TaxTMI 
TaxTMI 
2022 (5) TMI 683
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....2,200 shares allotted to appellant due to renouncement of rights by wife & father in favour of the appellant held as disproportionate allotment by AO without adequate consideration u/s 56(2)(vii) of the Act. 3 Ld. CIT (A) erred in law and on facts confirming addition of income made by AO on account of inadequate consideration on 14, 800 additional right shares allotted to the appellant u/s 56(2)(vii)(c) of the Act. Ld. CIT (A) erred in law and on facts confirming Rs. 1,89,68,350/- out of total addition by AO considering allotment of 97,000 (82,200 + 14,800) shares as disproportionate allotment. 5 Without prejudice to the above grounds, Id. CIT (A) erred in law and on facts making erroneous calculation @ Rs.195.55 per share for 97,000 additional shares confirming addition of Rs. 1, 89, 68, 350/-. 6 Levy of interest u/s 234 A/B/C & D of the Act is not justified. 7. Initiation of penalty proceedings u/s 271(1) (c) of the Act is not justified. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal." ITA No. 1643/Ahd2017....
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....ough the medium of issuance of additional shares issued at below FMV substantial controlling interest in the company / business could be passed on to. Hence, the provision of taxing section 56(2)(vii) bringing to tax the shortfall in consideration over the FMV is on firm, cogent and sound footing. On perusal of above comparison of shareholding percentage of Jigar J. Shah, it can be observed that the assessee not only 'quantitatively' gained shares of Kintech Synergy Ltd. at a value far lesser than the FMV of the shares (Rs.4.90,00,000), but also, "qualitatively" gained in terms of increase in his shareholding percentage. The assessee here became the majority shareholder holding 53.22% of total shares after receipt of shares in AY 13-14 as compared to shareholding percentage of 27.90% in AY 12-13. With forgoing mention of facts of the case and interpretation of the statute, below is the rebuttal of submission dated 21/03/2016 filed by assessee on each and every point:- I. Property:- As recorded in reasons for reopening for the purposes of section 56(2)(vii), the term 'property' includes "shares and securities" within its ambit. Acc....
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....rces" namely.........." Section 56 thus clearly reiterates the law that what are chargeable to tax under its provision is items of 'income nature'. The concept of 'income" must be understood both in its qualitative sense and quantitative sense. In a qualitative sense, it flaunts the characteristic of a 'gain' resulting to the assessee. In other words, the assessee must become monetarily better off by the transaction of receipt of property. In the quantitative sense, it is a 'measure' of the gain earned in terms of money. It is the "income' in its qualitative sense that attracts the charge of income tax through the charging section 4 of the Income Tax Act. Once the income is so found chargeable, the next step is to get it measured under the computational provisions pertaining to each head of the income. This is the determination of income in its quantitative sense. v. Disproportionate allotment- In the context of Section 56(2)(vii)(c), the value of the property which an assessee receives is to be evaluated by comparing the value of the property held by the assessee immediately before the receipt and the val....
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....llotment and hence s. 56(2)(vii) of the Act cannot be invoked. The assessee further submitted that that the Ld. Assessing Officer erroneously held that rights share allotment was disproportionate. The assessee further challenged the valuation of shares done by the Ld. Assessing Officer at Rs. 255/- per share as being excessive. The assessee submitted that the Ld. Assessing Officer has not considered the Supreme Court decision in the case of Khoday Distillers 307 ITR 312 (SC) wherein the Hon'ble Supreme Court held that the word 'allotment' indicates creation of shares by appropriation out of the unappropriated share capital to a particular person and such creation would not amount to transfer, and hence s. 56(2)(vii) of the Act cannot be invoked. The Ld. CIT(Appeals) gave part relief to the assessee in respect of allotment made proportionate to the current shareholding of the assessee (of 1,03,000 shares) relying on the decision of Sudhir Menon (HUF) v. ACIT 45 Taxmann.com 176 , but in respect of additional shares received by the assessee on renouncement of rights shares by wife and father of the assessee amounting to 82,200 shares and also 14,800 allotted the assessee as a ....
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....ionate shareholding. Simultaneously, the other share holders like wife and father of appellant who were also eligible for the additional shares on proportionate basis at 82,200 have renounced their right of entitlement of the additional shares in favour of the appellant and consequently, the appellant has been allotted more additional shares of 1,85,200 (1,03,300+ 82,200) in respect of himself and per the renouncement. In other words, the appellant has been allotted the total additional shares of 1,85,200 (1,03,000 + 82,200) in respect of himself and renouncement in his favour by his wife and father. Since the appellant has been allotted the additional shares of 1,03,000 as per his proportionate holding for which the provisions of section 56(2) fvii) are not applicable and no addition in this regard could be made as per the express provisions of the said section and the decision of Hon'ble ITAT, Mumbai 'A' Bench in the case of Sudhir Menon (HUF) Vs. ACIT, Mumbai [2014] 45 Taxmann.conrv;i76 dated 12/03/2014 which is discussed in the subsequent paras. The Honourable ITAT has held that the appellant's case is limited to right shares and to the extent the shares subscri....
