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2021 (4) TMI 802 - AT - Income TaxIncome from other sources - advance against share capital received during the year - applicability of provision of section 56(2)(viib) - HELD THAT:- 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. 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 the funds were moved from the holding company to the assessee and the funds were re-invested in the step down subsidiary company in order to revive the step down subsidiary in that process, the investment in such step down company is safeguarded. The receipt of consideration for issue of shares to mean the proceeds for exchange of ownership for the value. The term consideration means “something in return” i.e. Quid Pro Quo”. The receipt is exchanged with the ownership in the company. In the given case, the holding company passed the resolution to finance TMSL through the assessee and the funds intended for TMSL, which is step down subsidiary and the funds were remitted to the assessee as an advance towards share capital during this impugned assessment year (we do not intend to discuss the quantum of actual receipt of the advance during this assessment year at this stage. It is a separate discussion since assessee has only passed journal entries to convert the unsecured loan into advance towards share capital). The consideration means the promise of the assessee to issue shares against the advances received. In our view, the receipt of advances are a liability and will never take the character of the ownership until it is converted into share capital. The assessee can never enjoy the receipt of money from the investor until the ownership for the money received is not passed on i.e. by allotment of shares. The receipt of consideration during the previous year means the year in which the ownership or allotment of shares are passed on to the allottee in exchange for the investment of money. The tax authorities interpretation that when the receipt of money and mere agreement for allotment of shares without actual allotment of shares will make the consideration complete as per the contractual laws. In our view, unless and until the event of allotment of shares takes place, the assessee cannot become the owner of the funds invested in the company. The event of allotment will change the colour of funds received by the assessee from liability to the ownership. In our considered view, the provision of section 56(2)(viib) are attracted only in the year of allotment of shares i.e. assessment year 2014-15 - In case we accept the proposition of tax authorities then any fund received by the sick or capital eroded subsidiary companies will be more than the fair market price of the shares 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. Considering the above discussion, in our view, the provision of section 56(2)(viib) is applicable only in the year in which assessee issued actual share capital and AO is directed to drop the additions initiated under section 56(2)(viib) during this assessment year, therefore order of Ld. CIT(A) is set aside.
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