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M/s. Medplus Health Services P. Ltd. Versus The Income Tax Officer, Ward 16 (1) , Hyderabad

2016 (3) TMI 549 - ITAT HYDERABAD

Addition under section 56(2)(viia) - addition to the appellant's income as deemed gift - whether as the FMV of shares on transaction date was negative and hence, question of any addition u/s. 56(2)(viia) of the Act does not arise? - Held that:- The property i.e., shares which are transferred are the shares of a company in which the public are not substantially interested. Since the transaction of sale and purchase of shares is between related parties and both the companies are companies in which .....

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value of Optival share is at a negative figure) whereas the assessee has paid at ₹ 1 per share - Held that:- If AO was not satisfied with the working given by the assessee, he ought to have computed the FMV himself in the method prescribed under the rules but ought not to have adopted higher of the prices paid by the assessee for purchase of some of the shares of M/s Optival as even when the transactions are between the related parties, the provisions of section 56(2)(viia) can be applied .....

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aside and these issues including the issue raised in the additional ground of appeal are remitted to the file of the AO for reconsideration of the issue in accordance with law. - Decided in favour of assessee for statistical purposes - ITA. No. 871/Hyd/2015 - Dated:- 8-3-2016 - Smt. P. Madhavi Devi, Judicial Member And Shri B. Ramakotaiah, Accountant Member For the Petitioner : Mr. Kanchan Kaushal & Mr. Dhanesh Bafna For the Respondent : Sri. K. Ramesh ORDER Per Smt. P. Madhavi Devi, J. M. T .....

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arned AO) in the name of Medplus Health Care P. Ltd., which is not in existence on the date of passing the order and serving the said order on the appellant. 3. On the facts and the circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the order of the Learned AO of making an addition of ₹ 21,22,73,565 to the appellant's income as deemed gift u/s. Section 56(2)(viia) of the Act without appreciating the fact that the FMV of shares on transaction date was negati .....

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the circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the action of the AO in not following the prescribed Rule-11UA while computing disallowance u/s 56(2)(viia) of the Act. The appellant prays that the aforesaid addition made by the A.O. be deleted. 6. On the facts and in circumstances of the case, the Ld AO erred in levying interest under section 234C of the Act. 7. On the facts and in circumstances of the case, the Ld AO erred in initiating penalty proceedings u .....

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g to ₹ 10,33,34,100. 2. Brief facts of the case are as follows: The assessee is a company engaged in the business of whole sale trading of pharmaceuticals, medicines, general stores and its related items and running of clinics. Its supply of goods is mainly to its group company M/s Optival Health Solutions Private Ltd which is engaged in retail business of pharmaceuticals and general goods. The assessee company filed its return of income on 30.09.2011 declaring income at NIL after set off .....

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notices u/s 143(2) and 142(1) of the Act. In response, the assessee submitted the required details before the AO. 3. During the assessment proceedings u/s 143(3) of the Act, AO observed that the assessee company is a wholesale supplier of goods mainly to its group company M/s. Optival Health Solutions P. Ltd., which in turn is engaged in retail business of pharmaceuticals and general goods and further that both the companies have more than 67% common shareholdings. It was observed that during th .....

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that majority of the small shareholders of M/s. Medplus Health Care P. Ltd., transferred their shares to Mr. G. Madhukar Reddy, promoter and one of the major shareholders of assessee company and Mr. Madhukar Reddy along with other major shareholders transferred their majority of share holdings at an attractive price to some local and international institutional investors. Out of these transactions, the A.O. observed that two persons i.e., Mr. C. Srinivasa Raju and Chintalapati Holdings P. Ltd., .....

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cause notice dated 27.02.2014 requiring the assessee to explain as to why the difference amount of ₹ 74 per share should not be treated as a deemed gift/income and taxed in the hands of the company. The assessee, vide letter dated 07.03.2014, submitted a detailed note as to why the provisions of section 56(2) (viia) are not applicable to the assessee s case. It was submitted that as per Explanation to Section 56(2)(viia) of the Act, the fair market value (FMV in short) has to be computed .....

