Commissioner Of Income Tax vs. M/s. Tangi Facility Solutions Pvt Ltd.,

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TCA/259/2024HC Madras04 November 2024Bench: Honourable Mr Justice R. SURESH KUMAR5 pages
AI SummaryDismissed

What did the High Court hold?

The High Court dismissed the appeal filed by the Revenue. The Court noted that the primary question before the Tribunal was whether bonus shares distributed to the assessee amounted to income. The Tribunal had already decided this issue based on three prior decisions: CIT Vs. Dalmia Investment Co. Ltd (52 ITR 567), Hunsur Plywoods Limited Vs. CIT (229 ITR 112), and PCIT Vs. Dr. Ranjan Pai (ITA No.501 of 2016 dated 15.12.2020). Since the Tribunal followed these precedents in its impugned order, and no contrary judgment was presented, the High Court found no scope for interference with the ITAT's order. The Court agreed with the view taken by the Tribunal and held that the appeal deserved to be dismissed. The substantial questions of law were not explicitly answered individually, but the dismissal of the appeal implies that the Revenue's grounds were not accepted. No issue was expressly left undecided.

What were the facts?

The Revenue has filed an appeal against the order of the Income Tax Appellate Tribunal (ITAT), 'B' Bench, Chennai, dated 03.06.2024, concerning Assessment Year(s) not specified. The appeal challenges the ITAT's decision regarding the applicability of Sections 2(22)(b) and 56(2)(viia) of the Income Tax Act, 1961, to bonus shares received by the assessee, M/s. Tangi Facility Solutions Pvt Ltd. The assessee's primary business activity involved investing in shares of M/s. UDS Pvt Ltd. The Revenue contested the ITAT's findings that the bonus shares did not constitute income and that Section 56(2)(viia) was not applicable, particularly in light of CBDT Circular No. 3/2019. The High Court was asked to consider substantial questions of law raised by the Revenue.

What were the issues?

The Tribunal had to decide the following substantial questions of law raised by the Revenue: 1. Whether Section 2(22)(b) of the Income Tax Act, 1961, applies to the bonus shares received by the assessee, considering its business of investing in shares and reporting income from dividends or sale of shares. 2. Whether Section 56(2)(viia) of the Act applies when shares were acquired without consideration, contrary to their fair market value. 3. Whether Section 56(2)(viia) applies, considering CBDT Circular No. 3/2019, which warns against excluding fresh or bonus issuances from its purview as an anti-abuse measure. 4. Whether the Tribunal's reliance on the Karnataka High Court's decision in PCIT Vs. Dr. Ranjan Pai was appropriate, given the assessee's accounting method for dividend and share sale profits, which the Revenue argued was distinguishable. 5. Whether the Tribunal's reliance on CIT Vs. Dalmia Investment Co., Ltd. was correct, as the Revenue contended that the present case involved an addition under Section 56(2)(viia) on the entire value of shares acquired without consideration, unlike the former case which dealt with profits from share sales. 6. Whether the ITAT erred in allowing the assessee's appeal by disregarding CBDT Circular No. 3/2019, which clarified that excluding bonus shares from Section 56(2)(viia) is an incorrect approach. Assessee's Contention: Not recorded in the judgment. Revenue's Contention: The Revenue argued that the Tribunal erred in holding that Section 2(22)(b) and Section 56(2)(viia) do not apply. It contended that the assessee's business activity was investing in shares, and the bonus shares received should be treated as income. The Revenue also argued that the Tribunal's reliance on certain High Court decisions was misplaced due to differences in facts and accounting methods, and that CBDT Circular No. 3/2019 should have been followed, as it clarifies that excluding bonus shares from Section 56(2)(viia) is an incorrect approach and could lead to abuse.

Which sections of the Income-tax Act were involved?

