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TMI Blog2023 (9) TMI 1162X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and ITA No. 1643/Ahd/2017 filed by the appellant - revenue for the Assessment Year 2013-14. 3. In Tax Appeal No. 80 of 2023, arising out of common judgement and order dated 06.05.2022 in ITA No. 1541/Ahd/2017 filed by the respondent-assessee, the revenue has raised the following substantial question of law: "(a) Whether in the facts and circumstances of the case and in law, the learned ITAT has erred in deleting the addition u/s. 56(2)(vii)(c) of the Act in respect of the additional 82,200 shares allotted to assessee due to renouncement of rights by wife & father of the assessee?" 3.1 So far as Tax Appeal No. 96 of 2023 is concerned, the same is also arising out of common judgement and order dated 06.05.2022 ITA No. 1643/Ahd/2017 filed by the appellant - revenue. The revenue has raised the following two substantial questions of law: "(a) Whether in the facts and circumstances of the case and in law, the learned ITAT has erred in deleting the addition u/s. 56(2)(vii)(c) in respect of the additional shares allotted to the assessee? (b) Whether in the facts and circumstances of the case and in law, the learned ITAT has erred in adopting the valuation of shares at Rs. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee on renunciation of right shares by wife and father of the assessee, remaining 82,200 shares and also 14,800 shares allotted to the assessee as a result of third party share-holder renunciation in favour of the assessee, the disallowance on the ground that allotment of additional shares was disproportionate to person shareholding of the assessee and hence the provisions of Sec. 56(2)(vii)(c) of the Act were not made applicable. 4.6 Both, the assessee and the revenue, therefore, filed appeals challenging the order of the CIT(A) before the Tribunal. 4.7 The Tribunal, dismissed the appeal filed by the revenue on both counts i.e. firstly, Sec. 56(2)(vii)(c) not being applicable to the right shares proportionate to not existing holdings and secondly Fair Market Value of shares were Rs. 205.55 per share. 4.8 The Tribunal partly allowed the appeal of the assessee holding that the issue of right shares proportionate to holding of wife and father was not taxable under Sec. 56(2)(vii)(c). The Tribunal, further held that the provisions of Sec. 56(2)(vii)(c) would be applicable in respect of 14,800 shares which were allotted to the assessee as a result of third party declining to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions : Provided further that this clause shall not apply to any sum of money or any property received- (a) from any relative; or (b) on the occasion of the marriage of the individual; or (c) under a will or by way of inheritance; or (d) in contemplation of death of the payer or donor, as the case may be; or (e) from any local authority as defined in the Explanation to clause (20) of section 10; or (f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or (g) from any trust or institution registered under section 12AA; or (h) by way of transaction not regarded as transfer under clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation.-For the purposes of this clause,- (a) "assessable" shall have the meaning assigned to it in the Explanation 2 to subsection (2) of section 50C; (b) "fair market value" of a property, other than an immovable property, means the value determined in accordance with the method as may be prescribed; (c) "jewellery" shall have the meaning assigned to it in the Explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t regarded as transfer under clauses (via), (vic), (vicb), (vid) and (vii) of section 47 of the Act. Consequential amendments are proposed in- (i) Section 2(24), to include the value of such shares in the definition of income; (ii) Section 49, to provide that the cost of acquisition of such shares will be the value which has been taken into account and has been subjected to tax under the provisions of section 56(2). These amendments are proposed to take effect from 1st June 2010 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years. B. The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income under the garb of gifts, particularly after abolition of the Gift Tax Act. The provisions were intended to extend the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. It is, therefore, proposed to amend the definition of property, so as to provide that section 56(2)(vii) will have application to the 'property' which is in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dadabhoy Kapadia vs. CIT reported in 63 ITR 651 (SC). The Tribunal, also relied on a decision in the case of H. Holck Larsen Vs. Commissioner of Inome-tax, reported in 85 ITR 285 (BOM.), to hold that as long as there is no disproportionate allotment of shares, there was no scope of any property being received by them on the said allotment of shares, as there was only an apportionment of the value of their existing share holding over a large number of shares and hence no addition under Sec. 56(2)(vii)(c) would arise. It was, therefore, held that if the shares are allotted strictly on proportionate basis based on existing shareholding, then though the provisions per se are applicable, but will not operate adversely because the gain accruing on allotment of fresh shares will be offset by the loss in value of existing shares. 10. The Tribunal, in support of its finding relied upon the decision in the case of Deputy Commissioner of Income Tax, Circle-2, Jaipur Vs. Smt. Veena Goyal, reported in 119 taxmann.com 362 (Jaipur - Trib.) and on a decision in the case of Income-tax Officer Vs. Rajeev Ratanlal Tulshyan, reported in 136 taxmann.com 42 (Mumbai - Trib.). The Tribunal, therefore he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Tribunal upheld the decision of the CIT(A) holding that the CIT(A) has not erred in facts and in law in computing the FMV of shares on the above lines. The Tribunal relied on a decision in the case of ACIT Vs. Y. Venkanna Choudary reported in [2019] 112 taxmann.com 71 (Vishakhapatnam -Trib) and in the case of Sadhvi Securities (P) Ltd v. Asstt. CIT reported in [2019] 109 taxmann.com 245/179 ITD 197 (Delhi - Trib.), wherein, it is held that in case the balance sheet was not drawn on the date of allotment, the previous balance-sheet which was approved in the AGM has to be considered for valuation of FMV of the shares. The Tribunal, therefore, held that since the shares were allotted before balance-sheet for A.Y 2013-14, the CIT(A) did not erred in computing the FMV per share considering the previous balance-sheet approved in AGM for valuation of FMV of the shares. 14. Mr. Varun Patel, learned Senior Standing Counsel appearing with Mr. Dev D. Patel, learned advocate for the revenue, would submit that the CIT(A) erred in law in holding the addition under Sec. 56(2)(vii)(c). He would further submit that the CIT(A) erred in law and on facts adopting the valuation of shares at Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is transfer of the shares which pre-existed prior to the issuance of shares by the Company as there is vital difference between "creation" and "transfer of shares". The words "allotment of shares" having used to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person who has right to choose for such allotment. Therefore, there is a difference between issue of a share to a subscriber and the purchase of a share from an existing shareholder as in the first case, because, the first case is that of creation, whereas, the second is that of "transfer" entitle to the right in action. 18. In view of the above, the provisions of Sec. 56(2) would not be applicable to the issue of new shares which is also submitted by the explanatory notice to the Finance Bill, 2010, wherein, it is clarified that Sec. 56(2)(vii)(c) of the Act ought to be applied only in the case of transfer of shares. It is trite law that allotment of new shares cannot be regarded as transfer of shares. Therefore, in order to apply the provisions of Sec. 56(2)(vii)(c), there must be an existence of property before receiving it. As per advanced Law Lexicon Dictionar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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