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Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
Date of hearing : 22/07/2016 Date of pronouncement : 07/10/2016 O R D E R Per BENCH:
These are appeals filed by the assessee directed against the consolidated order of the learned Commissioner of Income- tax (Appeals)-Vi, Bangalore [CIT(A)] dated 24/10/2014 for the assessment years 2008-09 to 2011-12.
Since common issues are involved in all these appeals, all these appeals are heard together and disposed of vide common order for the sake of convenience. to 1652/Bang/2014 Page 2 3. The assessee raised the following grounds of appeal for the assessment year 2008-09.
4. Briefly facts relevant to assessment year 2008-09 are stated herein for the sake of convenience and clarity. The assessee is an individual deriving income under the head salary and income from other sources. He is the Managing Director of M/s.Team Life Care to 1652/Bang/2014 Page 3 Co.India Pvt.Ltd. [TLCCIP Ltd.], M/s.G7 Investments Pvt. Ltd. [G7IP Ltd.] and M/s. G7 Synergon Private Ltd. [G7 SP Ltd.] and M/s.G7 Health Care Pvt. Ltd. [G7HCP Ltd.]. Return of income for assessment year 2008-09 under the provisions of section 139(4) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] was filed on 24/8/2009 admitting income of Rs.2,79,72,380/-. While matter stood thus, a search and seizure operation u/s 132 of the Act were conducted in the business as well as residential premises of the appellant on 20/10/2011. As a result of search and seizure operation, it was noticed that certain incriminating material in the form of documents, sale deeds, sale agreements, loose sheets were found and seized marked as ‘A/MJ/1-A/MJ2’. Consequent to action u/s 132A notice u/s 153A dated 12/11/2013 was issued. In response to such notice, it was submitted that the original return of income filed may be treated as return in response to notice u/s 153A of the Act and subsequently, after issue of notice u/s 143(2), the assessment was completed u/s 143(3) r.w.s. 153A of the Act vide order dated 24/03/2014 after making addition of Rs.48,28,779/- as deemed dividend.
Facts leading to the addition are stated by the Assessing Officer [AO] vide parars.5 to 6 of the assessment order which are reproduced below:
After noticing the above facts, the AO had called upon upon the appellant to explain as to why provisions of section 2(22)(e) of the Act should not be applied in respect of amounts received from TLCCIP Ltd. In response to said notice, the appellant vide his letter dated 3/3/2014 had only requested that amount of Rs.1,48,37,196/- should be reduced from the total drawings of Rs.1,96,65,975/- for the purpose of determining deemed dividend. Thus, it appears, except for this difference, appellant had accepted in principle the taxability of deemed dividend.
Being aggrieved, an appeal was preferred before the CIT(A). It was contended before the CIT(A) that advances have been received only for business purpose of the company. It was further submitted that in terms of Memorandum of Understanding to 1652/Bang/2014 Page 6 with Smt. G.Sridevi, w/o the appellant who is also a director in the company, agricultural lands are to be purchased in the name of the said director and to be converted into commercial purpose and after conversion into commercial purpose, lands were to be transferred to the company again. Thus, it was claimed that the amounts were advanced by the company only for business purpose of the company and therefore, the vigour of provisions of section 2(22)(e) were not attracted. This submission was overruled by the CIT(A) by holding that no evidence or details in support of this proposition were filed either before the AO or before him and further it was observed by the CIT(A) that no such lands as claimed are shown to have been acquired during the year under consideration. It was further contended that deemed dividend should be set off against final dividend declared by the company. This contention of the appellant has been rejected by the CIT(A) placing reliance on the plain provisions of section 2(22)(e) of the Act. Thus, being aggrieved, appellant is before us in the present appeal.
Learned counsel for the assessee reiterated the same submissions which were made before the lower authorities before us also. He reiterated that no benefit had accrued to the appellant on account of impugned advances taken from the company. Advances received are purely for business purpose of the company TLCCIP Ltd. The main thrust of the submission is that advances are received for business purpose of the company. to 1652/Bang/2014 Page 7 It cannot be treated as deemed dividend in the hands of the appellant. Reliance is placed on the following decisions: i. DCIT vs. Tobby Simon (40 ITR(Trib) 250)(Bang.) ii. Bagmane Constructions (P) Ltd. vs. CIT (2015) 57 taxmann.com 120 (Kar)
Learned counsel for the assessee further submitted that to say that advances are received for the benefit of the company, ledger account in the books of TLCCIP Ltd., are filed before the lower authorities.
