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2022 (5) TMI 683 - AT - Income TaxAddition u/s 56 - addition in respect of allocation of 1,03,000 rights shares - HELD THAT - On plain reading of section 56(2)(vii)(c) of the Act, the term used is receives and the said term cannot in our view be restricted to receipt by way of transfer alone. The section does not indicate anything towards such a restricted interpretation, when using the term receives . Further, 56(2)(vii)(c) nowhere speaks of the word transfer or receives by way of transfer , so as to give a restricted interpretation to section 56(2)(vii)(c) of the Act. Allocation of 1,03,000 rights shares allotted to the assessee below FMV, proportionate to his shareholding in the company - Once the shares have been issued proportionate to existing shareholding, 56(2)(vii)(c) of the Act cannot be invoked. This issue has been dealt with and various Tribunals who have consistently taken the position that allocation of rights share proportionate to current shareholding would not attract provisions of section 56(2)(vii)(c) of the Act. See SUDHIR MENON HUF VERSUS ASST. CIT-21(2), MUMBAI 2014 (3) TMI 534 - ITAT MUMBAI as held as long as there is no disproportional allotment of shares, there was no scope for any property being received by the tax payer as there was only an apportionment of the value of the existing shareholder over a larger number of shares, and hence no addition u/s 56(2)(vii)(c) of the Act would arise. If the shares are allotted strictly on proportionate basis based on existing shareholding, then though the provisions perse are applicable, but will not operate adversely. This is because the gain accruing on allotment of fresh shares will be offset by the loss in value of existing shares. Thus we are of the view that provisions of section 56(2)(vii)(c) do not apply in respect of allocation of 1,03,000 rights shares allotted to the assessee proportionate to his shareholding in the company. Whether section 56(2)(vii)(c) of the Act can be invoked in respect of additional 82,200 shares received by the assessee since the assessee s wife and father did not exercise the rights issue and renounced the right in favour of the assessee? - It is a well settled principle of law that what cannot be done directly cannot be done indirectly as well. Had the wife and father of the assessee directly transferred their rights shareholding in favour of the assessee, provisions of 56(2)(vii)(c) of the Act could not have been invoked since wife/ father are falling within the definition of relatives , which are excluded from within the purview of operation of section 56(2)(vii)(c) of the Act. Consequently, such renunciation of rights shares, by way of not exercising the right to subscribe to them in favour of the assessee, in our view, would not attract the provisions of section 56(2)(vii)(c) The Vishakhapatnam ITAT in the case of Kumar Pappu Singh 2018 (12) TMI 525 - ITAT VISAKHAPATNAM held that since transaction of transfer of shares was within family and close relatives, proviso to section 56(2)(vii)(c) could not be applied for taxing income under head 'income from other sources'. Thus we are of the considered view that section 56(2)(vii)(c) of the Act cannot be invoked in respect of additional 82,200 shares received by the assessee, on account of renunciation of rights issue the by assessee s wife and father in favour of the assessee. Section 56(2)(vii)(c) invoked in respect of 14,800 allotted to the assessee as a result of third party shareholders declining to apply for rights shares in favour of the assessee - Renunciation of rights shares by third party shareholders in favour of the assessee, allowing the assessee to gain controlling interest has resulted in disproportionate allocation of rights shares in favour of the assessee and therefore, in respect of these shares, section 56(2)(vii)(c) of the Act shall apply, and income would taxable in the hands of the assessee. It would have been a different matter had the other parties not exercised their right of subscription to these rights shares, resulting in higher or controlling shareholding resulting in hands of the assessee. That, in our view, would not be disproportionate allocation, since the shareholders were allocated shares in proportion to their shareholding and only because some shareholders decided not to subscribe to rights shares offered to them in proportion to their shareholding, this itself would not make the allocation disproportionate, even if by way of non-exercise of rights, the assessee s shareholding has substantially increased as compared to other shareholders. However, in the instant case, renunciation of rights in favour of the assessee by third party (unrelated shareholders) does lead to disproportionate allocation in favour of the assessee, thereby leading to invocation of section 56(2)(vii)(c) - See SUDHIR MENON HUF VERSUS ASST. CIT-21(2), MUMBAI 2014 (3) TMI 534 - ITAT MUMBAI upheld the principle that section 56(2)(vii)(c) of the Act cannot be invoked only in the event the allotment of shares is not disproportionate, but in case allocation is disproportionate, section 56(2)(vii)(c) of the Act would come into operation. Accordingly, in our view, section 56(2)(vii)(c) of the Act would apply in relation to 14,800 allotted the assessee as a result of third party shareholders renouncing their rights shares in favour of the assessee. Reducing the valuation of shares to Rs. 205.55 per share by computing the FMV per share on date of allotment taking into consideration the book value as on 31-03-2012 and adding further consideration received on account of issuance of additional shares - CIT(Appeals) has not erred in facts and in law in computing the FMV of shares on the above lines. The ITAT in the case of ACIT v. Y. Venkanna Choudary 2020 (1) TMI 1012 - ITAT VISAKHAPATNAM held that in case the balance sheet was not drawn up 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. Thus, ITAT held that for arriving the FMV of shares previous Balance sheet which is audited and approved in the AGM has to be taken into consideration, before the allotment of shares. In the present case, since the shares were allotted before Balance Sheet for AY 2013-14 was finalized, in our view Ld. CIT(Appeals) has not erred in computing the FMV per share considering the previous balance sheet which was approved in the AGM for valuation of FMV of the shares.
