TATVA GLOABAL ENVIRONMENT LTD,MUMBAI vs. ITO 9(3)(3), MUMBAI

per Rule 11UA despite providing opportunity by CIT(A) during

appellate stage. The working of fair market value provided by assessee

during the assessment proceedings as well as appellate proceedings is

akin to book value as per rule 11UA. 16. The Ld.AR for the assessee relied upon the Explanatory Note to the

Finance Act, 2010 and circular No.1 of 2011 dated 06-04-2011. The

Ld.AR for the assessee further submits that as per Explanatory Notes to 12

ITAs 4012 & 4016/Mum/2016 Tatva Global Enviroment Limited the Finance Act 2010, there has to be transfer of shares from one person

to another. In order to transfer to take place, the share must be in

existence to be received by the recipient from the giver. In case of fresh

allotment of shares, the shares are not possessed by the company. They

did not come into existence until there is allotment by Company in

favour of shareholder. The provisions of section 56(2)(viia) are attracted

only where any person transfer to another person share of a Company

wherein public are not substantially interested, for no consideration or

for consideration which is lower than the fair market value of such

shares. A receipt of share otherwise than by way of transfer does not fall

within the ambit of section 56(2)(viia). It was further submitted that in

terms of Valuation Rules as well, property received is required to be

valued as on the valuation date which is the date on which property is

received. It is the value of the share which is being treated or transacted

which is relevant. This pre-supposes the existence of shareholder. The

assessee has subscribed the fresh issue of shares in case of investment

made in Shivalik Solid Waste Management Pvt Ltd and Coimbatore

Integrated Waste Management Pvt Ltd. Accordingly it was submitted

that the share did not exist at any time prior to the said subscription. The

rights in share acquired were created by virtue of said transaction. There

were neither shareholders nor right in the form of shares existing prior to

aforesaid subscription of shares. Accordingly, the aforesaid provision 13

ITAs 4012 & 4016/Mum/2016 Tatva Global Enviroment Limited ought not to be applied in case of investment made in share of Shivalik

Solid Waste Management Pvt Ltd and Coimbatore Integrated Waste

Management Pvt Ltd. 17. For the purchase of share of Enviro Technology Ltd (ETL), the ld. AR

for assessee submits that ETL is a company engaged in developing,

operating and maintaining a Common Effluent treatment Plant which is

set up for the treatment of effluents generated by chemical industries in

and around Ankleshwar. The Ankleshwar Environmental Preservation

Society, Rotary Pollution Control Cell carried out detailed study and

discussions at various forums to address the issue of treatment of effluent

generated by Chemical industries in Ankleshwar, one of the largest

Chemical Industrial Zones of Asia. Accordingly, it was decided to go

ahead with common effluent treatment plant exclusively for Small Scale

Industries. Accordingly, ETL was promoted after taking into

consideration of success and failure of common effluent treatment plant.

ETL is a closely held company and its shares are not freely transferrable.

Its shares did not have a ready market for sale or trading. The sale of

such share by Sidhi Samrat Dyechem Pvt Ltd was a mode of exit from

aforesaid arrangement due to certain financial difficulties being faced by

Sidhi Samrat Dyechem Pvt Ltd. In absence of ready market, the transfer

of shares at a face value was justified. The Ld.AR submits that the

addition made u/s 56(2)(viia) on the basis of fair market value calculated 14

ITAs 4012 & 4016/Mum/2016 Tatva Global Enviroment Limited as per Rule 11UA ought not to be made as the aforesaid shares were not

freely transferable and did not have a ready market. 18. Without prejudice to his submission, the Ld.AR submits that provision

of section 56(2)(viia) are anti abuse provision and intended to prevent

the practice of receiving property without consideration or for inadequate

consideration. Such provision should not be applied to a bonafide

transaction and in absence of any imputation or any consideration over

and above stated consideration being passed. In support of his

submission, the Ld.AR of the assessee relied upon the decision of

Mumbai Tribunal in ACIT Vs Subodh Menon in ITA 676/Mum/2015.

The Ld. AR for assessee submits that transaction of acquisition of shares

by the assessee is a bonafide transaction and accordingly, the provision

of section 56(2)(viia) being in the nature of anti abusive provision ought

not to be applied in the said transaction. 19. On the other hand the ld. DR for the revenue on supported the order of

the assessing officer. 20. We have considered the submissions of both the parties and gone

through the orders of authorities below. During the assessment the

assessing officer noted that Assessee Company made investment in

group companies by purchasing shares, at lesser price than the fair

market value. The assessing officer issued show cause notice to the

assessee as to why the difference representing the whole value of a set 15

ITAs 4012 & 4016/Mum/2016 Tatva Global Enviroment Limited received by assessee company without consideration or at the