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....account of issuance of additional shares comes to Rs.205.55 per share. In other words, the book value of the assets comes to Rs.l 1,70,17,4187- (including the book value of assets as on 31/03/2012 + Rs.20 lacs) consideration received towards additional shares / by 5,69,300 shares (includes 2 lacs additional shares). 3.9. In view of the above, the addition of income for the total 97,000 additional shares (82,200 + 14,800) @ Rs.l 95.55 (Rs.205.55 - Rs.10) works out to Rs. 1,89,68,3507- and the same is found justified and hence confirm Further relief of Rs.3,00,31,6507- is granted to the appellant." 6. Before us, both the assessee and Department are in appeal against the order by Ld. CIT(Appeals). The Ld. Counsel for the assessee reiterated the arguments taken before Ld. CIT(Appeals) to the effect that in the instant set of facts, provisions of s. 56(2)(vii) of the Act cannot be invoked. He submitted that Ld. CIT(Appeals) erred in and in facts in not applying the ratio of decision of Khoday Distillers 307 ITR 312 (SC) wherein the Hon'ble Supreme Court held that the words 'allotment of shares' have been used to indicate the creation of shares by appropriation out of....
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....her section 56(2)(vii)(c) of the Act can be invoked in respect of14,800 allotted the assessee as a result of third party shareholders renouncing their right to apply for rights shares in favour of the assessee. Fourth, whether Ld. CIT(Appeals) erred in accepting the valuation of shares proposed by the assessee. 8. Before, taking up these issues, it would be pertinent to first deal with the challenge to issuance of notice u/s 148 of the Act by the assessee. In our view, Ld. CIT(Appeals) has not erred in facts and in law in upholding the issuance of notice u/s 148 of the Act. The return of the assessee was processed u/s 143(1) of the Act and no regular assessment took place to consider the issue of taxability of income in respect of allotment of rights shares in favour the assessee. The Ld. Assessing Officer issued notice within four years from end of assessment year involved. The Ld. Assessing Officer, in our view, had substantive reasons to believe that income had escaped assessment on account of disproportionate allocation of shares in favour of the assessee. The case was reopened after following due process of law and reasons were furnished to the assessee and objections to th....
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....case of Sudhir Menon supra, in the following words: "The argument seeks to support the contention that the transaction in order to qualify as valid in law has to be a case of transfer in-as much as the consideration implies price, so that the word 'receipt' occurring in section 56(2)(vii) has to be read as a synonym for or equated with 'purchase' or 'transfer'. The shares under question being not acquired through transfer, the transactions falls outside the ambit of section 56(2)(vii). We are completely unimpressed. The argument, attractive on its face, fails miserably the moment the nature of the transaction, i.e., the allotment of the shares (through which the relevant shares stand acquired or received), upon which only the shares come into existence and are received by the allottee thereof, is clarified. The same has been subject to dilation and elucidation by the apex court inter alia in Shree Gopal & Co. (supra) and Khoday Distilleries Ltd. (supra) relied upon by the parties themselves before us. As stated explicitly in the former case, a share is a chose in action. A chose in action implies the existence of some person entitled to the rights, ....
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....r Menon HUF v. Asstt. CIT [2014] 45 taxmann.com 176/148 ITD 260following the Judgment of the Hon'ble Supreme Court in the case of Miss. Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 (SC) and Hon'ble Bombay High Court in the case of H. Holck Larsen v. CIT [1972] 85 ITR 285 (Bom) held that as long as there is no disproportional allotment of shares, there was no scope for any property being received by the tax payer as there was only an apportionment of the value of the existing shareholder over a larger number of shares, and hence no addition u/s 56(2)(vii)(c) of the Act would arise. If the shares are allotted strictly on proportionate basis based on existing shareholding, then though the provisions perse are applicable, but will not operate adversely. This is because the gain accruing on allotment of fresh shares will be offset by the loss in value of existing shares. The ITAT Jaipur in the case of DCIT v. Smt. Veena Goyal [2020] 119 taxmann.com 362 (Jaipur - Trib.) held that where additional shares were allotted to all shareholders of company in proportion to existing shareholding of shareholder in company and after allotment of additional shares, shareholding percentage o....
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....shareholders, viz., assessee and his brother, and whatever excess benefit was passed on to assessee was out of shareholding held by his brother, provisions of section 56(2)(viii)(c)(ii) would not apply. Considering the above, we are of the considered view that section 56(2)(vii)(c) of the Act cannot be invoked in respect of additional 82,200 shares received by the assessee, on account of renunciation of rights issue the by assessee's wife and father in favour of the assessee. 12. Now, on the issue of whether section 56(2)(vii)(c) of the Act can be invoked in respect of 14,800 allotted to the assessee as a result of third party shareholders declining to apply for rights shares in favour of the assessee, the issue for consideration is whether in the instant facts it can be concluded whether there has been disproportionate allotment of shares in favour of the assessee, in which case the position, in our considered view is clear that section 56(2)(vii)(c) of the Act can be invoked. The Ld. DR has relied on observations of the Ld. Assessing Officer in the assessment order wherein he has observed that the assessee has gained both quantitatively as well as qualitatively, and as a resul....
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....s on 31-03-2012 and adding further consideration received on account of issuance of additional shares.In our considered view, Ld. CIT(Appeals) has not erred in facts and in law in computing the FMV of shares on the above lines. The ITAT in the case of ACIT v. Y. VenkannaChoudaryheld[2019] 112 taxmann.com 71 (Visakhapatnam - Trib.), relying upon the coordinate bench of Tribunal in Sadhvi Securities (P.) Ltd. v. Asstt. CIT [2019] 109 taxmann.com 245/179 ITD197 (Delhi - Trib.) 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. Thus, ITAT held that for arriving the FMV of shares previous Balance sheet which is audited and approved in the AGM has to be taken into consideration, before the allotment of shares. In the present case, since the shares were allotted before Balance Sheet for AY 2013-14 was finalized, in our view Ld. CIT(Appeals) has not erred in computing the FMV per share considering the previous balance sheet which was approved in the AGM for valuation of FMV of the shares. 14. We shall now take up the individual Grounds raised by t....