2019 (5) TMI 952 - HC - Income Tax

Income from other sources u/s 56(2)(viib) - taxability of shares premium - determining the Fair Market Value of the Shares - amount brought into the Assessee Company by the mother for allotment of Equity Shares in her favour with a very high premium - gift - HELD THAT - Assessing authority was required to undertake the exercise of fact finding by determining the Fair Market Value of the Shares in question as required in the Explanation to Section 56 as quoted above. That exercise not having been done the matter deserves to be remanded back to the learned Assessing Authority for undertaking the said fact finding exercise. The Assessee will be free to raise all factual and legal contentions including the point about the said amount being treated as gift from mother to daughter. The Assessee may also seek necessary clarification from the Central Board of Direct Taxes on administrative side. Therefore without expressing any opinion on the merits of the case and answering the questions sought to be raised in the present Appeal under Section 260A of the Act we dispose of the Appeal filed by the Revenue by remitting the matter back to the Assessing Authority.

Summary

Issues:
1. Whether the Tribunal was justified in deleting the addition made under Section 56(2)(viib)?
2. Whether the Tribunal was justified in holding that the provisions of Section 56(2)(viib) cannot be invoked in the assessee's case?

Analysis:

1. The Revenue filed a Tax Case Appeal challenging the Tribunal's decision to allow the Assessee's Appeal for the Assessment Year 2014-2015. The issue revolved around the invocation of Section 56(2)(viib) of the Income Tax Act to tax the amount brought into the Assessee Company by the mother for the allotment of Equity Shares at a high premium. The Tribunal, citing legal fictions and judicial precedents, held that the provision could not be applied in this case as the benefit of the premium had passed to the daughter, and there was no scope in the Act to tax a transfer from a mother to her daughter. The Tribunal directed the deletion of the addition made under Section 56(2)(viib) in favor of the Assessee company.

2. The Appellant argued that the shares were issued at a premium far exceeding the Fair Market Value, making it "Income from Other Sources" under Section 56(2)(viib). The Respondent contended that the Assessing Authority failed to determine the Fair Market Value of the shares, which had increased due to a property purchase by the Company. The Respondent also highlighted that the provision exempts sums received from relatives, treating it as a gift. The Court noted the necessity for the Assessing Authority to ascertain the Fair Market Value as per the Act's provisions before applying Section 56(2)(viib). The matter was remanded for the Authority to conduct the required fact-finding exercise, allowing the Assessee to present legal contentions, including the "gift" argument, and seek clarification from the Central Board of Direct Taxes.

In conclusion, the Court remitted the case back to the Assessing Authority for further examination without expressing any opinion on the case's merits, emphasizing the importance of determining the Fair Market Value before invoking Section 56(2)(viib).