consideration below the market rate should not be taxed as income under

section 56(2)(viia) of the Act. The assessee filed a detailed reply, which

has been referred by assessing officer in para 4.4 of his order. The assessing officer computed the addition of ₹ 5,28,07,024/- by invoking

the provision of Rule 11 UA (as per the tabulated figure in para- 4

supra). During the first appellate stage the assessee urged that section

56(2) (viia) ought not to be invoked in case of assessee, since the section

apply only if any person received from any person share of a company

where the public is not substantially interested, for low consideration or

consideration less than the fair market value of shares received. And in

case of fresh allotment of shares, the shares are not by just by the

company, they do not come into existence until there is allotment by the

company and fair of shareholder. The purchase of shares in Shivalik

Solid-waste Management Ltd and Coimbatore Integrated Waste

Management Private Limited were the fresh issue of capital. The

assessee also furnished the fair market value of shares as per Rule 11

UA. The learned CIT(A) has extracted the details of written submission

in para 6.4 of his order. 21. In alternative and without prejudice submission of the assessee furnished

the fair market value of the investment as per Rule 11UA and as per AO

in the following manner; 16

ITAs 4012 & 4016/Mum/2016 Tatva Global Enviroment Limited

Sr. Investment Purchased Valuation Valuation as No. from as per per AO Rs. assessee Rs. 1 Shivalik Solid Waste Direct 9.21 11.34 Management Ltd. 2 Coimbatore Integrated Waste Direct 2.87 87.72 Management Private Ltd 3 Enviro Technology Ltd Third party 53.23 88.15

as stated in show cause notice by assessing officer and accordingly the difference of ₹ 42.23/-and for transfer of 25,000 share, the aggregate value of ₹ 10,58,250/- ought to be restricted, if any. The ld CIT(A) after

considering the submission of the assessee passed the following order ;

“6.5. I have considered the submissions carefully. Says the appellant has contended that the basis of working of FMV by assessing officer was not made available to appellant, vide this office letter dated 15.01.2016, the assessing officer was asked to furnish the same to the appellant as well as to this office by 21.1.2016. A reminder was issued on 8.0 2.2016 calling for the same by 16.0 2.2016. Till date the assessing officer has not submitted the same. 6.6. The section 56 (2)(viia) clearly applies to this case is the appellant company has received shares of other companies, and the appellant and the other companies whose shares are received are private limited companies in which public are substantially interested. The definition of FMV has to be taken as per explanation (b) to section 56(2)(vii). The value has to be as per method prescribed which is rule 11U and 11 UA. 6.7. I am unable to accept the contention that section 56 does not apply to fresh issue of shares. No such exception has been carved out. Whether it is by way of purchase, gift, transfer or allotment after 1.06.2010, the fact remains that shares are received. It is irrelevant how the shares come to be received. It is often seen that an existing company issues shares at a premium where it is justified on the 17

ITAs 4012 & 4016/Mum/2016 Tatva Global Enviroment Limited basis of FMV. Issuing shares at par in such cases to preferred persons such as close associate or even parent company is clearly in the nature of gift and is covered by this section. Similarly, the motive in acquiring shares is again irrelevant and there is no need to look at malafide regions or mens-rea for such receipt of share as has been argued by the appellant. No such mention is there on the statue and the plain word of the statue has been considered while it is being interpreted. Words or intention cannot be supplied when the law is explicit and there is no ambiguity. 6.8. The next issue is to whether the shares are received without consideration or at a consideration which is less by over Rs. 50,000/-of its FMV. The FMV has to be determined as per rules. The relevant rule was Rule 11 UA(1)@(b) before its amendment w.e.f. 29.11 .2012. The appellant has given its working of FMV. The assessing officer has not furnished his working even when called for in the remand report. He has also not shown how the working of appellant is not as per rules. The working of FMV which is akin to book value as per the Rules was submitted in the assessment proceeding and also in appellate proceedings. In all the three cases considered by the assessing officer, the shares were acquired at ₹ 10 per share. As per the working it is only shares of Enviro technology Ltd that has been received at price lower than FMV of ₹ 53.23 per shares. The FMV is lower than Rs.10/- in the other two cases. The amount to be added as per section 56(2)(viia) is (53.23-10) X 25,000 = Rs 1080750/-list the addition is to be restricted to ₹ 10,80,750/-and the appellant get the relief of ₹ 5,17,26,274/- the ground of appeal No. 3 is partly allowed as above.” 23. So far as the issue raised by the revenue in its appeal, with regard to

deleting the addition of difference of alleged FMV of Shivalik Solid

Waste management and Coimbatore Integrated Waste Management Pvt

Ltd is concerned, we have noted that the assessing officer during the

assessment not provided the valuation (FMV) arrived by him to the

assessee. During the first appellate stage the assessee furnished the

ITAs 4012 & 4016/Mum/2016 Tatva Global Enviroment Limited working of the FMV of the shares of these two entities, however, the AO

despite granting opportunity to file his remand report, not controverted

the said valuation. The valuation furnished by the assessee is in

accordance with Rule 11UA is also not disputed by AO. The values of

shares as per valuation furnished by assessee are less than the

consideration paid by the assessee for acquisition of shares. The ld. DR

for the revenue failed to bring any fact or evidence to our notice to take

other view. Thus, we do not find any infirmity in the order passed by ld.

