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TMI Blog2020 (1) TMI 1012X X X X Extracts X X X X X X X X Extracts X X X X ..... n this case. We are unable to accept the argument of the Ld.DR, since, prior to the allotment of shares on 05/04/2013 the share holders are only the assessee and his brother. In the fresh allotment apart from the assessee some applicants were allotted the shares. Therefore whatever the shares allotted to the assessee was from the interest of his brother who is a close relative. Hence, to the extent of shares allotted to the assessee the same is covered by the decision of this tribunal. Thus, we hold that there is no case for making any addition for allotment of shares allotted on 05/04 2013. Accordingly, we set aside the orders of the authorities below on this issue and delete the addition made by the Assessing Officer. FMV of the shares allotted to the assessee on 26/03/2014 - contention of the assessee is that for arriving at the FMV of the shares, the book value of the shares required to be adopted for determination of FMV of the share. Accordingly, the Assessing Officer arrived at the value of the share at ₹ 14.48 and the ld. CIT(A) arrived at ₹ 12.02. Though, the valuation means the date of property or consideration received as per Rule 11UA. This issue is con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jects Pvt. Ltd., and worked out the taxable income u/sec. 56(2)(vii)(c)(ii) of the Act, as per Rules 11U 11UA of the IT Rules 1962 as under:- Date No. of shares (A-L)* PV/PE FMV (Rs.) Cost of acquisition (Rs.) FMV minus cost of acquisition Income u/s 56(2)(vii)(c) (ii) (Rs.) 05/04/2013 4,25,000 (150169940-136039771)*10 200000 706.51 10 696.51 29,38,91,750 26/03/2014 9,05,000 (288716791-186682782)*10 85042600 12.00 10 2 18,10,000 Total 29,57,01,750 The Assessing Officer called for explanation of the assessee as to why the equity shares of 4,25,000 acquired on 05/04/2013 should not be valued adopting the FMV of ₹ 29,81,41,750/- and the shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary F Fair value of the shares: 10,74,26,806 * 1,34,00,000 8,50,42,600 = 1,69,27,036 i.e. 12.64 per share Valuation as on 26/03/2013 A Book Value of Assets Fixed Assets 57,92,608 Current Assets 14,02,08,058 14,60,00,666 B Book Value of Liabilities Long term borrowings 7,43,36,466 Short term borrowings 8,50,000 Trade Payables 33,73,198 Other current liabilities 12,75,50,000 Short ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment of shares and pressed for considering the FMV after including the fresh allotment of shares. However, the explanation offered by the assessee was not impressed to the Assessing Officer, hence, rejected the contention of the assessee and applied Rule 11U and 11UA of the IT Rules and arrived at the FMV of the shares at ₹ 676.55 per share for the shares allotted on 05/04/2013 and ₹ 14.48 per shares for the shares allotted on 26/03/2014. The relevant working made in paragraphs 10.1 to 10.3 of the assessment order is as follows:- 05/04/2013 Particulars Amounts Book Value of Assets (A) (Refer to Note No.1) 145,985,666 Book value of liabilities (L) (Refer to Note No.2) 132,454,763 Amount of paid up equity shares (PE) (Refer to Note No.3) 200,000 Paid up value of equity share (PV) 10 (A L) 13,530,903 Fair market value of unquot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration paid (₹ 10) worked out to ₹ 666.55. Accordingly, a sum of ₹ 28,32,83,750 (₹ 665.55 x 4,25,000) is to be treated as income of the assessee u/s 56(2)(vii)(c)(ii), in respect of shares received on 05/04/2013 Particulars Amount Book Value of Assets (A) (Refer to Note No.1) 294,190,834 Book value of liabilities (L) (Refer to Note No.2) 238,442,428 Amount of paid up equity shares (PE) (Refer to Note No.3) 38,505,600 Paid up value of equity share (PV) 10 (A L) 55,748,406 Fair market value of unquoted equity share (A-L)/PE*PV) 14.48 Note No.1 Book Value of Assets: Particulars Amount Total Value of Assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of shares are also required to be considered. Similarly, the ld. CIT(A) held that valuation date refers to the date on which the property received by the assessee and for this purpose, she placed reliance on the decision in the case of Sudhir Menon (HUF) (supra). The ld. CIT(A) further observed that the difference between the book value of assets and liabilities was 1,35,30,903/- as on 05.04.2013 and the shares before allotment was 20000/-. On the same date the total number of shares were increased to 38,50,560/- on allotment of fresh shares of 3830560/-.If the share value is taken at ₹ 676.55 the total value of the assets would 3850560*676.55 works out to ₹ 259.00 crores approximately against the actual value of the assets as on 05/04/2013 at ₹ 1.35 crores which leads to absurdity. When the book value of assets was ₹ 1.35 crores the same cannot lead to over valuation astronomically to ₹ 259.00 crores by application