THE DCIT, CENTRAL CIRCLE-1(3), AHMEDABAD vs. SURAJ IMPEX PVT.. LTD., AHMEDABAD

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ITSSA 13/AHD/2019Status: DisposedITAT Ahmedabad10 June 2024AY 2014-159 pages

In favour of the assessee: the Revenue's appeal was dismissed. From the AI summary of this appeal.

AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that the provisions of Section 56(2)(viia)(ii) of the Income Tax Act, 1961, were not attracted in the case. The Tribunal analyzed the conditions for invoking Section 56(2)(viia), which include the requirement that the shares received must be of a company 'not being a company in which the public are substantially interested.' The Tribunal noted that the shares purchased by the assessee were of Suraj Ltd. (formerly Suraj Stainless Ltd.), which was a listed company and therefore a company in which the public are substantially interested. As this condition was not fulfilled, the provisions of Section 56(2)(viia) could not be invoked. Consequently, the addition of Rs. 8,18,11,345/- treating the difference between the purchase price and the fair market value as 'Income from Other Sources' was deleted. The Tribunal found that the Ld. CIT(Appeals) had correctly observed that the provisions of Section 56(2)(viia)(ii) were not attracted. The Tribunal dismissed the Revenue's appeal on merits.

What were the facts?

The Revenue has appealed against the orders of the CIT(Appeals) for Assessment Years 2013-14 and 2014-15. The assessee, M/s. Suraj Impex Pvt. Ltd., purchased 19,05,250 shares of Suraj Stainless Ltd. on May 3, 2012, off-market at Rs. 13.56 per share from a related company, Suraj Enterprise Ltd. The Assessing Officer (AO) noted that the lowest traded price of Suraj Stainless Ltd. on the stock exchange on that day was Rs. 56.50 per share. The AO determined a benefit of Rs. 8,18,11,345 to the assessee, calculated as the difference between the fair market value (FMV) and the purchase price. The AO added this amount to the assessee's total income, viewing the transaction as an attempt to gain an advantage by trading listed shares off-market below FMV. The shares were subsequently sold back to Suraj Enterprise Ltd. in the same year at the same purchase price.

What were the issues?

1. Whether the provisions of Section 56(2)(viia)(ii) of the Income Tax Act, 1961, are applicable to the assessee's purchase of shares of a listed company at a price below its fair market value, when the transaction was conducted off-market. Assessee's contention: The assessee argued that Section 56(2)(viia)(ii) is not applicable because one of its essential conditions is that the shares purchased should be of a company 'not being a company in which the public are substantially interested.' Since Suraj Stainless Ltd. was a listed company, this condition was not met. The assessee also contended that off-market transactions are recognized by SEBI and are not prohibited. The assessee relied on the Ld. CIT(Appeals)'s finding that the AO did not clearly specify the provision under which the addition was made, but it was evident that Section 56(2)(viia)(ii) was invoked. Revenue's contention: The Revenue argued that considering the entirety of the transaction within the group, the assessee purchased shares off-market and sold them to a related party to create a loss within the group.

Which sections of the Income-tax Act were involved?

Section 56(2)(viia)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, AHMEDABAD “A” BENCH

Before: Smt. Annapurna Gupta & Shri Siddhartha Nautiyal

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “A” BENCH Before: Smt. Annapurna Gupta, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member

IT(SS)A Nos: 12 & 13/Ahd/2019 Assessment Years: 2013-14 & 2014-15 The DCIT, M/s. Suraj Impex Pvt. Ltd., Central Circle-1(3), Suraj House, Ahmedabad Vs Vidyanagar Society, Opp. Usmanpura Garden, Usmanpura, Ahmedabad PAN: AACCS9971R (Appellant) (Respondent) Revenue Represented: Shri Aarsi Prasad, CIT-DR Assessee Represented: Shri Jignesh Parikh, A.R.

Date of hearing : 13-03-2024 Date of pronouncement : 10-06-2024 आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-

These appeals are filed by the Revenue arising out of orders passed by Ld. Commissioner of Income Tax (Appeals)-11, Ahmedabad vide orders dated 30/10/2018 for the Assessment Years 2013-14 & 2014-15. Since common facts and issues for consideration are involved both the years under consideration before us, both the appeals of the Revenue for Asst. Years 2013-14 & 2014-15 are being taken up together.

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2.

