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TMI Blog2023 (9) TMI 1162X X X X Extracts X X X X X X X X Extracts X X X X ..... ght shares is creation of property and merely receiving such shares cannot be considered as a transfer under Sec. 56(2)(vii)(c) and accordingly, such provision would not be applicable on the issuance of shared by the Company in the hands of the allottee. The Apex Court in the case of Khoday Distilleries Ltd. [ 2008 (11) TMI 16 - SUPREME COURT] after referring to the decision in the case of Shri Gopal Jalan Co. vs. Calcutta Stock Exchange Association Ltd., [ 1963 (5) TMI 30 - SUPREME COURT] noted the question arose as to the amendment of the word allotment held that the word allotment means appropriation out of previously unappropriated capital of a company, of a certain number of shares to a person and till such allotment, the shares do not exist as such . Therefore, it is only on allotment that the shares come into existence. In every case, the words allotment of shares having used to indicate the creation of shares appropriation out of unappropriated share given to a particular person which is also referred to in the notice of clause to the Finance Bill 2010. Therefore, the aim and intention behind amending the provision of Sec. 56 is to prevent the practice of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 of 2023 is concerned, the same is also arising out of common judgement and order dated 06.05.2022 ITA No. 1643/Ahd/2017 filed by the appellant revenue. The revenue has raised the following two substantial questions of law: (a) Whether in the facts and circumstances of the case and in law, the learned ITAT has erred in deleting the addition u/s. 56(2)(vii)(c) in respect of the additional shares allotted to the assessee? (b) Whether in the facts and circumstances of the case and in law, the learned ITAT has erred 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.? 4. Facts in brief are as under: 4.1 The assessee filed the return of income for the Assessment Year 2013-14 declaring income of Rs. 86,94,247/- which was processed under Sec. 143(1) of the Act. Thereafter, during the assessment proceedings of M/s. Kintech Synergy Limited, it was noticed that the assessee was receiving salary in the capacity of Director of the said Company and the assessee was issue two lakhs right shares at face value of Rs. 10 in M/s. Kintec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled by the revenue on both counts i.e. firstly, Sec. 56(2)(vii)(c) not being applicable to the right shares proportionate to not existing holdings and secondly Fair Market Value of shares were Rs. 205.55 per share. 4.8 The Tribunal partly allowed the appeal of the assessee holding that the issue of right shares proportionate to holding of wife and father was not taxable under Sec. 56(2)(vii)(c). The Tribunal, further held that the provisions of Sec. 56(2)(vii)(c) would be applicable in respect of 14,800 shares which were allotted to the assessee as a result of third party declining to apply for the same. 5. The Tribunal, after considering the facts of the case and the order passed by the CIT(A), raised the following issues for consideration: 1) Whether section 56(2)(vii)(c) of the Act can be invoked in respect of allocation of 1,03,000 rights shares allotted to the assessee proportionate to his shareholding in the company? 2) 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 same in favour of the assessee? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or any trust or institution referred to in clause (23C) of section 10; or (g) from any trust or institution registered under section 12AA; or (h) by way of transaction not regarded as transfer under clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation . For the purposes of this clause, (a) assessable shall have the meaning assigned to it in the Explanation 2 to subsection (2) of section 50C; (b) fair market value of a property, other than an immovable property, means the value determined in accordance with the method as may be prescribed; (c) jewellery shall have the meaning assigned to it in the Explanation to sub-clause (ii) of clause (14) of section 2; (d) property means the following capital asset of the assessee, namely: (i) immovable property being land or building or both; (ii) shares and securities; (iii) jewellery; (iv) archaeological collections; (v) drawings; (vi) paintings; (vii) sculptures; (viii) any work of art; or (ix) bullion; 7. The aforesaid provision of Sec. 56(2)(vii)(c) of the Act was inserted vide amended Act with effect fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o take effect from 1st June 2010 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years. B. The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income under the garb of gifts, particularly after abolition of the Gift Tax Act. The provisions were intended to extend the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. It is, therefore, proposed to amend the definition of property, so as to provide that section 56(2)(vii) will have application to the property which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient. C. In several cases of immovable property transactions, there is a time gap between the booking of a property and the receipt of such property on registration, which results in a taxable differential. It is, therefore, proposed to amend clause (vii) of section 56(2) so as to provide that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a large number of shares and hence no addition under Sec. 56(2)(vii)(c) would arise. It was, therefore, held that if the shares are allotted strictly on proportionate basis based on existing shareholding, then though the provisions per se are applicable, but will not operate adversely because the gain accruing on allotment of fresh shares will be offset by the loss in value of existing shares. 10. The Tribunal, in support of its finding relied upon the decision in the case of Deputy Commissioner of Income Tax, Circle-2, Jaipur Vs. Smt. Veena Goyal, reported in 119 taxmann.com 362 (Jaipur Trib.) and on a decision in the case of Income-tax Officer Vs. Rajeev Ratanlal Tulshyan, reported in 136 taxmann.com 42 (Mumbai Trib.). The Tribunal, therefore held that the provisions of Sec. 56(2)(vii)(c) would not apply in respect of allocation of 1,03,000 right shares allotted to the assessee proportionate to its share holding in the company. 11. With regard to the issue whether the section 56(2)(vii)(c) of the Act can be invoked in respect of additional 82,200 shares received by the assessee since the wife and father of the assessee did not exercise the rights issued and ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Trib.), wherein, it is held that in case the balance sheet was not drawn on the date of allotment, the previous balance-sheet which was approved in the AGM has to be considered for valuation of FMV of the shares. The Tribunal, therefore, held that since the shares were allotted before balance-sheet for A.Y 2013-14, the CIT(A) did not erred in computing the FMV per share considering the previous balance-sheet approved in AGM for valuation of FMV of the shares. 14. Mr. Varun Patel, learned Senior Standing Counsel appearing with Mr. Dev D. Patel, learned advocate for the revenue, would submit that the CIT(A) erred in law in holding the addition under Sec. 56(2)(vii)(c). He would further submit that the CIT(A) erred in law and on facts adopting the valuation of shares at Rs. 205 per share instead of Rs. 255 per share determined by the Assessing Officer as per Rule 11UA(1)(c)(b). 15. Mr. B.S. Soparkar, learned counsel appearing for the assessee would support the order of the CIT(A) holding that the provisions of Sec. 56(2)(vii)(c) cannot be invoked as was rightly held by the appellate authority, as what was found by the appellate authority that the additional 82,200 shares r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch allotment. Therefore, there is a difference between issue of a share to a subscriber and the purchase of a share from an existing shareholder as in the first case, because, the first case is that of creation, whereas, the second is that of transfer entitle to the right in action. 18. In view of the above, the provisions of Sec. 56(2) would not be applicable to the issue of new shares which is also submitted by the explanatory notice to the Finance Bill, 2010, wherein, it is clarified that Sec. 56(2)(vii)(c) of the Act ought to be applied only in the case of transfer of shares. It is trite law that allotment of new shares cannot be regarded as transfer of shares. Therefore, in order to apply the provisions of Sec. 56(2)(vii)(c), there must be an existence of property before receiving it. As per advanced Law Lexicon Dictionary, the term receive has been defined as To receive means to get by a transfer, as to receive a gift, to receive a letter or to receive money and involves an actual receipt. Issue of new shares by company as a right shares is creation of property and merely receiving such shares cannot be considered as a transfer under Sec. 56(2)(vii)(c) and according ..... X X X X Extracts X X X X X X X X Extracts X X X X
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