TaxTMI 
TaxTMI 
2026 (7) TMI 1582
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....ed order. We shall first take up the appeal in ITA No.642/Viz/2025 as a lead matter and the order therein passed shall apply mutatis mutandis for the purpose of disposing of the other appeal. The Revenue has assailed the impugned order of the CIT(A) on the following grounds of appeals before us: "1. The order of the Ld. CIT(A) is erroneous both on facts and in law. 2. The Ld. CIT(A) has erred in deleting the addition of Rs. 5.39,76,840/- made towards deemed income u/s. 56 of the I.T. Act, 1961. 3. On the facts and in the circumstances of the case, the Ld. CIT(A), erred in relying upon the Hon'ble ITAT decision in ITA No.272/VIZ/2018 dt 30.09.2019 wherein it was held that the excess benefit passed on to the assessee was out of the shareholding held by his brother, completely ignoring the fact that 80400 shares were allotted to the assessee directly by the company Sardar Projects Pvt. Ltd.' as part of fresh allotment of shares made by the company to other persons, including the assessee. 4. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in relying upon the Hon'ble ITAT decision in ITA No.272/VIZ/2018 dt.30.09.20....
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.... fair market value of shares as computed by the Assessing officer. 5. The learned Commissioner of Income Tax (Appeals) is not justified in sustaining the addition of Rs. 3,86,220 made by the assessing officer u/s 56(2)(viic) of the Act respect of shares allotted on 26.03.2014. 6. Any other grounds of Cross-Objection that may the raised at the time of hearing." 2. Succinctly stated, the assessee had filed his return of income for AY 2014- 15 on 10/01/2015, declaring an income of Rs. 5,99,970/-. Thereafter, the AO based on information that the company, viz., M/s. Sardar Projects Private Limited, Visakhapatnam had issued 80,400 and 82,000 equity shares to the assessee on 05/04/2013 and 26/03/2014 respectively, i.e., the period relevant to the year under consideration at a face value of Rs. 10/- per share, which was substantially below their fair market value (FMV), held a conviction that the deemed income of the assessee as per the provisions of section 56(2)(vii)(c)(ii) of the Act for the subject year had escaped assessment, initiated proceedings under section 147 of the Act. Noice under section 148 of the Act, dated 20/04/2021 was issued to the assessee. 3. T....
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..... GVN Hari, the Ld. Authorized Representative (for short, "AR") for the assessee, at the threshold of hearing the appeal, submitted that the addition made by the AO is based on an erroneous assumption that a fresh allotment of shares by a company amounts to receipt of property from another person. Elaborating on his contention, the Ld. AR submitted that there is a well-recognized distinction in company law between allotment of shares and transfer of existing shares. In the case of a fresh allotment, the shares come into existence only upon allotment, and there is no transfer of any pre-existing property from one person to another. It was submitted that in case of fresh allotment of shares by a company, the essential requirement of section 56(2)(vii)(c)(ii), i.e., receipt of property from another person, is absent. The Ld. AR, in support of the aforesaid proposition, placed reliance upon the judgment of the Hon'ble High Court of Gujarat in Jigar Jashwantlal Shah v. Principal Commissioner of Income-tax-1 (2024) 468 ITR 628 (Guj) and the decision of the ITAT, Hyderabad in Thermodyne Dynamics Private Limited v. ITO, ITA 500/Hyd/2020, dated 03/07/2025. The learned AR submitted that ....
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....d" or "is issued" shares. Therefore, the foremost question is whether an allotment of fresh shares by a company can be regarded as a receipt of property from another person. At this stage, it is relevant to note that the distinction between the allotment of shares and the transfer of existing shares is well settled in company law. An allotment is the company's appropriation of a portion of its unissued share capital to a person. Accordingly, prior to allotment, the shares do not exist as property in the hands of any person, and they come into existence only upon allotment. On the other hand, a transfer involves the passing of an existing share from one holder to another. We may herein observe that the Hon'ble Supreme Court in Khoday Distilleries Ltd. v. CIT (2008) 307 ITR 312 (SC) recognized this distinction and explained that the allotment of shares is the creation of shares, not the transfer of existing shares. It was observed that the allottee obtains a right in the newly created shares on the basis of the allotment and not by way of transfer of a pre-existing asset from another person. 13. We find that the Hon'ble High Court of Gujarat in Jigar Jashwantlal Shah v....