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and held that the market value mentioned in the rule means price which it would have fetched if sold in the open market. He observed that the valuation of any property is based on the fact as to what value the property would fetch if sold in the open market and since in the assessee s own case there are certain transactions to clearly establish market value of the shares sold, resorting to estimation/calculation of market value of the unlisted shares as per the formula under Rule 11UA of I.T. Ru .....

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y at ₹ 63.79ps per share and the basis for adopting this rate is also not known but since it was much more than what is claimed by the assessee at ₹ 1 per share, he held that it was so shown to defraud the Revenue by transacting at abnormally low price. He therefore, held that the provision of deemed gift under section 56(2)(viia) of the I.T. Act is applicable. Thus, he adopted the price of ₹ 75.49ps paid to unrelated parties to be the market price of the unquoted shares of the .....

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acquired by the company from the shareholders. It was submitted that in the case of partly paid up shares, an amount of ₹ 9.50ps is still to be paid by the purchaser and hence, the value of deemed gift in the case of partly paid shares is to be calculated accordingly. After considering the assessee s contentions, the A.O. computed the value of the deemed gift of partly paid up shares at ₹ 10,33,34,100 and of fully paid up shares at ₹ 10,89,39,465 and brought it to tax. Aggrieve .....

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e was less than the fair market value computed under Rule 11UA of I.T. Rules. He submitted that where the legislature prescribes a particular method to be adopted, then the said method alone should be adopted. He has submitted that in the case of assessee before us, neither the provisions of section 56(2)(viia) nor the Rules prescribe for adoption of the market value of the shares as the fair market value for the purpose of deemed gift under section 56(2)(viia) of the I.T. Act since the provisio .....

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rarji Textiles Ltd., ITA.No.1979/Mum/2009 dated 10.05.2014 (ii) Bharat Hari Singhania & Others vs. Commissioner of Wealth Tax & Others. (1994) 207 ITR 1 (SC) (iii) Mrs. Prem Shamsher Singh vs. Commissioner of Wealth Tax (1994) 210 ITR 233 (Del.HC) (iv) Chandra Kishore Jha vs. Mahavir Prasad & Ors. (1999) 8 SCC 266 (SC) (v) State of Uttar Pradesh vs. Singhara Singh & Ors. 1963 AIR 358 (SC) (vi) Danish Aarthi vs. M. Abdul Kapoor CRP (NPD) (MD) No.475 & 476 of 2004 (Mad. HC) 5. .....

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ind that ground No.1 is general in nature and hence needs no adjudication. With regard to ground No.2, we find that though the assessee has raised this ground of appeal before the Ld. CIT(A), it was rejected on the ground that the assessee did not press the said ground of appeal. Even before us, the assessee did not advance any arguments on this issue at the time of hearing. In view of the same, ground No.2 of the assessee is not adjudicated and treated as rejected. 7. As regards grounds No. 3 t .....

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ia) of the I.T. Act are applicable to the facts of the case before us. For the sake of convenience and ready reference, the relevant provisions are reproduced hereunder : 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 14, items A to E . (2) In particular, and without prejudice to the generality .....

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ithout consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property ; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer un .....

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le property, means the value determined in accordance with the method as may be prescribed. 7.2. The prescribed method for valuation of the fair market value is under Rules 11U and 11UA(c)(b) of I.T. Rules. Rule 11UA (c)(b) reads as under : Rule 11UA(c)(b) as inserted by IT (Second Amdt.) Rules, 2010, applicable w.r.e.f. 1.10.2009 i.e., applicable for transactions undertaken after 1st October, 2009. (b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of .....

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in the Balance Sheet but not including the following amounts:- (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, by whatever name called, other than those set apart towards depreciation; , (iv) credit balance of the profit and loss account; (v) any amount representing provisi .....

