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TMI Blog2014 (3) TMI 534X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. - I.T.A. No. 4887/Mum/2013, SA No. 192/Mum/2013 - - - Dated:- 12-3-2014 - Shri D. Manmohan, VP And Shri Sanjay Arora, AM,JJ. For the Appellant : Shri S. E. Dastur Ms. Aarti Vissanji For the Respondent : Shri Surinder Jit Singh ORDER Per Sanjay Arora, A. M. This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-32, Mumbai ('CIT(A)' for short) dated 21.05.2013, dismissing the assessee's appeal contesting its assessment u/s.143(3) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant part, read as under: a) Section 2(24)(xv) of the Act reads as under: 'CHAPTER I PRELIMINARY Definitions. 2. In this Act, unless the context otherwise requires,-- (1) ............ (2) ............ (24) income includes-- (i) ............ (ii) ............ (xv) any sum of money or value of property referred to in clause (vii) of sub-section of section 56;' b) Section 56(2)(vii) reads as under: 'CHAPTER IV COMPUTATION OF INCOME FROM OTHER SOURCES F.--Income from other sources Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head Income from other sources , if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head Income from other sources , namely:-- (i) ....... (vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , where the asset is an immovable property or movable property as the case may be. This would avoid double taxation, i.e., on the same amount, on the transfer of the relevant capital asset. Clearly, therefore, the section gets attracted whenever an individual or Hindu undivided family (HUF) receives without consideration a property (as defined) the FMV of which is in excess of Rs.50,000/-, or where at a consideration the difference between the FMV and such consideration exceeds the said amount. The first issue that confronts us is if the provision/s is at all applicable to a transaction as the one under reference; the assessee contending it to be only an issue of right shares by the issuing-company (DKCPL). How could, it is asseverated, a provision brought on the statute to check bogus capital building or money laundering possibly apply to a case as a present one which is only a case of a rights issue, i.e., the issue of shares on rights basis, and which are ordinarily issued at a discount? It would, going by the argument, be equally applicable to bonus shares, and which is ludicrous indeed, the ld. Authorized Representative (AR) would continue. Reference in this regard was made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntended to cover a transaction of this nature, i.e., where the shares are offered to the existing shareholders - though below their market value, on rights basis. True, the shareholders get the right to acquire the additional shares on the passing of the board resolution, but the receipt of the property is only on their allotment, on which date the shares, a specified property, is in existence [refer: Shree Gopal and Company vs. Calcutta Stock Exchange Ltd. [1963] 32 Comp. Cas. 862 (SC) and Khoday Distilleries Ltd. vs. CIT [2008] 307 ITR 312 (SC) (176 Taxmann 142)], wherein it has been explained that allotment is generally neither more nor less than the acceptance by the company of the offer to take shares. All it means is appropriation out of the previously un-appropriated capital of a company of a certain number of shares to a particular person. Till such allotment the shares do not exist as such, and in a sense come into existence on their allotment. In this view of the matter, the plea of the rights under reference being not a property specified under the provision or the provision being sought to be applied by the Revenue to a non-existing property, is without basis. In fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o consideration is predicated in such cases or, put differently, considerations other than financial/monetary come into play. To that extent the provision is well-founded and adequately excepted. The provision, beginning with section 56(2)(v) by Finance (No.2) Act, 2004, which had a threshold limit of Rs.25,000/-, as against the present Rs.50,000/-, has been gradually enhanced in scope over time to include gifts-in-kind and immovable property as well, with section 56(2)(vii) taking effect from 01.10.2009 onwards, phasing out sections 56(2)(v) and 56(2)(vi) by limiting their application to specified periods in the interregnum. In fact, developments continue unabated, and the provision is further strengthened and broadened, with Finance Act, 2010 including a firm/company among the eligible recipients, i.e., where the property involved is shares in unlisted companies, i.e., in which the public is not substantially interested, as the present one, excluding transactions of business reorganization, amalgamation, demerger, etc. per clause (viia). The same are explained as an anti-abuse measure, following the abolition of the Gift Tax Act, 1958, which it is well- settled, as also explained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC) as well as in Khoday Distilleries Ltd. (supra), wherein reference stands made to the former, also quoting there-from, besides inter alia to Hunsur Plywood Works Ltd. vs. CIT [1998] 229 ITR 112 (SC), where the same were referred to as 'capitalization shares'. In other words, there is no receipt of any