On the other hand, learned CIT(DR) vehemently opposed the submissions of the learned counsel for the assessee. Ld.CIT(DR) submitted that there was no evidence brought on record suggesting that advances were received by the appellant only for the benefit of the company. Therefore, applying the plain provisions of section 2(22)(e) the amount is taxable in the hands of the appellant as deemed dividend.
We heard rival submissions and perused the material on record. The issue in present appeal is about taxability of the amount received as advanced from TLCCIP Ltd., as deemed dividend within the meaning and scope of provisions of section 2(22)(e) of the Act. There is no dispute about amount of advance received by the appellant from the said company. It is also undisputed fact that other conditions which are required to be satisfied u/s 2(22)(e), such presence of accumulated profits, the to 1652/Bang/2014 Page 8 appellant holding substantive interest in the said company are satisfied. Then issue boils down to whether the explanation offered by the appellant that advances were taken from the said company only for the business purpose of the company and therefore, falls within the exceptions culled out under the said provisions of section 2(22)(e) of the Act. No doubt there are plethora of decisions to the effect that where advances have been taken by the shareholder of the company who is having substantial interest, for the business purpose of the company, the same should not be treated as deemed dividend in the hands of shareholder. Thus, the law is fairly settled to the extent that once the loans or advances are received by the shareholder from the company only for the business purpose of the said company, the amount of loan cannot be treated as deemed dividend within the provisions of section 2(22)(e). But it is a matter of fact to be proved by adducing necessary evidence. But in the present case, as admitted by the appellant himself, except ledger account of the appellant in the accounts of TLCCIP Ltd, no other evidence was filed before the lower authorities in support of this contention. It is not discernible from the perusal of the assessment order whether any such contention was put forth by the appellant and therefore, the question of filing evidence in support of this contention does not arise. Perhaps this contention was urged for the first time before the CIT(A), but the CIT(A) had given a categorical finding that no details/evidence had been filed either to 1652/Bang/2014 Page 9 before the AO or before him. Even before us, appellant made no effort to file any evidence in support of this contention. But however, keeping in view interest of justice, we have directed the learned counsel for the assessee to file evidence proving this contention by filing extract of the bank passbook of the appellant. However, learned counsel for the assessee had filed very voluminous paper book running into 327 pages.
Ld.CIT(DR) vehemently opposed vide written submissions dated 1/7/2016 contesting that none of the documents contained in the paper book were filed before the lower authorities. She also referred to the findings of the CIT(A) that no such evidence was filed. She also referred to relevant para. of the CIT(A)’s order wherein the CIT(A) had found that no evidence was filed proving that advances are received only for business purpose of the company.
On verification of the paper book filed, we are not able to come to conclusion that advances which are received from the company were utilized only for business purpose of the company i.e. acquisition of agricultural land in the name of the director of the company and after converting the same into commercial use, again transfer the same back to the name of the company. We find from the paper book that though some lands were purchased in the name of director Smt.Sridevi, it is not clear whether these lands were purchased only out of money received from the to 1652/Bang/2014 Page 10 company and these lands are again transferred to the name of the company after converting them into commercial use. Even the learned counsel for the assessee had not demonstrated before us with reference to the paper book filed that loans were received from the company only for business purpose of the company. In the circumstances, we are of the considered opinion that the contention that advances are received by the appellant from the company TLCCIP Ltd., only for business purpose of the company is bereft of any supporting evidence and therefore, in our considered opinion it is only concocted story intended to take advantage of the judicial precedents to come out of the clutches of the vigor of the provisions of section 2(22)(e) of the Act. Therefore, these grounds of appeal filed by the assessee are rejected.
