, the Assessing Officer estimated the FMV as on 05/04/2013 and 26/03/2014 as per the previous year balance sheets of M/s. Sardar Projects Pvt. Ltd., and worked out the taxable income u/sec. 56(2)(vii)(c)(ii) of the Act, as per Rules 11U & 11UA of the IT Rules 1962 as under:- Date No. of shares (A-L)* PV/PE FMV (Rs.) Cost of acquisition (Rs.) FMV minus cost of acquisition Income u/s 56(2)(vii)(c) (ii) (Rs.) 05/04/2013 4,25,000 (150169940-136039771)*10 200000 706.51 10 696.51 29,38,91,750 26/03/2014 9,05,000 (288716791-186682782)*10 85042600 12.00 10 2 18,10,000 Total 29,57,01,750 The Assessing Officer called for explanation of the assessee as to why the equity shares of 4,25,000 acquired on 05/04/2013 should not be valued adopting the FMV of Rs. 29,81,41,750/- and the s....
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....p; 4,25,000 F Fair Value of the shares: 5,39,64,483 * 42,50,000 4,06,67,600 = 56,39,600 i.e. 13.26 per share Thus, the ld.AR argued that for arriving the value of fresh allotment of shares, FMV required to be worked out as on the date of allotment of shares but not excluding the fresh allotment. Thus, argued that FMV as on 26/03/2014 works out to Rs. 12.64 per share and Rs. 13.26 as on 26/03/2013. For the shares allotted on 05/04/2013, the ld.AR argued that as per Rule 11U valuation of shares allotted to the assessee has to be valued basing on the balance sheet as on the valuation date. The "valuation date" means the date on which the property or consideration, as the case may be, received by the assessee. Section 56(2)(vii)(c)(ii) has been brought in to the statute to address the issues consequent to abolition of gift tax where higher value is sought to be passed on from one person to another person without adequate consideration. In the instant case, the shares were allotted by the M/s. Sardar Projects Pvt., Ltd. subsequent to the adjustment of share application money, therefore argued that the balance sheet has to be taken into consideration for p....
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....d up share capital 200,000 10.2 From the above, the fair market value of the share of M/s. Sardar Projects Pvt. Ltd., is valued at Rs. 676.55. The difference between the fair market value (Rs. 676.55) and consideration paid (Rs. 10) worked out to Rs. 666.55. Accordingly, a sum of Rs. 28,32,83,750 (Rs. 665.55 x 4,25,000) is to be treated as income of the assessee u/s 56(2)(vii)(c)(ii), in respect of shares received on 05/04/2013 Particulars Amount Book Value of Assets (A) (Refer to Note No.1) 294,190,834 Book value of liabilities (L) (Refer to Note No.2) 238,442,428 Amount of paid up equity shares (PE) (Refer to Note No.3) 38,505,600 Paid up value of equity share (PV) 10 (A - L) 55,748,406 Fair market value of unquoted equity share (A-L)/PE*PV) 14.48 Note No.1 - Book Value of Assets: Particulars Amount Total Value of Assets 295,163,548 Less: Preliminary Expenses to the extent not written off 23,170 Advance Tax 900,000 Tax Deducted at Source / TCS 0 Differed Tax Asset 49,544 Book value of Assets 294,190,834 Note 2 - Boo....
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....orked out the FMV of the shares as on 05/04/2013 at Rs. 13.46 per share and 26/03/2014 at Rs. 12.64 per share. For the sake of convenience and clarity, the relevant part of the order of ld.CIT(A) is extracted which reads as under:- "5.10 I have carefully considered the contentions of the both the appellant and the assessing officer. Both the appellant and the assessing officer supported their respective valuations on the basis of Rule 11UA. The short issue before me is what is the correct understanding of Rule 11UA? In this regard, it is relevant to note that the total value of shares as contained in Rule 11UA is the difference between the total book value of the assets and total book value of the liabilities. As on 05/04/2013, the Assessing Officer considered the total value of assets at 14.59 crores and the total value of liabilities at 13.24 crores. The difference between the Assets(A) and Liabilities (L) i.e. (A-L) was arrived at as Rs. 1,35,30,903/-. No doubt the shares before the from allotment of shares i.e at the beginning of 05.04.2013 were only Rs. 20,000/-. But on the same date the total number of shares increased to 38,50,560 on allotment of fresh shares of 38,30,560.....