Section 2(22)(b),Section 56(2)(viia),Section 260A

AI-generated summary — verify with the full judgment below

T.C.A.No.259 of 2024 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 04.11.2024 CORAM THE HON'BLE MR.JUSTICE R.SURESH KUMAR AND THE HON'BLE MR.JUSTICE C.SARAVANAN Tax Case Appeal No.259 of 2024 Commissioner of Income Tax Central Circle 2(3), Chennai. ... Appellant Vs. M/s.Tangi Facility Solutions Pvt Ltd Old No.42, New No.2, Luz Avenue Mylapore, Chennai 600 004. ... Respondent ----- Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, 'B' Bench, Chennai, dated 03.06.2024 in ITA No.735/Chny/2023. ----- For Appellant : Mr.Karthik Ranganathan Senior Standing Counsel J U D G M E N T (Delivered by R.SURESH KUMAR,J.) This appeal has been filed against the order of the Income Tax Appellate Tribunal in ITA No.735/Chny/2023 dated 03.06.2024. https://www.mhc.tn.gov.in/judis T.C.A.No.259 of 2024 2. The following substantial questions of law have been raised by the appellant / Revenue. 1. Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that the provisions of Section 2(22)(b) of the Act do not apply in the present case when the only business activity carried out by the assessee in investing in shares of M/s.UDS Pvt Ltd and reporting the income arising from this investment as dividends or profits from the sale of those shares? 2. Whether on the fats and circumstances of the case, the Tribunal was correct in holding that the provisions of Section 56(2)(viia) of the Act do not apply when the shares in question were acquired without any consideration, as opposed to their fair market value of Rs.2,54,55,24,025/- as stipulated in Section 56(2)(viia)? 3. Whether the Tribunal was correct in holding that the provisions of Section 56(2) (viia) of the Act do not apply, considering the CBDT Circular No.3/2019 dated 21.01.2019 clearly states that excluding fresh issuances of shares or bonus shares from the provisions of Section 56(2)(viia) would be an incorrect approach, as this could lead to potential abuse and contradict the explicit provisions and legislative intent of Section 56(2)(viia)? Was the inclusion of Clause (vii) in Section 56(2) intended as an anti-abuse measure to prevent the transfer of shares of a specified company for no consideration or inadequate consideration? 4. Whether, based on the facts and circumstances of the case and applicable law, the Tribunal was correct in relying on the https://www.mhc.tn.gov.in/judis T.C.A.No.259 of 2024 decision of the Hon'ble Karnataka High Court in PCIT Vs. Dr.Ranjan Pai (ITA No.501 of 2016 dated 15.12.2020), given the present assessee's method of accounting for reporting dividend income and profits from the sale of shares received from M/s.UDS Pvt Ltd., year after year, is distinguishable from the accounting method used in the case of Dr.Ranjan Pai? 5. Whether, based on the facts and circumstances of the case and applicable law, the Tribunal was correct in relying on the decision in CIT Vs. Dalmia Investment Co., Ltd. (52 ITR 567) considering that the judgment pertains to profits computed from the sale of shares, whereas in the present case, the addition was made on the entire value of the shares under Section 56(2)(viia) of the Act due to the shares being acquired without any consideration, despite their fair market value being Rs.275/- per share? 6. Whether the learned ITAT erred in allowing the assessee's appeal based on the decisions of the Hon'ble Supreme Court in CIT Vs.Dalmia Investment Co. Ltd (52 ITR 567) and Hunsur Plywoods Limited Vs. CIT (229 ITR 112) by disregarding the clarification issued by the CBDT in Circular No.3/2019 dated 21.01.2019, which clearly states that excluding fresh issuances of shares or bonus shares from the provisions of Section 56(2)(viia) of the Act is not a correct approach, as it could lead to abuse and contradicts the express provisions and legislative intent of Section 56(2)(viia)?" 3. Heard Mr.Karthik Ranganathan, learned Senior Standing Counsel appearing for the appellant / Revenue. 4. The bonus shares that have been distributed to the respondent / https://www.mhc.tn.gov.in/judis T.C.A.No.259 of 2024 assessee whether amounts to income, was the question that was posed before the Tribunal. In fact that issue had already been decided at least in three decisions which have been cited by the Tribunal in the order impugned itself. One is CIT Vs.Dalmia Investment Co. Ltd (52 ITR 567), the second decision is Hunsur Plywoods Limited Vs. CIT (229 ITR 112) and the third decision is PCIT Vs. Dr.Ranjan Pai (ITA No.501 of 2016 dated 15.12.2020). 5. Since this issue has been considered as stated in the earlier decisions, which in fact had been followed by the Tribunal through the impugned order, contra to the same since there has been no judgment, the appeal filed by the Revenue challenging the order passed by the Tribunal dated 03.06.2024 cannot be decided on a fresh question of law. Therefore, we are in agreement with the view taken by the Tribunal, there is no scope for interference with the same. Hence, the appeal deserves to be dismissed. Accordingly, it is dismissed. No costs. (R.S.K.,J.) (C.S.N.,J.)

04.11.2024 NCS : Yes/No Index : Yes/No KST To The Income Tax Appellate Tribunal, 'B' Bench, Chennai. R.SURESH KUMAR, J. https://www.mhc.tn.gov.in/judis T.C.A.No.259 of 2024 AND C.SARAVANAN, J. KST T.C.A.No.259 of 2024 04.11.2024 https://www.mhc.tn.gov.in/judis

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