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2017 (1) TMI 1677

..... le as income from other sources as per CIT - HELD 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). On a careful reading of the provisions and the legislative intent, we agree with the submissions of Ld.AR that the provision would not be applicable to bonus/right shares as there is no increase or decrease in the wealth of shareholder assessee on account of bonus/right shares. Further, there is no element of “gift” in issuing of bonus/right shares to the assessee by the company. 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 appl .....

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..... ompanies. Subsequently, notice under section 153A(1)(a) of the Act was issued to assessee requiring her to file return of income in respect of assessment year under consideration for the six preceding assessment years. Assessee filed her return of income pursuant to this notice on 22.08.2013 for the year under consideration declaring an income of ₹ 5, 56, 010/-. Notices under section 143(2) and 142(1) alongwith questionnaire was issued to assessee. In response to the said notice, representative of the assessee appeared and attended the assessment proceedings and submitted relevant details as called for. Assessing Officer accepted the returned income filed by assessee and completed the assessment on 31.03.2014. 3. From the assessment records Ld. 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 cha .....

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..... eby required to show cause as to why the impugned assessment should not be revised u/s 263(1) of the IT Act, 1961. You may attend my office on or before 08.12.2015 either personally or through an authorized representative for making your submission. Sd/- (Ajay Singh) Principal Commissioner Income Tax Officer (Central] Gurgaon 5. Before Ld. CIT assessee vide letters dated 18.01.2016 and 21.03.2016 submitted that 1,47,357 right shares and 6,29,428 bonus shares, allotted to assessee does not fall within the ambit of section 56 (2) (vii) and is not liable to be taxed. However, Ld. CIT held the order passed by Ld. AO to be erroneous 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 .....

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..... ing whether it could be applied to bonus/right shares. He also submitted that prior to the introduction of these clauses, and during the period when gift tax act was applicable, issue of bonus/right shares were never considered as gift by company to its shareholder, and was never subjected to gift tax in the hands of the company, considering it to be a donor. 10. On the contrary Ld. DR supported the order passed by Ld. CIT. She submitted that allotment of shares was without adequate consideration and therefore, there was an attempt that has been 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 .....

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..... eding ₹ 50fOOO/- without consideration by and Individual and HUF was made taxable in the hands of recipient. Finance (No.2) Act 2009 w.e.f., 01,10.2009 introduced clause (vii) to section 56(2) which enhanced the scope of existing provision in clause (vi) and covered the receipt of 'properties' including 'immovable properties' in addition to 'sum of money'. Thus, receipt of any immovable property or property other than an immovable 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 .....

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..... efinition of property for the purposes of section 56(2)(vii) includes immovable property being land or building or both, shares and securities, jewellery, archaeological collection, drawings, paintings, sculpture or any work of art. These are anti-abuse provisions which are currently applicable, 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 ta .....

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..... pears from various decisions cited hereinabove, the issuance of bonus shares does not amount to distribution of accumulated profit of a company. The shareholder derives some benefit by the process of capitalising 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 intend .....

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..... by Ld. AO. He submitted that even during the search and survey there has been no material 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 .....

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