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....ares were not received by the appellant. It is only after the allotment of shares that the appellant received the shares and valuation as per Rule 11UA is triggered only after the appellant received the shares on allotment made by the company. The guidelines issued by the Controller of Capital Issues are no longer in existence. However, the concept behind these guidelines and the objective behind the amendment to S.56 are alike. Both were intended to curb the practice of shares being allotted at a price different from the intrinsic value of the share. Therefore, the assessing officer is not justified in discarding these guidelines. The assessing officer placed reliance in the decision of hon'ble Supreme Court in the case of Bharat Hari Singhania (Supra). I find that in this decision the hon'ble apex court only said that when a Rule is prescribed in the Statute the same has to be followed. In the case before me, it is not the case of the appellant that the valuation has to be made ignoring the Rule 11UA. Therefore, this case does not have any bearing on the issue before me. Further, the appellant brought to my notice during the course of appeal hearing the decision rendered ....
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....ties will get reduced by a sum of Rs. 4,65,37,000/- and the paid up value of share capital will get increased by the same amount. c) With the above changes, the value of the share as on 05/04/2013 would be as under:- Total assets (A) Rs. 14,59,85,666 Total Liabilities (L) Rs. 9,41,49,4163 Net value (A - L) Rs. 5,18,36,503 Paid up value of equity capital Rs. 3,85,05,600 Fair market value (A-L)*PE/PV Rs. 13.46 per share Value of 4,25,000 shares Rs. 57,20,500/- Face value of shares Rs. 42,50,000 Difference being income u/s 56 Rs. 14,70,500/- d) Similarly, the value of shares as on 26/03/2014 would be as under:- Total assets (A) Rs. 29,41,90,834/- Total Liabilities (L) Rs. 19,19,05,428/- Net value (A - L) Rs. 10,22,85,406/- Paid up value of equity capital Rs. 8,50,42,600/- Fair market value (A-L)*PE/PV Rs. 12.02/- Value of 4,25,000 shares Rs. 1,08,78,100/- Face value of shares Rs. 90,50,000/- Difference being income u/s 56 Rs. 32,98,600/- 5. Against the order of the ld. CIT(A), the Revenue is in appeal before this Tribunal and the assessee has filed the Cross objection challenging the additions confirmed by the ld. CI....
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..../2013, had issued 38,30,560 shares to the assessee and others, if the value of the shares is taken at Rs. 676.55, the total value of the assets would be working out to astronomical figure of Rs. 259.00 crores against the actual value of Rs. 1.35 crores and leads absurdity. Any interpretation of Rules needs to be on the basis of reality of facts, but should not lead to absurdity. Similarly, as on 26/03/2014, the total assets were Rs. 29.41 crores and total liabilities were Rs. 23.84 crores and net assets were Rs. 5.57 crores. If the same rule is applied the FMV as per the Assessing Officer worked out to Rs. 14.48 per share and the net assets would be Rs. 5.57 crores on 26/03/2014. Without any major change in the financial position, the net assets got decreased from Rs. 259.00 to 5.57 crores. Thus, ld.AR argued that the interpretation of Rule should be based on the facts and as held by the Hon'ble ITAT, Bombay Tribunal in the case of Sudhir Menon (HUF) (supra) the date on which the capital assets received would be required to be considered for arriving at the FMV. Ld.AR argued that the FMV required to be worked out after including the fresh allotment of shares as on the valuation....
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..... Hence argued that "valuation date" means the date on which the property or consideration, as the case may be, is received by the assessee. In the instant case, the assessee has received the property in the form of shares and the shares can be said to have become the property of the assessee only after the allotment to the assessee. For the purpose of valuation, ‗balance sheet' means the balance-sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor of the company appointed under section 224 of the Companies Act, 1956 (1 of 1956) and where the balance-sheet on the valuation date is not drawn up, the balance-sheet drawn up as on a date immediately preceding the valuation date on which it has been approved and adopted in the annual general meeting of the shareholders of the company. Therefore, argued that FMV of the shares required to be considered at end of the day after the fresh allotment of shares as on the valuation date. Otherwise, it becomes the balance sheet drawn on the beginning of the day which was never drawn and it is always drawn at the end of the day. Wh....
