TaxTMI 
TaxTMI 
2020 (1) TMI 1012
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....rdar Projects Pvt. Ltd. on 05/04/2013 and 26/03/2014 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,....
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....ions 7,21,519 9,20,36,183 C NET VALUE (A-B) 5,39,64,483 D Share Capital Subscribed and paid up share 3,85,05,600 capital Reserve for allotment of share application money 21,62,000 4,06,67,000 E No. of shares allotted to Y.V. Choudary 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 cons....
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....06,454 Provision for Taxation 0 Amount set apart for Equity and Preference Dividend 0 Any amount representing provisions made for unascertained liabilities 0 Any amount representing Contingent liabilities 0 Different Tax Liability 0 Book value of Liabilities 132,454,763 Note No.3 - Calculation of amount of paid up of Equity shares Particulars Paid up share capital 200,000 Amount of paid 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 eq....
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....f shares were increased to 38,50,560/- on allotment of fresh shares of 3830560/-.If the share value is taken at Rs. 676.55 the total value of the assets would 3850560*676.55 works out to Rs. 259.00 crores approximately against the actual value of the assets as on 05/04/2013 at Rs. 1.35 crores which leads to absurdity. When the book value of assets was Rs. 1.35 crores the same cannot lead to over valuation astronomically to Rs. 259.00 crores by application of the Rules which shows inconsistency. The ld. CIT(A) further viewed that interpretation of Rule which results into valuation of assets more than the book value of the assets would be contrary and inconsistent to the spirit of the intention of Legislature. Accordingly, the ld. CIT(A) worked 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.....
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....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 assessing officer sought to distinguish this decision by observing that it was rendered in the context of issue of rights shares. However, I find that the principle enunciated in this decision is applicable in all cases. The assessing officer attributed the entire value of assets only to 20,000 shares. However, the fact remains that the total value of assets is to be shared among all the 38,50,260 shares once the shares are allotted. Therefore, it would be appropriate to value the share by considering the position after the allotment of shares. Before the allotment of shares, the shares 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 a....
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....ideration." This decision reiterated the principle that the valuation of the shares has to be on the basis of post allotment of shares in as much as the valuation as contemplated in Rule 11UA is in respect of property received. 5.12 In view of the above discussion, I hold that: a) The gross value of assets as considered by the Assessing Officer is proper. b) The gross value of liabilities is to be decreased by the amount of share capital resulting out of allotment of shares and the paid up value of equity capital is to be increased by the same amount. The value of liabilities as on 05/04/2013 will get reduced by a sum of Rs. 3,83,05,600/- and the paid up value of equity capital would increase by the same amount. Similarly on 26/03/2014, the value of liabilities 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....
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....relied on the order of the ITAT, Bangalore Bench in the case of M/s.Kottaram Agro Foods Pvt. Ltd. Vs. ACIT in ITA No. 2852 & 2853/Bang/2018, dated 28/12/2018. 7. Per contra the ld.AR submitted that the Assessing Officer had valued the FMV of shares at Rs. 676.55 per share against the value arrived at by the ld. CIT(A) at Rs. 13.46 per share and similarly on 26/03/2014, the FMV of shares worked out by the Assessing Officer was at Rs. 14.48 per share and the ld. CIT(A) at Rs. 12.02 per share. Ld.AR submitted that the total value of the assets as on 05/04/2013 was Rs. 14,59,85,666/- out of which the liabilities were Rs. 13,24,54,763/- and the net assets were Rs. 1,35,30,903/-. Before fresh allotment of shares the number of shares held by the company was 20,000 shares. Thus, FMV of shares worked out to Rs. 676.55 per share. The company on 05/04/2013, 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 fact....
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.... 8504260 4653700 CIT(A) considered the position post allotment of shares Value per share (A)/(B) 14.48 12.02 Same as above 8. The ld.AR argued that from the above comparative analysis, differences are glaring and the FMV adopted by the AO applying Rule 11UA of IT Rules are not reflecting the real value of book value of the assets and the share value as on 05/04/2013 were shown at Rs. 676.55 against the correct value of Rs. 13.46 as worked out by the Ld.CIT(A). Similarly from the same balance sheet, the AO arrived at the FMV of the share at Rs. 14.48 against which the Ld./CIT(A) worked out at Rs. 12.02 after considering the fresh allotment of shares also as on valuation date following the decision of ITAT Mumbai in the case of Sudhir Menon(Supra). Thus argued that if the fresh allotment of shares is not included the valuation of FMV would be unreal and it is not the intention of the legislature to tax the unreal income. 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 ....