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hare capital as shown in the balance-sheet; PV = the paid up value of such equity shares;" 7.3. From the literal reading of the above provision, it is clear that to apply the above provision, the following conditions have to be satisfied: i. there is transfer of shares a company not being a company in which the public are substantially interested: ii. the purchaser of the shares is a company not being a company in which the public are substantially interested; iii. the consideration is less .....

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ated parties and both the companies are companies in which the public are not substantially interested, we are of the opinion that the AO was justified in examining the applicability of the provisions of section 56(2)(viia) of the Act to the transaction of transfer of shares. 9. The next step for application of this provision is to arrive at the fair market value of the shares before comparing it with the consideration at which the shares are purchased by the assessee to examine if it was less t .....

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ed rule i.e., rule 11UA. According to the ld counsel for the assessee, where the Act prescribes a rule, it has to be strictly and mandatorily followed and further if the statute has conferred a power to do an act and has laid down the method in which that power is to be exercised, it necessarily prohibits the doing of the act in any other manner than that has been prescribed. In support of this contention, the assessee has relied upon various decisions cited supra. Let us now examine the applica .....

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before us: a) Rule 1D prescribed for the valuation of unquoted equity shares has necessarily to be followed and WTO has no option either to follow or not to follow the same and the question whether the rule is mandatory or directory does not arise. b) Valuation officer is as much bound by rules of valuation made under the Act as anybody else is. Since Rule 1D uses the word shall , it prima facie indicates its mandatory character. 2. Mrs. Prem Shamsher Singh vs CWT (cited supra): In this case, t .....

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inciple that if a stature provides for a thing to be done in a particular manner, then it has to be done in that manner and in no other manner. 4. State of Uttar Pradesh vs Singhara Singh and others (cited supra) : In this case the Hon ble Supreme Court was dealing with the validity of a confession not recorded in accordance with the procedure prescribed u/s164 of the Criminal Procedure Code and held that if a statute has conferred a power to do an act and had laid down the method in which that .....

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er, the same shall not be done in any other manner than prescribed under the law. For coming to this conclusion, the court relied on the judgements of the Hon ble Supreme Court cited above. Though the facts and circumstances under which the above rulings have been given are distinguishable, we find that the legal principles laid down in the above judgments are clearly applicable to the facts of the case before us. Therefore the question before us is whether the A.O. can adopt the value at which .....

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ompute the fair market value and only then can compare the same with the consideration paid by the assessee and apply the said provision only if the conditions set therein are satisfied. In the case before us, undisputedly some of the shareholders have sold the shares at a much higher price than that at which the assessee has purchased the balance of the shares from other shareholders i.e., at Re.1. Though the A.O. has not computed the fair market value in accordance with Rule 11UA of the I.T. R .....

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t price of some of the shares at a higher value than ₹ 1 was available, the AO has adopted the same as the fair market value. This stand of the AO could have been sustainable had the section provided that the FMV of an unquoted share shall be the value computed in accordance with the rule or the actual market value, if any, whichever is higher. But as can be seen from the Act and the rules provided there under, no such provision has been made. In fact, under the wealth tax Act, Section 7(1 .....

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e fair market value. The A.O. and the Ld. CIT(A) have not followed the relevant provisions for adopting or computing the fair market value of the shares, but have adopted the market value at which some of the shares have been purchased by the assessee as FMV. This, in our opinion, is not correct. As held by the Courts in the above judgments, the A.O. has to compute the fair market value in accordance with the prescribed method but cannot adopt the market value as fair market value under section .....

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e) whereas the assessee has paid at ₹ 1 per share. He has also observed that no basis is given by the assessee for adopting the rate of ₹ 63.79 per share for purchase of shares by Sri Madhukar Reddy. He observed that there is no basis for the transacting in the shares at different rates and that this arrangement has been done to defraud the revenue of its taxes by transacting at abnormally low prices. Having regard to the above observations of the AO, we are of the opinion that if th .....

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