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.... argument, the Ld DR submitted that with regard to non-application of section 56(2)(vii)(c)(ii) of the Act for close relatives the ld.DR argued that the shares were not only allotted to the assessee but also to other shareholders on both the dates. Thus, argued that the case law relied on by the assessee in the case of Sri Kumar Pappu Singh Vs. DCIT in ITA No. 270/VIZ/2018, dated 07/12/2018 has no application to the assessee's case. 10. We have heard both the sides and perused the material placed on record. In the instant case, the assessee has acquired fresh allotment of shares from M/s. Sardar Projects Pvt. Ltd. The company has allotted the shares of 4,25,000 @ 10/- each on 05/04/2013 and 9,05,000 shares @ 10/- each on 26/03/2014. The net book value of the assets as on 05/04/2013 was Rs. 1.35 crores. The company had issued 38,30,560/- shares @ 10/- each to the assessee and 28 others on 05/04/2013. Similarly, on 26/03/2014, the company had issued 46,53,700 shares @ 10/- each to the assessee and 14 others. In the allotment, the assessee had been allotted 4,25,000 shares on 05/04/2013 and 9,05,000 shares on 26/03/2014. The FMV of each share was worked out by the Assessing Officer a....
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....e explanation of relative to exempt the assessee from taxing the excess fair market value under the head "income from other sources‟. Whereas, the contention of the assessee is that all the shareholders are relatives. The transaction between the close relatives is not taxable under the head "income from other sources u/s 56(2) of the Act and hence, the section 56(2)(vii)(c) has no application. We have gone through the provisions of 56(2)(vii)(c) and this provision was brought as an anti-abuse measure, seeks to tax the understatement of 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. The transactions between close the relatives are outside the scope of application of 56(2)(vii)(c). The legislature in its wisdom excluded the transaction of close relatives for the purpose of taxation under the income from other sources. Even the gifts received from the close relatives u/s 56(2)(v) are outside the scope of 56(2). Though the shares are allotted to the assessee, the entire shareholding of the company is retained by the family and no share was allotted to the outsiders. In this case, though the ....
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....om any close relative. The definition of relative as mentioned in proviso to Explanation (e) of section 56(2)(vii) as under:- "(e) "relative" means,- (i) in case of an individual- (A) spouse of the individual; (B) brother or sister of the individual; (C) brother or sister of the spouse of the individual; (D)brother or sister of either of the parents of the individual; (E) any lineal ascendant or descendant of the individual; (F) any lineal ascendant or descendant of the spouse of the individual; (G) spouse of the person referred to in items (B) to (F)." 12. There is no dispute that the assessee and other shareholders are close relatives, therefore the consideration received rather excess consideration passed on from the share of his brother is exempt from taxation u/sec. 56(2)(viii)(c)(ii) of the Act. Thus, we hold that the difference in FMV of the shares and the consideration paid by the assessee is squarely covered by the exemption clause provided u/sec. 56(2)(vii) of the Act and case law relied on by the assessee in the case of Sri Kumar Pappu Singh (supra) is squarely applicable in the assessee's case. The Ld.DR argued that the shares were not only al....
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....f receipt of the consideration the balance sheet of the assessee company was not drawn up as the same was drawn up only on 31st July, 2014 which is evident from the audited balance sheet filed. Clause (b) and clause (j) of Rule 11UA makes it clear that for computing fair market value of the shares the value of the assets and liabilities as stated in the audited balance sheet immediately prior to the receipt of consideration should be adopted. If, on the date of receipt of the consideration, the balance sheet was not drawn up, then, the balance sheet drawn up as on a date immediately preceding the valuation date should be adopted i.e., the balance sheet of the immediately preceding year should be adopted. We find, in the instant case, on the valuation date i.e., on 31.03.2014, the balance sheet was not drawn up by the auditor as audited financials were drawn up only on 31st July, 2014 and, therefore, we concur with the observation of the ld.CIT(A) that the valuation of assets and liabilities in the balance sheet of the immediately preceding year i.e., 31.03.2013 should have been adopted. Since the valuation done by the assessee was not in accordance with the Rule framed for valuatio....