of the Rules which shows inconsistency. The ld. CIT(A) further viewed that interpretation of Rule which results into valuation of assets more than the book value of the assets would be contrary and inconsistent to the spirit of the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares. I have gone through the case of Sudhir Menon (HUE) (supra). In this case the findings of the Hon'ble Tribunal are as under: 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 assessing officer sought to distinguish this decision by observing that it was rendered in the context of issue of rights shares. However, I find that the principle enunciated in this decision is applicable in all cases. The assessing officer attributed the entire value of assets only to 20,000 shares. However, the fact remains that the total value of assets is to be shared among all the 38,50,260 shares once the shares are allotted. Therefore, it would be appropriate to value the share by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portion of reserves and surplus, there is no increase in the asset value of a company, in any manner. What really happens is that the value of equity shares goes down prorata. Total value of equity shares held along with bonus shares remains the very same. Thus any profit derived by the assessee on account of receipt of bonus shares is theoretically offset by the depression in the value of the equity shares already held by him. Bonus shares does not result in recipient getting a property without consideration or for inadequate consideration. This decision reiterated the principle that the valuation of the shares has to be on the basis of post allotment of shares in as much as the valuation as contemplated in Rule 11UA is in respect of property received. 5.12 In view of the above discussion, I hold that: a) The gross value of assets as considered by the Assessing Officer is proper. b) The gross value of liabilities is to be decreased by the amount of share capital resulting out of allotment of shares and the paid up value of equity capital is to be increased by the same amount. The value of liabilities as on 05/04/2013 will get reduced by a sum of ₹ 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audited by the auditor of the company appointed under section 224 of the Companies Act, 1956 (1 of 1956) and where the balance-sheet on the valuation date is not drawn up, the balance-sheet drawn up as on a date immediately preceding the valuation date on which it has been approved and adopted in the annual general meeting of the shareholders of the company. Thus, argued that in the instant case, there is no balance sheet which was drawn up on 05/04/2013 i.e. the date of allotment of shares, therefore previous balance sheet which is available has to be taken. Thus, argued that the Assessing Officer rightly taken the balance sheet as on 31/03/2013 and arrived at the FMV at ₹ 676.55 per share for the shares allotted on 05/04/2013, hence, argued that there is no infirmity in the FMV adopted by the Assessing Officer, hence, requested to upheld the order of the Assessing Officer and set aside the order of the ld. CIT(A). Similarly for the shares allotted on 26/03/2014 submitted that the net assets were ₹ 5,57,48,406/- and the number of shares before allotment was 38,50,560/- and FMV works out to ₹ 14.48 per share thus argued that the AO has correctly worked out the FMV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under:- AS ON 05/04/2013 Particulars As per A.O As per CIT(A) Difference Remarks Number of shares before allotment 20000 20000 - No difference Fresh shares allotted 3830560 3830560 - No difference Total shares 3850560 3850560 - No difference Total assets 145985666 145985666 - No difference Total Liabilities 132454763 94149163 38305600 Face value of fresh shares allotted Net Assets (A) 13530903 51836503 38305600 Face value of fresh shares allotted Number of shares (PE/PV) (B) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of ITAT Mumbai in the case of Sudhir Menon(Supra). Thus argued that if the fresh allotment of shares is not included the valuation of FMV would be unreal and it is not the intention of the legislature to tax the unreal income. Hence argued that valuation date means the date on which the property or consideration, as the case may be, is received by the assessee. In the instant case, the assessee has received the property in the form of shares and the shares can be said to have become the property of the assessee only after the allotment to the assessee. For the purpose of valuation, ‗balance sheet means the balance-sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor of the company appointed under section 224 of the Companies Act, 1956 (1 of 1956) and where the balance-sheet on the valuation date is not drawn up, the balance-sheet drawn up as on a date immediately preceding the valuation date on which it has been approved and adopted in the annual general