ACIT, CENTRAL CIRCLE-1, VISAKHAPATNAM vs. SIREESHA YARLAGADDA, SRIKAKULAM

PER BENCH: The present appeals filed by the Revenue in the case of the aforementioned assessees are directed against the respective orders passed by the Commissioner of Income Tax (Appeals), Visakhapanam-3 (for short, “CIT(A)”), dated 28/08/2025, which in turn arises from the respective orders passed by the Assessing Officer (for short, “AO”) under section 19/05/2023 for Assessment Year (AY) 2014-15. As the common issues are involved in the aforementioned appeals, the same are being taken up and disposed of vide a consolidated order. We shall first take up the appeal in ITA No.642/Viz/2025 as a lead matter and the order therein passed shall apply mutatis mutandis for the purpose of disposing of the other appeal. The Revenue has assailed the impugned order of the CIT(A) on the following grounds of appeals before us: “1. The order of the Ld. CIT(A) is erroneous both on facts and in law. 2. The Ld. CIT(A) has erred in deleting the addition of Rs.5.39,76,840/- made towards deemed income u/s.56 of the I.T. Act, 1961. 3. On the facts and in the circumstances of the case, the Ld. CIT(A), erred in relying upon the Hon'ble ITAT decision in ITA No.272/VIZ/2018 dt 30.09.2019 wherein it was held that the excess benefit passed on to the assessee was out of the shareholding held by his brother, completely ignoring the fact that 80400 shares were allotted to the assessee directly by the company Sardar Projects Pvt. Ltd.' as part of fresh allotment of shares made by the company to other persons, including the assessee. 4. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in relying upon the Hon'ble ITAT decision in ITA No.272/VIZ/2018 dt.30.09.2019 wherein it was held that 80400 shares allotted to the assessee were from the shareholding interest of his relative and the case is covered by the Proviso to section 56(2)(vii)(c)(ii) of the Income-tax Act, completely ignoring the fact that no shares were transferred to the assessee by his relative and all of the 80400 shares were allotted by the company Sardar Projects Pvt. Ltd., as part of fresh allotment of shares. 5. On the facts and in the circumstances of the case the Ld. CIT(A) erred in deleting the addition made u/s.56(2)(vii)(c)(ii) of the Income-tax Act, 1961 by holding that the difference in the FMV of the shares and the consideration paid by the assessee is covered by the exemption clause provided under that section, notwithstanding the fact that no shares were acquired by the assessee from his relative and the entire 80400 shares were allotted to the assessee by the company as a part of fresh allotment shares and therefore, the Proviso to section 56(2)(vii)(c)(ii) of the Income-tax Act, is not applicable to the present case. 6. The Ld. CIT(A) has erred by not taking into consideration the fact that the Department has filed appeal before the Hon'ble High Court, against the ITAT order on which Ld. CIT(A) relied upon and which is still pending. 7. Any other grounds that may arise at the time of hearings. Also, the assessee is before us as a cross objector on the following grounds of appeal: 1. “The learned Commissioner of Income Tax (Appeals) is not justified in holding that the issue of notice u/s 148 is not barred by limitation.

Sardar Projects Private Limited allotted to the assessee, as per the value determined under Rule 11(U) and 11(UA) of the Income Tax Rules, 1962 at Rs.676.55 (on 05/04/2013) and Rs.14.71 (on 26/03/2014) worked out the deemed income of the assessee under section 56(2)(vii)(c)(ii) of the Act at Rs.5,39,76,840/-. Accordingly, the AO vide his order passed under section 147 of the Act, dated 19/05/2023 determined the income of the assessee at Rs.5,45,76,810/- a/w agricultural income of Rs.66,880/-.

