TMI Blog2018 (10) TMI 1095X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company. - Decided in favour of assessee. - I.T.A. No. 1352/Chny/2018 - - - Dated:- 27-8-2018 - SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER For The Appellant : Shri R. Vijayaraghavan, Advocate For The Respondent : Shri Prabhu Mukunth Arunkumar, Sr. Standing Counsel ORDER Per A. Mohan Alankamony, AM:- This appeal by the assessee is directed against the order passed by the learned Commissioner of Income Tax(Appeals)-1, Chennai, dated 19.03.2018 in ITA No.199/16-17 for the assessment year 2014-15 passed U/s. 250(6) r.w.s. 143(3) of the Act. 2. The assessee has raised several grounds in its appeal however the crux of the issue is that the Ld.CIT(A) has erred in confirming the addition made by the Ld.AO amounting to ₹ 23,31,68,600/- towards income from other sources invoking the provisions of Section 56(2)(viib) of the Act. 3. The brief facts of the case are that the assessee is a private limited company engaged in real estate business filed its return of income for the assessment year 2014-15 on 29.09.2014 declaring loss of ₹ 4,40,920/-. Initially the return was processed U/s.143 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s brought to tax, in the hands of the Company, ₹ 23.31 crores under Section 56(2)(viib). Section 56(2)(viib} was introduced by the Finance Act, 2012. The purpose of introduction of Section 56(2)(viib), as explained by the Finance Minister while introducing the Finance Bill, was to cover investment of unaccounted money by investing in shares with huge share premium. Further 3rd parties such investment at exorbitant rate of share premium, will be conferring benefit to the existing shareholders by enhancing the value of their shareholding. Thus sec 56(2)(viib) was introduced to curb unconnected parties conferring benefit to the existing shareholders with an ulterior motive. Further the purpose of introduction of Section, as per the speech of the Finance Minister introducing these provision was to deter generation and use of the unaccounted money. Thus, for the application this Section is to be seen whether unconnected parties confer benefit of enhanced shareholding to existing shareholders by bringing funds and being allotted shares at a huge share premium. This is basically a provision to attack tax avoidance and would apply to what can be considered as 'i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ium and thus, avoiding taxation under Section 56(2)(x). However, in the present benefit goes to daughter of the shareholders, who falls within the exempted category of relatives under sec 56(2)(x). Any benefit granted by mother to daughter is not taxable under Section 56(2)(x). Again, Mother could have gifted 50% of the amount to the daughter, which is not taxable u/ s 56(2)(x). Both could have invested equal amount in the Company, on the same terms and conditions. Even then the company would be assessed to tax u/ s 56(2)(viib). That is to say, even if all the existing shareholders contribute additional equity in proportion of their shareholding (Rights issue) for the business of the Company, and if the shares are allotted at a premium, the Company will be taxed u/s 56(2)(viib). This would be against the purpose of introduction of the section. A penal section should be interpreted in a harmonious manner achieve the purpose for which it was introduced, it has to be read down. It cannot be applied to penalize a genuine transaction which was never intended to brought within the mischief which was sought to be covered. Therefore considering the purpose in which Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be the value- ( i) as may be determined in accordance with such method as may be prescribed. 8. As above, the section is absolute in its wording and does not provide for any exceptions other than the ones specifically given. The Section further refers to the valuation of unquoted shares under Rule 11 UA which in-turn has given certain methods for valuing the unquoted shares. The assessee has not claimed being specifically covered by any futuristic method of valuation like the discounted cash flow or any other method. Under the circumstances, it is presumed that the net asset value for arriving at the fair market value of shares is accepted by the assessee. The Assessing Officer has also taken the valuation at NAV and has considered the entire share premium as being excessive and liable for taxation u/s 56(2)(viib). In this regard, the written submission of the assessee is perused. The assessee has claimed that shares are allotted at a premium to one of the shareholders who is a blood relative of the other shareholder. The AR contends that 56(2)(viib) is not attracted on account of the beneficial share purchaser being a relative of the other existing shareholder. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holder of the assessee company had brought in cash into the assesse company for allotment of equity shares with premium to purchase land and the benefit of the share premium has only passed on to the only other shareholder who is here daughter. It was further argued that Section 56(2)(viib) of the Act was brought in to deter generation and use of black money and in the case of the assessee company there was no such generation and use of black money and therefore the provisions of Section 56(2)(viib) of the Act need not be invoked. It was therefore pleaded that the addition made by the Ld.AO which was further confirmed by the Ld.CIT(A) may be deleted. The Ld.DR on the other hand relied on the orders of the Ld.Revenue Authorities and argued in support of the same. 7. We have heard the rival submissions and carefully perused the materials on record. We find merits in the submission of the Ld.AR. The Hon ble Finance Minister in his speech of Finance Bill 2012 had stated at para 155 as follows I propose a series of measures to deter the generation and use of unaccounted money. To this end, I propose- *--------------------------- *---------------------------- *-- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee the following facts emerge and the same is not in dispute:- (i) The appellant company had only two shareholders at the beginning of the relevant financial year viz., Mrs. Sasikala Raghupathy and her husband Mr. B.G. Raghupathy each holding 5000 shares. (ii) On the demise of Mr. B.G. Raghupathy the shares devolved on their daughter Mrs. Vani Raghupathy. (iii) Thereafter Mrs. Sasikala Raghupathy introduced cash into the company amounting to ₹ 23.32 crores against which she was allotted 10,100 shares at a premium of ₹ 23.31 crores. (iv) Thus the total number of shares held as on the end of the relevant assessment year by Mrs. Sasikala Raghupathy stood at 15100 shares and the total number of shares held by Mrs. Vani Raghupathy stood at 5000 shares aggregating to 20100 shares. (v) The Ld.AO invoked the provisions of Section 56(2)(viib) of the Act, because 10,100 shares was allotted at an unrealistic premium of ₹ 23.31 crores to Mrs. Sasikala Raghupathy. 7.2 From the above facts it is apparent that though Mrs. Sasikala Raghupathy had introduced cash into the assessee company amounting to ₹ 23.31 crores for allotment of shares at premiu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upathy to Mrs. Vani Raghupathy i.e., from mother to daughter. Further it is pertinent to mention that by virtue of the provisions of Section 56(2)(vi) (x) of the Act when gift is bestowed by mother to daughter, it is not taxable. Thus in the case of the assessee, when the provisions of Section 56(2)(vi), (viib) (x) of the Act, are interpreted in a harmonious manner lifting the corporate wheel of the assessee company, it is abundantly clear that the provisions of Section 56(2)(viib) of the Act, has no implication in the case of the assessee company, more-so keeping in view of the speech delivered by the Hon ble Finance Minister referred herein above. It is also pertinent to mention that in the instant case the benefit of infusing cash into the assessee company by way of equity share with premium by Mrs.Sasikala Raghupathy will not benefit any other shareholders inducted in the company in future because in such event the shares will have to be allotted on the basis of the intrinsic value of the shares of the assessee company otherwise at that point of time the provisions of Section 56(2)(viib) of the Act will be instantly attracted. In the present situation we are also reminded o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that even when there are transfer of shares physically, in the event of family arrangements, the Hon ble High Courts have held that the entire transactions has to be viewed lifting the corporate veil and treat the transaction as if there is no transfer of shares and hence capital gain tax is not attracted. Similarly we are of the view that in the case of the assessee company also the corporate veil is required to be lifted and thereafter the transaction has to be viewed in the light of the relevant provisions of the Act. 7.4 Bearing in mind, the facts of the case, the decision of the higher Judiciary Authorities cited supra and the legal principles discussed herein above, we are of the considered view that provisions of Section 56(2)(viib) of the Act, cannot be invoked in the case of the assessee company because by virtue of cash being brought into the assessee company by Mrs. Sasikala Raghupathy for allotment of equity shares with unrealistic premium the benefit has only passed on to her daughter Mrs. Vani Raghupathy and there is no scope in the Act to tax when cash or asset is transferred by a mother to her daughter. Hence we hereby direct the Ld.AO to delete the addition ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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