The brief facts of the case are during the course of assessment proceedings, the Ld. Assessing Officer observed that assessee has purchased 1905250 shares of a listed company Suraj Stainless Ltd. on 03.05.2012 at Rs. 13.56 per share. This purchase was made by the assessee off market without paying of STT and outside the stock exchange. On verification of the BSE data, it was revealed that the lowest traded price of this scrip - Suraj Stainless Ltd. on 03.05.2012 was Rs. 56.50 per share on the stock exchange, which implies that assessee has purchased shares less than the fair market value. Though assessee has purchased the listed companies shares it is admitted fact that shares were purchased at Rs. 13.56 per share which is less than the fair market value of Rs. 56.50 per share on that particular day i.e. 03.05.2012. The Ld. Assessing Officer observed that the shares were purchased from related company - M/s. Suraj Enterprise Ltd. and hence the shares which are available to the public at minimum Rs. 56.50 per share was available to the assessee only at Rs. 13.56 per share. Thus, the Ld. Assessing Officer observed that the assessee has clearly got the benefit of Rs. 8,18,11,345/- on this purchase. If the assessee would have purchased the shares on recognized stock exchange than it would must have to pay Rs. 10,76,46,625/- instead of it the assessee has got these shares only at Rs. 2,58,35,190/-and got clear benefit of Rs. 8,18,11,345/-. The whole transaction was carried out by the assessee within the group company. Further, these shares were sold back to the same concern i.e. Suraj Enterprise Ltd. in the same year i.e. 26.03.2013 at the rate of Rs. 13.56 per share. Hence, though the assessee has not incurred an

I.T(SS).A Nos. 12 & 13/Ahd/2019 A.Ys. 2013-14 & 2014-15 3 DCIT Vs Suraj Impex Pvt. Ltd.

profit or loss in this transaction, as the purchase was made less than fair market value, the Ld. Assessing Officer held that the difference of Rs. 8,18,11,345/- is liable to be added to the total income of the assessee. The Ld. Assessing Officer was of the view that that listed company shares have to be traded on recognized stock exchanges. The purchase price and sale price of listed company shares are driven by market force. Trading in such shares is open for all public and they make profit or loss on the basis of day to day trading or long term or short term investments. The mechanism of the stock exchanges are in existence so that public cannot be cheated by private interest of the corporate entities. If the companies themselves indulged in trading of listed shares off market, then public interest would be distorted. A person who is buying shares on stock exchange at a higher price than the price of the shares which is bought off market would remain definitely in a disadvantage. In the present case the assessee have done the same thing. It has purchased listed companies share lower than fair market value and thus got the advantage of Rs. 8,18,11,345/- In view of the above discussion, a sum of Rs. 8,18,11,315/- was added to the total income of the assessee.

3.

In appeal, Ld. CIT(Appeals) allowed the appeal of the assessee by holding that to invoke the provisions of section 56(2)(viia)(ii) of the Act, one of the essential conditions is that the shares so transferred/purchased should not be a company in which the public is substantially interested i.e. it should not be a listed company. In the instant facts, the company whose shares were purchased was a listed company and hence the provisions of

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Section 56(2)(viia)(ii) of the Act could not be invoked in the instant facts. Ld. CIT(Appeals) made the following observations while allowing the appeal of the assessee:

“7. Third & Fourth Grounds of appeals are in respect of addition of Rs.8,18,11,345/- on account of purchase of shares of listed company lower than the fair market value and thereby got the advantage to that extent. It is seen that during the previous year 2012-13, the appellant company has purchased 19,05,250 equity shares of Suraj Limited (earlier known as Suraj Stainless Ltd.), a listed company, from one of the group company namely Suraj Enterprise Pvt. Ltd. at Rs.13.56 per share This purchase was done off market, i.e. outside the stock exchange. From the copy of the D-Mat account, it is seen that the delivery of the said shares were duly received by the appellant company. This fact has not been disputed by the AO. On the basis of the BSE data the AO observed that the lowest traded price of this scrip-Suraj Stainless Ltd. is of Rs. 56.50 on 03/05/2012 and therefore the AO is of the view that the appellant has purchased shares less than the fair market value Therefore, the AO held that the appellant has clearly got the benefit of Rs 8,18,11,345/- on this purchase. The AO has further observed that listed company's shares have to be traded on recognized stock exchanges. The purchase price and sale price of listed company shares are driven by market force. Trading in such shares is open for all public and they make profit or loss on the basis of day to day trading or long term or short term investments. The mechanism of stock exchanges are in existence so that public cannot be cheated by the private interest of the corporate entities. If the companies themselves indulged in trading of listed shares off market, then public interest would be distorted. Accordingly, the AO held that the appellant has purchased listed company's shares lower than fair market value and thus got advantage of Rs. 8,18,11,345/- and therefore added to the total income. On the other hand, the AR of the appellant contended that the off market transactions are duly recognized by the SEBI also and there is no