In the result, the appeal filed by the assessee is dismissed. (Assessment years: 2009-10): 14. The assessee raised the following grounds of appeal:
15. The assessee raised the following additional ground:
16. Ground Nos.1, 5 and 6 are general in nature and do not require any adjudication.
Ground Nos. 2 and 3 of the grounds of appeal
challenge the addition made on account of deemed dividend u/s 2(22)(e) of the Act. Facts leading to the addition on account of deemed dividend are narrated by the AO in paragraphs. 6 to 7.3 of the assessment order as under: to 1652/Bang/2014 Page 19
18. Thus, the AO was of the opinion that the amount of loan received from TLCCIP Ltd., of Rs.2,74,60,467/- and amount of loan received from G7SP Ltd of Rs.1,21,95,586/-is in the nature of deemed dividend as all other conditions necessary for invoking the provisions of section 2(22)(e) are satisfied. The AO also not accepted the contention of the appellant that deemed dividend should be set off against final dividend of Rs.3,90,00,000/- declared by the company by holding that the company i.e. TLCCIP Ltd., had not set off interim dividend against final dividend declared under Companies Act,1956 declared the entire dividend of Rs.3,90,00,000/- had been paid to the appellant. In respect of deemed dividend of Rs.1,21,95,586/- received from G7 SP Ltd., submission made by the assessee was that G7 SP Ltd., was later on acquired by TLCCIP Ltd. for and on behalf of G7 SP Ltd., the AO held that for payment made to a company or to a concern in which shareholder has a substantial interest, provisions of 2(22)(e) are squarely applicable and the amount should be taxed as deemed dividend in the hands of only the shareholder. For this proposition, the AO placed reliance on the decision of the Mumbai Special Bench of Tribunal in the case of ACIT vs. Bhaumik Colour Pvt. Ltd. reported in 118 ITD 1 and the Hon’ble Bombay High Court decision in the case of Universal Medicare Pvt. Ltd. (324 ITR 363)(Bom).
Being aggrieved, an appeal was preferred before the CIT(A) who vide impugned order, confirmed the addition. to 1652/Bang/2014 Page 20 20. Being aggrieved, the assessee is in appeal before us in the present appeal reiterating the same submissions. Learned counsel for the assessee submitted that the provisions of section 2(22)(e) are not applicable as the deemed dividend has been set off against finally declared dividend under the Companies Act, 1956. In this regard, he placed reliance on the decision of the Hon’ble Madras High Court in the case of CIT vs. T.P.S.H.Selva Saroja (244 ITR 671)(Mad). In respect of deemed dividend received from G7SP Ltd., it was submitted that it was only a part of the TLCCIP Ltd., which means that payments have been made to said company by TLCCIP Ltd., only out of business exigency. Therefore, should be treated as the amount advanced for the benefit of the company. Reliance was placed on the following decisions: i. CIT vs. T.P.S.H.Selva Saroja (244 ITR 671)(Bom); ii. DCIT vs. Toppy Simon (40 ITR (Trib) 250(Bang); and iii. Bagmane Constructions P. Ltd. vs. CIT (57 taxmann.120).
We heard the rival submissions and perused material on record. An identical issue has been decided by us in the appeal filed by the assessee for the assessment year 2008-09 viz. ITA No.1649/Bang/2014. In this year additional arguments were made that in respect of amount received from TLCCIP Ltd., it was urged that deemed dividend/ should be set off against final dividend declared by the company within the meaning of sub- clause (iii) of clause (e) of sub-section (22) of section 2 of the to 1652/Bang/2014 Page 21 Act. Thus, the appellant made submissions from two angles – (i) advances are received only for business purpose of the company and (ii) deemed dividend should be set off against dividend finally declared by the company.
In respect of first limb of submissions, the findings given by us in for assessment year 2008-09 equally hold good and therefore, the first contention of the assessee is rejected. These findings are also supported from the fact that the appellant had filed additional grounds before us urging that advances received for business purpose of the company cannot be termed as deemed dividend in the hands of the shareholder, which goes to suggest that this contention was never urged either before the AO or before the CIT(A) and the question of filing any evidence in support of this contention does not arise. Thus, the contentions, that advance received only for business purpose of the company, are rejected.
