DCIT, CIRCLE-2, JAIPUR vs. SMT. VEENA GOAYAL, JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES “A”, JAIPUR Jh jes'k lh 'kekZ] ys[kk lnL; ,oa Jh lanhi x®lkÃa] U;kf;d lnL; ds le{k BEFORE: SHRI RAMESH C SHARMA, AM & SHRI SANDEEP GOSAIN, JM vk;dj vihy la-@ITA No. 75/JP/2020 fu/kZkj.k o"kZ@Assessment Year :2013-14 D.C.I.T., cuke Smt. Veena Goyal, 76, Vs. Circle-2, Dhuleshwa Garden, Ajmer Jaipur. Road, Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: ACPPG 7004 F vihykFkhZ@Appellant izR;FkhZ@Respondent vk;dj vihy la-@ITA No. 76/JP/2020 fu/kZkj.k o"kZ@Assessment Year :2013-14 D.C.I.T., cuke Smt. Kajal Goyal, 76, Vs. Circle-2, Dhuleshwa Garden, Ajmer Jaipur. Road, Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: ACPPG 7003 C vihykFkhZ@Appellant izR;FkhZ@Respondent jktLo dh vksj ls@ Revenue by: Smt. Runi Paul (Addl.CIT-DR) fu/kZkfjrh dh vksj ls@ Assessee by: Shri Manish Tantiwala (CA) lquokbZ dh rkjh[k@ Date of Hearing : 07/09/2020 mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : 15/09/2020 vkns'k@ ORDER PER: R.C. SHARMA, A.M. These are the appeals filed by the revenue against the separate orders of ld. CIT(A)-I, Jaipur dated 19/11/2019 for the A.Y. 2013-14 in the matter of order passed U/s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 (in short, the Act).

2 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr 2. Common grounds have been taken by the revenue in both these appeals and both the assessees are related persons, therefore both these appeals are heard together and disposed of by this consolidated order.

3 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr therefore her account never represented a debit balance. However, two Cheque of Rs. 35,00,000/- each which were credited in the books on 01.02.2013 & 2.2.2013 but the cheques was presented by the company after some time but during the current financial year, in the books of the assessee there was a credit balance of Rs 20,00,000/- on 4.2.2013 even after debit of Rs 70 Lacs for Share Application money but the learned ACIT has treated the same as deemed dividend u/s 2(22)(e) of the Income Tax Act and made the addition.

4 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr

5 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr (iv) Thus, during the survey also, the appellant clarified that the debit balance occurred in the books of accounts of the company on account of delay in clearance of cheques issued against the allotment of shares. It is also noted from the accounts produced by the appellant that after the clearance of the cheques against the allotment of shares, the balance of the appellant in the books of accounts of the company again became credit of Rs. 20,00,000/-. While making the addition, the AO considered the debit balance in the books of the company while the keyword used in the section 2(22)(e) of the Act is that payment to the shareholder is to be made by way of advance or loan. In the present case, the debit balance occurred not because of any payment was made by the company to the shareholder rather it was due to journal entry passed by the company regarding allotment of fresh shares. The AO has made the addition by considering the other conditions like percentage of holding, reserves and surplus etc. but completely missed the basic principle that the provisions of section 2(22)(e) of the Act can be applied only when the debit balance occurred against the shareholder on account of advance or loan. The fact of allotment of shares by the company and payment made by the appellant is not denied by the AO, rather addition on account of same has also been made under different provisions of the Act. In view of the above and totality of the facts, the addition made by the AO on account of deemed dividend u/s 2(22)(e) of the Act is deleted.

6 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr not in default of making payment for value of shares applied for on her part. The Company M/s Pinkcity Jewelhouse Pvt. Ltd. did not present the cheque for claim before making the allotment and on allotment of shares on 4.2.13 debited the value of shares to the ledger account of the assessee, thus in fact there was no debit balance as on 4.02.2013. But the learned assessing officer due to the fact the cheque were cleared later on treated Rs 50 Lacs as deemed dividend.

7 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr entries in the books of accounts are required to be made on the basis of transactions entered which is the receipt of cheque, which was subsequently honoured by the bank, hence the entries appearing in the ledger account is correct and same cannot be ignored and balance cannot be worked out on notional basis and even if he wants to do the same, then also the amount was never paid to the Share Holder but in fact was received from the Share Holder and the date of debit should also be transferred to the date on which the amount was cleared. And as discussed earlier in no way by this company has paid any amount to the shareholder and thus provisions of section 2(22)(e) are not applicable.