meeting of the shareholders of the company. Therefore, argued that FMV of the shares required to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rajan Pai [(2016) 48 ITR (Trib.) 170 (Bang.)] 2) Bharat Hari Singhania Ors. Vs. CWT Ors. [(1994) 207 ITR 01] 3) Sri Kumar Pappu Singh Vs. DCIT in ITA No.270/VIZ/2018, dated 07/12/2018 (ITAT, Visakhapatnam Bench) 9. Responding to the argument, the Ld DR submitted that with regard to non-application of section 56(2)(vii)(c)(ii) of the Act for close relatives the ld.DR argued that the shares were not only allotted to the assessee but also to other shareholders on both the dates. Thus, argued that the case law relied on by the assessee in the case of Sri Kumar Pappu Singh Vs. DCIT in ITA No. 270/VIZ/2018, dated 07/12/2018 has no application to the assessee s case. 10. We have heard both the sides and perused the material placed on record. In the instant case, the assessee has acquired fresh allotment of shares from M/s. Sardar Projects Pvt. Ltd. The company has allotted the shares of 4,25,000 @ 10/- each on 05/04/2013 and 9,05,000 shares @ 10/- each on 26/03/2014. The net book value of the assets as on 05/04/2013 was ₹ 1.35 crores. The company had issued 38,30,560/- shares @ 10/- each to the assessee and 28 others on 05/04/2013. Similarly, on 26/03/2014, the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order this tribunal in para 14 which reads as under:- 14. The assessee has only applied for shares which were allotted by the company. The contention of the revenue is that since there is no relation between the company and the assessee there is no case for invoking the explanation of relative to exempt the assessee from taxing the excess fair market value under the head income from other sources‟. Whereas, the contention of the assessee is that all the shareholders are relatives. The transaction between the close relatives is not taxable under the head income from other sources u/s 56(2) of the Act and hence, the section 56(2)(vii)(c) has no application. We have gone through the provisions of 56(2)(vii)(c) and this provision was brought as an anti-abuse measure, seeks to tax the understatement of 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. The transactions between close the relatives are outside the scope of application of 56(2)(vii)(c). The legislature in its wisdom excluded the transaction of close relatives for the purpose of taxation under the income from other sources. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rother Mr.Y. Ramesh Chandra and whatever excess benefit was passed on to the assessee was out of the interest of share holding held by his brother Mr.Y.Ramesh Chandra, hence, the provisions of section 56(2)(viii)(c)(ii) shall not apply in case of money or any property received from any close relative. The definition of relative as mentioned in proviso to Explanation (e) of section 56(2)(vii) as under:- (e) relative means,- (i) in case of an individual- (A) spouse of the individual; (B) brother or sister of the individual; (C) brother or sister of the spouse of the individual; (D)brother or sister of either of the parents of the individual; (E) any lineal ascendant or descendant of the individual; (F) any lineal ascendant or descendant of the spouse of the individual; (G) spouse of the person referred to in items (B) to (F). 12. There is no dispute that the assessee and other shareholders are close relatives, therefore the consideration received rather excess consideration passed on from the share of his brother is exempt from taxation u/sec. 56(2)(viii)(c)(ii) of the Act. Thus, we hold that the difference in FMV of the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been audited by the auditor of the company and where the balance sheet on the valuation date has not been drawn up the balance sheet drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the AGM of the shareholders of the company. We find in the instant case, on the date of receipt of the consideration the balance sheet of the assessee company was not drawn up as the same was drawn up only on 31st July, 2014 which is evident from the audited balance sheet filed. Clause (b) and clause (j) of Rule 11UA makes it clear that for computing fair market value of the shares the value of the assets and liabilities as stated in the audited balance sheet immediately prior to the receipt of consideration should be adopted. If, on the date of receipt of the consideration, the balance sheet was not drawn up, then, the balance sheet drawn up as on a date immediately preceding the valuation date should be adopted i.e., the balance sheet of the immediately preceding year should be adopted. We find, in the instant case, on the valuation date i.e., on 31.03.2014, the balance sheet was not drawn up by the auditor as audited financials were drawn up only o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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