TMI Blog2018 (12) TMI 981X X X X Extracts X X X X X X X X Extracts X X X X ..... e acceptance of shares offered by the company. Therefore, the offer made by the company was accepted by the shareholders before 1st October, 2009 hence, the contract between the company and the shareholder for issue by the company of shares was completed before 1st October, 2009. The provisions of section 17 do not apply to the shares allotted by the company to the assessee as the shares were not allotted by the company to the assessee in his capacity of being an employee of the company. The shares were offered and allotted to the assessee by the company by virtue of the assessee being a shareholder of the company. Therefore the provisions of section 17 are not applicable. Circular No. 710 dated 24 July, 1995 also supports the assessee's stand that where shares are offered by company to a shareholder, who happens to be an employee of the company (as Mr. Subodh Menon indeed is), at the same price as have been offered to other shareholders or the general public, there will be no perquisite in the shareholder's hands. In the instant case, the shares were offered to the assessee and other shareholders at a uniform rate of ₹ 100 and therefore, the difference between the fair m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 28.03.2013, assessing the total income at ₹ 3,26,32,85.240/-. In the assessment order the A.O stated that the assessee at the beginning of the year was holding 7,28,664/- shares of a closely held company namely M/s Dort Ketal Chemicals India Pvt. Ltd. having face value of ₹ 100 per share. During the year the assessee increased his stake to 28,22,696 shares by acquiring 20,94,032 shares @Rs.100/- per share i.e. the face value for a consideration of ₹ 20,94,03,200/-. M/s Dorf Ketal Chemicals India Pvt. Ltd. is closely held company of the assessee, who is also a director of the company. The A.O worked out the fair market value of the share at ₹ 1438.64 per share. The difference in share value was brought to tax u/s 56(2}(vii)(c) of the Act. 4. The A.O. further stated that without prejudice to the above, if it is held that section 56 is not applicable, the above transaction is to be considered u/s 17 of the I T Act in view of the fact that the assessee is working as a director of M/s Dorf Ketal India Ltd., and is in receipt of income from salary. The shares allotted to assessee, being a salaried employee, is to be treated either as perquisite or profit in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arket value on rights basis. (5) Valuation date under rule 11U(j) is the date of receipt of the property and the shares are received on their allotment. (6) Bonus shares or in the case of allotment of additional shares there is neither increase nor decrease in the wealth of the shareholder or of the issuing company and the percentage holding of the share-holder remains constant. What transpires is that a share gets split in the same proportion for all the share-holders. The ITAT also explained the same by stating that it would be akin to somebody exchanging a one thousand rupee note for two five hundred or ten hundred rupee notes. There is, accordingly, no question of any gift of or accretion to property; the share-holder getting only the value of his existing shares, which stands reduced to the same extent. 14.3 The following sentences in para No. 4.3 of the ITAT order is also relevant. We say so as to extent the value of the property in the additional shares is derived from that of the existing shareholding, on the basis of which the same are allotted, no additional property can be said to have been received by the shareholder. The Revenue argues otherwis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not acceptable since the ITAT while deciding the case of Sudhir Menon (HUF) held that there is no inadequate consideration involved. The taxability u/s 17 of the Act will arise only if there is Jnadequate consideration which can be treated as perquisite. Since the Hon'ble ITAT clearly held in the case of Sudhir Menon (HUF) that no addition is possible on account of inadequate consideration, it is therefore not possible to assess the same as perquisite u/s 17 of the Act. Since the facts are identical the decision of Hon'ble ITAT, Mumbai is binding and the question of charging the inadequate consideration u/s 17 of the Act does not arise in the case of the appellant. 14.6 In the assessment order the A.O relied upon the decision of the Hon'ble Mumbai High Court in the case of D.R.Pathak [99 ITR 14]. As per the A.O the ratio laid down in the case of D.R.Pathak [99 ITR 14] that all benefits, amenities and advantages received by the employee from the employer are taxable as perquisite u/s 17 of the Act. The contention of the A.O is not correct. The issue involved in the case of D.R.Pathak [99 ITR 14] is whether City Compensatory Allowance is a permissible allowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, respectfully following the decision of the Hon'ble ITAT, Mumbai in the group case of i,e Sudhir Menon (HUF) for the A.Y. 2010-11, the grounds of appeal 2 to 5 are hereby allowed. 