8 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr of the ld. CIT(A) for deleting the addition so made. Hence, we uphold the same.

“3.2.2 Determination:

(i) As discussed during the year, the appellant was allotted 11,20,000 additional shares by M/s Pinkcity Jewel House Pvt. Ltd. The above shares were allotted at Rs. 10/- of face value only. The AO noted that the FMV of such shares at the time of allotment, as per the books of accounts of the company was Rs. 20.37. As the share's were allotted at Rs. 10/- only, the AO treated the difference of Rs. 10.37 as benefit transferred to the appellant. Considering the provision of section 56(2)(vii)(c) of the Act, the AO taxed Rs.1,16,14,400/- (11,20,000 * 10.37) as deemed income of the

9 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr appellant. The relevant portion of the assessment order is reproduced as under:

"8. ADDITION ON A/C SHARE ALLOTMENT U/S 56(2)(Vii)(C

Further, as mentioned above in the reasons recorded for re-opening of the case, the assessee was allotted 11,20,000 shares by M/s Pinkcity Jewel House Pvt. Ltd. Jaipur and the assessee is also a director in the said company. The shares were allotted on face value of Rs. 10/- only. Whereas as per the section 56(2)(vii)(c) the value of the share at the time of allotment is of Rs. 20.37, thus it can clearly be concluded that the shares were issued, less by Rs. 10.37 than the fair market value, therefore difference required to be added as income in the hands of director assessee. Out of total shares issued by the company i.e. 32,00,000 the assessee was allotted 11,20,000 shares. Thus difference of Rs. 10.37 on these share which come to Rs. 1,16,14,4001 (1120000 X 10.37) is deemed to be an income of the assessee and to be assessed under the head " Income from Other Sources". In this regard the section 56(2)(vii)(c) reads as under: " 56. (2) In particular, and without prejudice to the generality of the provisions of sub-section(I), the following incomes, shall be chargeable to income-tax under the head "Income from Other sources", namely :-(vii) where an individual or a hindu undivided family receives, in any previous year, from any persons or persons on or after the 1st day of October, 2009 but before the 1st day of April, 2017. 1…………. 2…………. 3. any property, other than immovable property -, (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding

10 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr fifty thousand rupee. the aggregate fair market value of such property as exceeds such consideration : By a plain reading of the above section, it can be clearly hold that the section 56(2)(vii)(c) is dewy applicable in the case of the assessee, as the assessee has received 11,20,000 share below the fair market value by Rs. 10.37. The assessee has already been provided ample opportunity to explain her case, but she has failed to do so and it can also be hold that the assessee having nothing to say in this regard in her defence. Thus, an amount of Rs. 1,16,14,4001 is being added into the total income of the assessee under the head "Income from Other Sources" (ii) In the appellate proceedings, it was contended that during the year only additional shares were allotted to all the shareholder of the company in proposition to the existing shareholding of the shareholder in the company. It was submitted that the appellant's share in company before allotment of additional shares was 35% which also remained at 35% even after allotment of additional shares. The appellant relied on the judgment of Hon'ble ITAT in the case of M/s Sudhir Menon HUF vs. AC IT (2014) 103 DTR 0145 (Mum ITAT) wherein it was held that as long as there no disproportional allotment of shares, there is no scope for any property being received by the taxpayer and addition u/s 56(2)(vii)(c) of the Act cannot be made. The appellant also filed the working to show that after allotment of additional shares. the average value per share has also reduced and after taking into account the payment made by the appellant: no gain has arisen in hands of the appellant.

