2023 (9) TMI 1162 - HC - Income Tax

Addition u/s. 56(2)(vii)(c) - additional 82,200 shares allotted to assessee due to renouncement of rights by wife father of the assessee - HELD THAT - As 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 Dictionary, the term receive has been defined as To receive means to get by a transfer, as to receive a gift, to receive a letter or to receive money and involves an actual receipt. Issue of new shares by company as a right shares is creation of property and merely receiving such shares cannot be considered as a transfer under Sec. 56(2)(vii)(c) and accordingly, such provision would not be applicable on the issuance of shared by the Company in the hands of the allottee. The Apex Court in the case of Khoday Distilleries Ltd. 2008 (11) TMI 16 - SUPREME COURT after referring to the decision in the case of Shri Gopal Jalan Co. vs. Calcutta Stock Exchange Association Ltd., 1963 (5) TMI 30 - SUPREME COURT noted the question arose as to the amendment of the word allotment held that the word allotment means appropriation out of previously unappropriated capital of a company, of a certain number of shares to a person and till such allotment, the shares do not exist as such . Therefore, it is only on allotment that the shares come into existence. In every case, the words allotment of shares having used to indicate the creation of shares appropriation out of unappropriated share given to a particular person which is also referred to in the notice of clause to the Finance Bill 2010. Therefore, the aim and intention behind amending the provision of Sec. 56 is to prevent the practice of transferring unutilized shares at a price which are allotted for the first time by way of right shares. The amendment is therefore never meant to aim the fresh issue or fresh allotment of shares by a company. With regard to issue of 82,200 shares, the name of wife and father of the assessee would also not be hit by provision of Sec. 56(2)(viii)(c) as both of them would be covered by definition of relative covered in the exemption of relative, and therefore, the provision of section 56 would not be applicable at all. The findings recorded about valuation of shares to Rs. 205.55 is concerned, there are concurrent findings of fact which do not require any interference as the CIT(A) has rightly computed the FMV on the basis of the balance sheet which was available on record for the previous year and which was approved in AGM.

Summary

Issues Involved:
1. Applicability of Section 56(2)(vii)(c) of the Income-tax Act, 1961.
2. Valuation of shares for tax purposes.

Summary:

Issue 1: Applicability of Section 56(2)(vii)(c) of the Income-tax Act, 1961

The primary issue was whether Section 56(2)(vii)(c) of the Income-tax Act, 1961, could be invoked for the allocation of shares to the assessee. The Tribunal considered three scenarios:

1. 1,03,000 Rights Shares Proportionate to Shareholding: The Tribunal held that Section 56(2)(vii)(c) could not be invoked as the shares were allotted proportionate to the existing shareholding. The shares were not "received from any person," which is a fundamental requirement for invoking this section. The Tribunal relied on the decisions in Sudhir Menon (HUF) vs. A.C.I.T, Mumbai, and Ms. Dhun Dadabhoy Kapadia vs. CIT, among others, to conclude that there was no disproportionate allotment of shares, thus no addition under Section 56(2)(vii)(c) would arise.

2. 82,200 Shares from Renunciation by Wife and Father: The Tribunal held that Section 56(2)(vii)(c) could not be invoked for the additional shares received due to the renunciation by the assessee's wife and father. Both are classified as "relatives," which are excluded from the purview of this section. The Tribunal relied on the principle that what cannot be done directly cannot be done indirectly, referencing cases like Kumar Pappu Singh v. Deputy Commissioner of Income-tax.

3. 14,800 Shares from Third-Party Renunciation: The Tribunal held against the assessee, stating that the renunciation of rights by third parties who are not related leads to a disproportionate allocation of shares, thus invoking Section 56(2)(vii)(c).

Issue 2: Valuation of Shares for Tax Purposes

The Tribunal upheld the CIT(A)'s decision to value the shares at Rs. 205.55 per share, instead of Rs. 255 per share as determined by the Assessing Officer. The valuation was based on the book value as of 31.03.2012 and the additional consideration received from the issuance of new shares. The Tribunal referenced cases like ACIT Vs. Y. Venkanna Choudary and Sadhvi Securities (P) Ltd v. Asstt. CIT to support this valuation method.

Conclusion:

The Tribunal concluded that Section 56(2)(vii)(c) does not apply to the proportionate allocation of rights shares or to shares received from relatives. However, it does apply to shares received from third-party renunciations. The valuation of shares at Rs. 205.55 per share was upheld. Consequently, no substantial question of law arose from the Tribunal's judgment, and the appeals were dismissed.