Now, we shall delve into the second limb of argument that the amount of advance treated as deemed dividend should be set off against final dividend declared by the company. Sub-clause (iii) of clause (e) of sub-section (22) of section 2 of the Act carves out an exception to the rule contained in clause (e) that amount of loan advanced received by a shareholder in certain circumstances should be deemed to be dividend in the hands of to 1652/Bang/2014 Page 22 the shareholder. Sub-clause (iii) of clause (e) of sub-section (22) of section 2 of the Act, reads as under: “2(22)(e) (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previous paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off; Thus provisions of sub-clause (iii) of clause (e) of sub-section (22) of section 2 carves out an exception that where a company which has granted loan or advance to shareholder and was deemed to be dividend within the meaning of section 2(22)(e) of the Act, and the company had declared a dividend under the provisions of the Companies Act and the dividend so declared is set off by the company against the amount earlier granted, same shall not be treated as deemed dividend within the meaning of section 2(22)(e) of the Act. In the present case, it is admitted fact that the company i.e. TLCCIP Ltd. had declared a dividend of Rs.3,90,00,000/- and the entire dividend has been received by the appellant on 28/3/2009 which is duly reflected in the bank account of the appellant. This fact emanates from paragraph 6.18 of the assessment order. Had the company set off the amount of loan advance given earlier against final declared dividend by the company, the company would have paid only a sum of Rs.1,15,39,533/-, as the appellant had already received a sum of Rs.2,74,60,467/-. Thus, this fact goes to prove that the company had not set off amount of loan or advance given against final dividend declared by the company. Therefore, the case of to 1652/Bang/2014 Page 23 the appellant does not fall within sub-clause (iii) of clause (e) of sub-section (2) of section 2 of the Act. In fact, the Hon’ble Bombay High Court in the case of L.P.Badiani v. CIT (1985) 154 ITR 204 held that benefit of sub-clause (iii) of clause (e) of sub- section (2) of section 2 is not available to an assessee where advance received is already repaid. The same principle was again reiterated by the Hon’ble Bombay High Court in the case of Walchand & Co.(P) Ltd. vs. CIT (204 ITR 146)(Bom) in the following words:
“In our view, the case of the assessee is directly covered by the ratio of the judgment of this court in L.P. Badiani v. CIT [1985] 154 ITR 204 . This was a case arising under the 1961 Act. The assessee had taken a loan from a company of which he was a shareholder. The company was not one in which the public were substantially interested within the meaning of section 2(22)(e) of the Act. The loan was repaid just before the company declared the dividend. The Revenue treated the loan in the hands of the assessee as deemed dividend within the meaning of section 2(22)(e) and brought it to tax. The contention of the assessee was that this amount was liable to be set off against the dividend actually paid by the company and that, therefore, its case would be covered by sub-clause (iii). This was rejected by this court by holding that the set-off, in order to avail of the exemption under sub- clause (iii), has to be made by the company in respect of the dividend and could be availed of against the loan amount receivable by the company. Since the assessee therein had already paid off the loan amount from its own income and had converted its account with the company to a credit balance, there could be no occasion for the company to set off the amount of dividends against the loan advanced to the assessee and, therefore, the assessee could not avail of the provision for exclusion contained in sub-clause (iii) of section 2(22)(e) of the 1961 Act.” to 1652/Bang/2014 Page 24 In the instant case also, since the company had fully paid to the appellant dividend declared by it, it goes to show that the company had not set off the amount of advance or loan treated as deemed dividend against final dividend. Therefore, submissions made in this behalf cannot be accepted and are bereft of any evidence on record. Thus, the grounds of appeal, relating to the second limb of argument that deemed dividend should be set off against final dividend declared by the company is dismissed.
The additional grounds of appeal were raised challenging the addition of deemed dividend as the amounts were stated to have been received only for the benefit of the company. This contention was rejected by the assessee’s appeal for assessment year 2008-09 in (supra). Hence, additional grounds of appeal are also dismissed.