(iii) I have duly considered the submissions of the appellant, assessment order and the material placed on record. The shareholding pattern of the M/s Pinkcity Jewel House Pvt. Ltd

11 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr

before and after the allotment of additional shares, as submitted by the appellant, is as under: "Memberwise Share Holding Pattern and Analysis S.No. Category Name No of Shares % of Share No of Shares % of Share As Holding As Holding on 31.3.2012 on 31.3.2013 1 Director Manuj Goyal 1353000 30% 2313000 30% 2 Share Holder Veena Goyal 1578500 35% 2698500 35% 3 Director Kajal Goyal 1578500 35% 2698500 35%

Total 4510000 100% 7710000 100%

No of Shares Allotted During FY 2012-13 S.No.. Category Name No of Shares No of Shares % of Share No Of As Allotted Allotment Shares As on 31.3.2012 during FY on 31.3.2013 2012.13

1 Director Manuj Goyal 1353000 960000 30% 2313000

2 Share Holder Veena Goyal 1578500 1120000 35% 2698500

3 Director Kajal Goyal 1578500 1120000 35% 2698500

Total 4510000 3200000 100% 7710000

(iv) From the above table, it can be seen that initially 45,10,000 shares were allotted by the company in which 15,78,500 were held by the appellant having 35% shareholding. During the year, the company issued 3200000 additional shares in which 11,20,000 shares were allotted to the appellant. Thus, after allotment out of total shares of 77,10,000 of the company, the

12 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr appellant was holding 26,98,500 shares having 35% shareholding. Thus, even after allotment of additional shares, the shareholding percentage of the appellant in the company remained the same. Similar issue came up before Hon'ble ITAT, Mumbai in the case of Sudhir Menon HUF vs. ACIT (2014) 103 DTR 0145 (Mum ITAT) on which the appellant has also relied. The Hon'ble ITAT while deciding the above issue held as under:

"Income—Computation of income—Income from other sources— Assessee, held 15,000 shares in company 'X' where entire capital was held by family members of assessees karta's family—Assessee was offered certain additional shares on proportionate basis at face value rate of Rs. 100 each—Book value of shares of X' was Rs.1,538 per share, which was to be adopted as measure of their fair market value (FMV) u/r. 11U and 11 UA—AO, treating difference of money per share as extent of inadequate consideration in terms of section 56(2)(vii)(c), toward acquisition of additional shares, brought same to tax—Order of AO confirmed in appeal—Held, section 56(2)(vii)(c) would be attracted whenever individual or HUF receives property without consideration, FMV of which was in excess of Rs.50,000, or where difference between FMV and such consideration exceeds amount . specified—Issue of additional/bonus shares was capitalization of profit by issuing-company—There was neither any increase nor decrease in wealth of shareholder or of issuing company on account of bonus issue—As long as there was no disproportionate allotment, there was no scope for any property being received by shareholders on allotment of bonus shares—Section 56(2)(vii)(c) would apply uniformly for all capital assets, drawing no exception for any particular class or category of specified Assets, as 'right' shares—No addition u/s. 56(2)(vii)(c) would arise—Language employed in statue would be determinative factor of legislative intent— Foundational basis of any interpretation, would be found from words used by Legislature itself—Consequences would not alter meaning of statutory provision where such meaning is plain and unambiguous—'Income' being word of widest 'amplitude, would include gains derived in any manner=Provision of section 56(2)(vii)(c) would not apply and specified amount could not be assessed as income in hands of

13 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr assessee on ground of inadequate consideration—Appeal partly allowed. Held Section 56(2)(vii)(c) gets attracted whenever an individual or Hindu undivided family (HUF) receives without consideration a property (as defined) the FMV of which is in excess of Rs.50,000/-, or where at a consideration the difference between the FMV and such consideration exceeds the said amount Issue of bonus shares is by definition capitalization of its profit by the issuing-company. There is neither any increase nor decrease in the wealth of the shareholder (or of the issuing company) on account of a bonus issue, and his percentage holding therein remains constant." Thus, the Hon'ble ITAT while deciding the allotment of additional (v) shares on proportional basis, held that as long as additional shares are allotted on prorata to the shareholders based on their existing shareholding, no additional property can be said to have been received by the shareholder. On the allotment of additional shares to the extent the value of the property in the additional shares is derived from that of the existing shareholding on the basis of which, the same are allotted, there being only an apportionment of the value of their existing shareholding over a large number of shares and therefore, section 56(2)(vii)(c) of the Act, though per se applicable to the transaction of this genre, is not attracted in such a case. Thus, the Hon'ble ITAT held that in case of proportional allotment of additional shares at par the provisions of section 56(2)(vii)(c) of the Act will not apply. In the case of the appellant, the shareholding with the appellant was 35% before allotment of additional shares which also remained at 35% after allotment of additional shares. Therefore, there is no change in shareholding pattern of the company and all the shareholder were allotted additional shares on proportional basis. Thus, it amounts to capitalization of profit of the company and does not result into any additional gain in the hands of the

