AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2021 (4) TMI 802
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....rofessional fee, Debenture issue expenses, Audit fee etc., aggregating to Rs. 13,55,79,897/- and declared the book profit at Rs. 270,23,45,103/-. 4. In the computation of income, entire claim of expenses have been disallowed and resultant income has been further reduced by "Provision for investment done earlier year no longer required written off' to arrive at Business income of Rs. NIL, claiming it was added back in A.Y. 2011-12. While computing tax payable u/s 115JB, the provision as mentioned above has been reduced from the Book profit as well claiming that such diminution in value of investment was added back while computing book profit of A.Y. 2011-12; to arrive at Book profit as per section 115JB at a loss of Rs. 13,55,79,897/-. 5. On verification of the Balance sheet as on 31.03.2013, AO observed that the assessee has received a sum of Rs. 313,63,93,516/- as Advance against Share capital. During the course of assessment proceedings the AR of the assessee was asked to file the details of actual allotment of shares against advance received in F.Y. 2012-13. Vide reply dated 15.02.2016, the assessee stated that in lieu of advance against share capital, the assessee had mad....
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....in the earlier two financial years. Thus, having regard to the title of the relevant ledger account, the narration given in the ledger account for the amounts paid by EIL/ICSPL to the appellant and the absence of disclosure of said amounts as Advance against share capital in the balance sheet of the appellant as well as EIL/ICSPL in the financial years 2010-11 and 2011-12, it has to be inferred that the amounts of Rs. 17.26 crores and Rs. 142.00 crores received by the appellant from EIL during the FYs 2010-11 and 2011-12 respectively were in the nature of loans received from EIL and not Advances against share capital/share application money as claimed by the appellant. 28. In this regard, it was explained by the appellant that the share application money of Rs. 159.26 crores received prior to FY 2012-13 was shown under Current liabilities in the balance sheet and that it was classified as Share application money only during FY 2012-13. On perusal of the balance sheet of the appellant as on 31/03/2011 and 31/03/2012 in the light of this explanation of the appellant, It is seen that the relevant amounts of Rs. 17.26 crores and Rs. 142.00 crores received during the FYs 2010-11 and....
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....n contended by the appellant that the provisions of section 56(2)(viib) are applicable only in the year in which the shares are issued by the company and not in the year in which the share application money is received on the ground that the "consideration for issue of shares" arises only when the shares are issued. It has been contended that the share application money received by the company prior to Issue of shares does not bear the character of consideration for the issue of shares, since the shares come into existence only on their issue. 31. In this regard, it would be useful to refer to the provisions of section 56(2)(viib), which has been inserted in the Act by the Finance Act, 2012 w.e.f. 01.04.2013, which are as under: 56 (2) In particular, and without prejudice to the generality of the provisions of sub- section (1), the following incomes, shall be chargeable to income- tax under the head "income from other sources" namely :- (viib) Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, t....
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....sent case, share application money of Rs. 313.63 crores has been received during the previous year relevant to the assessment year under consideration, as per the factual finding given earlier. Hence, the condition that the relevant amount considered for taxation U/s 56(2)(viib) is received during the previous year, is fulfilled in the present case. Hence, the aspect that requires to be examined now is whether the condition that such receipt during the year represents "consideration for issue of shares", so as to consider the said amount for application of the provisions of section 56(2)(viib). 35. In this regard, it is the contention of the appellant that since the shares were actually issued by the appellant against the said share application money of Rs. 313.63 crores during the subsequent financial year 2013-14, the share application money acquired the character of "consideration for issue of shares" during the AY 2014-15 relevant to the FY 2013-14 and therefore the provisions of section 56(2)(viib) would be applicable for AY 2014-15 only and not for the assessment year under consideration. It has been contended that unless the terms of the issue of shares is finalised so a....
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....number of shares proposed to be issued, the amount of premium if any and the period before which shares shall be allotted shall be disclosed in the notes to the accounts. The instruction further states that it shall also be disclosed whether the company has sufficient authorized capital to cover the share capital amount resulting from allotment the shares out of such share application money. The instruction also states that the period for which the share application money has been pending beyond the period for allotment as mentioned in the document inviting application for shares along with the reason for such share application money being pending shall be disclosed. It is further stated in the instruction that share application money not exceeding the issued capital and to the extent not refundable shall be shown under the head Equity and the share application money to the extent it is refundable shall be separately shown under Other current liabilities. 38. The above mentioned instruction for preparation of the balance sheet contained in the revised Schedule VI to the Companies Act, 1956 is applicable mandatorily to all the companies, including private companies as that of the ....