Issues Involved:
1. Validity of reassessment proceedings initiated under section 148 of the Income Tax Act. 2. Application of section 56(2)(vii)(c) of the Income Tax Act to the allotment of additional shares. 3. Valuation of shares for tax purposes. 4. Levy of interest under section 234 A/B/C & D of the Income Tax Act. 5. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. Detailed Analysis: 1. Validity of Reassessment Proceedings: The assessee challenged the reassessment proceedings initiated by the Assessing Officer (AO) under section 148 of the Income Tax Act, arguing that there were no "reasons to believe" that income had escaped assessment. The Tribunal upheld the issuance of notice under section 148, stating that the AO had substantive reasons to believe that income had escaped assessment due to disproportionate allocation of shares. The notice was issued within four years from the end of the assessment year, following due process of law, and there was no question of change of opinion as no regular assessment had taken place earlier. 2. Application of Section 56(2)(vii)(c): The Tribunal examined whether section 56(2)(vii)(c) could be invoked for different categories of share allotment: - Proportionate Allotment (1,03,000 shares): The Tribunal held that section 56(2)(vii)(c) does not apply to the proportionate allotment of shares. It cited various judgments, including Sudhir Menon HUF v. ACIT, which held that proportionate allotment does not result in any property being received by the taxpayer, as there is only an apportionment of the value of existing shares over a larger number of shares. - Renouncement by Relatives (82,200 shares): The Tribunal ruled that section 56(2)(vii)(c) does not apply to shares received due to the renouncement of rights by the assessee's wife and father. It reasoned that direct transfer of shares from relatives would not attract tax under section 56(2)(vii)(c) as relatives are excluded from its purview. Therefore, renunciation of rights by relatives should also not attract this section. - Renouncement by Third Parties (14,800 shares): The Tribunal held that section 56(2)(vii)(c) applies to shares received due to renouncement by third-party shareholders. This resulted in disproportionate allocation, increasing the assessee's controlling interest in the company, thus attracting tax under section 56(2)(vii)(c). 3. Valuation of Shares: The Tribunal upheld the valuation of shares at Rs. 205.55 per share as determined by the CIT(Appeals). It agreed that the fair market value (FMV) should be calculated based on the book value as on 31-03-2012, adding the consideration received for additional shares. This method was consistent with Rule 11UA(1)(c)(b) and previous judicial precedents. 4. Levy of Interest: The Tribunal did not specifically address the issue of levy of interest under section 234 A/B/C & D, as it was not pressed by the assessee. 5. Initiation of Penalty Proceedings: The Tribunal did not specifically address the initiation of penalty proceedings under section 271(1)(c), as it was not pressed by the assessee. Conclusion: - The Department's appeal was dismissed. - The assessee's appeal was partly allowed, with relief granted for the proportionate allotment of shares and shares received due to renouncement by relatives. - The Tribunal upheld the reassessment proceedings and the application of section 56(2)(vii)(c) for shares received due to renouncement by third parties. - The valuation of shares at Rs. 205.55 per share was upheld.
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