5. The Revenue, aggrieved with the order of the CIT(A) to the extent he vacated the addition of Rs.5.35 crores (approx.) has carried the matter in appeal before us.

reliance upon the judgment of the Hon'ble High Court of Gujarat in Jigar Jashwantlal Shah v. Principal Commissioner of Income-tax-1 (2024) 468 ITR 628 (Guj) and the decision of the ITAT, Hyderabad in Thermodyne Dynamics Private Limited v. ITO, ITA 500/Hyd/2020, dated 03/07/2025. The learned AR submitted that the Tribunal in the case of Thermodyne Dynamics Private Limited v. ITO (supra), after considering the statutory provisions and the law laid down by the Hon'ble Supreme Court in Khoday Distilleries Ltd. v. CIT (2008) 307 ITR 312 (SC), has categorically held that a fresh allotment of shares does not amount to receipt of property from another person within the meaning of section 56(2)(vii) of the Act. Carrying his contention further, the Ld. AR submitted that now, as per the settled position of law, the fresh allotment of shares of M/s Sardar Projects Private Limited to the assessee company, could not be brought within the meaning of Section 56(2)(vii)(c) of the Act, the impugned addition made by the AO cannot be sustained, and on that count itself is liable to be quashed.

obtained property for inadequate consideration, the manner in which the property came into existence is irrelevant for the purposes of the charging provision.

and they come into existence only upon allotment. On the other hand, a transfer involves the passing of an existing share from one holder to another. We may herein observe that the Hon'ble Supreme Court in Khoday Distilleries Ltd. v. CIT (2008) 307 ITR 312 (SC) recognized this distinction and explained that the allotment of shares is the creation of shares, not the transfer of existing shares. It was observed that the allottee obtains a right in the newly created shares on the basis of the allotment and not by way of transfer of a pre-existing asset from another person.

“23. We have thoughtfully considered the contentions advanced by the Ld. Authorized Representatives of both parties in the backdrop of the orders of the lower authorities. It is the claim of the Ld. AR that the provisions of Section 56(2)(viia) that have been made available on the statute vide the Finance Act, 2010, w.e.f 01.06.2010 are applicable only in the case of “transfer” of shares and not in a case of a “fresh allotment”. On a perusal of Section 56(2)(viia) of the Act, we find that the same is applicable where a firm or company, not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010 [but before the 1st day of April, 2017], any property, being shares of a company not being a company in which the public are substantially interested, viz. (i). without consideration; or (ii). for a consideration that is less than the FMV of such property. We find substance in the Ld. AR’s claim that as Section 56(2)(viia) has as a pre-condition of receipt of shares by an assessee, i.e a firm or company (not being a company in which public are substantially interested), therefore, the said shares must be in existence failing which the section in itself will be rendered as unworkable. We find that the Hon’ble Supreme Court in the case of M/s Khoday Distilleries Ltd. Vs. CIT & Anr. (2008) 307 ITR 312 (SC), has held that there is a difference between the issue of a share to a subscriber and the purchase of a share from an existing shareholder. The Hon'ble Apex Court after drawing support from its earlier order in the case of Sri. Gopal Jalan & Company Vs. Calcutta Stock Exchange Association Ltd. 1964 (3) SCR 698, has observed that it is only on “allotment” that the shares come into existence, and till such an allotment the shares do not exist at all. Further, it was observed that “allotment” indicates the creation of shares by appropriation out of the unappropriated share capital to a particular person and that such creation does not amount to transfer. We thus, in the backdrop of the aforesaid settled position of law are of the firm conviction that the allotment of 3,15,00,000 shares of M/s. Kineta Metals and Minerals Limited (supra) to the assessee company on 02.07.2012 (supra), i.e creation of shares by appropriation out of the unappropriated share capital cannot be brought within the meaning of receipt of shares, which is a pre-condition for invoking the provisions of Section 56(2)(viia) of the Act. 24. We further find that our aforesaid view that the provisions of Section 56(2)(viia) of the Act cannot be invoked regarding the fresh allotment of 3,15,00,000 shares of M/s. Kineta Metals and Minerals Limited (supra) to the assessee company on 02.07.2012 is supported by the judgment of the Hon'ble High Court of Gujarat in the case of Pr. CIT Vs. Jigar Jashwantlal Shah (2024) 460 ITR 628 (Guj). The indulgence of the Hon'ble High Court in the aforementioned case was, inter alia, sought by the revenue for adjudicating the scope of a similarly worded Section 56(2)(vii)(c) of the Act on the following question of law:- "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?