15.0 The appellant in ground No.6 (additional ground) contended that the A.O erred in not granting credit for TDS on salary amounting to ₹ 7,43,13,801/- and on interest amounting to ₹ 2,529 as claimed in the ROI by the appellant. In the remand report the AO as well as the Additional CIT., Central Range-10 have stated that the rectification. 6. Against the above order of CIT(A), Revenue is in further appeal before us. 7. It was argued by learned DR that assessee has allotted shares at a face value of ₹ 100/- instead of ₹ 1,538.64/- as per fair market value in the books of accounts of M/s. Dorf Ketal Chemicals India Pvt. Ltd., The learned DR further argued that the assessee has not disputed the fact that during the year the assessee received 20.94,032 shares of face value of Ra.lOO/- each on fresh issue of allotment of M/s Dorf Ketal Chemical (India) Pvt. Ltd., and paid a consideration of ₹ 20,94,03,200/-. The assessee received these shares on 28.01.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding gets as a result of the transaction, in fact reduced from 4.98% to (as stated) 3.17%. The argument as well as the premise on which we found the issue of bonus shares as not applicable would, to the extent pari materia, apply in equal measure to the issue of additional shares, i.e., where and to the extent it is proportional to the existing share-holding. We may though, at the outset, clarify that the instant issue cannot be called a rights issue. Section 81 of the Companies Act, 1956 is not applicable to a private company (s.81(3)), so that it is firstly not obliged to issue shares to the existing shareholders only, and again, even so, on a proportionate basis. That apart, we state so as the scheme does not have a provision for the renunciation of rights by the existing shareholders. The same could thus at the option of the issuing company be offered for allotment to any other, i.e., whether existing shareholder or not. Thus, though the issue has elements of a right issue inasmuch as the offer is made in the first instance to the existing shareholders on the basis of their shareholding on proportional basis, the same cannot be strictly termed as one; the company appropriatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, i.e., of this genre, getting attracted in such a case. A higher than proportionate or a non-uniform allotment though would, and on the same premise, attract the rigor of the provision. This is only understandable inasmuch as the same would only be to the extent of the disproportionate allotment and, further, by suitably factoring in the decline in the value of the existing holding. In the context of the example cited, by taking the difference at ₹ 700/- per share for such shares. We emphasize equally on a uniform allotment as well. This is as a disproportionate allotment could also result on a proportionate offer, where on a selective basis, i.e., with some shareholders abstaining from exercising their rights (wholly or in part) and, accordingly, transfer of value/property. Take, for example, a case of a shareholding distributed equally over two shareholder groups, i.e., at 50% for each. A 1:1 rights issue, abstained by one group would result in the other having a 2/3rd holding. A higher proportion of rights‟ shares (as 2:1, 3:1, etc.) would, it is easy to see, yield a more skewed holding in favour of the resulting dominant group. We observe no absurdity or unint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re referred to in the said provision) are interlinked and, accordingly, a gain cannot be computed independent of each other. It is in fact in acknowledgment thereof that the Legislature has considered it proper and necessary to provide for determination of cost in such cases, i.e., for uniform application. The same though would operate for the purpose of computing capital gains, which would arise on the subsequent transfer of such assets. We have already noted an internal consistency between the two sets of provisions in-as-much as section 49(4) stands simultaneously incorporated to deem the value adopted or taken for the purpose of section 56(2)(vii) (or (viia)) as the cost of acquisition of the relevant asset (refer para 4.1). In fact, the argument becomes irrelevant in view of our decision holding that section 56(2)(vii) shall not have effect, irrespective of the value at which the additional shares are allotted, where and to the extent they are so on the strength of and against the existing shareholdings, made uniformly or subject to adequate pricing. Much was made before us of the Revenue not treating the transaction as a rights issue of shares, as well as of the power of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision, which is to be considered as valid, was required to be placed in perspective and within the scheme of the Act, could be drawn to the deeming provisions of its Chapter VI titled Aggregation of income and set off or carry forward of loss‟. An investment or asset found not ecorded, wholly or partly, in the books of account maintained by the assessee (for any source of income), and in respect of acquisition or ownership of which he is unable to furnish a satisfactory explanation, i.e., as to the nature and source of acquisition, the value