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TMI Blog2022 (5) TMI 683X X X X Extracts X X X X X X X X Extracts X X X X ..... -21(2), MUMBAI [ 2014 (3) TMI 534 - ITAT MUMBAI] as held as long as there is no disproportional allotment of shares, there was no scope for any property being received by the tax payer as there was only an apportionment of the value of the existing shareholder over a larger number of shares, and hence no addition u/s 56(2)(vii)(c) of the Act would arise. If the shares are allotted strictly on proportionate basis based on existing shareholding, then though the provisions perse are applicable, but will not operate adversely. This is because the gain accruing on allotment of fresh shares will be offset by the loss in value of existing shares. Thus we are of the view that provisions of section 56(2)(vii)(c) do not apply in respect of allocation of 1,03,000 rights shares allotted to the assessee proportionate to his shareholding in the company. Whether section 56(2)(vii)(c) of the Act can be invoked in respect of additional 82,200 shares received by the assessee since the assessee s wife and father did not exercise the rights issue and renounced the right in favour of the assessee? - It is a well settled principle of law that what cannot be done directly cannot be done indirect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of rights in favour of the assessee by third party (unrelated shareholders) does lead to disproportionate allocation in favour of the assessee, thereby leading to invocation of section 56(2)(vii)(c) - See SUDHIR MENON HUF VERSUS ASST. CIT-21(2), MUMBAI [ 2014 (3) TMI 534 - ITAT MUMBAI] upheld the principle that section 56(2)(vii)(c) of the Act cannot be invoked only in the event the allotment of shares is not disproportionate, but in case allocation is disproportionate, section 56(2)(vii)(c) of the Act would come into operation. Accordingly, in our view, section 56(2)(vii)(c) of the Act would apply in relation to 14,800 allotted the assessee as a result of third party shareholders renouncing their rights shares in favour of the assessee. Reducing the valuation of shares to Rs. 205.55 per share by computing the FMV per share on date of allotment taking into consideration the book value as on 31-03-2012 and adding further consideration received on account of issuance of additional shares - CIT(Appeals) has not erred in facts and in law in computing the FMV of shares on the above lines. The ITAT in the case of ACIT v. Y. Venkanna Choudary [ 2020 (1) TMI 1012 - ITAT VISAKHAPA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er share for 97,000 additional shares confirming addition of Rs. 1, 89, 68, 350/-. 6 Levy of interest u/s 234 A/B/C D of the Act is not justified. 7. Initiation of penalty proceedings u/s 271(1) (c) of the Act is not justified. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal. ITA No. 1643/Ahd2017 filed by Revenue 3. The Revenue has raised following grounds of appeal:- 1. The Ld.CIT(A) has erred in law and on facts in deleting the addition u/s 56(2)(vii)(c) in respect of the additional shares allotted to the assessee . 2. The Ld.CIT(A) has erred' in law and on facts in adopting the valuation of shares at Rs 205 per share instead of Rs 255 per share determined by the AO as per Rule 11UA(1)(c)(b) in respect of the additional shares allotted to the assessee . 3. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 4. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... percentage of 27.90% in AY 12-13. With forgoing mention of facts of the case and interpretation of the statute, below is the rebuttal of submission dated 21/03/2016 filed by assessee on each and every point:- I. Property:- As recorded in reasons for reopening for the purposes of section 56(2)(vii), the term 'property' includes shares and securities within its ambit. Accordingly, additional shares i.e. issue of shares to existing shareholders below the market value, would qualify as property . Shares are movable property and they become existent on allotment. II. Receipt / Receives- The assessee acquired the right to acquire additional shares at the time of passing of resolution, the receipt of property happened at the time of allotment of shares. This was also the date when property came into existence. Allotment of shares is the event of receipt of property. As per the Supreme Court decision, the shares are 'created' by the exercise of allotment. So on allotment, the shares become 'existent in hands of the allottee, and therefore, it is legally right an unlawful to say that he receives movable property at that time. III. Transfer vs. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertaining to each head of the income. This is the determination of income in its quantitative sense. v. Disproportionate allotment- In the context of Section 56(2)(vii)(c), the value of the property which an assessee receives is to be evaluated by comparing the value of the property held by the assessee immediately before the receipt and the value of the property immediately after the receipt and only the incremental value should be considered to be the .value of the property received. A higher than proportionate or a non-uniform -allotment and the consequential higher than proportionate allotment to the purchasing shareholder, who exercises the rights purchased by him, results in receipt by the shareholder of property in the form of shares and securities (at a discount) will attract Section 56(2)(vii)(c). A higher than proportionate or a non - uniform / disproportionate allotment of additional / bonus shares stands on a different footing. To the extent of disproportionate allotment, the Gift Tax provision stands attracted. A proportionate offer can, in certain circumstances, result in a disproportionate allotment. One of the ways could be selective basis, i.e. wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the current shareholding of the assessee (of 1,03,000 shares) relying on the decision of Sudhir Menon (HUF) v. ACIT 45 Taxmann.com 176 , but in respect of additional shares received by the assessee on renouncement of rights shares by wife and father of the assessee amounting to 82,200 shares and also 14,800 allotted the assessee as a result of third party shareholders renouncing their rights shares in favour of the assessee, he upheld the disallowance on the ground that the allotment of additional shares was disproportionate to present shareholding of the assessee and hence provisions of s. 56(2)(vii) of the Act are applicable. Ld. CIT(Appeals) also gave part relief on the valuation of shares and reduced the same to Rs. 205.55 per share from Rs. 255 per share as worked out by the Ld. Assessing Officer. The Ld. CIT(Appeals) while allowing part relief observed as under: 3.3 I have carefully considered the facts of the case, assessment order submission of the appellant. The AO has made the addition of Rs.4,90,00,000/- invoking the provisions of section 56(2)(vii) of the I. T. Act, 1961 in respect of the disproportionate allotment of additional shares issued by the company namel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and the decision of Hon'ble ITAT, Mumbai 'A' Bench in the case of Sudhir Menon (HUF) Vs. ACIT, Mumbai [2014] 45 Taxmann.conrv;i76 dated 12/03/2014 which is discussed in the subsequent paras. The Honourable ITAT has held that the appellant's case is limited to right shares and to the extent the shares subscribed to are right shares i.e. allotted pro rata on the basis of existing share holding (as on a cut-off date). The provisions though per se applicable does not operate adversely. Hence, the Honourable ITAT has held that no income on this account in the hands of the appellant on the ground of inadequate consideration could be taxed. For ready reference, the head note of the judgment is reproduced as under:- IT : Where additional shares of a company were allotted pro rata to shareholders including assessee based on their existing shareholding, there was no scope for any property being received on said allotment of shares and, consequently provisions of section 56(2)(vii)(c) did not apply to difference in book value an face value of additional shares. 3.5. In view of the aforesaid discussion and the submissions made by the appellant, the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act cannot be invoked. He submitted that Ld. CIT(Appeals) erred in and in facts in not applying the ratio of decision of Khoday Distillers 307 ITR 312 (SC) wherein the Hon ble Supreme Court held that the words 'allotment of shares' have been used to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person. There is a difference between issue of a share to a subscriber and the purchase of a share from an existing shareholder. The first case is that of creation, whereas the second case is that of transfer of chose in action. In the present case, when the assessee is allotted shares, applying the ratio of above ruling, such allotment was not a transfer and hence provisions of s. 56(2)(vii) of the Act cannot be invoked. He further submitted that s. 56(2)(vii) of the Act contemplates transfer of asset in favour of the assessee, but in so far as the company is concerned, shares are liability of the company and hence incapable of being transferred by company in the first place in favour of the assessee. He further submitted that that so far as additional allotment of 82,200 shares are concerned, the same have been renou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvolved. The Ld. Assessing Officer, in our view, had substantive reasons to believe that income had escaped assessment on account of disproportionate allocation of shares in favour of the assessee. The case was reopened after following due process of law and reasons were furnished to the assessee and objections to the issuance of notice filed by the assessee were disposed by way of a speaking order on 14-03-2016. Since, the regular scrutiny assessment did not take place, there is no question of change of opinion. Therefore, in our considered view, the notice issued u/s 148 of the Act has been issued after due application of mind and following due process of law and hence we find no infirmity in order of Ld. CIT(Appeals) confirming the validity of issuance of notice u/s 148 of the Act. 9. In addition, before discussing the issues for consideration as enumerated, it would be important to first discuss whether for invoking section 56(2)(vii)(c) of