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TMI Blog2020 (6) TMI 745X X X X Extracts X X X X X X X X Extracts X X X X ..... During assessment proceedings the Assessing Officer (AO) asked the assessee to provide the valuation of the shares as per the book value and fair market value as on 31.03.2014 and provide the justification for charging the exorbitant share premium in terms of section 56(2)(viib). The assessee contented that the share application money had not been received in the relevant previous year and therefore the provisions of section 56(2)(viib) were not applicable to the case of the assessee. The AO was of the opinion that as per the Company's Act, any amount received and held pursuant to an offer made in accordance with the provisions of the Act, towards any subscription to any security including share application money or advance towards allocation of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of securities applied for shall be in nature of a Deposit. The AO noted that it is only in the financial year relevant to the assessment year under reference that the issue of shares had taken place and hence, the cause of action had arisen in the relevant period under consideration. The AO stated that the explanation to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directed deletion of the addition made. The relevant finding of the ld. CIT(A) at para 7.3 of his order is as under : 7.3 I have considered the submissions of the appellant and perused the assessment order. The main contention in this case is whether the provisions of section 56(2)(viib) are applicable in the impugned assessment year or not. Section 56(2) (viib) of the Act, inserted in the statute by the Finance Act, 2012 w.e.f. 01.04.2013, provides that if a company in which public is not substantially interested, issues shares at premium to any person being a resident, the excess of the aggregate consideration received for such shares over-the fair market value thereof would be taxable as "income from other sources ". The aforesaid clause (viib) to section 56(2) of the Act is reproduced hereunder for ready reference: 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. ......................... 56(2) In particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 590/- per share against the share application money received in financial year 2007-08, 2008-09, 2009-10 and 2010-11. Thus, in this case, the consideration was received in earlier years and no consideration has been received in the relevant previous year. In the years in which the consideration was received by the assessee, the provisions of section 56(2)(viib) were not applicable. The AO has noted in the assessment order that that as per the Company's Act, any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards any subscription to any security including share application money or advance towards allocation of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of securities applied for shall be in nature of a Deposit. It is only in the financial year relevant to the assessment year under reference that the issue of shares had taken place. Hence, the cause of action had arisen in the relevant period under consideration. I am unable to concede to this reasoning of the AO. Even if the share application money received by the assessee in the earlier previous years i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any person being a resident". (iii) Whether on the facts and circumstances of the case, the Ld. CIT(A) has not erred in law and fact in deleting the addition made on account of excess premium received on issuance of shares without appreciating the fact that shares have been issued at excessive premium in terms of section 56(2)(viib) of the Act read with Rule 11UA during the F.Y. 2014-15 and cause of action has arisen in this financial year and not in year of receipt of share application money. (iv) Whether on the facts and in the circumstances of the case, the Ld CIT(A) has not erred in law and fact in holding that cause of action had arisen in year of receipt of share application money when as per Company's Act any amount received and held pursuant to an offer made towards any subscription to any security including share application money or advance towards allocation of securities pending allotment is in the nature of a deposit and issue of shares was in this FY. (v) Whether in the facts and circumstances of the case and in law, the Ld.CIT(A) was right in holding that consideration was received in the earlier years in which the provisions of section 56(2)(viib) were not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of comparison. He further contended that if the share application money is received in several previous years, then the question arises as to in which year the addition is to be made. He contended that the only reasonable interpretation, therefore, is that the Section is triggered on the issue of shares and not on the receipt of consideration for the same. He further contended that even as per the Companies Act, any amount received as share application money pending allotment is not in the nature of consideration for the issue of shares but is treated as a deposit and it is only on the actual allotment of shares that the said amount changes its character and is treated as consideration for the issue of shares. The ld. DR in support of his contention, relied on the following decisions : (i) India Today Online Pvt. Ltd. ITA No 6453 /5454/De/2018 (ii) M/s Cimex Land and Housing pvt. Ltd. ITA No 5933/Del/2018 7. A brief synopsis of the arguments made by the ld. DR were filed before us which are reproduced hereunder : 1. The main issue is with regard to the applicability of section 56(2)(viib) given the fact that the share premium was not received in the year under considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f fmv we know is the basis of comparison. Obviously it cannot be the intention of the legislature to make the section so limited in its operation to render it practically redundant. (iii) Furthermore, what would happen if the share application money is received in several previous years as in the present case? Since according to the assessee it is the receipt in the relevant previous year which is the basis of addition, then in which year can the addition be made, if at all? On the contrary it would only be reasonable to say that since in those assessment years when the share application money was received the shares were not allotted, therefore the share premiums could not have been examined by the Assessing Officer u/s 56(2)(viib) of the Act. 5. According to the companies Act, any amount received as share application money pending allotment is in the nature of a deposit. It is only on the actual issue of shares that the situation changes and hence the cause of action is the actual issue of shares. (This is discussed at page 3 of the Assessment order) Ld. Counsel for the Assessee on the hand made several arguments in support of its contention that the critical word for invok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ib) ii. ACIT vs. M/s Diach Chemicals & Pigments Pvt. Ltd in ITA No. 546/Kol/2017 order dt. 19/06/2019 (Kol Trib) g) That any other interpretation would lead to absurd result in as much as it would be a scenario more evil than a retrospective application of section. Since in case of retrospectively, application of section inserted subsequently is applied to a transaction effected in earlier years. However in the present case the transaction took place in an earlier year and the law enacted subsequently is sought to be applied that too in later years to an earlier transaction. That the same was patently erroneous and contrary to all canons of interpretation. 