TMI Blog2017 (1) TMI 1677X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable to the allotment of bonus/Right shares, then for the purpose of calculating capital gains under section 48 and 49 on the sale of such shares, the cost of acquisition shall be taken as per section 49 (4) which means the value of bonus/right shares considered while applying the provisions of section 52 (2) (vii), which is clearly contradicting the provisions of section 55 (2) (aa) (iiiia). If the legislature really intended to bring allotment of bonus/right shares within the ambit of section 56 (2) (vii), it would have amended section 55 (2) (aa) (iiia) simultaneously. As no property however is being passed on to the assessee in the instant case before us on allotment of bonus/right shares and the no addition could be made by applying provisions of section 56 (2) (vii) as the case may be. - Decided in favour of assessee Initiation of proceedings u/s 263 - AR has raised and argument regarding the proceedings under section 263 being initiated wrongly as there was no material before Ld. CIT that was unearthed during the search - HELD THAT:- We reject this argument as the assessing officer has not dealt with share standing in the name of assessee at the time of assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT observed that during the year under consideration M/s Bestech India Pvt. Ltd., had allotted 10,000 equity shares at ₹ 400/- on 18.03.2010 to the assessee. Further 6,29,428 bonus shares were issued to assessee on 31.03.2010 without any consideration. The bonus shares were issued by way of capitalization of share premium account and reserve account. Ld. CIT was thus, of the opinion that benefit given to assessee was clearly chargeable as income from other sources under section 56(2)(vii)(c) of the Act. 4. Ld. CIT in exercise of his powers under section 263, issued show cause notice on 27.11.2015 in which it was alleged that assessee was allotted rights shares, and as per rule 11UA, there is an increase in the net wealth and section 56(2)(vii) of the Act is attracted, which is reproduced hereunder: To Smt. Meenu Satija 1/2873, Ram Nagar, Loni Road, Shahdra Delhi-110032. Subject: Notice u/s 263 of IT Act, 1961 for A.Y. 2010-11 - regarding. The assessment order u/s 153A(1)(b) of' IT Act, 1961 dated 31.03.2014 for A.Y. 2010-11, passed by Dy. Commissioner of Income Tax, Central Circle-1, Faridabad in your case was r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eous and prejudicial to the interest of the revenue as the amount of ₹ 1,61,05,074/- need to be added under section 56 (2)(vii) (c) of the Act as under: 06. 6,29,428 bonus shares were allotted by M/s Bestech India Pvt. Ltd., to the assessee for NIL consideration and 1,47,357 right shares were allotted for ₹ 14,73,5707-. However, the fair market value of these shares, as computed under Rule 11U 11 UA of the I.T. Rules, comes to Rs. l,75,78,644/-(₹ 22.63 x 7,76,785). Accordingly, the difference of fair market value of the bonus/ right equity shares and the value at which these shares were allotted to the assessee by M/s Bestech India Pvt. Ltd., comes to ₹ 1,61,05,074/- (₹ 1,75,78,644 -₹ 14,73,570). Therefore, amount of ₹ 1,61,05,0747- needs to be added u/s 56(2)(vii)(c) of the I. T. Act, 1961 as assessee's income from other sources. The order of the AO is, therefore, erroneous and prejudicial to the interest of the revenue. 07. The AO is directed to recompute the income by making the addition of ₹ 1,61,05,0747- (₹ 1,75,78,644 - ₹ 14,73,5707-) u/s 56(2)(vii)(c) of the I. T. Act, 1961. 6. Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to evade tax. It has been submitted by Ld. DR that as per working under rule 11UA, the value of shares allotted to assessee as on 18.03.2010 was ₹ 400/- each and there is an increase in the assessee s net wealth on account of the allotment of bonus/right shares. She further submitted that right shares issued to assessee was at a face value of ₹ 10/- and bonus shares issued to the assessee were without any consideration. She submitted that there is a difference in the market value of the shares and Ld. CIT was right in making addition in the hands of assessee being the difference in the value of shares at ₹ 1,61,05,074/-. 11. She placed reliance upon the decision of Hon ble Supreme Court, in the case of M/s Khoday Distilleries Ltd. vs. CIT in Civil Appeal No. 6654 of 2008 vide order dated 14.11.2008. 