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TMI Blog2018 (10) TMI 1095X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2014-15 on 29.09.2014 declaring loss of Rs. 4,40,920/-. Initially the return was processed U/s.143(1) of the Act and subsequently the case was selected for scrutiny under CASS and notice U/s.143(2) of the Act was served to the assessee on 23.09.2015. Finally assessment order was passed U/s.143(3) of the Act on 16.11.2016 wherein the Ld.AO had made addition of Rs. 23,31,68,600/- towards 'Income from other sources' invoking the provisions of Section 56(2)(viib) of the Act. 4. During the course of scrutiny assessment proceedings, it was observed by the Ld.AO that in the relevant assessment year, the assessee company had issued 10,100 equity shares having face value of Rs. 10/- each at a premium of Rs. 23,086/- to one of the existing share holder. On query to justify the allotment of equity share at premium it was explained that the assessee company had acquired land for a consideration of Rs. 23,09,57,869/- during the relevant assessment year i.e., on 12.12.2013 and therefore the fair market value per equity share of the company as on 31.12.2013 was Rs. 23,096/-. However since the assessee company has computed the net worth of the equity share, after taking into accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd would apply to what can be considered as 'impermissible Transactions'. But in the instant case, the entire share holding of the Company was held by the mother and the daughter. The Company wanted fund for acquiring landed property. As only mother had the necessary funds, she had brought in requisite amount to acquire the property. If the amount brought in as a loan, it would be difficult to service or repay apart from the loan being considered as deposit against acceptance of deposit rules. Similarly, allotment of huge amount of shares (to the extent Rs. 23 crores) would make the company top heavy and the shareholders cannot be serviced and would be difficult to attract further investments. Therefore, the Company (Shareholders) had decided on allotment of 10100 shares at face value to the mother and had considered the balance amount as share premium account. Introduction of additional equity capital was not merely to benefit the existing shareholder but was required for specific purpose of the Company viz for acquisition of the land. Therefore, it was not an exercise to merely grant benefit to the existing shareholders by increasing the value of their shares. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose in which Section was introduced, considering the fact that the money brought in by the existing shareholders, considering the fact that two shareholders who closely related and conferment of benefit by one on other cannot be taxed under Section 56, Provisions of Sec. 56(2)(viib) are not applicable to the facts of the instant case. In any event, (i)without prejudice the value of shares are to be determined under Section 56(2)(viib) after allotment of the shares and the difference between the amount brought in and the value of the shares after allotment can be brought to tax under Section 56(2)(viib). (ii) The fact that after allotment the mother was holding 75% of equity shares and the daughter was holding only 25% of the shares. Only the benefit that is deemed to accrue to the daughter out of her holding 25% of shares (i.e only one fourth of the additional amount brought in by mother should be assessed u/s 56(2)(viib). However the Ld.CIT(A) confirmed the order of Ld.AO by observing as under:- "6. As above, the assessee has submitted that prior to allotment of new shares, Mrs Sasikala Raghupathy and her daughter Mrs. Vani Raghupathy, were holding 5,000 shares each of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee cannot be accepted as the exclusion of 'relatives' from the liability for taxation on account of beneficial transfer is provided only under 56(2)(v), 56(2)(vi) and 56(2)(vii). It is specifically noted that the liability for taxation u/s 56(2)(viib) has not been made specifically exempt when the beneficial transfer is between 'relatives'. In view of the same, the submissions made by the assessee for being excluded from the liability for taxation u/s 56(2)(viib) is rejected. 9. The AR for the assessee has also made a plea that the beneficial transfer from one shareholder to the other shareholder is only 25% of the shareholding and as such the taxation of share premium should also be restricted to only 25% of the total premium received. In this regard, it is noted that the section 56(2)(viib) does not provide any limitation from taxation of share premium which is in excess of the fair market value of the shares. The Assessing Officer has correctly worked out the fair market value of the shares and has arrived at the excess share premium received. The argument of the assessee presumes the beneficial transfer from one person/ shareholder to the other pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------- *----------------------------- * Increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value. * Taxing of unexplained money, credits, investments, expenditures etc., at the highest rate of 30%., irrespective of the slab of income." The relevant portion of the Finance Bill 2012, Bill No.11 of 2012 [As introduced in Lok Sabha on 16th March 2012] is reproduced herein below for reference. "Share premium in excess of the fair market value to be treated as income Section 56(2) provides for the specific category of incomes that shall be chargeable to income-tax under the head "Income from other sources". It is proposed to insert a new clause in section 56(2). The new clause will apply where a company, not being a company in which the public are sub-stantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares. In such a case if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the benefit of such investment at an unrealistic share premium has only passed on to her daughter because there are only two shareholders in the assessee company i.e., Mrs. Sasikala Raghupathy and her daughter Mrs. Vani Raghupathy at that point of time. Had Mrs. Sasikala Raghupathy gifted the money to her daughter Mrs. Vani Raghupathy and thereafter if the daughter would have brought the same into the assessee company for allotment of equity shares at face value, invoking of the provisions of Section 56(2)(viib) of the Act would not have aroused. Further as pointed out by the Ld.AR, it is evident from the Finance Minister's speech that the provisions of Section 56(2)(viia) of the Act was introduced by the Finance Act 2012, only to curb generation and use of unaccounted money. In the absence of the provisions of Section 56(2)(viia) & Section 56(2)(viib) of the Act it was possible for any company either closely held or otherwise to introduce unaccounted money as investment in equity share of the company with inflated share premium through a deploy as investor. However in the case of the assessee company, the investors source of investment is genuine and not in dispute. The only othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lative intent, construe all the constituent parts of the statute together and seek to ascertain the legislative intention from the whole Act, considering every provision thereof in the light of the general purpose and object of the Act itself and endeavouring to make every part effective, harmonise and sensible". Further mischief rule of interpretation also propagate that where a statute has been passed to remedy a weakness in the law, the interpretation which will correct that weakness is the one to be adopted. 7.3 It should be also kept in mind that provisions of Section 56(2)(viib) of the Act creates a deeming fiction and while giving effect to such legal fictions all facts and circumstances incidental thereto and inevitable corollaries thereof have to be assumed. At this juncture we are reminded of the decision of the Hon'ble Kolkata High Court in the case M.D. Jindal vs. CIT reported in 164 ITR 29, wherein it was held that "legal fictions are created only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond the legitimate field. But the legal fiction has to be carried to its logical conclusion within the frame ..... X X X X Extracts X X X X X X X X Extracts X X X X
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