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TMI Blog2016 (3) TMI 549X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas 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 - ITA. No. 871/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout prejudice to each other. 1.1. The assessee has also raised the following additional ground of appeal along with an application for admission of the same. On the facts and in the circumstances of the case and in law : 8. Without prejudice to Ground No. 3-5, the learned Income Tax Officer, Ward 16(1) (learned AO ) erred in computing the addition under section 56(2)(viia) with respect to 15,90,000 partly paid shares amounting to ₹ 10,33,34,100. 2. Brief facts of the case are as follows: The assessee is a company engaged in the business of whole sale trading of pharmaceuticals, medicines, general stores and its related items and running of clinics. Its supply of goods is mainly to its group company M/s Optival Health Solutions Private Ltd which is engaged in retail business of pharmaceuticals and general goods. The assessee company filed its return of income on 30.09.2011 declaring income at NIL after set off of brought forward loss of ₹ 72,76,000 under normal provisions of the Act and book profit under section 115JB of the Act also at Rs. NIL. The same was initially processed u/s. 143(1) of the I.T. Act. Meanwhile, there was a survey operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as a deemed gift/income and taxed in the hands of the company. The assessee, vide letter dated 07.03.2014, submitted a detailed note as to why the provisions of section 56(2) (viia) are not applicable to the assessee s case. It was submitted that as per Explanation to Section 56(2)(viia) of the Act, the fair market value (FMV in short) has to be computed in accordance with Rule 11UA of I.T. Rules and that the assessee had computed the fair market value as per the prescribed rule according to which, the fair market value of the share is less than Rs. zero and hence, payment of ₹ 1 per share by the assessee to acquire the shares is more than the fair market value computed under Rule 11UA. Thus, according to him, the provisions of section 56(2)(viia) of the Act do not apply. The A.O. however, was not convinced with the assessee s contentions and held that the market value mentioned in the rule means price which it would have fetched if sold in the open market. He observed that the valuation of any property is based on the fact as to what value the property would fetch if sold in the open market and since in the assessee s own case there are certain transactions to clearl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, while reiterating the submissions made by the assessee before the authorities below, drew our attention to the provisions of section 56(2)(viia) of the I.T. Act, to demonstrate that the said provisions would apply to the assessee only if the price paid by the assessee was less than the fair market value computed under Rule 11UA of I.T. Rules. He submitted that where the legislature prescribes a particular method to be adopted, then the said method alone should be adopted. He has submitted that in the case of assessee before us, neither the provisions of section 56(2)(viia) nor the Rules prescribe for adoption of the market value of the shares as the fair market value for the purpose of deemed gift under section 56(2)(viia) of the I.T. Act since the provisions relates to anti abuse provisions. He submitted that where a specific method is prescribed, the A.O. is precluded from adopting any other method. He further drew our attention to the decision of Hon ble Allahabad High Court in the case of Dr. Shashi Kant Garg vs. CIT Ors. reported in (2006) 285 ITR 158 in support of his contention that a prescribed method has to be strictly followed. He has also placed reliance upon the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 followings incomes, shall be chargeable to income tax under the head income from other sources namely, (i) . (viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested,- (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property ; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that this clause shall not apply to any such property received by way of a transaction not regarded as tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties, other than ascertained liabilities; (vii) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance-sheet; PV = the paid up value of such equity shares; 7.3. From the literal reading of the above provision, it is clear that to apply the above provision, the following conditions have to be satisfied: i. there is transfer of shares a company not being a company in which the public are substantially interested: ii. the purchaser of the shares is a company not being a company in which the public are substantially interested; iii. the consideration is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees; and iv. the deemed income in the hands of the transferee shall be the aggregate fair market value of such property as exceeds such consideration. 8. From the facts of the case before us, it is seen 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 transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y else is. Since Rule 1D uses the word shall , it prima facie indicates its mandatory character. 2. Mrs. Prem Shamsher Singh vs CWT (cited supra): In this case, the Hon ble dehi High court followed the judgement of the Hon ble Supreme court in the above cited case of Bharat Hari Singhania and others. 3. Chandra Kishore Jha vs. Mahavir Prasad others (cited supra): In this case, the Hon ble Supreme Court was dealing with an election petition filed after the prescribed period of 45 days from the election and while examining the rules made for the said purpose and the appellants complaince thereto, it was held that it is a settled salutary principle principle that if a stature provides for a thing to be done in a particular manner, then it has to be done in that manner and in no other manner. 4. State of Uttar Pradesh vs Singhara Singh and others (cited supra) : In this case the Hon ble Supreme Court was dealing with the validity of a confession not recorded in accordance with the procedure prescribed u/s164 of the Criminal Procedure Code and held that if a statute has conferred a power to do an act and had laid down the method in which that power has to be exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will not be available and hence the formula is given to overcome that deficiency . Since the market price of some of the shares at a higher value than ₹ 1 was available, the AO has adopted the same as the fair market value. This stand of the AO could have been sustainable had the section provided that the FMV of an unquoted share shall be the value computed in accordance with the rule or the actual market value, if any, whichever is higher. But as can be seen from the Act and the rules provided there under, no such provision has been made. In fact, under the wealth tax Act, Section 7(1) defines the expression value of an asset as the price which in the opinion of the WTO it would fetch if sold in the open market on the valuation date but in the relevant provisions the definition of fair market value is given in the Act and method has also been prescribed thereunder. 11. On a careful reading of the judgments discussed above, it is seen that the Courts have held that where a method has been prescribed by the legislature, that method alone shall be followed for computation of the fair market value. The A.O. and the Ld. CIT(A) have not followed the relevant provisions for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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