TaxTMI 
TaxTMI 
2020 (6) TMI 745
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....each at a premium of Rs. 590/- per share. During assessment proceedings the Assessing Officer (AO) asked the assessee to provide the valuation of the shares as per the book value and fair market value as on 31.03.2014 and provide the justification for charging the exorbitant share premium in terms of section 56(2)(viib). The assessee contented that the share application money had not been received in the relevant previous year and therefore the provisions of section 56(2)(viib) were not applicable to the case of the assessee. The AO was of the opinion that as per the Company's Act, any amount received and held pursuant to an offer made in accordance with the provisions of the Act, towards any subscription to any security including share application money or advance towards allocation of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of securities applied for shall be in nature of a Deposit. The AO noted that it is only in the financial year relevant to the assessment year under reference that the issue of shares had taken place and hence, the cause of action had arisen in the relevant period under consideration. The....
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.... not sustainable under law. He, accordingly, directed deletion of the addition made. The relevant finding of the ld. CIT(A) at para 7.3 of his order is as under : 7.3 I have considered the submissions of the appellant and perused the assessment order. The main contention in this case is whether the provisions of section 56(2)(viib) are applicable in the impugned assessment year or not. Section 56(2) (viib) of the Act, inserted in the statute by the Finance Act, 2012 w.e.f. 01.04.2013, provides that if a company in which public is not substantially interested, issues shares at premium to any person being a resident, the excess of the aggregate consideration received for such shares over-the fair market value thereof would be taxable as "income from other sources ". The aforesaid clause (viib) to section 56(2) of the Act is reproduced hereunder for ready reference: Income from other sources. 56(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section ....
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....e section is sought to be invoked. It is undisputed that during the relevant previous year the assessee had only issue/allotted 235667 equity shares of Rs. 10 at a premium of Rs. 590/- per share against the share application money received in financial year 2007-08, 2008-09, 2009-10 and 2010-11. Thus, in this case, the consideration was received in earlier years and no consideration has been received in the relevant previous year. In the years in which the consideration was received by the assessee, the provisions of section 56(2)(viib) were not applicable. The AO has noted in the assessment order that that as per the Company's Act, any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards any subscription to any security including share application money or advance towards allocation of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of securities applied for shall be in nature of a Deposit. It is only in the financial year relevant to the assessment year under reference that the issue of shares had taken place. Hence, the cause of action had arisen in the relevant p....
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....ved during the year, whereas the section 56(2)(viib) only refers to issuance of shares stating "if a company in which public is not substantially interested, issues shares at premium to any person being a resident". (iii) Whether on the facts and circumstances of the case, the Ld. CIT(A) has not erred in law and fact in deleting the addition made on account of excess premium received on issuance of shares without appreciating the fact that shares have been issued at excessive premium in terms of section 56(2)(viib) of the Act read with Rule 11UA during the F.Y. 2014-15 and cause of action has arisen in this financial year and not in year of receipt of share application money. (iv) Whether on the facts and in the circumstances of the case, the Ld CIT(A) has not erred in law and fact in holding that cause of action had arisen in year of receipt of share application money when as per Company's Act any amount received and held pursuant to an offer made towards any subscription to any security including share application money or advance towards allocation of securities pending allotment is in the nature of a deposit and issue of shares was in this FY. (v)....
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.... He pointed out that if the share application money is received in one year but the shares are not issued in that year , no addition can be made since the Fair Market Value cannot be determined and the Fair Market Value is the basis of comparison. He further contended that if the share application money is received in several previous years, then the question arises as to in which year the addition is to be made. He contended that the only reasonable interpretation, therefore, is that the Section is triggered on the issue of shares and not on the receipt of consideration for the same. He further contended that even as per the Companies Act, any amount received as share application money pending allotment is not in the nature of consideration for the issue of shares but is treated as a deposit and it is only on the actual allotment of shares that the said amount changes its character and is treated as consideration for the issue of shares. The ld. DR in support of his contention, relied on the following decisions : (i) India Today Online Pvt. Ltd. ITA No 6453 /5454/De/2018 (ii) M/s Cimex Land and Housing pvt. Ltd. ITA No 5933/Del/2018 7. A brief synopsis of the ....
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....ous year AND the issue of shares is also in the same previous year (determination of fmv). If share application money is received in a year but the shares are not issued in that year then, according to the assessee, no addition can be made as fmv has not been determined and calculation of fmv we know is the basis of comparison. Obviously it cannot be the intention of the legislature to make the section so limited in its operation to render it practically redundant. (iii) Furthermore, what would happen if the share application money is received in several previous years as in the present case? Since according to the assessee it is the receipt in the relevant previous year which is the basis of addition, then in which year can the addition be made, if at all? On the contrary it would only be reasonable to say that since in those assessment years when the share application money was received the shares were not allotted, therefore the share premiums could not have been examined by the Assessing Officer u/s 56(2)(viib) of the Act. 5. According to the companies Act, any amount received as share application money pending allotment is in the nature of a deposit. It is on....
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....53] 23 ITR 230 in this regard. Ld. Counsel for the assessee further relied on the following decisions of the ITAT in support of the its contention that the provisions of section 56(2)(viib) of the Act invoked only in the year of receipt of consideration. i. M/s Luxmi Foodgrains Pvt. Ltd. Vs. ITO in ITA No. 316/Chd/2019 order dt. 07/11/2019 (Chd Trib) ii. ACIT vs. M/s Diach Chemicals & Pigments Pvt. Ltd in ITA No. 546/Kol/2017 order dt. 19/06/2019 (Kol Trib) g) That any other interpretation would lead to absurd result in as much as it would be a scenario more evil than a retrospective application of section. Since in case of retrospectively, application of section inserted subsequently is applied to a transaction effected in earlier years. However in the present case the transaction took place in an earlier year and the law enacted subsequently is sought to be applied that too in later years to an earlier transaction. That the same was patently erroneous and contrary to all canons of interpretation. 8. We have heard both the parties, carefully gone through the orders of the authorities below as well as the documents and case laws referred to before us. ....
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.... Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Explanation.-For the purposes of this clause,- (a) the fair market value of the shares shall be the value- (i) as may be determined in accordance with such method as may be prescribed16 ; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; (b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of 17[Explanation] to clause (23FB) of section 10;] The Rules for determining the Fair Market v....
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....2 of 1956); (f) "registered dealer" means a dealer who is registered under Central Sales Tax Act, 1956 or General Sales Tax Law for the time being in force in any State including value added tax laws; (g) "registered valuer" shall have the same meaning as assigned to it in section 34AB of the Wealth-tax Act, 1957 (27 of 1957) read with rule 8A of Wealth-tax Rules, 1957; (h) "securities" shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (i) "unquoted shares and securities", in relation to shares or securities, means shares and securities which is not a quoted shares or securities; (j) "valuation date" means the date on which the property or consideration, as the case may be, is received by the assessee.] Rule 11 UA 11UA. [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- (a) valuation of jewellery,- (i) the fair market value of jewellery shall be estimated to be the price which such jewellery would ....
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....and securities on any recognized stock exchange; (b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:- the fair market value of unquoted equity shares =(A+B+C+D - L)x (PV)/(PE), where, A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by,- (i) any amount of income-tax paid, if any, less the amount of income tax refund claimed, if any; and (ii) any amount shown as asset including the unamor tised amount of deferred expenditure which does not represent the value of any asset; B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; C = fair market value of shares and securities as determined in the manner provided in this rule; D = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property; L=....
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....as asset including the unamor tised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities ot....
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....ation arises. Prior to it any amount paid cannot be termed as consideration. All/Any amount paid until then is only in the nature of a deposit/security alongwith the proposal for subscribing to the shares of the company. This deposit, on being adjusted against the price of the shares when issued, changes its character and becomes consideration for the issue of shares and at this point ,consideration can be said to be "received" against issue of shares. In short, on the issue or allotment of shares by a company when consideration arises, all deposits or share application money received earlier take the colour of consideration and this conversion is to be treated as receipt of consideration on the issue of shares. It is at this point that all the conditions of section 56(2)(viib) can be said to be fulfilled so as to invoke the same. Thus the trigger for invoking section 56(2)(viib) of the Act is the issue of shares. This is further evident from the explanation(a) to Section 56(2)(viib) , which explains the term Fair Market Value, for determining the excess consideration received over and above it, which is subjected to tax under the section. The explanation states the FMV of th....
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....e shares are issued. 13. The arguments of the Ld. Counsel for the assessee are all based on laying emphasis solely on the word" received" used in the section ,which hold no ground since as we have held above the words used in the section are not to be read in isolation and the correct interpretation lies in the meaning of the phrase "consideration received on is sue of shares", which we have held relates to the year of issue of shares and not before. As for the reliance placed by the ld. CIT(A) on the decision of the Kolkata Bench of the ITAT in the case of Diach Chemicals and Pigments(supra),we find that the same is distinguishable on facts since in the facts of the said case the shares were found to have been applied for in earlier year as per terms and conditions settled in that year and accordingly it was held that the provisions of section 56(2)(viib) were invoked in that year and not in the year of allotment of shares.In the case before us the terms and conditions of issue of shares were not settled in the year of application for shares but on the contrary in the year of allotment since while the application had been made at a premium of Rs. 90/- the shares were allotte....