25. Ground No.4 relates to addition of Rs.37,50,000/- made as undisclosed investment. The AO noticed that the appellant had acquired agricultural property in Wayanad District of Kerala. It was purchased through one C.Rajagopal and the same is reflected as advance of Rs.17,50,000/- to C.Rajagopal which is equivalent to guidance value as per Sub-Registrar’s office. It was mentioned in the assessment order that the residence of C.Rajagopal was also searched under the provisions of section 132. As a result of search operation, noting marked as A/CR/01 to 1652/Bang/2014 Page 25 pg.04 was found from the residence and decoding of such noting it was mentioned that said property was acquired for a sum of Rs.55 lakhs. On confronting this material to the appellant, the appellant in his sworn statement dated 14th March 2014 u/s 131 of the Act, had declared a sum of Rs.37,50,000/- as undisclosed income. The relevant statement given by the appellant is as under:
Based on the sworn statement of the appellant addition was made by the AO.
Being aggrieved, an appeal was preferred before the CIT(A). The CIT(A) confirmed the addition by holding that having agreed to the addition, it is not open to the appellant to contest the addition in the appellate proceedings.
Before us, learned counsel for the assessee argued that no addition can be made on the basis of admission and reliance in this regard was placed on the following decisions:
i. CIT vs. Sri Ramdas Motor Transport (238 ITR 177)(AP); ii. Kailashben Manharlal Chokshi vs. CIT (328 ITR 411)(Guj) and to 1652/Bang/2014 Page 26 iii. Saveetha Institute of Medical & Technical Sciences vs. ACIT 12 ITR (Trib.) 376 On the other hand, ld.CIT(DR) placed reliance on the orders of the lower authorities.
We heard rival submissions and perused the material on record. The impugned addition was made by the AO based on the sworn statement of the appellant with reference to seized material found as a result of search and seizure operations. Thus, it is not addition made merely based on admission of the appellant. The admission was made with reference to seized material. There is no allegation that admission was made out of coercion or pressure exercised by the department. The appellant never protested during the course of assessment proceedings. In this background, it was contended that in the absence of any corroborative evidence found during the course of search or otherwise, supporting the statement made, the statement cannot be relied upon for the purpose of making addition. In support of this reliance was placed on the following decisions: i. CIT vs. Sri Ramdas Motor Transport (238 ITR 177)(AP) ii. Kailashben Manharlal Chokshi vs. CIT (328 ITR 411)(Guj) and iii. Saveetha Institute of Medical & Technical Sciences vs. ACIT 12 ITR (Trib.) 376.
The decision of the Hon’ble Gujarat High Court in the case of Kailashben Manharlal Chokshi (supra) was held to be not applicable in case where statement was made voluntarily, by the to 1652/Bang/2014 Page 27 Hon’ble Bombay High Court in the case of T.Lakhamshi Ladha & Co. vs. CIT (2016) 386 ITR 245 wherein it was held as follows:
(b) The decision of the Gujarat High Court in Kailashben Manharlal Chokshi v. CIT [2010] 328 ITR 411 wherein the statement made under Section 132 (4) of the Act was subsequently retracted giving proper explanation with documents in support of the retraction. Further, the statement therein was recorded at midnight, which was considered to be in voluntary in view of the subsequent retraction with documentary evidence. In the present facts, it is not the case of the appellant that the statement made under Section 132(4) of the Act was recorded in the midnight or that any pressure or coercion was put upon the appellant to make a statement contrary to the facts. In the present facts, the statement dated 15th September, 1988 was made at 9.30 p.m. This is not an odd hour. Moreover, the retraction was bereft of any supporting evidence to establish that the original statement made on oath is incorrect. Thus, the aforesaid decision does not assist the appellant. Here again, the onus to establish by corroborative evidence is upon the assessee that the statement made on oath earlier is not correct while retracting it.
The Hon’ble Bombay High Court in the above case held that admission is a valid evidence for making addition in the absence of any retraction even if there is retraction of statement of admission, unless it is supported by corroborative evidence. In the present case, the admission is based on corroborative evidence found as a result of search and seizure operations. Therefore, it cannot be said that the addition was made merely based on admission. In view of the above decision of the Hon’ble Bombay High Court in the case of T.Lakhamshi Ladha & Co. to 1652/Bang/2014 Page 28 (supra), we have no hesitation to confirm the addition. The grounds of appeal on this issue are dismissed.