In the case before the Hon'ble High Court the assessee was allotted 2,00,000 right shares of M/s. Kintech Synergy Limited at a face value of Rs.10/- per share, which comprised of, viz. (i) 1,03,000 equity shares (right shares) allotted to the assessee as per his proportionate shareholding; (ii) 82,200 equity shares (right shares) allotted to the assessee due to renouncement of the rights in his favor by his wife and his father; and (iii) 14,800 equity shares were allotted to the assessee as a result of third party shareholder renunciation in favor of the assessee. The assessee had, inter alia, claimed that as the shares were not "received" by transfer but allotted by way of right shares allotment, hence, the provisions of Section 56(2)(vii)(c) of the Act did not apply to such allotment of shares by the company. However, the aforesaid claim of the assessee was rejected by the A.O who after considering the "Fair Market Value" (FMV) of the shares to the extent the same exceeded the consideration paid by the assessee for receipt of shares brought the difference in the said value to tax under Section 56(2)(vii)(c) of the Act. 25. On appeal, the Hon'ble High Court by drawing support from the judgment of the Hon’ble Supreme Court in the case of M/s Khoday Distilleries Ltd. Vs. CIT & Anr. (2008) 307 ITR 312 (SC) and the “Explanatory notes” to the Finance Bill, 2010, inter alia, observed that as the shares had come into existence only when the allotment was made by the company as right shares, therefore, the same could not be said to have been "received from any person", which was the fundamental requirement for invoking the provisions of Section 56(2)(vii)(c) of the Act. The Hon'ble High Court was of the view that the intention of the legislature that the property must pre-exist for triggering the provisions of Section 56(2)(vii)(c) of the Act could safely be gathered from the words used in the said statutory provision. For the sake of clarity, the observations of the Hon’ble High Court are culled out as under (relevant extract): "6. Sec.56(2)(vii)(c) of the Act, reads as under: "56 .... xxx xxx xxx (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely:-- xxx xxx xxx (vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009 but before the 1st day of April, 2017,-- xxx xxx xxx (c) any property, other than immovable property,-- (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that where the stamp duty value of immovable property as referred to in sub-clause (b) is disputed by the assessee on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub- section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of sub- clause (b) as they apply for valuation of capital asset under those sections : Provided further that this clause shall not apply to any sum of money or any property received-- (a) from any relative; or (b) on the occasion of the marriage of the individual; or (c) under a will or by way of inheritance; or (d) in contemplation of death of the payer or donor, as the case may be; or (e) from any local authority as defined in the Explanation to clause (20) of section 10; or (f) from any fund or foundation or university or other educational institution or hospital or other medical institution 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 from 01.07.2010. Explanatory notes explaining the provisions of Finance Bill reads as under: "Taxation of certain transactions without consideration or for inadequate consideration Under the existing provisions of section 56(2)(vii), any sum of money or any property in kind which is received without consideration or for inadequate consideration (in excess of the prescribed limit of Rs.50,000) by an individual or an HUF is chargeable to income-tax in the hands of recipient under the head 'income from other sources'. However, receipts from relatives or on the occasion of marriage or under a will are outside the scope of this provision. The existing definition of property for the purposes of section 56(2)(vii) includes immovable property being land or building or both, shares and securities, jewellery, archeological collection, drawings, paintings, sculpture or any work of art. A. These are anti-abuse provisions which are currently applicable only if an individual or an HUF is the recipient. Therefore, transfer of shares of a company to a firm or a company, instead of an individual or an HUF, without consideration or at a price lower than the fair market value does not attract the anti-abuse provision. In order to prevent the practice of transferring unlisted shares at prices much below their fair market value, it is proposed to amend section 56 to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which public are substantially interested). Section 2(18) provides the definition of a company in which the public are substantially interested. It is also proposed to exclude the transactions undertaken for business reorganization, amalgamation and demerger which are not regarded as transfer under clauses (via), (vic), (vicb), (vid) and (vii) of section 47 of the Act. Consequential amendments are proposed in- (i) section 2(24), to include the value of such shares in the definition of income; (ii) section 49, to provide that the cost of acquisition of such shares will be the value which has been taken into account and has been subjected to tax under the provisions of section 56(2). These amendments are proposed to 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 it would apply only if the immovable property is received without any consideration and to remove the stipulation regarding transactions involving cases of inadequate consideration in respect of immovable property. These amendments are proposed to take effect retrospectively from 1st October, 2009 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years. D. It is proposed to amend the definition of 'property' as provided under section 56 so as to include transactions in respect of 'bullion'. This amendment is proposed to take effect from 1st June, 2010 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years.