property by the shareholder, and what stands received by him is the split shares out of his own holding. It would be akin to somebody exchanging a one thousand rupee note for two five hundred or ten hundred rupee notes. There is, accordingly, no question of any gift of or accretion to property; the share-holder getting only the value of his existing shares, which stands reduced to the same extent. The same has the effect of reducing the value per share, increasing its mobility and, thus, liquidity, in the sense that the shares become more accessible for transactions and, thus, trading, i.e., considered from the holders' point of view. We may though add a note of caution. There could be a case of bonus issue coupled with the release of assets (of the issuing company) in favour of the shareholders. The same would fall to be considered as dividend u/s. 2(22)(a) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision to bonus shares. It fails to take into account the nature of the transaction. To exemplify, shares in the ratio (say) 1:1 are offered for subscription at the face value of Rs.100/- as against the current book value of Rs.1,500/- (say). The moment a right share is allotted, the book value shall fall to Rs.800/- per share. It is easy to see that the new share partakes a part of the value of the existing share, which is only on the basis of the underlying assets on the company's books. The excess (over face value), or Rs.1,400/-, gets apportioned over two shares as against one earlier, which is already the shareholders' property. This is also the basis and the premise of the decisions in the case of Dhun Dadabhoy Kapadia vs. CIT [1967] 63 ITR 651 (SC) and H. Holck Larsen vs. CIT [1972] 85 ITR 285 (Bom), relied upon and referred to by the parties before us. As long as, therefore, there is no disproportionate allotment, i.e., shares are allotted pro-rata to the shareholders, based on their existing holdings, there is no scope for any property being received by them on the said allotment of shares; there being only an apportionment of the value of their existing hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Dhun Dadabhoy Kapadia (supra) would be no longer applicable, i.e., even in principle, so that the said decline would be of no consequence in view of the specific provisions being since incorporated under section 55 of the Act, providing for the cost of shares under such situations, as for example a nil cost for bonus shares. The capital asset received by the assessee (shares in the present case), it may be appreciated, are to be valued as on the date of its receipt. That is, it is only the asset received that is to be valued. In-as-much as therefore the value of the additional shares is derived - if only in part - from that of the existing shares, the decline in the value thereof cannot be excluded or ignored - though only by following the valuation method prescribed under the rules - in arriving at the property by way of additional shares received by the assessee. The provision of section 55(2)(aa) provides for the cost of a capital asset, being a share or security, which the assessee becomes entitled to subscribe to by virtue of his holding such a capital asset. In our view, the same, on the contrary, provides statutory support, i.e., in principle, to our decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany. We have in fact already noted that these provisions, i.e., clause (vii), together with clauses (v) and (vi) preceding it, and clauses (viia) and (viib) following it, of section 56(2), exclude transactions of business reorganization, merger, demerger, etc. (refer para 4.2). As shall be noted, it is only the shares or interest in a company in which public is not substantially interested, arbitrage or leveraging of interest in which, being largely outside the public domain, that the provision/s seek to capture for tax purposes. A demerger stands, further, also specifically excluded from the definition of dividend per clause (v) of section 2(22). 4.5 We may next meet the various arguments advanced by either side. The assessee claims of section being not per se applicable as neither is there any transfer in its favour nor is the issuer-company the owner of the shares, which stand acquired by way of subscription. We are unable to appreciate the argument. How else, we wonder, is the issued capital in a company supposed to be acquired? The section nowhere stipulates 'transfer' as the prescribed mode of acquisition. The transfer of a capital asset is even otherwise a relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted only to showing the assessee to be the owner or in possession of the relevant asset. In fact, even this is to be regarded as discharged where it is able to exhibit circumstances that lead to the inference of the assessee being the owner, even as clarified by the apex court in K.P. Varghese (supra) (also refer C.K. Sudhakaran vs. ITO [2005] 279 ITR 533 (Ker)). The receipt of an asset by the assessee, and in his own right, is, on the other hand, the very basis or the edifice on which the provision of section 56(2)(vii) rests, so that it proceeds on the basis or the footing of the burden of the Revenue being satisfied. The receipt of a capital asset is accordingly made the basis or the condition for the charge to tax as income, unless falling under any of the excepted