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....c)(ii) of the Act. Hence, ld.AR argued that even the higher value is passed on from one of the close relatives to another close relative, there is no application of sec. 56(2)(vii)(c)(ii) of the Act. In the instant case, the assessee has been allotted the shares at Rs. 10/- per share and whatever excess consideration, the same was passed on from his own brother and the brother is covered within the meaning of relative u/sec.56(2)(vii)(c)(ii) of the Act. Thus, ld.AR argued that there is no case for taxing the excess consideration worked over and above the book value of share price in the hands of the assessee u/sec. 56(2)(vii)(c)(ii) of the Act. Ld.AR relied on the following judicial precedents:- 1) ACIT Vs. Dr. Rajan Pai [(2016) 48 ITR (Trib.) 170 (Bang.)] 2) Bharat Hari Singhania & Ors. Vs. CWT & Ors. [(1994) 207 ITR 01] 3) Sri Kumar Pappu Singh Vs. DCIT in ITA No.270/VIZ/2018, dated 07/12/2018 (ITAT, Visakhapatnam Bench) 9. Responding to the 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 ot....
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....he case of Sri Kumar Pappu Singh (supra). Therefore, argued that as on 05/04/2013, section 56(2)(viii)(c)(ii) has no application to the assessee's case. We consider the argument of the ld.AR and find that there are only two shareholders in the company i.e. assessee and his brother Mr. Y. Ramesh Chandra in company and both the shareholders are brothers as defined in the Act under the close relatives. The transaction made between close relatives are excluded for the purpose of deeming income under section 56(2)(viii)(c)(ii) of that Act. This view is upheld by the decision of this Tribunal in the case of Sri Kumar Pappu Singh (supra). For the sake of convenience and clarity, we extract the relevant part of the order this tribunal in para 14 which reads as under:- "14. The assessee has only applied for shares which were allotted by the company. The contention of the revenue is that since there is no relation between the company and the assessee there is no case for invoking the 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 sharehol....
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....e tax. Therefore, we are of the considered opinion that the transaction is within the family and close relatives and covered by the proviso to section 56(2)(vii)(c) of the Act and there is no application of the said section for taxing the income under the head "income from other sources‟. The coordinate bench of ITAT Chennai in the case of Vani Estates Pvt. Ltd. Vs. ITO, Corporate Ward-3(4), Chennai, 98 taxman.com 92 also taken the similar view in respect of excess share premium for the transactions between the relatives which required to be taxed u/s 56(2)(vii)(b) of the Act." 11. In the instant case, there is no dispute that existing shareholders prior to fresh allotment was the assessee and his brother Mr.Y. Ramesh Chandra and whatever excess benefit was passed on to the assessee was out of the interest of share holding held by his brother Mr.Y.Ramesh Chandra, hence, the provisions of section 56(2)(viii)(c)(ii) shall not apply in case of money or any property received from 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- ....
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.... by the coordinate bench of ITAT, New Delhi in ITA No.1047/Del/2019 dated 16/07/2019 in Sadhvi Securities Ltd and held that in case the balance sheet was not drawn up on the date of allotment, the previous balance sheet which was approved in the AGM has to be considered for valuation of FMV of the shares. For the sake clarity we, reproduce the relevant part of the order of coordinate Bench of ITAT, New Delhi in Sadhvi Securities(supra) which reads as under: "12. We do not find any merit in the argument of the ld. counsel for the assessee. A perusal of the Rule 11U(b) as reproduced by CIT(A) at para 5.6 of his order makes it clear that the balance sheet means the balance sheet as drawn up on the balance sheet date which has been audited by the auditor of the company and where the balance sheet on the valuation date has not been drawn up the balance sheet drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the AGM of the shareholders of the company. We find in the instant case, on the date of 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, 201....