2016 (3) TMI 549 - AT - Income Tax

Addition under section 56(2)(viia) - addition to the appellant s income as deemed gift - whether as the FMV of shares on transaction date was negative and hence, question of any addition u/s. 56(2)(viia) of the Act does not arise? - Held that - The property i.e., shares which are transferred are the shares of a company in which the public are not substantially interested. Since the transaction of sale and purchase of shares is between related parties and both the companies are companies in which the public are not substantially interested, we are of the opinion that the AO was justified in examining the applicability of the provisions of section 56(2)(viia) of the Act to the transaction of transfer of shares. Fair market value of the shares computation - AO has recorded that the assessee has furnished the valuation of the shares based on the working given under rule 11UA(c )(b) of the IT Rules, according to which, the fair market value of the shares is Rs.-64.48/- (i.e., the value of Optival share is at a negative figure) whereas the assessee has paid at ₹ 1 per share - Held that - If AO was not satisfied with the working given by the assessee, he ought to have computed the FMV himself in the method prescribed under the rules but ought not to have adopted higher of the prices paid by the assessee for purchase of some of the shares of M/s Optival as even when the transactions are between the related parties, the provisions of section 56(2)(viia) can be applied only in accordance with the prescribed method and the difference between the price at which the assessee has purchased the shares and aggregate of the fair market value of the shares as computed can be brought to tax as deemed income in the hands of the assessee. For the above reasons, we are satisfied that the provisions of section 56(2)(viia) are not properly and correctly applied in the assessee s case. In view of the same, the assessment order as well as the order of the Ld. CIT(A) are set aside and these issues including the issue raised in the additional ground of appeal are remitted to the file of the AO for reconsideration of the issue in accordance with law. - Decided in favour of assessee for statistical purposes

Issues Involved:
1. Excessive assessment contrary to facts, law, and principles of natural justice.
2. Validity of assessment order in the name of a non-existent entity.
3. Addition of Rs. 21,22,73,565 as deemed gift under Section 56(2)(viia) of the Income Tax Act.
4. Non-applicability of Section 56(2)(viia) in the appellant's case.
5. Non-compliance with Rule 11UA while computing disallowance under Section 56(2)(viia).
6. Levy of interest under Section 234C.
7. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Excessive Assessment:
The appellant contended that the assessment made is highly excessive and contrary to facts, law, and principles of natural justice. This general ground did not require specific adjudication.

2. Validity of Assessment Order:
The appellant argued that the assessment order was issued in the name of a non-existent entity, Medplus Health Care P. Ltd. However, this ground was rejected as it was not pressed by the appellant before the CIT(A) and no arguments were advanced on this issue during the hearing.

3. Addition as Deemed Gift under Section 56(2)(viia):
The appellant challenged the addition of Rs. 21,22,73,565 to its income as a deemed gift under Section 56(2)(viia). The AO observed that the appellant purchased shares at Rs. 1 per share while the market rate was Rs. 75.49 per share, thus attracting provisions of Section 56(2)(viia). The appellant argued that the fair market value (FMV) should be computed as per Rule 11UA, which indicated a negative value, making the provisions of Section 56(2)(viia) inapplicable. The Tribunal agreed that the AO must compute FMV as per Rule 11UA and cannot adopt the market value directly.

4. Non-applicability of Section 56(2)(viia):
The appellant reiterated that Section 56(2)(viia) was not applicable as the FMV computed under Rule 11UA was negative. The Tribunal supported this view, emphasizing that the AO must follow the prescribed method under Rule 11UA and cannot substitute it with the market value.

5. Non-compliance with Rule 11UA:
The appellant argued that the AO did not follow Rule 11UA while computing the disallowance. The Tribunal found that the AO should have computed the FMV using the prescribed method under Rule 11UA and not based on the market value of some shares. The Tribunal remitted the issue back to the AO for reconsideration as per the law.

6. Levy of Interest under Section 234C:
The appellant contended that the levy of interest under Section 234C was consequential. The Tribunal remitted this issue back to the AO to provide consequential relief, if any.

7. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant challenged the initiation of penalty proceedings under Section 271(1)(c). The Tribunal dismissed this ground as premature at this stage.

Conclusion:
The Tribunal set aside the assessment order and the CIT(A)'s order, remitting the issues back to the AO for reconsideration in accordance with the law, particularly emphasizing the need to compute FMV as per Rule 11UA. The appeal was treated as allowed for statistical purposes.

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