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Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI
Before: SHRI S. RIFAUR RAHMAN & SHRI PAVAN KUMAR GADALE
ORDER PER S. RIFAUR RAHMAN, A.M. The present appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-10, Mumbai [in short ‘CIT(A)’] for the assessment year 2014-15 dated 14.06.2018 and arises out of assessment completed u/s 143(3) of the Income Tax Act, 1961 (in short the Act).
Brief facts of the case are, the assessee filed its return of income on 01.10.2014 declaring total income of ₹1,12,02,300/-. Further, the assessee filed revised return of income of 18.12.2014 declaring total income of ₹59,77,300/-. The assessee stated the reasons for filing the revised return of income that the M/s JSW Logistics Infrastructure Pvt. Ltd. 2 provision of section 56(2)(viia) are not applicable in its case. Since, the consideration paid is more than the Fair Market Value (FMV). Subsequently, the case was selected for scrutiny through CASS and accordingly, notices u/s 143(2) and 142(1) of the Income Tax Act, 1961 was issued and served on the assessee. In response, the Ld. AR of the assessee filed the relevant the information as called for.
2.1 During the assessment proceedings, the assessee was asked to show cause as to why revised return of income which was revised based on the submissions of the assessee for provisions of section 56(2)(viia) are not applicable in its case. In response, the assessee filed the following submissions :
“During the course of assessment proceedings, your goodself has asked to show cause as to why income of Rs. 52,25,000| - shown under head 'income from other sources' with regard to inadequate consideration in terms of section 56(2)(via) of the Income Tax Act, 1961 ('the Act') should not be added to total income. in this regard, a detailed note has already been given by way of a 'note on reason for filing revised return'. However, for sake of clarity, we again submit as under: The issue under consideration is with regard to issuance and allotment of 2,75,00,000/- shares of one M/s. JSW Projects Ltd. to your assessee company at face value of Rs.
Before the allotment of these shares by JSW Projects Ltd., the fair market ¿Income Tax Rules, 1962. Under a wrong impression and understanding that allotment of shares being at par with transfer, an amount of Rs. 52,25,000/- were erroneously offered for tax in the original return of income. Kind attention of your goodself is brought to the wordings of section 56(2) (via) which reads as under: "Receipt of any property (being shares of a company not being a company in which public are substantially interested) by a firm or company………. However, in the assessee's case, the shares came into existence only on allotment of such shares and therefore question of receipt of such shares M/s JSW Logistics Infrastructure Pvt. Ltd. 3 (something which is non-existing) is not possible. It is in fact an allotment of fresh shares by the Company and not a transfer of shares by one shareholder to another shareholder. Further, it is a settled law that there is a vital difference between creation and "transfer* of shares. The words, "allotment of shares" have been used to indicate the creation of shares by appropriation out of previously unappropriated share capital to a particular person. In the case of Sri Gopal Jalan and Company (3 SCR 698) a question arose before Hon"ble Supreme Court as to the meaning of the word "allotment. It was held that in Company Law 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. It is only on allotment that the shares come into existence and in every case the words "allotment of shares* have been used to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person. Reliance is also placed on the Hon'ble Supreme Court's judgement in the case of Khoday Distilleries Lta. (307 ITR 312), wherein the Hon"ble Supreme Court has relied on the above SC judgment in the case of Sri Gopal Jalan & Company (supra). Attention is also invited to CBDI Circular no 1/2011 which clearly states that the intention of inserting the provisions of section 56 (2) (vila) was to prevent the practice of transferring unlisted shares at prices much below their fair market value. In the instance above, the shares of JSW Projects Limited are neither transferred nor they are allotted at much below FMV. On the other way round, the law (i.e., section 56 (2) (viib) of the Act) itself prohibits the private limited complainer from issuing shares in excess of the face value of shares and hence the question of issuing shares by private limited company at more than face value does not arise. In the instant case, the shares have been issued at face value of Rs. 10 and same are subscribed by and allotted to your assessee company at face value. In view of the above, in the present case the provisions of section 56(2)(viia) are not applicable and hence no amount is taxable.”
