2021 (10) TMI 166 - AT - Income Tax

Addition u/s 56 - allotment of shares through right issue @1 per share - difference between FMV and the consideration paid u/s 56(2)(vii) - The assessee being resident individual is stated to be director and a major shareholder in the private limited company - HELD THAT - It could be inferred that provisions of section 56(2)(vii) were introduced as an anti-abuse measure and to prevent laundering of unaccounted income under the garb of gifts, after abolition of the Gift Tax Act. Upon perusal of orders of lower authorities, we find that there are no such allegations and no case of tax evasion or tax abuse has been made out against the assessee. In fact, the transactions are ordinary transactions of issue of right shares to existing shareholders in proportion to their existing shareholding and therefore, no case of abuse or tax evasion could be made out against the assessee. This proposition is supported by the fact that in line with the intent of legislatures, CBDT issued another Circular No. 10/2018 on 31/12/2018 clarifying that keeping in view the legislative intent to apply anti-abuse measures, Section 56(2)(viia) of the Act shall not be applicable in case of receipt of shares as a result of fresh issuance of shares, including by way of issue of bonus shares, rights shares and preference shares. The said circular was withdrawn immediately vide another Circular No.02/2019 dated 04/01/2019 and new Circular No. 03/2019 dated 21/01/2019 was issued wherein it was mentioned that the view taken in Circular No.10/2018 (subsequently withdrawn by Circular No.02/2019) that section 56(2)(viia) of the Act would not apply to fresh issuance of shares, would not be a correct approach, as it could be subject to abuse and would be contrary to the express provisions and the legislative intent of section 56(2)(viia) or similar provisions contained in section 56(2) - the fact that intent of introducing the provisions was anti-abusive measures still remain intact and there is no reason to depart from the understanding that the provisions were counter evasion mechanism to prevent laundering of unaccounted income. Additions as made by AO in the assessment order are not sustainable in the eyes of law.

Issues Involved:
1. Applicability of Section 56(2)(vii)(c)(ii) of the Income-tax Act to the allotment of shares.
2. Determination of whether the allotment of shares was proportionate or disproportionate.
3. Validity of the addition of ?42,87,75,000/- to the assessee's income.
4. Consideration of anti-abuse provisions and genuine business transactions.

Issue-wise Detailed Analysis:

1. Applicability of Section 56(2)(vii)(c)(ii) of the Income-tax Act:
The core issue revolves around whether the allotment of shares to the assessee falls under the purview of Section 56(2)(vii)(c)(ii). The Assessing Officer (AO) contended that the shares were allotted at a value less than the fair market value (FMV), thus attracting tax under this section. The assessee argued that the shares were allotted on a proportionate basis, and hence, the section should not apply. The Tribunal referenced the case of Sudhir Menon HUF V/s ACIT, which held that proportionate allotment does not attract Section 56(2)(vii)(c)(ii).

2. Determination of Whether the Allotment of Shares was Proportionate or Disproportionate:
The AO noted an increase in the assessee's shareholding from 90.37% to 96.88%, suggesting disproportionate allotment. However, the Tribunal found that the right shares were offered proportionately to all shareholders, but other shareholders did not subscribe, leading to an increased holding for the assessee. The Tribunal concluded that the allotment was indeed proportionate, and the provisions of Section 56(2)(vii)(c)(ii) should not apply.

3. Validity of the Addition of ?42,87,75,000/- to the Assessee's Income:
The AO calculated an intrinsic value of ?11.85 per share, adding the differential amount of ?10.85 per share to the assessee's income, resulting in an addition of ?42,87,75,000/-. The CIT(A) reduced this addition to ?1,50,87,320/-, considering the principle of diminution in the value of existing shareholding. The Tribunal, however, found that the entire addition was unsustainable as the allotment was proportionate, and thus, no addition should be made under Section 56(2)(vii)(c)(ii).

4. Consideration of Anti-Abuse Provisions and Genuine Business Transactions:
The Tribunal acknowledged that Section 56(2)(vii) was introduced as an anti-abuse measure to prevent money laundering and tax evasion. It referenced CBDT Circulars No. 5/2010 and 1/2011, which clarified that the section was not intended to tax genuine business transactions. The Tribunal concluded that the right issue was a bona fide business transaction, and no case of tax evasion or abuse was made against the assessee. Hence, the provisions of Section 56(2)(vii)(c)(ii) should not apply to this genuine issue of shares.

Conclusion:
The Tribunal held that the revenue's appeal was dismissed, and the assessee's cross-objections were partly allowed. The impugned additions made by the AO were deleted, as the allotment of shares was proportionate and fell within the ambit of genuine business transactions, not attracting the anti-abuse provisions of Section 56(2)(vii)(c)(ii). The order was pronounced on 1st October 2021.

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