CIT (A) in deleting the addition qua the acquisition of shares of Shivalik

Solid Waste management and Coimbatore Integrated Waste

Management Pvt Ltd., which we affirm. In the result ground No.2 in

revenue’s appeal is dismissed. 24. Now adverting to the issue in the appeal of the assessee on account of

addition in respect of purchase of shares of ETL. The ld CIT(A)

sustained the addition of difference of FMV as per Rule 11UA. The ld.

AR for the assessee vehemently argued that ETL is a closely held

company and its shares are not readily available in the market for sale or

trading and that the sale by Sidhi Samrat Dychem Pvt Ltd was a mode of

exit from the agreement due to certain financial difficulties faced by

Sidhi Samrat Dychem Pvt Ltd. No such evidence in the form of

correspondence or any communication is brought on record by the

assessee that Sidhi Samrat Dychem Pvt Ltd was facing financial 19

ITAs 4012 & 4016/Mum/2016 Tatva Global Enviroment Limited difficulties, which may justify the action/ transaction with assessee.

Hence, we do not find merit in the submissions of the ld. AR for the

assessee.

provisions of section 56(viia) are anti abuse and intended to prevent the

practice or receiving property without consideration or for inadequate

consideration, are concerned, the ld AR has strongly relied on the Circular No. 01/2011 dated 6th April 2011 issued by Central Board of

Direct Tax (CBDT) and the decision of Tribunal in ACIT Vs Subhodh

Menon (supra). The throughout the proceedings took the stand that the

assessee that the transaction with ETL is bonafide transaction. We are

also of the view that in absence of any imputation of any consideration

over and above consideration was passed, the addition is not justified.

The assessing officer has not made any investigation from ETL. We have

noted that the coordinate bench of Tribunal in ACIT Vs Subhodh Menon

(supra), while refereeing the CBDT Circular No. 01/2011 held:

“17. We further observe that provisions of section 56(2)(vii) does not apply to bona fide business transaction. As explained hereinabove, shares were issued by the company to comply with a covenant in the loan agreement with State Bank of India which required the promoters to increase the total net worth of the company to Rs. 150 crores by 31 March, 2010. Therefore, the shares were issued by the company for a bona fide reason and as a matter of business exigency. Circular No.1/2011 dated 6 April, 2011 issued by the CBDT explaining the provision of section 56(2)(vii) specifically states that the section was inserted as a counter evasion mechanism to prevent money 20

ITAs 4012 & 4016/Mum/2016 Tatva Global Enviroment Limited

laundering of unaccounted income. In paragraph 13.4 thereof where it is stated that "the intention was not to tax transactions carried out in the normal course of business or trade, the profit of which are taxable under the specific head of income".

"The object and purpose of sub-section (2), as explicated from the speech of the Finance Minister, was not to strike at honest and bona fide transactions where the consideration for the transfer was correctly disclosed by the assessee but to bring within the net of taxation those transactions where the consideration in respect of the transfer was shown at a lesser figure than that actually received by the assessee, so that they do not escape the charge of tax on capital gains by understatement of the consideration. This was real object and purpose of the enactment of sub- section (2) and the interpretation of this sub-section must fall in line with the advancement of that object and purpose. We must, therefore, accept as the underlying assumption of sub-section (2) that there is understatement of consideration in respect of the transfer and sub-section (2) applies only where the actual consideration received by the assessee is not disclosed and the consideration declared in respect of the transfer is shown at a lesser figure than that actually received." 19. In view of the above, the provisions of section 56(2)(vii)cannot be applied to transaction under consideration.”

absence of any imputation of any consideration over and above

ITAs 4012 & 4016/Mum/2016 Tatva Global Enviroment Limited consideration was passed, the addition is not justified. The assessing

officer has not made any investigation from ETL nor brought any

adverse material on record against the assessee. Hence, we accept this

submission of the ld. AR for the assessee and allow the ground of appeal

raised by the assessee.

ground No. 2 in appeal of assessee is allowed.

of the revenue is dismissed.

Order pronounced in the open court on 01-11-2019.

Sd/- Sd/- (Rajesh Kumar) (Pawan Singh) ACCOUNTANT MEMBER JUDICIALMEMBER Mumbai, Dt : 1st November, 2019 Pk/- Copy to : 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR By order Asstt. Registrar, ITAT, Mumbai