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TMI Blog2022 (4) TMI 805X X X X Extracts X X X X X X X X Extracts X X X X ..... attracted. Whether there is a difference between allotment of shares and receipt of shares ? - For receipt of share there should be shares in existence and a person holding such share transferring it to another person. As against this in case of allotment of shares, it comes into existence after it is allotted and there is no transfer of shares from one person to another person. Therefore allotment of shares cannot be equated with receipt of shares because in case of receipt of shares the property is already in existence whereas in case of allotment of shares the property comes into existence after it is allotted. Whether assesses comes under the definition of Relative? - There is no dispute in the contention of the assessee is that all the shareholders are relatives and 95% of the shares have been within the relatives. The transaction between the close relatives is not taxable under the head 'income from other sources u/s 56(2) of the Act. We are of the opinion that the section 56(2)(vii)(c) has no application and the company is liable to be taxed . The opinion and well known facts that in a private limited company major percentage of shares are holded by the rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le on record. The prayer as mentioned by the assessee for condonation of delay of 180 days has merit and we concur with the submission of the assessee. Thus the delay of 180 days in filing the appeal by the assessee is condoned. 5. The assessee has raised the following grounds:- 1. The Ld. CIT(A), NFAC has erred on facts and in law in confirming the addition of ₹ 4,56,000/- u/s 56(2)(vii)(c)(ii) of the Act by not accepting the contention of assessee that :- (i) section 56(2)(vii) is not applicable as it is applied to tax those receipts which are received without consideration or for inadequate consideration whereas the present case is allotment of shares which cannot be equated with receipt of shares. (ii) even if section 56(2)(vii)(c) is applicable, the same would not be subject to tax in view of Explanation (e) of said section 2. The appellant craves to alter, amend and modify any ground of appeal. 6. Brief facts of the case are that the assessee is an existing shareholder of M/s Prakash Deep Finance Co. Ltd. (in short PDFCL) having 99,500/- shares of ₹ 10/- each amounting to ₹ 9,95,000/- since 2007. During the year PDFCL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n my considered view. The shares of PDFCL had face value of ₹ 10. Buy a system of valuation prescribed under rule 11UA of the Rules, the value of shares were found to be ₹ 11.52. The value is more than what was paid by assessee. The assessee is trying to distinguish between initial allotment and secondary sale of shares. But the attempted distinction has no relevance for the present purpose. Assessee's case is not that of issue of bonus shares. The company which allotted the share had its authorised number of shares which it could allot. Some of the authorised shares have been allotted to assessee. Hence, this leg of assessee's argument is rejected. Second facet of assesse's argument is that 95.350 of shares in PDFCL were owned by members covered within exception prescribed in provision to section 56(2)(vii)(c)(vii) of the Act. Instead of allotting shares to all existing shareholder who were relatives, the shares were allotted to assessee and it was in the nature of transfer of rights to assessee. Hence, the provision of section 56(2) vii (g) would not get attracted. Reliance was placed on decision in case Assistant Commissioner of Income Tax Vs. Venkanna Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e section cannot be equated to allotment. Hence, allotment of shares will not fall under the ambit of section 56(2)(vii)(c) consequently addition made by AO is not as per law. 2. Without prejudice to above, even if it is held that allotment of shares is covered by section 56(2)(vii)(c), then also the addition made by AO is uncalled for in as much as the entire share capital of PDFCL as on 27.09.2013i.e. just before fresh allotment of shares to the assessee was held by its relatives being the members of the HUF as defined in Explanation (e) to this clause as per the following details:- Shareholder Name Relation with assessee Number of Shares Percentage of Holding Prakash Chand Sharma Members of the HUF 21,26,000 44.20% Kalawati Sharma 9,30,500 19.35% Shruti Sharma 4,78,000 9.94% Saurabh Sharma 4,78,000 9.94% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther even if the observation of Ld. CIT(A) that some of the shareholders of PDFCL are companies who do not fall in the definition of relatives is accepted, then also 95.35% of shares which are held by relatives of the assessee, to that extent the shares allotted to the assessee cannot be charged to tax u/s 56(2)(vii)(c). 