12. We have perused the submissions advanced by both parties in light of the records placed before us and decisions relied upon by them. 13. It is an undisputed fact that assessee has invested in shares of M/s Bestech India Pvt. Ltd., during the financial year relevant to the assessment year under consideration. She was allotted 10,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovable property either without consideration or at a consideration less than its Fair Market Value by an Individual and HUF became taxable in the their hand, in case, consideration is less than FMV for a sum not less than 50,000/-. However, some exception to this provision is also given in the proviso. It is relevant to mention here that these provisions remained to be effective only on individual and HUF. Finance Act 2010 w.e.f. 01.06.2010 introduced clause (viia) to section 56(2) which enhanced the scope of existing provision in clause (vii) to Firm or Company. Finance Act 2012 w.e.f. 01.04.2013 introduced clause, (viib) to section 56(2) whereby in case of allotment of shares by any company, any amount, received by the company in excess of its fair market value of shares or its face value was made taxable in the hands of the such company. Provision of section 56(2)(vii) are applicable on Individual and HUF whereas Provisions of 56(2)(viia) are applicable on firm and company. As the assessee before us is an Individual we are concerned with Sex. 56(2)(vii). Finance (No.2) Act 2009 w.e.f. 01.10.2009 introduced clause (vii) as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able, only, if an individual or an HUF is the recipient Therefore, transfer of shares of a company to a firm or a company, instead of an individual or an HUF, without consideration or at a price lower than the fair market value does not attract the anti-abuse provision. In order to prevent the practice of transferring unlisted shares at prices much below (their) fair market value, it is proposed to amend section 56 to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interest) either for inadequate, consideration or without consideration where the recipient is a firm of a company (not being a company in which public are substantially interested}. Section 2(18) des the definition of a company in which the public are substantially interested . From the above discussion, it is amply clear that Legislator intended to tax the transfer of shares at a value lesser than its fair market value under Provisions of Section 56(2)(vii), and 56(2)(viia). 17. On a careful reading of the provisions and the legislative intent, we agree with the submissions of Ld.AR that the provision would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alising of their cumulative profit but at the same time the value of his original shareholding does not go down. 19. In view of the above observations by Hon ble Supreme Court, we do not find this decision being of any help to the revenue. 20. We agree with submission advanced by Ld. AR that in case section 56(2)(vii)/56 (2) (viia) is made applicable on issue of bonus/right shares, various other sections of the Act would become contradictory. This is because if for the sake of discussion it is presumed that the provisions of section 56 (2) (vii) are made applicable to the allotment of bonus/Right shares, then for the purpose of calculating capital gains under section 48 and 49 on the sale of such shares, the cost of acquisition shall be taken as per section 49 (4) which means the value of bonus/right shares considered while applying the provisions of section 52 (2) (vii), which is clearly contradicting the provisions of section 55 (2) (aa) (iiiia). If the legislature really intended to bring allotment of bonus/right shares within the ambit of section 56 (2) (vii), it would have amended section 55 (2) (aa) (iiia) simultaneously. 21. Ld. AR placed his r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial that was unearthed which could form basis of the proceedings initiated under section 263. 25. On the contrary Ld. DR submitted that assessment order passed by Ld. AO is erroneous, in so far as prejudicial to the interests of the revenue, as Assessing Officer has not verified regarding issue of bonus/right shares to assesse. She submitted that during the assessment proceedings Assessing Officer has not raised any query regarding the same, which establishes non application of mind by Ld.AO. 26. We have perused the submissions advanced by both sides in the light of the records placed before us. 27. On the specific query raised by this bench to Ld. AR regarding consideration of this issue by Assessing Officer during the assessment proceedings, it has been submitted that Ld. AO has not called for any details regarding shares being allotted to assessee. Even from the assessment order passed it could not be discerned that Assessing Officer has conducted any enquiry regarding issue. 28. Ld. AR has raised and argument regarding the proceedings under section 263 being initiated wrongly as there was no material before Ld. CIT that was unearthed d ..... 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