2020 (9) TMI 916 - AT - Income Tax

Addition u/s 2(22)(e) for deemed dividend - CIT-A deleted the addition - HELD THAT - The debit balance has been notionally worked out by the assessing officer by working out the balance in ledger account of shareholder on the basis of clearing date of cheque received (not paid) in the bank account, which is not correct. As per accounting principles entries in the books of accounts are required to be made on the basis of transactions entered which is the receipt of cheque, which was subsequently honoured by the bank, hence the entries appearing in the ledger account is correct and same cannot be ignored and balance cannot be worked out on notional basis and even if he wants to do the same, then also the amount was never paid to the Share Holder but in fact was received from the Share Holder and the date of debit should also be transferred to the date on which the amount was cleared. In no way by this company has paid any amount to the shareholder and thus provisions of section 2(22)(e) are not applicable. The substance of section 2(22)(e) is any payment made by a company that too by way of advance or loan which shows that for invoking the provisions of section 2(2)(e), there must be a payment by way of advance or loan. This vital aspect is missing in the case of the assessee as neither there is any payment nor the company made any advance or loan to the assessee, thus debit balance worked out by the assessee company will not fall within the ambit of the provisions of section 2(22)(e) and thus are not applicable in the case of the assessee. Detailed finding recorded by the ld. CIT(A) are as per the material on record, accordingly, we do not find any reason to interfere in the order of the ld. CIT(A) for deleting the addition so made. Hence, we uphold the same. Addition u/s 56(2(vii)(c) - Allotment of shares - difference calculated between fair market value and that of face value under section 56(2)(vii)(c) - CIT-A deleted the addition - HELD THAT - Mumbai Bench of ITAT in the case of ACIT Vs Subodh Mennon 2018 (12) TMI 981 - ITAT MUMBAI have held that only when a higher than a propionate allotment of fresh shares issued by a company is received by a shareholder, the provisions of section 56(2)(vii) get attracted; provisions of section 56(2)(vii) are not applicable to the facts of the case - addition under 56(2)(vii)(c) being the difference between alleged fair market value of shares and the subscribed value of shares was not sustainable. It is only when a higher than propionate allotment of fresh shares issued by a company is received by a shareholder, the provisions of section 56(2)(vii) get attracted. Detailed finding so recorded by the ld. CIT(A) while deleting the addition made U/s 56(2)(vii)(c) are as per material on record which do not require any interference on our part. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition under Section 2(22)(e) of the Income Tax Act for deemed dividend.
2. Deletion of addition under Section 56(2)(vii)(c) of the Income Tax Act for the difference between fair market value and face value of shares.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 2(22)(e) for Deemed Dividend:

The revenue was aggrieved by the deletion of an addition of ?50,00,000 made by the Assessing Officer (A.O.) under Section 2(22)(e) of the Income Tax Act, which pertains to deemed dividends. The assessee, a shareholder in M/s Pinkcity Jewelhouse Pvt. Ltd., applied for 11,20,000 shares and paid ?1,12,00,000 via cheques. The company allotted the shares before the cheques were cleared, resulting in a temporary debit balance in the assessee’s account. The A.O. treated this debit balance as a deemed dividend.

The CIT(A) deleted this addition, observing that the debit balance was due to the delay in cheque clearance, not because of any loan or advance by the company to the shareholder. The CIT(A) emphasized that Section 2(22)(e) applies only when a company makes a payment to a shareholder by way of advance or loan, which was not the case here.

The Tribunal upheld the CIT(A)’s decision, noting that the assessee had made the payment for the shares, and the debit balance was not due to any loan or advance but a journal entry for share allotment. The Tribunal concluded that the provisions of Section 2(22)(e) were not applicable as there was no payment made by the company to the shareholder.

2. Deletion of Addition under Section 56(2)(vii)(c) for Fair Market Value Difference:

The revenue was also aggrieved by the deletion of an addition of ?1,16,14,400 made under Section 56(2)(vii)(c) of the Income Tax Act. The A.O. determined the fair market value of the shares at ?20.37 per share, whereas the shares were allotted at ?10 per share, and added the difference as income.

The CIT(A) deleted this addition, noting that the additional shares were allotted proportionately to all shareholders, maintaining their existing shareholding percentage. The CIT(A) relied on the judgment of the ITAT in the case of Sudhir Menon HUF vs. ACIT, which held that proportional allotment of shares does not result in any property being received by the shareholder, and thus, Section 56(2)(vii)(c) does not apply.

The Tribunal upheld the CIT(A)’s decision, referencing the provisions of Section 56(2)(vii)(c) and the judicial pronouncements. The Tribunal noted that the proportional allotment of additional shares did not result in any gain to the assessee, as the shareholding percentage remained unchanged, and thus, no addition under Section 56(2)(vii)(c) was justified.

Conclusion:

The appeals filed by the revenue were dismissed in both cases. The Tribunal upheld the findings of the CIT(A), concluding that the additions made under Sections 2(22)(e) and 56(2)(vii)(c) were not justified based on the facts and the provisions of the Income Tax Act. The orders of the CIT(A) were found to be in accordance with the material on record and judicial precedents.