categories, and which it would be noted is a valid basis u/s. 2(45) r/w s.5 of the Act. It is this in fact that had led us to state earlier of the receipt (of an asset) as having been adopted as the basis or the condition of deeming as income u/s. 56(2)(vii) (or clauses (v) and (vi)), and of the provision as being on a firm footing. What the provision essentially does is to widen the scope of the afore-referred provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st prior to its allotment, and in that sense comes into existence only on its allotment. Allotment of a share is only the appropriation of the authorized share capital, being un-appropriated, to a particular person. In nutshell, the difference between the issue of a share to a subscriber and a purchase of a share from an existing shareholder is the difference between the creation and transfer of a chose in action (refer pgs.865, 866). How could, therefore, purchase be equated with allotment? In fact, the purchase or transfer implies existence of a property, while the shares, where out of un-appropriated capital, come into existence only on their allotment. It becomes, thus, in the context of the provision, completely irrelevant and of no consequence that the shares in the issuing company are not its property, and that it does not become, therefore, any poorer as a result of the allotment of shares therein. 'Receipt' is a word or term of wide import, and would include acquisition of the subject matter of receipt - defined capital assets in the present context, by modes other than by way of transfer as well. We find no reason to limit or restrict the scope of the word 're ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the actual consideration received by the assessee as against the consideration declared or disclosed by him. Accordingly, once it is established that the consideration actually received by the assessee is more than what is declared or disclosed by him, the Revenue is not required to show the precise extent of the understatement or the exact consideration received by the assessee - an impossible task in most cases. That is to say that unless, therefore, the primary condition of an inaccurate or incorrect disclosure or declaration; rather, an under- statement thereof, was satisfied, the section, which again provided a surrogate measure in the form of the FMV of the relevant asset, as does section 56(2)(vii), could not be invoked. Not doing so would, in its words, would be to read into the statutory provision something which is not there. It is not difficult to see that the Revenue, in applying the provision of section 52(2) in the manner it did, i.e., without establishing the condition of its invocation, was putting the cart before the horse. The process led to a fundamental flaw in-as-much as it proceeded to estimate - which is a process integral to assessment - something (conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds. Why, this in fact is the basis for the transfer pricing legislation, which is by now an integral part of the tax law of most countries. That the provision may operate harshly in some cases is no reason for it to be not read in the manner it ought to be, i.e., given its clear mandate. The proposition, apart from being well settled, has been sought to be advanced before us by the Revenue by relying on the decision in the case of Turner Morrison Co. Ltd. vs. CIT [1953] 23 ITR 152 (SC). In fact, even the assessee's case is limited to right shares only, and does not speak of any other capital asset covered by the provision, including shares and securities. We have already explained that to the extent the shares subscribed to are right shares, i.e., allotted pro-rata on the basis of the existing share-holding (as on a cut- off date), the provision, though per se applicable, does not operate adversely. A disproportionate allotment, which cannot, therefore, strictly be regarded as right shares, though could be allotted under a rights issue, would however invite the rigor of the provision, i.e., to that extent. It is to be noted that the fresh shares rank parri passu with the exis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deeming provisions of Chapter VI of the Act, laying down the statutory rules of evidence, incorporating the principles of common law jurisprudence. In sum, as also in fine, the provision, brought as an anti-abuse measure, only seeks to tax the understatement in consideration as the income in the hands of the recipient (of the corresponding asset) as against the donor in the case of Gift Tax Act, since no longer in force, particularly considering the burden that the Revenue would otherwise be called upon to discharge, i.e., to prove otherwise, even as the receipt of the asset by the assessee is established. No ambiguity or absurdity or unintended consequence has been either observed by us or brought to our notice, even as we have endeavoured to examine the provision from all angles; it being well excepted, also excluding cases of business reorganization. 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. In fact, we have also observed the same to be in accord with the trend in the legislative field in the recent past where in view of the increasing complexity of business or e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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