14 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr appellant. Further, as per working submitted by the appellant It is seen that after allotment of additional shares, the average value per share has also reduced and after taking into account the payment made by the appellant, no gain has arisen in hands of the appellant. In view of the above discussion and judicial pronouncement, no (vi) addition is justified in the hands of the appellant. The addition made by the AO amounting to Rs. 1,16,14,400/- is deleted.” 14. Against the above order of the ld. CIT(A), the revenue is in appeal before the ITAT.

15 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr Chemicals Pvt. Ltd. Offered additional shares 313624 shares to Sudhir Mennon HUF (shareholder), the HUF subscribe and was allotted 1,94,000 shares at the face value of Rs. 100/- each. The book value of shares as at 31.03.2009 was Rs. 1538/-. The assessing officer treated the difference of Rs. 1438/- per share (Rs. 1538/- - Rs. 100/-) as inadequate consideration u/s 56(2)(vii)(c) of the Act and taxed Rs. 27 lacs as additional income in the hands of the assessee. The Mumbai ITAT following the Judgment of the Hon’ble Supreme Court in the case of Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC) and Hon’ble Bombay High Court in the case of H. Holck Larsen vs. CIT (1972) 85 ITR 285 (Bom) held that 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, no addition u/s 56(2)(vii)(c) of the Act would arise in the present case. In view of the decision of the Hon’ble Supreme Court in the case of Dhun Dada Bhoy Kapadia vs. CIT (supra) as follows in the case of Sudhir Mennon HUF vs. ACIT (supra) before concluding that the difference of Rs. 10.37 can be treated as inadequate consideration or not, the ACIT had to work out prorate holding of the shares prior to allotment of 1120000 shares and after allotment of the same, as it is a settled decision of the Hon’ble Supreme Court. That the Mumbai Bench of ITAT in the case of ACIT Vs Subodh Mennon 198 TTJ

16 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr (Mumbai) 79 (2019) have held that only when a higher than a propionate allotment of fresh shares issued by a company is received by a shareholder, the provisions of section 56(2)(vii) get attracted; provisions of section 56(2)(vii) are not applicable to the facts of the case. The facts of the case were that the existing shareholders of the company were allotted additional shares below book value assessee held 104179 shares which was equivalent to 34.57% of total issued share capital, based on the existing shareholding of 34.57 % the assessee was offered 21,78,204 shares at face value of Rs 100 per share. Assessee accepted part offer of the Shares only to the extent of 20,94,032 shares consequently his shareholding came down from 34.57 % to 33.30 %. The ITAT held that the addition under 56(2)(vii)(c) being the difference between alleged fair market value of shares and the subscribed value of shares was not sustainable. It is only when a higher than propionate allotment of fresh shares issued by a company is received by a shareholder, the provisions of section 56(2)(vii) get attracted.

17 ITA 75 & 76/JP/2020_ DCIT Vs. Smt. Veena Goyal & 1 Anr 18. Now we take ITA No. 76/JP/2020. In this appeal, the grounds taken by the revenue are exactly same as ITA No. 75/JP/2020. Facts and submissions are also identical to the facts and submissions made in ITA No. 75/JP/2020, therefore, following the reasoning given in ITA No. 75/JP/2020 hereinabove in case of Smt. Veena Goyal, we do not find any infirmity in the order of the ld. CIT(A) and we uphold the same. This appeal of the revenue is dismissed.

Sd/- Sd/- ¼lanhi x®lkÃa½ ¼jes'k lh 'kekZ½ (SANDEEP GOSAIN) (RAMESH C SHARMA) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 15/09/2020 *Ranjan आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू vihykFkhZ@The Appellant- The DCIT, Circle-2, Jaipur. 1. izR;FkhZ@ The Respondent- (i) Smt. Veena Goyal, Jaipur. 2. (ii) Smt. Kajal Goyal, Jaipur. vk;dj vk;qDr@ CIT 3. vk;dj vk;qDr¼vihy½@The CIT(A) 4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5. xkMZ QkbZy@ Guard File (ITA No. 75 & 76/JP/2020) 6. vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत