TaxTMI 
TaxTMI 
2021 (3) TMI 399
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....r of Income Tax (Appeals) failed to appreciate that order of assessment is bad in law. 4. For that the Commissioner of Income Tax (Appeals) failed to appreciate that no opportunity of being personally heard was provided to the appellant during the course of assessment proceedings. 5. For that the Commissioner of Income lax (Appeals) erred n upholding the addition of Rs. 17,46,25,000/- u/s.56(2)(viib). 6. For that the Commissioner of Income Tax (Appeals) faired to appreciate that the provisions of section 56(2)(viib) are not invocable in the facts and circumstances of the appellant's case. 7. For that the Commissioner of Income lax (Appeals) failed to appreciate that the provisions of section 56(2)(viib) are invocable only when the consideration for issue of shares exceeds the face value of shares and not when they are issued at face value. 8. For that the Commissioner of Income lax (Appeals) failed to appreciate that the appellant did not receive any consideration excess of the face value of shares issued. 9. For that the Commissioner of Income Tax (Appeals) having accepted that the shares have been allotted at face value, faile....
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.... of raising share capital, because the assessee has issued preference shares at face value of Rs. 10,000/- per share, whereas face value of equity shares was fixed at Rs. 10/- per share. Further, fair market value of share as on date of issue was at Rs. 4.73, which is far lower than the face value fixed by the assessee. The Assessing Officer further noted that although the provisions of Companies Act, 2013 requires to specify the purpose of issue of preference shares and also requires basis for fixation price, but the assessee has not substantiated face value of preference shares at Rs. 10,000/- per share, when the asset base of the company is not supporting such valuation. The Assessing Officer further was of the opinion that the assessee has also failed to furnish confirmation letter from person who has invested in share capital. The Assessing Officer has discussed the issue at length in light of shareholding pattern of the assessee company and investor company and their business relationship to come to the conclusion that the assessee has not established that transaction is commercial transaction which passed the test of genuineness in order to simply consider under the provisio....
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....the case while confirming additions made by the Assessing Officer towards consideration received for allotment of preference shares over and above fair market value of shares as on date of value without appreciating the fact that the provisions of section 56(2)(viib) of the Act will come into operation only in a case where shares has been issued at a premium over and above face value of such shares. The AR further submitted that in this case assessee has issued non-convertible cumulative preference shares with face value of Rs. 10,000/- each without any premium, therefore, question of application of the provisions of section 56(2)(viib) of the Act is misplaced. He further submitted that although the Assessing Officer has given various reasons to consider transactions of issue of shares is not a commercial transaction, but if you consider the manner in which share capital has been raised by assessee and purpose of raising share capital there should not be any doubt of whatsoever as considered by the Assessing Officer, because assessee has fulfilled all conditions prescribed under the Companies Act, 2013 and rules made thereunder for issue of preference shares. The assessee has al....
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....s neither the contention of the Assessing Officer nor learned CIT(A) that transaction is sham. Further, the Hon'ble Supreme Court decision in the case of McDowell's is on impermissible tax avoidance arrangements and the same is not applicable to the case of the assessee, because the assessee has merely issued preference shares at par and redeemed the same at cost in the next year. The AR further submitted that the allegation of the learned DR that share price fixed for issue of preference shares is not backed by any asset / business of the assessee is incorrect, because the assessee has issued preference shares to M/s. Kalpatharu Infrastructure Development Company Pvt. Ltd. in order to raise funds to repay loan from Directors, who had settled dues to bank which originally funded the investment made by the assessee in equity shares of M/s.Deccan Digital Networks Pvt. Ltd. Therefore, it is incorrect to say that assessee has structured transaction to circumvent the provisions of section 56(2)(viib) of the Act. 8. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. The Assessing Officer has made additions tow....
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....res alone, however, assessee has amended its share capital clause in Memorandum of Association vide AGM held on 2.1.2014, where share capital has been divided into equity shares and preference shares. Further, the assessee has retained face value of equity shares at Rs. 10/- per share, but face value of preference shares has been fixed at Rs. 10,000/- per share. Admittedly, at the time amendment to share capital and also at the time of issue of preference shares, net worth of assessee company was negative, which is evident from the fact that the Assessing Officer has computed negative face value of Rs. -4.73 per share. Therefore, in this factual background, if you examine the amendment carried out to share capital clause and fixation of face value of 10,000 equity shares, certainly doubt arises about the manner in which such share capital was amended and face value of preference shares was fixed. Admittedly, except certain privileges including first preference over dividend and repayment of capital, there are no special privileges to preference shareholders. Therefore, while examining allotment of preference shares, this factor needs to be considered. Moreover, provisions ....
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....urpose of the company. We, further, are of the considered view that from sequent of events and manner in which preference share capital was raised, including terms of repayment, rate of return and period of shares, it can be easily concluded that transaction of issue of preference share capital is arranged transaction in the nature of sham transaction to overcome the amended provisions of section 56(2)(viib) of the Income Tax Act, 1961. In this regard it is very essential to recollect the land mark decision of Hon'ble Supreme Court in the case of Mc Dowell & Co Ltd. Vs Commercial tax Officer(1985) 154 ITR 148, where it was held that the tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by restoring to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can now get away with a tax avoidance project ....