E. It is proposed to amend section 142A(1) to allow the Assessing Officer to make a reference to the Valuation Officer for an estimate of the value of property for the purposes of section 56(2). This amendment is proposed to take effect from 1st July, 2010." 8. Conjoint reading of the provision as well as the explanatory note of the said provision, it is clear that only when an individual or a HUF receives any property for consideration which is less than the FMV, the provisions of Sec.56(2)(vii)(c) would be attracted. In the facts of the case, the shares had come into existence only when the allotment is made by the company as right shares cannot be said to be "received from any person". The shares which have been allotted to the assessee were not "received from any person" which is the fundamental requirement for invoking sec.56(2)(vii)(c). In other words, the property must pre-exist for application of Sec.56(2) (vii)(c), which is clear from the intention of the legislature. **** **** **** 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 tern "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." Issu 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 accordingly, such provision would not be applicable on the issuance of shared by the Company in the hands of the allottee. 19. The Apex Court in the case of Khoday Distilleries Ltd. vs. CIT reported in [2008] 307 ITR 312 (SC) (176 Taxmann 142)], after referring to the decision in the case of Shri Gopal Jalan & Co. vs. Calcutta Stock Exchange Association Ltd., reported in 1964 (3) SCC 698, 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 transferring unutilized shares at a price which are allotted for the first time by way of right shares. The amendment is therefore never meant to aim the "fresh issue" or "fresh allotment" of shares by a company. **** **** **** ” (emphasis supplied by us)

16. Coming to the facts of the present case before us, we find that 80,400 equity shares were admittedly allotted by M/s. Sardar Projects Private Limited to the assessee as part of a fresh issue of share capital. In fact, the AO himself has proceeded on the footing that the company allotted the shares to the assessee at a value lower than the fair market value. In our view, once the transaction is accepted as a fresh allotment and not a transfer of existing shares, the ratio laid down by the coordinate bench in Thermodyne Dynamics Private Limited v. ITO (supra) squarely governs the controversy before us.

construction. In the absence of clear statutory language bringing fresh allotment of shares within their ambit, the provision cannot be extended by implication to transactions not expressly covered by Parliament. The Cross Objection filed by the assessee is accordingly allowed in terms of our aforesaid observations.

ITA 643/Hyd/2025 & CO 44/Hyd/2025

22. As the facts and the issue involved in the present appeal remain the same as were before us in the ITA 642/Hyd/2025 and CO 43/Hyd/2025, as had been adjudicated by us hereinabove, therefore, the order therein passed shall apply mutatis mutandis to the present case.

Order pronounced in the open court on 15th July, 2026.

Sd/- Sd/- OMKARESHWAR CHIDARA RAVISH SOOD ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad. Dated: 15th July, 2026. Copy to: ACIT, CENTRAL CIRCLE-1, ROOM NO.503 5th FLOOR, DIRECT TAXES BUILDING, 1 SECTOR 8 MVP COLONY, VISAKHAPATNAM-530017, ANDHRA PRADESH (i) RAMESH CHANDRA YARLAGADDA, 2-198/1 REVENUE WARD NO 6, GUDLAVANIPALEM, VISAKHAPATNAM-530045, 2 ANDHRA PRADESH (ii) SIREESHA YARLAGADDA, NH-5 ROAD, BINNALA VILLAGE, SRIKAKULAM-532242, ANDHRA PRADESH 3 THE PCIT, VISAKHAPATNAM. 4 THE D.R., ITAT, VISAKHAPATNAM BENCH 5 GUARD FILE