2014 (3) TMI 534 - AT - Income Tax

Validity of assessment of income - addition on account of inadequate consideration - Difference between the value of the shares allotted and consideration paid u/s 56(2)(vii)(c) of the Act Held that - The court cannot read anything into a statutory provision which is plain and unambiguous - a statute being an edict of the Legislature - The language employed in a statue is a determinative factor of the legislative intent, the foundational basis of any interpretation, is to be found from the words used by the Legislature itself Relying upon Padmasundra Rao and others vs. State of Tamil Nadu 2002 (3) TMI 44 - SUPREME Court and Britannia Industries Ltd. vs. CIT 2005 (10) TMI 30 - SUPREME Court - the consequences cannot alter the meaning of a statutory provision where such meaning is plain and unambiguous, though could certainly help to fix its meaning in case of doubt and ambiguity. The provisions/s, though no doubt a charging provision, is an extension of the deeming provisions of Chapter VI of the Act, laying down the statutory rules of evidence, incorporating the principles of common law jurisprudence - No ambiguity or absurdity or unintended consequence has been either observed by us or brought to notice - The provision is well founded, even as it is settled that hardship in a case would not by itself lead to supplying casus omissus or reading down the provision thus, no property however being passed on to the assessee on the allotment of the additional shares, no addition in terms of the provision itself shall arise in the facts of the case - the provision of s. 56(2)(vii)(c) shall not apply and the amount cannot be assessed as income in the hands of the assessee on the ground of inadequate consideration Decided in favour of Assessee.

Issues Involved:
1. Validity of assessment under Section 56(2)(vii)(c) of the Income Tax Act, 1961.
2. Applicability of Section 56(2)(vii)(c) to the issue of additional shares.
3. Interpretation of the term "property" under Section 56(2)(vii)(c).
4. Relevance of the decline in value of existing shareholding.
5. Consideration of the transaction as a rights issue.
6. Arguments regarding the applicability of Section 56(2)(vii)(c) to the transaction.

Detailed Analysis:

1. Validity of Assessment under Section 56(2)(vii)(c) of the Income Tax Act, 1961:
The primary issue in the appeal was the validity in law of the assessment of income based on the difference between the value of the shares allotted to the assessee and the consideration paid by it. The assessee contested the assessment made under Section 143(3) for the assessment year 2010-11, where the Assessing Officer (A.O.) treated the difference between the fair market value (FMV) and the consideration paid for additional shares as income under Section 56(2)(vii)(c).

2. Applicability of Section 56(2)(vii)(c) to the Issue of Additional Shares:
The provision of Section 56(2)(vii)(c) was examined to determine if it applied to the transaction of receiving additional shares. The section gets attracted when an individual or Hindu undivided family (HUF) receives property without consideration or at a consideration less than the FMV, exceeding fifty thousand rupees. The key question was whether this provision could apply to a transaction involving the issue of additional shares on a rights basis.

3. Interpretation of the Term "Property" under Section 56(2)(vii)(c):
The term "property" under Section 56(2)(vii)(c) includes shares and securities. The assessee argued that the right to acquire shares at a concessional rate does not constitute "property" until the shares are allotted. The Tribunal clarified that the shares come into existence upon allotment, and the right to acquire shares is a property that can be taxed under this provision.

4. Relevance of the Decline in Value of Existing Shareholding:
The Tribunal discussed whether the decline in the value of existing shareholding should be considered while applying Section 56(2)(vii)(c). It was concluded that the value of the additional shares is derived from the existing shareholding, and any decline in value should be factored in. The provision aims to tax the receipt of property at a value less than its FMV, considering the decline in the value of existing shares.

5. Consideration of the Transaction as a Rights Issue:
The Tribunal examined if the transaction could be considered a rights issue. It was noted that the issue of additional shares was made on a proportionate basis to existing shareholders, similar to a rights issue. However, the scheme did not provide for renunciation rights, making it not strictly a rights issue. The Tribunal concluded that the transaction had elements of a rights issue but could not be strictly termed as one.

6. Arguments Regarding the Applicability of Section 56(2)(vii)(c) to the Transaction:
The assessee argued that Section 56(2)(vii)(c) was not intended to apply to transactions involving the issue of additional shares on a rights basis. The Tribunal rejected this argument, stating that the provision applies to any receipt of property at a value less than its FMV, including additional shares. The Tribunal emphasized that the provision aims to prevent tax avoidance through undervalued transactions.

Findings:
The Tribunal found that Section 56(2)(vii)(c) applies to the transaction of receiving additional shares. However, since the shares were allotted on a proportionate basis to existing shareholders, no additional property was received by the assessee. The decline in the value of existing shareholding was considered, and it was concluded that no income arose under this provision.

Decision:
The Tribunal held that the provision of Section 56(2)(vii)(c) does not apply to the facts of the case, and the amount of Rs. 27,89,02,160/- cannot be assessed as income in the hands of the assessee. The assessee's appeal was partly allowed, and the stay application was dismissed as infructuous. The order was pronounced in the open court on March 12, 2014.

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