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....gainst the share application money and the provisions of section 56(2)(viib) would therefore be applicable for the AY 2014-15, the appellant has also stated that there is no income chargeable to tax under section 56(2)(viib) in the hands of the appellant in AY 2014-15 on account of the reason that the relevant balance sheet to be considered for valuation of the shares would be the balance sheet drawn up as on 31,03.2013 since the valuation date is 07,03.2014 and the fair market value of the shares on the basis of the said balance sheet works out to Rs. 3299/-per share as against the consideration of Rs. 3000/- per share at which the appellant issued the shares. As observed by the AO, the appellant reversed the provision for diminution in the value of its investment of Rs. 283.79 crores in the shares of TMSL made by it in the earlier FY 2010-11 during the financial year 2012-13 relevant to the present assessment year. By writing back the said provision during the year, the appellant was able to increase the value of the assets held by it in the balance sheet as on 31.03.2013 by the said sum of Rs. 283.79 crores and the same resulted in arriving at fair market value of the shares at ....
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....on money so paid partakes the character of "Consideration for issue of shares" since the same was paid in acceptance of the invitation/offer to issue shares made by company at the specified terms. 42. It has also been contended by the appellant that the computation provisions as specified in rule 11U and 11UA will fail in the case of the appellant, if the provisions of section 56(2)(viib) are invoked for the present assessment year since the definition of "valuation date" in rule 11U(j) was amended with effect from 29.11.2012 only so as to make it applicable for computing the fair market value of the shares for the purpose of section 56(2)(viib) and the adoption of the balance sheet of the appellant as on 31.03.2012 as the basis for computing the fair market value of the shares on invoking the provisions of section 56(2)(viib) for the present assessment year will be contrary to the provisions of the Act and Rules since the rule dealing with the valuation of the shares for the purpose of section 56(2)(viib) was not applicable prior to 29,11.2012. This contention of the appellant is also found to be without merit. The definition of "valuation date" in rule 11U(j) was amended with e....
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....ent dates during the financial years 2010-11 to 2012-13 and it becomes impractical to arrive at the fair market value of the shares in such a situation. It was therefore contended that in the absence of specific provisions in the Act/Rules with regard to computation, of FMV of unquoted equity shares at different valuation dates, the computation provisions fail and consequently, the charging provisions of section 56(2)(viib) cannot be enforced. This contention is found to be unacceptable in light of the factual finding already made earlier in this order that the entire share application money of Rs. 313.63 crores has been received during the FY 2012-13 only and not in multiple financial years. In the light of the said factual finding, there is only one valuation date i.e., 30.03.2013 being the last day of receipt of share application money during the year. 45. It was also contended by the appellant that the provisions of section 56(2)(viib) cannot be invoked in the case of the appellant with regard to the share application money received from its own holding company keeping in view the object behind the insertion of the said section in the Act. It was stated that the memorandum to....
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....subscribe to the proposed issue of shares during the year is 9,40,000 shares. In view of this, the share application money received by the appellant computed at Rs. 3,000 per share (at the terms at which shares were actually issued in the subsequent year) in respect of 9,40,000 shares which works out to Rs. 282.00 crores only can be considered as the receipt towards consideration for issue of shares during the present assessment year. The balance share application money of Rs. 31.63 crores has to considered as the receipt towards consideration for issue of shares in the subsequent AY 2014-15 when the authorized share capital has been increased to Rs. 2.00 crores represented by 20 lakh shares having a face value of Rs. 10 each. 47. In view of the detailed discussion in the preceding paragraphs, it is held that the share application money to the extent of Rs. 282.00 crores received by the appellant during the year represents receipt of "consideration for Issue of shares" during the year for the purpose of the provisions of section 56(2)(viib) of the Act. Hence, the AOs action of invoking the provisions of section 56(2)(viib) for the instant AY 2013-14 is upheld to the extent of the....
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...., for the reasons which are wrong and contrary to the facts and circumstances of the case, the provisions of Income Tax Act, 1961 and the Rules made there under. 1(d) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding and confirming the action of Id. AO in adopting 30/03/2013 being last date of receipt of advance against equity as the valuation date and thereby considering the Balance Sheet drawn up as on 31/03/2012 (i.e., Balance Sheet drawn up immediately preceding the valuation date) for the purpose of determination of fair market value of unquoted equity shares under Rule 11U read with Rule 11UA(2) of the Income-tax Rules, 1962, for the reasons which are wrong and contrary to the facts and circumstances of the case, the provisions of Income Tax Act, 1961 and the Rules made there under. 1(e) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of Id. AO in computing the Fair Market Value of the unquoted equity shares at Rs. Nil on the basis of Balance Sheet drawn up as on 31/03/2012. 1(f) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in drawing an inference th....
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....porated as a wholly owned subsidiary of Essar Investments Limited ('EIL'). Pursuant to the demerger of the investment and finance division of EIL to Imperial Consultants and Securities Private Limited ('ICSPL') with effect from 1st April 2010 (being the appointed date as per the scheme of demerger), the assessee became a wholly owned subsidiary of ICSPL. The assessee holds shares of various unlisted companies. One of such companies, which is a wholly owned subsidiary of the assessee, is The Mobile Stores Limited ('TMSL'). Transaction;- 2. The transaction which is the subject matter of the present appeal is the issue of 10,95,425 equity shares at a price of Rs. 3,000 per share to the assessee's holding company, ICSPL. 3. It may be useful to trace the history and the object behind this transaction before dwelling into its implications under the Income-tax Act, 1961 ('the Act')- Theassessee's subsidiary, TMSL, is engaged in the business of retailing and marketing of telecom products including mobile handsets and providing related services. TMSL incurred heavy losses in the initial years of its business with losses after tax running into Rs....
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....assessee. Events in the F.Y. 2012-13; 8. In view of the above Board Resolution, another sum of Rs. 154.37 crores was advanced by ICSPL to the assessee in the financial year relevant to the present appeal, i.e. F.Y. 2012-13 (details on page 247 of the paperbook). These advances towards share capital are disclosed on the face of the balance sheet of the assessee for the F.Y. 2012-13 (on page 38 of the paperbook). To the same effect, is a disclosure in Note 18 of Notes of Accounts of the Audited Financial Statements for the F.Y. 2012-13 (on page 46 of the paperbook), which is reproduced hereunder: "During the year, Company has received advance against equity share from its holding company, Imperial Consultants & Sec. Pvt. Limited amounting to Rs. 1,543,768,861 (FY2O12 - Rs. 1,592,624,655) and total cumulative balance as at year end is Rs. 3,136,393,516. As per agreed terms, the advance received is non-refundable and the shares shall be allotted by March 2015. No interest is payable on the advance received against equity shares. The company is in process of finalizing the detailed terms and conditions including the number of shares proposed to be issued and the issue price." ....
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.... ofallotment to be 7th March, 2014. The details regarding the issue of shares are also disclosed in the assessee's Audited Financial Statements for F.Y. 2013-14. In this regard, reference may be made to Note 2 which provides details of share capital (on page 94 of the paperbook) and Note is(C) which provides details of related party transactions (on page 99 of the paperbook). Reference may also be made to Note 18 (on page 99 of the paperbook), the relevant extract of which is reproduced hereunder- "During the year, Company has received advance against share capital from its holding company, Imperial Consultants & Securities Private Limited amounting to Rs. 23,50,00,000 (FY 2013- Rs. 1,543,768,861) and total cumulative balance as at year end is Rs. 8,50,00,000 (FY 2013- Rs. 3,136,393,516). The company has already issued equity shares against the Advance against Share capital amounting to Rs. 3,286,275,000 on 7th March, 2014. Subsequent to the year, allotment of equity shares having face value of Rs. 10 each has been made on 28 May, 2014." Thus, from the above, it is evident that the terms as regards the pricing and number of shares to be allotted were finalized only at the t....
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....e Finance Minister's Budget Speech given at the time of introduction of the Finance Bill, 2012. Para 155 of the Budget Speech is reproduced- '155. I propose a series of measures to deter the generation and use of unaccounted money. To this end, I propose- Increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value." 15. Similarly, the Memorandum explaining the provisions of the Finance Bill, 2012 classified the amendment under the head 'Measures to prevent generation and circulation of unaccounted money'. Undisputedly, the object behind the introduction of the provision was to bring to tax only those cases of issue of shares where unaccounted income was sought to be introduced into the books in the guise of premium for issue of shares. This is further substantiated from the fact that this provision was introduced along with the introduction of the proviso to section 68 of the Act which places the onus on a company in explaining the nature and source of a sum credited in the books, which consists of share application money, share capital or share premium. Even the Finance....
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....ng done, the provisions of section 56(2)(viib) could not be pressed into service. (ii) In the case of DCIT vs. Pali Fabrics P. Ltd. (2019) (no taxmann.com 310) (Mum) (para 16) (sr. no. 14 in the legal compilation), the Tribunal noted that section 56(2)(viib) as well as the proviso to section 68 were introduced together so as to only deal with those cases where there was an allegation that any income from undisclosed sources was being introduced and where the assessee had failed to prove the genuineness of the transaction. In the absence of any such circumstance, the provisions of section 56(2)(viib) could not apply. (iii)In the case of Rameshwaram Strong Glass Pvt, Ltd. vs. ITO (2018) (172 ITD 571) (Jpr) (para 4.5.6) (sr. no. 16 in the legal compilation), the Tribunal held that where shares were allotted to related persons, there was no scope of introduction of any unaccounted income through allotment at an unreasonably high price and, accordingly, the provisions of section 56(2)(viib) could not apply. (iv) Dealing with the provisions of section 56(2)(vii) of the Act, the Tribunal in the case of ACIT vs. Subhodh Menon (2019) (175 ITD 449) (Mum) (para 17) (sr. no. 25 in the le....
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....(Rs.) Example l: Shares are not issued at premium 1,000 equity shares of Rs. 10 each 10,000 Example 2: Shares are issued at premium 500 equity shares of Rs. 10 each 5,000 Add: Securities Premium (500 equity shares of Rs. 10 per share) 5,ooo 10,000 By referring to the above example, subsequently, if the company declares a dividend or issues bonus shares/ right shares, then, the company would have to declare dividend only on 500 equity shares instead of 1,000 equity shares. Accordingly, bykeeping a low capital base, the company would be able to serve its capital better and effectively. 20. In view of the above, it is submitted that the provisions of section 56(2)(viib) cannot apply to the instant transaction at the threshold as there is no benefit accruing or arising to shareholder or to the assessee under 100% shareholding structure since the rights of the shareholder and the obligations of the assessee have remained unchanged. 21. Accordingly, a transaction between holding company and its wholly owned subsidiary company cannot be equated with generation/circulation ....
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....erbook). The AO considered this date of 30th March, 2013 to be the Valuation date' for the purpose of examining the provisions of section 56(2)(viib). Accordingly, in terms of rule 11U (b), the balance sheet of 31st March, 2012 was considered, being the last balance sheet drawn up prior to the valuation date. The AO opined that as on 31st March, 2012, the book value of the liabilities exceeded the book value of the assets for the purpose of valuation under rule 11UA (2), and, therefore, the fair market value of the shares was NIL. Accordingly, the entire receipt towards the issue of shares, i.e. Rs. 313.64 crores (17.26 crores received in the F.Y. 2010-11, Rs. 142 crores received in the F.Y. 2011-12 and Rs. 154.37 crores received in the F.Y. 2012-13) was added as the income of the assessee under section 56(2)(viib) of the Act. 26. On appeal, the CIT(A) observed that the receipt alone will not trigger the provisions of section 56(2)(viib) of the Act. It is only when the receipt is attributed towards the consideration for issue of shares will the section apply. The CIT(A) was of the opinion that the receipt takes the colour of consideration upon the finalisation of the terms ....
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....be calculated on the date of issue of shares, it follows that the first value, i.e., under rule 11UA(2) will also have to be undertaken on the same date since it is necessary that the two values being compared be of the same date. Adopting the first value on any other date would make the provision unworkable. 29. It may further be appreciated that adopting the value as on the date of receipt of money (as suggested by the AO) or the date of finalisation of the terms (as suggested by the CIT(A)) would lead to absurd results. It is very much possible that inspite of receipt of share application money or finalisation of the terms, the shares may eventually be never issued. This could be for several reasons. For instance, the concerned authorities under Company law or SEBI may not sanction the share issue, or there might not be sufficient authorised capital or the issuer company may get dissolved. In such an eventuality, if the date of receipt of share application money or the date of finalisation of terms is adopted as the triggering event, it would mean that an addition is made under section 56(2)(viib) without an actual eventual issue of shares, which is strictly against the mandat....
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.... number, to be taken by the person who made the offer. This constitutes a binding contract to take that number according to the offer and acceptance... So Farwell L. J. said in Mostly v. Koffufontein Mines Lid. [1911] 1 Ch. 73 84 "As regards the construction of these particular articles it is plain that the words 'creation', 'issue', and 'allotment' are used with the three different meanings familiar to business people as well as to lawyers. There are three steps with regard to new capital: first, it is created: till it is created the capital does not exist at all. When it is created in may remain unissued for years, as indeed it was here ; the market did not allow of a favourable opportunity of placing it. When it is issued it may be issued on such terms as appear for the moment expedient. Next comes allotment. To take the words of Stirling J. in Spitzel v. Chinese Corporation, [1899] 80 LT. 347, he says : What is an allotment of shares? Broadly speaking, it is an appropriation by the directors or the managing body of the company of shares to a particular person... It is beyond doubt from the authorities to which we have earlier referred, and there ....