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....e failing which the section in itself will be rendered as unworkable. We find that the Hon'ble Supreme Court in the case of M/s Khoday Distilleries Ltd. Vs. CIT & Anr. (2008) 307 ITR 312 (SC), has held that there is a difference between the issue of a share to a subscriber and the purchase of a share from an existing shareholder. The Hon'ble Apex Court after drawing support from its earlier order in the case of Sri. Gopal Jalan & Company Vs. Calcutta Stock Exchange Association Ltd. 1964 (3) SCR 698, has observed that it is only on "allotment" that the shares come into existence, and till such an allotment the shares do not exist at all. Further, it was observed that "allotment" indicates the creation of shares by appropriation out of the unappropriated share capital to a particular person and that such creation does not amount to transfer. We thus, in the backdrop of the aforesaid settled position of law are of the firm conviction that the allotment of 3,15,00,000 shares of M/s. Kineta Metals and Minerals Limited (supra) to the assessee company on 02.07.2012 (supra), i.e creation of shares by appropriation out of the unappropriated share capital cannot be brought within the mea....
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....e shares had come into existence only when the allotment was made by the company as right shares, therefore, the same could not be said to have been "received from any person", which was the fundamental requirement for invoking the provisions of Section 56(2)(vii)(c) of the Act. The Hon'ble High Court was of the view that the intention of the legislature that the property must pre-exist for triggering the provisions of Section 56(2)(vii)(c) of the Act could safely be gathered from the words used in the said statutory provision. For the sake of clarity, the observations of the Hon'ble High Court are culled out as under (relevant extract): "6. Sec.56(2)(vii)(c) of the Act, reads as under: "56 .... xxx xxx xxx (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:-- xxx xxx xxx (vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009 but before the 1st day of April, 2017,-- xxx xxx xxx (....
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....i) immovable property being land or building or both; (ii) shares and securities; (iii) jewellery; (iv) archaeological collections; (v) drawings; (vi) paintings; (vii) sculptures; (viii) any work of art; or (ix) bullion;" 7. The aforesaid provision of Sec.56(2)(vii)(c) of the Act was inserted vide amended Act with effect from 01.07.2010. Explanatory notes explaining the provisions of Finance Bill reads as under: "Taxation of certain transactions without consideration or for inadequate consideration Under the existing provisions of section 56(2)(vii), any sum of money or any property in kind which is received without consideration or for inadequate consideration (in excess of the prescribed limit of Rs. 50,000) by an individual or an HUF is chargeable to income-tax in the hands of recipient under the head 'income from other sources'. However, receipts from relatives or on the occasion of marriage or under a will are outside the scope of this provision. The existing definition of property for the purposes of section 56(2)(vii) includes immovable property being land or building or both, s....
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....al asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient. C. In several cases of immovable property transactions, there is a time gap between the booking of a property and the receipt of such property on registration, which results in a taxable differential. It is, therefore, proposed to amend clause (vii) of section 56(2) so as to provide that it would apply only if the immovable property is received without any consideration and to remove the stipulation regarding transactions involving cases of inadequate consideration in respect of immovable property. These amendments are proposed to take effect retrospectively from 1st October, 2009 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years. D. It is proposed to amend the definition of 'property' as provided under section 56 so as to include transactions in respect of 'bullion'. This amendment is proposed to take effect from 1st June, 2010 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years. E. It is proposed to amen....
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....ment" means appropriation out of previously unappropriated capital of a company, of a certain number of shares to a person and till such allotment, the shares do not exist as such". Therefore, it is only on allotment that the shares come into existence. In every case, the words "allotment of shares" having used to indicate the creation of shares appropriation out of unappropriated share given to a particular person which is also referred to in the notice of clause to the Finance Bill 2010. Therefore, the aim and intention behind amending the provision of Sec.56 is to prevent the practice of transferring unutilized shares at a price which are allotted for the first time by way of right shares. The amendment is therefore never meant to aim the "fresh issue" or "fresh allotment" of shares by a company. **** **** **** " (emphasis supplied by us) 26. We thus, in the backdrop of the aforesaid settled position of law, i.e a fresh allotment of shares is a mere creation of such shares, which cannot be brought within the meaning of "receipt of shares" under Section 56(2)(viia) of the Act; read alongwith the "Explanatory Notes" to the Finance Bill, 2010 (explaining the purpose ....
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..../- made by the AO cannot be sustained. 18. Before parting, we may observe that the controversy involved in the present appeal highlights the distinction between the transfer of an existing capital asset and the creation of a new asset by way of allotment of shares. In our considered opinion, the deeming provisions contained in section 56(2)(vii)(c)(ii), being charging provisions creating a legal fiction, are required to receive strict construction. In the absence of clear statutory language bringing fresh allotment of shares within their ambit, the provision cannot be extended by implication to transactions not expressly covered by Parliament. The Cross Objection filed by the assessee is accordingly allowed in terms of our aforesaid observations. 19. As we have allowed the cross-objection filed by the assessee and vacated the addition made by the AO for the reason that in case of fresh allotment of shares by a company, the essential requirement of section 56(2)(vii)(c)(ii),i.e., receipt of property from another person, is absent, therefore, the appeal filed by the revenue wherein it has assailed the order of the CIT(A) on the ground that he has erred in following the decision....