the Act, the asset (shares in the instant case) in question should be existence and should be capable of being transferred to the recipient. The argument put forth before us is that there is a difference between issuance of a share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject to dilation and elucidation by the apex court inter alia in Shree Gopal Co. (supra) and Khoday Distilleries Ltd. (supra) relied upon by the parties themselves before us. As stated explicitly in the former case, a share is a chose in action. A chose in action implies the existence of some person entitled to the rights, which are rights in action as distinct from rights in possession, and, until the share is issued, no such person exists. A share does not exist prior to its allotment, and in that sense comes into existence only on its allotment. Allotment of a share is only the appropriation of the authorized share capital, being un-appropriated, to a particular person. In nutshell, the difference between the issue of a share to a subscriber and a purchase of a share from an existing shareholder is the difference between the creation and transfer of a chose in action (refer pgs.865, 866). How could, therefore, purchase be equated with allotment? In fact, the purchase or transfer implies existence of a property, while the shares, where out of un-appropriated capital, come into existence only on their allotment . It becomes, thus, in the context of the provision, completely irre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of existing shares. The ITAT Jaipur in the case of DCIT v. Smt. Veena Goyal [2020] 119 taxmann.com 362 (Jaipur - Trib.) held that where additional shares were allotted to all shareholders of company in proportion to existing shareholding of shareholder in company and after allotment of additional shares, shareholding percentage of assessee in company remained same and average value per share had also reduced and no gain had arisen in hands of assessee, provisions of section 56(2)(vii)(c) would not be applicable. Again, the Mumbai ITAT in the case of ITO v. Rajeev RatanlalTulshyan[2022] 136 taxmann.com 42 (Mumbai - Trib.) held that where shares of a company were allotted proportionately to assessee shareholder based on its existing shareholding, there was no scope for any property being received on said allotment of shares and, consequently, provisions of section 56(2)(vii)(c) did not apply to difference in book value and face value of such shares allotted. Respectfully, following the above decisions, and for the reasons cited above. we are of the view that provisions of section 56(2)(vii)(c) do not apply in respect of allocation of 1,03,000 rights shares allotted to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the assessee, in which case the position, in our considered view is clear that section 56(2)(vii)(c) of the Act can be invoked. The Ld. DR has relied on observations of the Ld. Assessing Officer in the assessment order wherein he has observed that the assessee has gained both quantitatively as well as qualitatively, and as a result of such renunciation, his shareholding in the company has increased from 29.90% to 53.22%, thereby giving him the controlling interest in the company. Thereby, there has been a disproportionate allotment of rights shares in favour of the assessee. We are of the considered view that renunciation of rights shares by third party shareholders in favour of the assessee, allowing the assessee to gain controlling interest has resulted in disproportionate allocation of rights shares in favour of the assessee and therefore, in respect of these shares, section 56(2)(vii)(c) of the Act shall apply, and income would taxable in the hands of the assessee. It would have been a different matter had the other parties not exercised their right of subscription to these rights shares, resulting in higher or controlling shareholding resulting in hands of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares. In the present case, since the shares were allotted before Balance Sheet for AY 2013-14 was finalized, in our view Ld. CIT(Appeals) has not erred in computing the FMV per share considering the previous balance sheet which was approved in the AGM for valuation of FMV of the shares. 14. We shall now take up the individual Grounds raised by the respective parties. We shall first deal with Department Grounds of Appeal. Ground No. 1: 15. The Ground of the Department is dismissed. It is held that Ld. CIT(Appeals) has not erred in deleting addition in respect of proportionate allocation of shares relying on the decision of Sudhir Menon (supra) . 16. Ground No. 1 of the Department s appeal is dismissed. Ground No. 2: 17. In our view, Ld. CIT(Appeals) has not erred in adopting the valuation of shares at Rs. 205 per share considering the previous balance sheet which was approved in the AGM for valuation of FMV of the shares. Ground No. 2 of the Department s appeal is dismissed. 18. Grounds No. 3, 4 and 5 of the Department Appeal are general and do not require any specific adjudication. We shall now take up the assessee s Grounds of Appeal. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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