Considering the submissions of the assessee, the Assessing Officer rejected the same and he observed that the second return filed by the assessee is not M/s JSW Logistics Infrastructure Pvt. Ltd. 4 ITA No. 5814/M/2018 revised return because reasons for filing second return is not on account of obvious or inadvertent error but it was diagonally opposite view is taken in the second return. Accordingly, he rejected the second return of income filed by the assessee and he also observed that the second return of income is not backed by the auditor’s report and accordingly he assessed the income as declared by the assessee in the original return of income.
Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), the assessee submitted that the original return as well as the revised return was filed within the time limit as per provisions of section 139(1) and 139(5) of the Act respectively and the Act does not restrict the scope for rectification of Return of Income to merely obvious or inadvertent error. The assessee has distinguished the case law relied upon by AO and stated that in these case the assessee had first made wrongful claims and after being confronted they had revised the return to avoid the penal provisions, whereas in the present case, the assessee had made bonafide mistake by wrongly interpreting the provisions of Sec. 56(2)(via) and filed revised return to correct the mistake.
4.1 On merits, it was submitted that assessee company being a company in which public are not substantially interested received shares of three companies in which public are not substantially interested namely SW Projects Limited, JSW Aluminum Limited and JSW Cement Limited. Details of shares received and the Fair Market Value (FMV) vis-à-vis purchase price was tabulated as given below: Particulars Name of the company of which shares are received by JSWLIPL JSW Projects Limited JSW Aluminium Limited JSW Cement Limited Number of shares received 2,75,00,000/- 10,17,45,500/- 2,65,50,000/- FMV per share 10.19 9.9 10.63 Purchase/Subscribed 10 10 10 price per share M/s JSW Logistics Infrastructure Pvt. Ltd. 5 Nature of transaction Issued Partly issued and partly Transferred transferred 4.2 Submitting as above, the assessee claimed that in case of shares received from JSW Projects Limited, the shares which were fully subscribed by the assessee company at Rs. 10 per share and the consideration paid was less than the FMV by Rs. 0.19 per share, were freshly allotted (not transferred) and thus contending that the shares which were allocated to the assessee were not in existence earlier hence, there was no transfer of shares to the assessee, therefore, the provision of Section 56(2) (viia) are not attracted.
After considering the submissions of the assessee, the Ld. CIT(A) dismissed the appeal of the assessee with the following observation :
7.3.1 I have considered the submission of the assessee, carefully gone through the order of the AO, perused the material on record, and referred to the case laws relied upon by the assessee and the AO. 7.3.2 In my view the claim of the assessee cannot be merely denied for the reason that the claim made in revised return is contrary to the view taken by the assessee in original return, since no such restrictions is placed by the statute in terms of provisions of Section 139(5) of the Act. Therefore, the plea of the assessee accepted and the issue is decided on merits as under. 7.3.3 As regards the claim of the assessee on merit, it was the only contention of AR before me that the shares allocated to the assessee were not in existence earlier, hence, there was no transfer of shares to the assessee. Therefore, the provision of Section 56(2) (via) are not attracted. In my view the contention raised by the assessee is fallacious. The provisions of Section 56(2) (via) read as under: Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head Income from other sources", not chargeable to income-tax under any of the heads specified in section 14, items A to E.