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prohibition under any law for the off market transactions. From the perusal of the assessment order, it is not clear as to under which provision of the Act, the AO has made the addition of Rs. 8,18,11,345/- However, it is clearly evident from the comparison of the purchase price and FMV of the shares so purchased, done by the AO, that the AO has made the impugned addition of Rs. 8,18,11,345/- u/s. 56(2)(viia)(ii) of the Act, By analyzing the provisions of said Section 56(2)(viia)(ii) of the Act as reproduced hereinabove, it is clear that one of the conditions of said section is not satisfied and therefore, the provisions of Sec. 56(2)(viia)(ii) of the Act are not attracted in the case of the appellant and therefore the additions made by the AO is unjustified One of the conditions of Sec. 56(2)(viia)(ii) is that the property received should be the shares of any company not being a company in which public are substantially interested. In the present case, the shares purchased by the appellant company are of Suraj Stainless Ltd., a listed company. The shares of the said company are listed on the BSE and NSE. This fact has not been disputed by the AO in the assessment order. In the present case, the shares transacted are the shares of a listed company viz. Suraj Ltd. (earlier known as Suraj Stainless Ltd) and therefore one of the conditions is not satisfied and therefore the provisions of sec 56(2)(viia) of the Act is not attracted. Further, it is also seen from the assessment order that the submission dated 21/03/2016 of the appellant on this issue has not been completely dealt with and there is no finding of the AO that the provisions of sec. 56(2)(viia)(ii) of the Act are not applicable. After considering the totality of the facts of the case, submission and the legal position, I am of the considered view that the provisions of section 56(2)(viia)(ii) of the Act are not attracted /applicable to the appellant company since one of the conditions is not satisfied. Further, during the course of search, no incriminating materials has been found indicating actual receipt of such benefit/advantage by the appellant company by transacting the purchase and sale of the shares of listed company. Therefore, the addition of Rs. 8,18,11,345/- made by the AO as advantage received by the appellant on

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account of difference between the purchase price and fair market value of the share is deleted. Thus, grounds no. 3 & 4 are allowed.”

4.

The assessee is in appeal before us against the order of Ld. CIT(Appeals). The Ld. Counsel for the assessee reiterated the arguments taken before Ld. CIT(Appeals) which are to the effect that when the company whose shares were purchased by the assessee was a publicly listed company on the stock exchange, and therefore, Ld. CIT(Appeals) has correctly held that there is no question of invoking the provisions of section 56 of the Act, in the instant facts. Notably, the Ld. Assessing Officer is not questioning the sale price, but only the purchase price.

5.

In response, the Ld. DR submitted that looking in to the entirety of transaction within the group, the assessee purchased shares off- market and sold to a related party to create a loss within the Group.

6.

We have heard the rival contentions and perused the material on record.

7.

As regards the applicability of the provisions of Sec. 56(2)(viia)(i) of the Act, said provisions read as under: 56(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 :- (i) (ii) (iii)

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(iv) (viia) where a firm or a 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, any property, being shares of a company not being a company in which the public are substantially interested,- (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 this clause shall not apply 8. From the plain reading of the above provisions, all the following conditions should be fulfilled/satisfied so as to considered it as “Income from Other Sources” u/s. 56(2)(viia) or as the case may be: a) The recipient should be either a firm or a company not being a company in which the public are substantially interest.

b) The receipt of the property should be from any person or persons.

c) The receipt of the property must be on or after 1st day June, 2010

d) The property received should be the shares of any company not being a company in which public are substantially interested.

e) The aggregate value of the property so received must exceeds rupees Rs. 50,000/-.

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8.1 Thus, if all the above conditions are satisfied, only then the difference between the Fair Market Value and the value for which the said property is being transferred, shall be considered as "Income from other sources". However, if any of the above conditions is not satisfied, then the provisions of Sec. 56(2)(viia) would not, in our view, be attracted at all. In the present case of the assessee company, it has purchased the shares of the company namely Suraj Ltd. (a company in which public are substantially interested) from the seller company namely Suraj Enterprise Pvt. Ltd. Thus, the conditions mentioned at Sr. No. d) hereinabove is not fulfilled/satisfied. Therefore, Ld. CIT(Appeals) has correctly observed that the provisions of Sec. 56(2)(viia)(ii) of the Act are not attracted in case of the assessee company in respect of the said purchase of shares of Suraj Ltd. from Suraj Enterprise Pvt. Ltd. Once the provisions of Sec. 56(2)(viia)ii) are not attracted, the additions treating the alleged difference of Rs. 8,18,11,435/- as "Income from Other Sources" are not liable to be sustained.

9.

In the result, the Revenue’s appeal is dismissed. Since, we have dismissed the Revenue’s appeal on merits itself, we are not inclined to adjudicate on other grounds of appeal.

10.

In the result, appeal of the Revenue is dismissed for assessment year 2013-14.

11.

Since the facts and issued for consideration for assessment year 2013-14 is identical to assessment year 2014-15, our observations for assessment year 2013-14 would apply to assessment year 2014-15 as well.

I.T(SS).A Nos. 12 & 13/Ahd/2019 A.Ys. 2013-14 & 2014-15 9 DCIT Vs Suraj Impex Pvt. Ltd.

12.

Accordingly, appeal of the Revenue is dismissed for assessment year 2014-15, as well.

13.

In the combined result, appeal of the Revenue is dismissed for assessment year 2013-14 and 2014-15.

Order pronounced in the open court on 10-06-2024

Sd/- Sd/- (ANNAPURNA GUPTA) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 10/06/2024 True Copy आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद

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