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....f the Tribunal, wherein, while dealing with the applicability of section 14A read with Rule 8D, it has been held that share application money cannot be considered as an investment because till the time the share application money is converted into shares, the applicant does not have any rights of a shareholder- * ITO vs. LGW Ltd. (2015) (174 TTJ 553) (Kol) (para 6) (sr. no. 9 in the legal compilation) * MSA Securities Services P. Ltd. vs. ACIT (2013) (58 SOT 44) (Chennai) (para 12) (sr. no. 12 in the legal compilation) * Rainy Investments P. Ltd. vs. ACIT (2013) (56 SOT 61) (Mum) (para 4) (sr. no. 15 in the legal compilation) 32. It may be observed that when the section uses the expression- "any consideration for issue of shares that exceeds the face value of such shares", what it seeks to cover is the amount of share premium on the issue of shares. It may be noted that share premium arises only on issue of shares and not prior to it. In this regard, reliance is placed on section 78 of the Companies Act, 1956, which reads as under- "78. Application of premiums received on issue of shares- (i) Where a company issues shares at a premium, whether for cash or otherwise, a s....
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....provisions ofSec.56(2)(viib) of the Act applies to AY 2013-14." 34. To the same effect is the decision of the Hon'ble Delhi Tribunal in the case of Cimex Land and Housing P. Ltd. vs. ITO (2019) (104 taxmann.com 240) (sr. no. 3 in the legal compilation), wherein it was held as under: "10.1 It is true that the provision refers to consideration for issue of shares received in any previous year and it is equally true that Rs. 4.os crores was received in A. Y. 2012-13 and Rs. 40 lacs was received in A. Y. 2013-14 but the fact of the matter is that the entire share allotment was done during the year under consideration, therefore, it cannot be said that the assessee was not liable to justify it share premium supported by the valuation report as mentioned under Rule 11 U and 11 UA. We are of the considered view that the valuation report which was the counsel sought to file before us should have been filed before the Assessing Officer so that the same can be examined within the purview of rules 11 U and 11 UA. 12. As mentioned elsewhere the part of the share application was received in earlier assessment years but since in those assessment years shares were not allotted, therefor....
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....ar language. "(ix) any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,- (a) such sum is forfeited; and (b) the negotiations do not result in transfer of such capital asset;" In the context of this provision also, it has been held by the Tribunal that what invokes the section is not the receipt of money, but the substantive event, i.e., the forfeiture. In this regard, reference is made to the decision of the Hon'ble Delhi Tribunal in the case of RS Triveni Foods Pvt. Ltd. vs. ITO (2019) (ITA 739/Del/i9) (para 13) (sr. no. 17 in the legal compilation), wherein it was held as under- "13. In so far as the argument of the Ld. Counsel that the provision of section 56(2)(ix) would not be applicable on the facts of the present case because the said section has come w.e.f. 1.4.2015 and assessee has not received any sum or advance in this year, therefore, this provision would not be applicable. We are unable to subscribe to such an argument, because the deeming provision is attracted in the event when any sum is forfeited out of any sum and money received as advance or otherwise in the course of negotiations fo....
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...., the balance sheet as on 31st March, 2013, which is a day apart and not an year old balance sheet as on 31st March, 2012. This is because it is impracticable and impossible to expect a company to get its accounts audited on each date when there is a receipt of the sum of money. In this regard, reliance is placed on the judgment of the Hon'ble Supreme Court in the case of S. Viji vs. Commissioner of Gift-tax (1998) (229 ITR 421) (sr. no. 19 in the legal compilation). In this case, the Hon'ble Supreme Court was dealing with the provisions of section 6 of the Gift-tax Act, 1958. The relevant rule, i.e. rule 5 of the Gift-tax Rules is on page 452 of the legal compilation. In this regard, the Explanation to rule 5 provides as under- "Explanation- For the purpose of this rule, "balance sheet", in relation to any company, means the balance sheet of such company (including the Notes annexed thereto and forming part of the accounts) as drawn up on the date on which the gift was made and, where there is no such balance sheet, the balance sheet drawn up on a date immediately preceding that date, and, in the absence of both, the balance sheet drawn up on a date immediately after the....
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.... fair market value under Rule 11UA (2) was Rs. 3,299.16 per share. Such value, being in excess of the issue price of Rs. 3,000 per share, there cannot be adverse action under section 56(2)(viib). It may also be noted that the fair market value as on 31st March, 2014 is also Rs. 3,000 per share. Accordingly, similar consequences will follow if either of the two balance sheets are adopted for the purpose of valuation. 43. It is reiterated that the assessee has submitted ample evidence in the form of Board Resolutions and notes to financial statements which unequivocally state that the terms of the issue were finalised in the F.Y. 2013-14. Therefore, even if the assertion of the CIT(A) for accepting the year of finalisation to be the relevant year for section 56(2)(viib) was accepted, the event would fall within the financial year 2013-14 and the relevant balance sheet date would still be 31st March, 2013. The finding of the CIT(A) that the terms must have been finalised in the F.Y. 2012-13 is only an assumption, not backed by an iota of evidence. It is evident from Note 18 of Notes to Accounts of Audited Financial Statements of assessee for FY 2012-13 that the terms for the propo....
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.... (a) the fair market value of unquoted equity shares = (A-L) x (PV)/(PE) where, A = book value of the assets in the balance-sheet as reduced by any 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 and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet..." 47. At the outset it may be observed, that the rule requires adoption of the book value of the assets in the balance sheet. It does not permit the assessee or the department to substitute any other value with such book value. It is submitted that in view of the clear mandate of the rule, the action of the AO in ignoring the book value of the assessee's investments, such books having been audited without qualification, and substituting such value with a perceived fair value is unfounded and beyond the prescription of the rule. 48. In this regard, reliance is placed on the judgment of the Hon'ble Bombay High Court in the case of Commissioner of Wealth-t....
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....uation 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 unamortised 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= book value of liabilities shown in the balance sheet 52. Therefore, it is submitted that the provisions of rule 11UA(2) [relevant for valuation for the purpose of section 56(2)(viib)] seen in contras....
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....ught to be struck down. Thus, in light of undisputed fact that the shares were issued and allotted in FY2013-14 and since the consideration (Rs. 3,000 per share) does not exceed the FMV (Rs. 3,299.16 per share) of unquoted equity shares, supported by the valuation report dated 3.12.2013, determined on basis of book value of assets and liabilities as shown in audited Balance Sheet as on 31st March 2013, the provisions of section 56(2)(viib) of the Act cannot be appliedfor the assessment year under consideration. Alternate submissions- 56. In the alternate and without prejudice to any of the above, it is submitted that even if an addition is to be sustained in the subject assessment year, the advances received in the preceding financial years (Rs. 17.26 crores received in the F.Y. 2010-11 and Rs. 142 crores received in the F.Y. 2011-12) cannot be brought to tax as these were received prior to the conception of section 56(2)(viib), which was introduced by the Finance Act, 2012 with effect from 1st April, 2013. The Department's assertion in this regard that even though the money was received in the preceding years, it was 'received as share application money' in this ye....
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.... (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. 3 (3.1) This Section 56(2)(viib) of the Income Tax Act,1961 was introduced in the Finance Act 2012 which requires a Company (issuer), not being a company in which the public are substantially interested, to issue shares at Fair Market Value (FMV). Any consideration received by such issuing Company in excess of the FMV, to the extent it exceeds the face value of such shall be liable to tax. For the purpose of this section, FMV shall be the value, Higher of the following: (a) as may be determined in accordance with such methods as may be prescribed( Methods prescribed under Rule 11UA are Book value Method (NAV) and Discounted Cash flow method); or (b) 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....
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....entire amount of Rs. 313.63 has come into the accounts as share capital in this year only. CIT(A) has rightly brought out the facts on analysis of the accounts in the AY.2013-14 . Whereas as on 31/03/2011 and as on 31/03/2012 ,no amount has been shown as ―advance against share capital'.It is also pointed out from the relevant extracts of the accounts that the amount of Rs. 17.26 crores and Rs. 142 crores in the respective F. years 2010-11 and 2011-12, it was recorded in the books as ― Loans received from Essar Investment Ltd(EIL). This clarifies that the said amounts are only loans and advances and not as advance paid against share capital. CIT(A) has depicted the flow of the event in a systematic manner and the nature of such funds flown into the accounts of the appellant in para no 25, 26,27,28 and 29. From these facts, it clarifies that the funds reflected in the appellant's balance sheets for the F.Y.2010-11 and 2011-12 are only loans and advances and not by any stretch of imagination be "advances for share Capital". 4.1 As emerged facts from AO's order and CIT(A)'s order in the relevant paragraphs about sec.56(2)(viib) and its applicability in the appellant's c....
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....share application money received by the appellant during the year on the basis of such terms and conditions qualifies to be treated as ―Consideration for issue of Shares'. 5.1 Since the terms of the proposed issue of shares are finalised and a document inviting application for shares containing the said terms was issued to the prospective shareholders before the receipt of the share application money during the relevant year under consideration. Further it was also a fact that all the relevant money has been received in the year under consideration. These facts are elaborately discussed by CIT(A) in its order in para No 41 of the order. Though the minutes of the corporate entity finalised in the early April about the allocation of shares , however the fact remains that all the terms have been finalised, money received, offer and acceptance has been completed , value of share application money, premium has been finalised .Valuation of such shares been completed by the appellant in the relevant year i.e., FY2012-13. In short entire process of such allocation of shares has been finalised in the captioned year i.e. AY 2013-14 , therefore the year to be considered is AY 2013-14 ....
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....It is much relevant in the present case that what was offered by the corporate entity has been accepted by the investors without any change in our case. That means in its totality all the substance and form of offer has been accepted in the said case in the relevant year , therefore this is very much fits into the definition of allotment as mentioned in the said apex court judgement . 7.2 The Hon'ble jurisdictional High court's decision in Sesa Goa Ltd as mentioned by the appellant in its written submissions in page 16 is on misappropriation of the amount paid for purchase of shares and right to attend meetings of share holders and vote. These facts are not applicable to our present case. Therefore the same may not be considered. 7.3 Appellant's commentary on offer and acceptance by citing Palmer's Company law is also not factual fit into the relevant case. In this case the appellant made an offer to its investors and the same is accepted by its investors by paying adequate consideration. It is also a fact that entire consideration in our case has been fully received . According to Contract Law, all the essential ingredients such offer, acceptance and full and complete consid....
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....and adequate consideration in the relevant previous year have been completed. b). The valuation has been done the appellant in the relevant year under consideration and the figures in the valuation report have not been changed or altered. c). The judicial pronouncements cited by the appellant are on the issue of pending allotment whereas our case is on consideration for issue of shares. This is clear as per statute. d). As the consideration for issue of shares is complete without any alteration of the terms of the offer and acceptance , assessing authorities have not been given any discretion to leave such taxation of excess share capital but to tax. e). Our case is on the consideration for issue of shares not on allotment of shares wherein allotment is only a mere formality. In the present case neither terms nor quantum of allocation nor in any manner the share allocation has been changed . It is also a fact that the entre consideration has been received in the relevant year under consideration , therefore assessing authority does not have discretion but to tax in the relevant year under consideration. f). Both AO and CIT(A) have thoroughly and systematically brought the....
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....he Mobile Stores Limited (TMSL) by way of subscribing to its shares in order to revive it from its adverse financial position. No other terms were finalised between the companies. In this regard, attention is invited to Schedule 9-Notes to accounts of the assessee's Audited Financial Statements for FY 2010-11 (on page 84 of the paperbook) and Board Resolutions passed by EIL on 20th March, 2010 (on page 245 of the paperbook) and by ICSPL on 30th March, 2012 (on page 246 of the paperbook). 5. Further, it is evident from Note No. 18 of Notes to Accounts of Audited Financial Statements of the assessee for the F.Y. 2012-13 (on page 46 of the paperbook) that the terms for proposed issue of unquoted equity shares were also not finalized in the said year. In fact, there was no acceptance by the assessee in the F.Y. 2012-13. The Board of directors approved the issue of equity shares on right basis by way of Resolution dated 17th December, 2013 (on page 215 of the paperbook). The shareholders approved the said issue in EGM vide resolution dated 31st January, 2014 (on page 217 of the paperbook). Finally, the issue of shares on the above terms was approved by the Board of directors vide ....
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.... law. Under the Act, a company having a share capital is required to state in its memorandum the amount of that capital and the division thereof into shares of a fixed amount: See section 13(4). This is what is called the authorised capital of the company. Then the company proceeds to issue the shares depending on the condition of the market. That only means inviting applications for these shares. When the applications are received, it accepts them and this is what is generally called allotment. No doubt there may be an allotment of shares with out an application, but no instance exists where that word is used to describe a transaction whereby one becomes a shareholder otherwise than by appropriation to him of a share out of the previously un-appropriated share capital. So Farwell L. J. said in Mostly v. Kqffyfontein Mines Lid. [1911] i Ch. 73 84 "As regards the construction of these particular articles it is plain that the words 'creation', 'issue', and 'allotment' are used with the three different meanings familiar to business people as well as to lawyers. There are three steps with regard to new capital: first, it is created: till it is created the ca....
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....assessee does not have any indeafisible right to the consideration till any time before the acceptance of the offer of ICSPL by way of allotment/issue of shares. 13. In para 7.3 and 8.a) of the submissions, the assessee's reliance on the commentary, Palmer's Company Law, has been sought to be distinguished by urging that in the present case, the transaction was concluded in this year as the assessee's offer to the investors was accepted by them by paying adequate consideration. It is submitted that the Department has misconstrued the observations in the commentary. The commentary states that the acceptance of the offer is complete when the issuer company (i.e. the assessee in this case) accepts the prospective investor's offer, and having alloted the shares to such investor, notifies it of such allotment. The acceptance has to be qua the issuer company and not the investor. In any event, as highlighted in the commentary, acceptance is complete only upon the notification of the allotment of shares. The relevant extracts of the commentary are reproduced on page 16 of the assessee's submissions. In the present case, undoubtedly, the allotment of shares has happen....
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....hares only upon the actual allotment/issue. When the entire section is based on the issue of shares, it is absurd to suggest that the event of issue is irrelevant. 12. Considered the rival submissions and material placed on record. We notice from the record that the assessee is an investment holding company, wholly-owned subsidiary of EIL, pursuant to the merger of the investment and finance division of EIL, the assessee became a wholly owned subsidiary of ICSPL. The assessee has invested in various unlisted companies including M/s The Mobile Stores Ltd (TMSL), which is wholly-owned subsidiary of the assessee company. From the records we notice that TMSL incurred huge losses in the initial years of its business. Owing to the huge adverse financial position of TMSL, in financial year 2010-11, assessee has revalued its investment in TMSL and reduced the value of investment on account of provision to the extent of Rs. 283.79 crores (page 80 of the paper book). Because of the above said revaluation of the investment, the net worth of the assessee company has become nil or negative. In order to improve the financial position of TMSL, the holding company of the assessee passed a resolu....
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....rket value of the shares are NIL and the advances received towards share capital over above the fair market value is taxable under section 56(2)(viib). The argument of the tax authorities are that no prudent investor will invest more than fair market value. Yes, we agree that no prudent investor will invest but prudent businessman will invest in order to safeguard the investment in the subsidiary or to revive the subsidiary company. The tax authorities invoked the provision u/s 56(2)(viib) without bringing on record whether the investment received by the assessee are genuine or not. We notice that the provision introduced by the legislature in order to curb the practice of generation and circulation of unaccounted money. In the current case, the tax authorities have not brought on record any generation or circulation of unaccounted money. Rather they acknowledged that the funds were invested by the holding company and received by the subsidiary company as advance towards share capital. It is not disputed that the net worth of the company is NIL because of investment in step down subsidiary company (due to provision towards revaluation of investment). It is also not disputed that th....
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....ceives in any previous year' and the expression 'any consideration for issue of shares'. Ld. CIT(A) stressed the point that "where any amount is received during the previous year towards consideration for issue of shares", then the provision of section 56(2)(viib) are attracted to ascertain whether such consideration the face value of the shares or aggregate consideration exceeds the fair market value of the shares. Based on the above interpretation, he came to the conclusion that assessee has received advance towards share capital during this year to the extent of Rs. 282 crores and the assessee has finalized the terms of issue of such shares during this assessment year only. Further, Ld. CIT(A) relied on the Revised Schedule VI to Companies Act, in which assessee has to declare the portion of share application separately and declaration of unsecured loan etc. to sustain the receipt of advance towards share capital as the addition under section 56(2)(viib). We notice that Ld. CIT(A) has interpreted the section 56(2)(viib) without any finding on the generation and circulation of black money in the assessee's case and further, he interpreted the words 'receipts of consideration for ....
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....ntend to receive any funding from any person not even from the holding company because any funds received against expansion or plan to revive the business will automatically get attracted to the deeming provision under section 56(2)(viib). In normal condition, all the required funds were first invested in such subsidiary companies and subsequently the terms are finalized only when such subsidiaries are in the process of recovery. By merely transferring funds as unsecured loan or advances towards share capital will not trigger the deeming provision under section 56(2)(viib). We do not foresee that the legislature must have intended to tax such legitimate investment under section 56(2)(viib). This is a peculiar case where not only share premium are brought under the deeming provision but including face value of shares. In our view, the tax authorities have mechanically invoked the deeming provision without actually investigating whether the assessee has actually indulged in any money laundering activities. The tax authorities are not expected to act mechanically without appreciating the soul and purpose of introduction of the particular and specific provision. We get strength from th....