thereof or the excess (unrecorded) value, as the case may be, is deemed as the assessee‟s income. The apex court in Chuharmal vs. CIT [1988] 172 ITR 250 (SC) explained that the provision of section 110 of the Indian Evidence Act, 1872, raising a presumption of ownership in favour of the person in possession (in-as-much as possession is a prima facie proof of ownership) is applicable under tax jurisprudence as well, so that the onus to show that he was not the actual owner is upon such a person. It, accordingly, found nothing amiss in the charge to tax as income, the assets, properly valued, where unexplained (or not satisfactorily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to therein is dispensed with where the receipt is in respect of a capital asset, as defined, and, further, does not fall under any of the excepted categories in-as-much as the same is regarded as not normative or outside the realm of accepted human behavior, based on preponderance of probabilities (of human conduct). To argue of the receipt as being a synonym for transfer, or of it as not flowing from its owner, is, thus, inconsistent, both in the context of the provision as well as its clear language. Reference in this context was also made by the ld. AR to section 122 of the Transfer of Property Act, 1882 and section 25 of the Indian Contract Act, 1872. A transaction could be either with or without consideration. Consideration signifies a price, so that it is a case of transfer, which the impugned transaction is not, while if considered as without consideration, the transaction is void in law, being not a gift in-as-much as the company is not the owner of its shares. 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‟ o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal is even otherwise not competent to, being not a court of law, but reading it in a manner totally inconsistent with the unambiguous language and the clear intent (of the Legislature) conveyed thereby, but also its context as well as the drift of section, in complete violence thereto. In the case of issue of bonus shares (as also on emerger), no property is being conveyed to the shareholder in-as-much as the property therein is comprised in the existing shareholding of the allottee. There is as such no case of a gift; the shareholder only receiving his own property, albeit in a different form. A right‟ share, on the other hand, is placed differently. To the extent it is allotted to a person not against his existing shareholding or, even so, albeit disproportionately, there is, depending on the terms of the allotment, which is the mode of acquisition and, thus, it‟s receipt, scope for value or property being passed on to him, which cannot be said to be in lieu of or as recompense of his existing property. The section would, as afore-stated, therefore, apply, though the extent of income, if any, chargeable there-under would depend on the actual allotment and its term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being no longer on the statute, all this is not relevant, and the abiding legacy of the decision, and the purpose for which it was referred to was inter alia its relevance on the principle of contemporanea expositio and the statement of the objects per the extant official communications. The argument is, in the context of the present case, misconceived. This is as we have firstly pointed out a fundamental infirmity in the interpretation placed on or accorded to section 52(2) by the Revenue. Section 52(1), which again only enabled the A.O. to substitute the FMV as the consideration as against that declared by the assessee on transfer, subject to his having reason to believe that the transfer was effected with the object of evading or reducing the liability to tax u/s.45, was not adversely commented upon by the apex court. It is easy to see that all the official pronouncements notwithstanding, the apex court would or rather could not have opined in the manner it did but for the fundamental flaw observed by it as-much as the provision has to be read within its legal framework, giving a purposeful meaning to its clear words. No such infirmity inflicts the section under reference or ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly discuss the issue from the stand point of interpretation of statutes, which was urged before us with reference to some case law, viz., C.W.S. (India) Ltd. vs. CIT [1994] 208 ITR 649 (SC); CIT vs. J. H. Gotla [1985] 156 ITR 323 (SC); Addl. CIT vs. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC), besides in the case of K. P. Varghese (supra), also concluding the matter. The gist thereof, or atleast to a substantial extent, stands in fact already brought out in the earlier part of this order while discussing the several arguments urged before us. All that is logical relevant, yielding insight into the purpose and object for and toward which the amendment stands brought, should be admissible. A casus omissus cannot be readily inferred, and the courts eschew supplying the same except in the case of clear necessity. The court cannot read anything into a statutory provision which is plain and unambiguous; a statute being an edict of the Legislature. The language employed in a statue is a determinative factor of the legislative intent, the foundational basis of any interpretation, is to be found from the words used by the Legislature itself. The principle is in fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for commercial transactions for the purpose of taxing statutes. The reliance on the argument made in this regard would thus be of no assistance to the assessee. No property however being passed on to the assessee in the instant case, i.e., on the allotment of the additional shares, no addition in terms of the provision itself shall arise in the facts of the case. We accordingly answer the question raised at the beginning of this order (refer para 2) in the negative. Decision 5.1 In view of the foregoing, therefore, the provision of s. 56(2)(vii)(c), in the facts and circumstances of the case, shall not apply and, hence, the amount of ₹ 27,89,02,160/- cannot be assessed as income in the hands of the assessee on the ground of inadequate consideration. This answers ground nos. 2 to 4. Ground # 1 stands dismissed as not pressed. We decide accordingly. 5.2 The assessee has also moved a stay application. In view of our having decided the appeal itself, the same becomes infructuous. 10. We also found that CIT(A) has also dealt with each and every objection of the AO as well as the order of the Tribunal in case of brother of assessee for the A.Y.2010-11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areholders of the company of the shares offered to them by the company the value of each share of the company was ₹ 184 per share. The assessee filed his return of income for the assessment year 2010-11 declaring total income of ₹ 25,04,16,549. The Assessing Officer passed an order dated 28 March 2013 under section 143(3) of the Act making an addition of ₹ 3,01,25,58,196 under section 56(2)(vii)of the Act. 15. Now, we deal with the contention of learned DR. As per learned DR the provisions of section 56(2)(vii) are applicable to the transaction as there has been disproportionate allotment in the case of the assessee. The assessee was offered 21,78,204 shares however, subscribed only to 20,94,032 shares. Therefore as held by the Tribunal at Para 4.3 in the case of Sudhir Menon (HUF) (supra), the provisions of section 56(2)(vii) are applicable when there is disproportionate allotment. He further submitted that the provisions of section 56(2)(vii) are in the nature of anti-abuse provisions and therefore should be interpreted strictly. In this regard, the Department relied on the Circular No. 1/2011 dated 6 April, 2011 and the decisions of the Tribunal in case of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 14.4 of his order he concluded, considering the fact that the issue involved is identical in the case under consideration as well as in the case of Sudhir Menon (HUF) for the A. Y. 2010-11, following the decision of Hon'ble ITAT, Mumbai, it is hereby held that the provisions of section 56(2)(vii)(c) of the Act is not applicable to the facts and circumstances of the assessee's case. 17. We further observe that provisions of section 56(2)(vii) does not apply to bonafide business transaction. As explained hereinabove, shares were issued by the company to comply with a covenant in the loan agreement with State Bank of India which required the promoters to increase the total net worth of the company to ₹ 150 crores by 31 March, 2010. Therefore, the shares were issued by the company for a bonafide reason and as a matter of business exigency. Circular No.1/2011 dated 6 April, 2011 issued by the CBDT explaining the provision of section 56(2)(vii) specifically states that the section was inserted as a counter evasion mechanism to prevent money laundering of unaccounted income. In paragraph 13.4 thereof where it is stated that the intention was not to tax transactions ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Further, on 21st September, 2009, the company informed the shareholders about the acceptance of shares offered by the company. Therefore, the offer made by the company was accepted by the shareholders before 1st October, 2009 hence, the contract between the company and the shareholder for issue by the company of shares was completed before 1st October, 2009. Accordingly, the provisions of section 56(2)(vii) do not apply to as the contract was executed prior to 1st October 2009. It was only the formal routine act of issuance of the share certificate by the company which took place after 1 October, 2009. The revenue has also relied on the provisions of section 17 that there would be a tax liability under section 17, even if section 56(2)(vii) does not apply, as the assessee being an employee of the company. The allotment of shares by the company the holding of the assessee came down from 34.57% to 33.30%, i.e., shareholding of the assessee witnesses a decline after the shares were allotted by the company, no benefit was received by the assessee and therefore, even the provisions of section 17 of the Act are not applicable. 21. Furthermore, the provisions of section 17 do not ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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