In the result, the appeal filed by the assessee is dismissed. (Asst.year: 2010-11):
The assessee raised the following grounds of appeal:
31. The assessee raised the following additional grounds:
32. Ground Nos.1, 4 and 5 are general in nature and not require any adjudication.
Ground Nos. 2 and 3 of the grounds of appeal challenge the addition made on account of deemed dividend u/s 2(22)(e) of the Act.
34. We heard the rival submissions and perused material on record. An identical issue has been decided by us in the appeal by the same assessee for the assessment year 2008-09 viz. and assessment year 2009-10 in ITA No.1650/Bang/2014, and the findings given by us equally hold good for facts of additions in this assessment year also. Therefore, the ground Nos.2 and 3 on this issue are rejected.
The appellant raised additional grounds of appeal
challenging addition of deemed dividend u/s 2(22)(e) of the Act in respect of the amount of advance made by TLCCIP Ltd. and G7 SP Ltd., as no benefit had accrued to the appellant and the to 1652/Bang/2014 Page 32 amounts were advanced only for the benefit of G7 SP Ltd. The issue in the additional grounds of appeals is covered against the appellant by the decision of the Hon’ble jurisdictional High Court in the case of Bagmane Constructions (P) Ltd (supra) wherein it was held as follows:
30. It was also contended on behalf of the revenue that having regard to the plain words used in clause (e) 'to any concern', when the amount is paid or when any payment is made to a concern, the tax is levied on the concern and not on the shareholders. As far as this question is concerned, this Court following the judgment of the Bombay High Court in the case of CIT v. Universal Medicare (P.) (Ltd.)[2010] 324 ITR 263/190 Taxman 144 has categorically held that when any payment is made by a company to any concern, which falls under clause (e), the tax is leviable on the shareholder only and not on the concern. We respectfully agree with the aforesaid judgment and we do not see any justification to take another view of this matter. Therefore, the finding recorded by the Tribunal that, these advances made by the BDPL to the sister concern as well as to its shareholder do not constitute deemed dividend under Section 2(22)(e) of the Act, is legal and valid and do not call for any interference.
In the above decision, the Hon’ble jurisdictional High Court had followed the decision of the Hon’ble Bombay High Court in the case of Universal Medicare Pvt. Ltd. (supra) wherein it has been held that when any payment is made by a company to any concern which falls under clause (e) of section 2(22), tax is leviable in the hands of shareholder having substantial interest in the said concern and not in the hands of the concern. Thus the additional grounds of appeal are dismissed following the law laid down by the Hon’ble jurisdictional High Court in the case of Bagmane Constructions (P) Ltd (supra). to 1652/Bang/2014 Page 33
36. In the result, the appeal filed by the assessee is dismissed. (Assessment year: 2011-12):
37. The assessee raised the following grounds of appeal:
38. Grounds No.1, 5 and 6 are general in nature and do not require any adjudication.
39. Ground No.2 challenges the addition made on account of deemed dividend u/s 2(22)(e) of the Act. An identical issue was involved in the appeals by the assessee for the assessment year
ITA Nos.1649 to 1652/Bang/2014 Page 36 2008-09 to 2010-11 in to 1651/Bang/2014. For the detailed reasons given by us above in the above appeals, we uphold the addition made on account of deemed dividend. Thus we reject the ground of appeal on this issue.
40. Ground No.3 deals with addition made under clause (vii) of sub-section (2) of section 56 of the Act on account of receipt of bonus shares from the company. The AO had narrated the facts of this addition vide para.10 of the assessment order which is reproduced below:
Being aggrieved by the above addition, an appeal was preferred before the CIT(A). The CIT(A) upheld the addition placing reliance on the plain provisions of clause (vii) of sub- section (2) of section 56.
Before us learned counsel for the assessee contended that the provisions of section 56(2)(vii)(a) are not applicable in case of receipt of bonus shares. He further submitted that the provisions of section 56(2)(viia)are not applicable in the case of individual. to 1652/Bang/2014 Page 39 On the other hand, ld.CIT(DR) relied on the orders of the lower authorities.