10.1 The ld. AR of the assessee submitted a clarification application with reference to the query raised by this Hon ble Bench which reads as under:- It is with reference to the query raised by Hon'ble Bench regarding filing of evidence of renunciation of the allotment of shares by existing shareholder to the assessee. In this connection it is submitted that during the year Prakash Deep Finance Co. Ltd. (PDFCL) issued 33 lakhs shares of ₹ 10 each to its existing shareholders. However, except Sh. Prakash Chand Sharma and Prakash Chand Sharma HUF, all other shareholders renounce their rights in the shares in favour of these two persons. Smt. Kalawati Sharma who was entitled to 6,38,550 shares renounced 78,056 shares in favour of assessee and balance in favour of Sh. Prakash Chand Sharma. Shubhdeep Finance Company Pvt. Ltd. and Kaladeep Develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are of something. For receipt of share there should be shares in existence and a person holding such share transferring it to another person. As against this in case of allotment of shares, it comes into existence after it is allotted and there is no transfer of shares from one person to another person. Therefore allotment of shares cannot be equated with receipt of shares because in case of receipt of shares the property is already in existence whereas in case of allotment of shares the property comes into existence after it is allotted. C. Whether assesses comes under the definition of Relative? The definition of close relative given in the act under section 56(2)(vii)(c) of the act in Explanation is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 each to the assessee and 14 others. In the allotment, the assessee had been allotted 4,25,000 shares on 5th April, 2013 and 9,05,000 shares on 26th March, 2014. The FMV of each share was worked out by the AO at ₹ 676.55 as on 5th April, 2013 as against the book value of assets of ₹ 1,35,30,903. Similarly on 26th March, 2014, the AO had worked out the value of the same shares at ₹ 14.48 without any increase in the value of the assets from 5th April, 2013 to 26th March, 2014. The FMV of the shares has been worked out by the AO at ₹ 676.55 on 5th April, 2013 and ₹ 14.48 per shares on 26th March, 2014. If the share value as on 5th April, 2013 is to be adopted @ ₹ 676.55 the book value of the assets would be increase to astronomical figure of 260 crores for 38,50,560 which is nowhere near the actual value of assets. According to the learned Authorised Representative, the valuation date means, the date on which the property or consideration as the case may be received by the assessee. Thus, argued that for arriving FMV fresh allotment of shares also required to be included in the existing paid up share capital and to arrive at FMV of the shares by di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the income from other sources. Even the gifts received from the close relatives under s. 56(2)(v) are outside the scope of 56(2). Though the shares are allotted to the assessee, the entire shareholding of the company is retained by the family and no share was allotted to the outsiders. In this case, though the assessee had received the excess shares, renouncement was from the close relatives and the assessee is at liberty to transfer the shares to other relatives or shareholders at any point of time without attracting the taxation under s. 56(2)(vii)(c). Therefore, surrender of the rights of the close relatives in favour of the another close relative is covered for exemption under s. 56(2)(vii)(c) of the Act. In the decision rendered by the Hon ble Madras High Court in the case CIT vs. Kay Arr Enterprises Ors. (2008) 215 CTR (Mad) 244 : (2008) 3 DTR (Mad) 205 : (2008) 299 ITR 348 (Mad) and in the decision of the Hon ble Karnataka High Court in the case CIT vs. R. Nagaraja Rao (2013) 352 ITR 565 (Kar) : (2012) 207 Taxman 236 (Kar) it has been categorically held that where there are transactions involving family arrangement with respect to transfer of shares, the corporate ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 56(2)(viii)(c)(ii) of the Act. Thus, we hold that the difference in FMV of the shares and the consideration paid by the assessee is squarely covered by the exemption clause provided under s. 56(2)(vii) of the Act and case law relied on by the assessee in the case of Kumar Pappu Singh (supra) is squarely applicable in the assessee s case. The learned Departmental Representative argued that the shares were not only allotted to the assessee but also allotted to others and submitted that the case law of Kumar Pappu Singh has no application in this case. We are unable to accept the argument of the learned Departmental Representative, since, prior to the allotment of shares on 5th April, 2013 the shareholders 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 5th April, 2013. Accordingly, we s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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