M/s JSW Logistics Infrastructure Pvt. Ltd. 6 (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 [(via) 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 $ 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, (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 this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation.-For the purposes of this clause, "fair market value" of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);] 7.3.4 A plain reading of the above provision would clearly show that once the assessee “receives" the shares of a company not being a company in which the public is not substantially interested, the provision of Section 56(2) (viia) are attracted. There is no denial to the fact that the assessee has received the share, whether the assessee receives the shares on transfer or allotment is for the purpose of Section 56(2) (via). It is abundantly apparent from the first proviso to the section which reads as under : Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vin) of section 47. 7.3.5 A plain reading of the provisions of the Section 56(2)(vila) would show that whereas the main clause refers to receives', the proviso excludes only certain transactions which are not regarded as "transfer from the ambit of M/s JSW Logistics Infrastructure Pvt. Ltd. 7 main clause. Had it been the intention of the legislature to restrict the scope of the provision to the cases involving transfer only, they would have done so with reference to 'transfer' as defined u/s. 2(47) of the Act, however the 'transfer does not find any mention in the main clause. 7.3.6 For the aforesaid reasons the reliance of the assessee on the decision of Hon'ble SC in the case of Sh. Gopal Jain & Co (3 SCR 698) & the decision in the case of Khoday Distilleries Lid. 307 IT 312 is misplaced. The issue involved in the case of Khoday Distilleries Ltd. 307 IT 312 was Whether any "gift" arose in terms of section 2(xi) of the Gift-tax Act, 1958 (1958 Act") on the allotment of rights issue by the assessee company to its shareholders vide Boards Resolution dated 29-1-1986? 7.3.7 In this case the twenty shareholders did not subscribe to the rights issue and consequently the assessee-company allotted them to the remaining existing shareholders. The Hon'ble Tribunal came to the conclusion that the allotment of rights by the assessee did not constitute "transfer" as it did not involve any existing property at the time of such allotment. In this context. On appeal, the Hon'ble Apex Court ruled that liability to pay gift tax would be on the donor (shareholder) who exercises the option to renounce and not on the assessee-company. 7.3.8 Under the provision of Section 56(2) (via), whether the assessee receives the shares on transfer or allotment is inconsequential since the term used in the section is “received" in contradistinction to the term used in Gift Tax Act transferred. There is no denial to the fact that the assessee has received the share. Therefore, the provision of Section 56(2) (viia) are clearly attracted in the case of the assessee.”
Aggrieved with the above order, the assessee is appeal before us raising following grounds of appeal :
The Ld. CIT(A) has erred in confirming action of Ld. Assessing Officer in invoking the provisions of section 56(2)(viia) of the Income Tax Act, 1961, without considering the facts and circumstances of the case.
At the time of hearing, it is submitted that the assessee was allotted shares by JSW Projects Ltd. at face value of ₹10 each and at the time of allotment the FMV of the shares at ₹10.19 per share as per Rule 11UA of the Income Tax Rules, 1962. Under a wrong impression and understanding that allotment of shares being with transfer an amount of ₹52.25 lacs were wrongly offered for tax in the M/s JSW Logistics Infrastructure Pvt. Ltd. 8 original return of income which was subsequently rectified by filing revised return of income. The Ld. CIT(A) sustained the addition on merits by invoking section 56(2)(viia) by the Assessing Officer. It is submitted that the ₹0.19 value of shares which cannot be considered for addition u/s 56(2)(viia). Considering the fact that the difference between FMV is negligible, the Ld. CIT(A) has not considered the average value of FMV in all the three companies except chose to retain value of shares of JSW Projects Ltd. Ld. AR brought to our notice the table submitted before the Ld. CIT(A) at page 6 of appellate order: 8. On the other hand, the Ld. DR relied on the findings of the lower authorities.
Considered the rival submissions and material placed on record. We noticed that the assessee has received shares of three companies in which the public is not substantially interested namely (i) JSE Project Ltd., (ii) JSW Aluminium Ltd. and (iii) JSW Cement Ltd. 9.1 We observed that the assessee received shares of JSW Projects Ltd. at the face value of ₹10 each whereas at the time of allotment the FMV of the per share stood at ₹10.19 per share. We observed from the transaction that the assessee was allotted shares and the assessee received the shares by allotment of share not by subsequent transfer which can be classified u/s 47 of the Act. In our considered view, the shares were issued by JSW Projects Ltd. after due valuation and as per the valuation it is valued at ₹10.19, accordingly, the shares were allotted at ₹10 per share. Therefore, it is left to the company who issue and allots the shares to decide the value of shares which is nearest to the face value and tax authorities has to interpret the law in practical manner. It is not practical to allot M/s JSW Logistics Infrastructure Pvt. Ltd. 9 ITA No. 5814/M/2018 shares @ ₹10.19 per share. We do not see any difference in value of shares allotted at ₹10 and FMV of ₹10.19. Therefore, we are in agreement with the submissions of the assessee, accordingly, the grounds raised by the assessee are allowed.
10 In the result, the appeal filed by the assessee is allowed.