8. We have heard both the parties, carefully gone through the orders of the authorities below as well as the documents and case laws referred to before us. The issue before us relates to the interpretation of the provisions of Section 56(2)(viib) of the Act which treats as income the amount of excess consideration received on issue of shares, in excess of the Fair Market Value of shares. The controversy is relating to the point of time of trigger of the Section, whether on the receipt of amounts relating to the shares prior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be the value- (i) as may be determined in accordance with such method as may be prescribed16 ; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; (b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of 17[Explanation] to clause (23FB) of section 10;] The Rules for determining the Fair Market value of shares for the purpose of the section prescribed in Rule 11U and 11UA of the Income Tax Rule s,1962 are reproduced he reunder : Rule 11U 11U. For the purposes of this rule and rule 11UA,- [(a) "accountant",- (i) for the purposes of sub-rule (2) of rule 11UA, means a fellow of the Institute of Chartered Accountants of India within the meaning of the Chartered Accountants Act, 1949 (38 of 1949) who is not appointed by the company as an auditor un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) "unquoted shares and securities", in relation to shares or securities, means shares and securities which is not a quoted shares or securities; (j) "valuation date" means the date on which the property or consideration, as the case may be, is received by the assessee.] Rule 11 UA 11UA. [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- (a) valuation of jewellery,- (i) the fair market value of jewellery shall be estimated to be the price which such jewellery would fetch if sold in the open market on the valuation date; (ii) in case the jewellery is received by the way of purchase on the valuation date, from a registered dealer, the invoice value of the jewellery shall be the fair market value; (iii) in case the jewellery is received by any other mode and the value of the jewellery exceeds rupees fifty thousand, then assessee may obtain the report of registered valuer in respect of the price it would fetch if sold in the open market on the valuation date; (b) valuation of archaeological collections, drawings, paintings, sculptures or any work of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent the value of any asset; B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; C = fair market value of shares and securities as determined in the manner provided in this rule; D = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property; L= book value of liabilities shown in the balance sheet, but not including the following amounts, namely:- (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) 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; or (b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method. 9. A bare reading of the Section 56(2)(viib) , reveals that what is sought to be subjected to tax under it is the excess consideration received during the year for issue of shares (emphasis supplied by us),over and above the fair market value of shares. All the highlighted words,which have been used in the section, have to be read together and not in isolation. What is necessary therefore and primary for invoking the section in a particular assessment year is there being receipt during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viib) of the Act is the issue of shares. This is further evident from the explanation(a) to Section 56(2)(viib) , which explains the term Fair Market Value, for determining the excess consideration received over and above it, which is subjected to tax under the section. The explanation states the FMV of the shares to be the value determined as per method prescribed(sub clause(i) or the value substantiated by the company to the satisfaction of the AO based on the value on the date of " issue o f s ha r e s" of its assets including intangible assets, goodwill, know-how, patent, copy right, trade mark, franchise or other business or commercial rights of similar nature. Thus as per clause (ii) of the explanation to the section, the FMV of the shares, is the value on the date of issue of shares. Therefore the section can be triggered or invoked only in the year of issue of shares . The Rules prescribed for determining the Fair Market Value of the shares also makes sense and are workable only on applying this interpretation .The Rules prescribed are Rule 11U and 11UA ,both of which are reproduced above. Rule 11UA(2) specifically deals with the valuation of fair market value of unquote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not in the year of allotment of shares.In the case before us the terms and conditions of issue of shares were not settled in the year of application for shares but on the contrary in the year of allotment since while the application had been made at a premium of Rs. 90/- the shares were allotted in the impugned year at a premium of Rs. 590/-. The said decision therefore is of no assistance to the assessee. The decision of the ITAT Chandigarh Bench in the case of Luxmi Foodgrains(supra) is also distinguishable on facts since in that case the dispute about the invocation of section 56(2)(viib) arose on account of the fact that the consideration received by way of cheques had not been enchased by the assessee at all and therefore he disputed the applicability of the section on the ground of receipt of consideration .There was no dispute about consideration having arisen in that case ,which distinguishes it from the present case. Thus, reading the provisions of the Section and the Rules prescribed for determining the Fair Market Value of shares, what is arrived is that the provisions of Section 56(2)(viib) are triggered in the year of issue/allotment of shares. In the present case, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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