We heard rival submissions and perused the material on record. There is no dispute about valuation of bonus shares and receipt of bonus shares. The issue is whether the receipt of bonus shares falls within the scope of clause (vii) of sub-section (2) of section 56 of the Act. The said provision reads as under: 56(2)(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,— (a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum; (b) any immovable property,— (i) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property; (ii) for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration: Provided that where the date of the agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of the agreement may be taken for the purposes of this sub-clause: Provided further that the said proviso shall apply only in a case where the amount of consideration referred to therein, or a part thereof, has been paid by any mode other than cash on or before the date of the agreement for the transfer of such immovable property;] (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 to 1652/Bang/2014 Page 40 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 The following clause (h) shall be inserted after clause (g) of second proviso to clause (vii) of sub-section (2) of section 56 by the Finance Act, 2016, w.e.f. 1-4-2017 : (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 sub-section (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 prescribed6; (c) "jewellery" shall have the meaning assigned to it in the Explanation to sub-clause (ii) of clause (14) of section 2; (d) "property" 7[means the following capital asset of the assessee, namely:—] (i) immovable property being land or building or to 1652/Bang/2014 Page 41 both; (ii) shares and securities; (iii) jewellery; (iv) archaeological collections; (v) drawings; (vi) paintings; (vii) sculptures; (viii) any work of art; or (ix) bullion; (e) "relative" means,— (i) in case of an individual— (A) spouse of the individual; (B) brother or sister of the individual; (C) brother or sister of the spouse of the individual; (D) brother or sister of either of the parents of the individual; (E) any lineal ascendant or descendant of the individual; (F) any lineal ascendant or descendant of the spouse of the individual; (G) spouse of the person referred to in items (B) to (F); and (ii) in case of a Hindu undivided family, any member thereof;] (f) "stamp duty value" means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property;]
From a bare reading of the section, it is clear that fair market value of a property other than immovable property by an individual or HUF, received without consideration, is chargeable to tax under the provisions of clause (c) of the above section. The vigor of the section is applicable in case where property is received by a person or HUF from any person or persons. Property has been defined to include shares and securities. The sine qua non condition for applicability of provisions of section to 1652/Bang/2014 Page 42 56(2)(vii) is that the property should be received by an assessee without any consideration. Then the issue to be determined boils down to whether issue of bonus shares involve passing of any consideration. The co-ordinate bench of Bangalore in the case of Dy. CIT vs. Dr. Rajan Pai reported in (2016) 180 TTJ 714 held after considering the decision of the Hon’ble Supreme Court in the case of CIT vs. Dalmia Cements Co. Ltd. (1964) 52 ITR 567 held that bonus shares can never be considered as received without consideration or for inadequate consideration calling for application of sub-clause (c) of clause (vii) of sec.56(2) as there is a pro rata decrease in the value of equity shares when there is an issue of bonus shares. The relevant paras. of the order are reproduced below: 09. A careful study of clause (c) of Section 56(2)(vii) of the Act, would show that two situations are considered therein. First is where a property is received without consideration and second where it is received for a consideration less than the fair market value. Situation can be better illustrated through an example. Let us consider the case of a company having 100 equity shares of Rs.10/- each, with a reserve and surplus of Rs.10,000/-. If the company considering its immense reserves and surplus, decides to issue bonus shares in the ratio of 1 : 1, how would its balance sheet look before and after such issue ? Hypothetically it should be as under : BALANCE SHEET PRIOR TO ISSUE OF BONUS SHARES Equity shares @ 100 x Rs. 1,000 Fixed & Rs.11,000 Rs.10/- Current assets Reserves & surplus Rs.10,000 Rs.11,000 Rs.11,000 BALANCE SHEET WOULD AFTER ISSUE OF BONUS SHARES Equity Rs.200 x10 Rs. 2,000 Fixed & Rs.11,000 Current assets Reserves & Surplus Rs. 9,000 Rs.11,000 Rs.11,000 to 1652/Bang/2014 Page 43 Value of one equity share before the issue of bonus shares will be Rs.11,000 ÷ 100 = ��. 110. Value of the equity share after the issue of bonus share will be equal to Rs.11,000 ÷ 200 = ��. 55. If a person was having 10 equity shares of the above company with him, after the bonus shares issue, it would become 20. However value of the ten equity shares (10 x Rs.110) is the same as value of 20 shares (20 x Rs.55) after the bonus shares issue. This in other words would mean that there is a prorata decrease in the value of equity shares when there is an issue of bonus shares. Thus when there is an issue of bonus shares there is a detriment suffered by the recipient share holder, through the depression in the value of the shares held by him. There is indeed a consideration flowing out which is exactly counter balanced by the value of the bonus shares received. The simple reason is that when bonus shares are issued by capitalising a portion of reserves and surplus, there is no increase in the asset value of a company, in any manner. What really happens is that the value of equity shares goes down prorata. Total value of equity shares held along with bonus shares remains the very same. Thus any profit derived by the assessee on account of receipt of bonus shares is theoretically offset by the depression in the value of the equity shares already held by him. Bonus shares does not result in recipient getting a property without consideration or for inadequate consideration. It is for this reason that Mumbai bench in the case of Sudhir Menon HUF (Supra) made the following observation in para 4.2 of its order : “......We may, before we conclude our discussion on this aspect of the matter, dilate on the application of the provision to the transaction of the nature under reference. The provision, firstly, would not apply to bonus shares, and the argument alluding thereto arises only on account of misconception in respect thereof. Though the shares under reference are admittedly not bonus shares, we consider it relevant to dwell thereon, not only to meet the argument in their respect, made emphatically before us, but also to demonstrate the wholesomeness of the provision, which is in fact what was being sought to be impugned. Issue of bonus shares is by definition capitalization of its profit by the issuing-company. There is neither any increase nor decrease in the wealth of the shareholder (or of the issuing company) on account of a bonus issue, and his percentage holding therein remains constant. What in effect transpires is that a share gets split (in the same proportion for all the shareholders), as for example by a factor of two in case of a 1:1 bonus issue. Reference in this regard may be made to the decision in CIT vs. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC) as well as in Khoday Distilleries Ltd. (supra), wherein reference stands made to the former, also quoting there-from, besides inter alia to Hunsur Plywood Works Ltd. vs. CIT [1998] 229 ITR 112 (SC), where the same were referred to as ‘capitalization shares’. In other words, there is no receipt of any property by the to 1652/Bang/2014 Page 44 shareholder, and what stands received by him is the split shares out of his own holding. It would be akin to somebody exchanging a one thousand rupee note for two five hundred or ten hundred rupee notes. There is, accordingly, no question of any gift of or accretion to property; the share-holder getting only the value of his existing shares, which stands reduced to the same extent. The same has the effect of reducing the value per share, increasing its mobility and, thus, liquidity, in the sense that the shares become more accessible for transactions and, thus, trading, i.e., considered from the holders’ point of view. We may though add a note of caution. There could be a case of bonus issue coupled with the release of assets (of the issuing company) in favour of the shareholders. The same would fall to be considered as dividend u/s. 2(22)(a) of the Act.” 10. Hon’ble Apex Court in the case of CIT v. Dalmia Investment Co. Ltd [(1964) 252 ITR 567] had as early as 1964 held that bonus shares if they ranked pari passu with the original shares, had to be valued at average of both bonus and the original shares. Paras 14 to 17 of the above judgment of Hon’ble Apex Court, is reproduced hereunder : “Can we then say that the bonus shares are a gift and are acquired for nothing? At first sight, it looks as if they are so, but the impact of the issue of bonus shares has to be seen to realise that there is an immediate detriment to the shareholder in respect of his original holding. The Income-tax Officer, in this case, has shown that in 1945 when the price of shares became stable it was Rs. 9 per share, while the value of the shares before the issue of bonus shares was Rs. 18 per share. In other words, by the issue of bonus shares pro rata, which ranked pari passu with the existing shares, the market price was exactly halved, and divided between the old and the bonus shares. This will ordinarily be the case but not when the shares do not rank pari passu and we shall deal with that case separately. When the shares rank pari passu the result may be stated by saying that what the shareholder held as a whole rupee coin is held by him, after the issue of bonus shares, in two 50 nP. coins. The total value remains the same, but the evidence of that value is not in one certificate but in two. This was expressed forcefully by the Supreme Court of the United States of America, quoting from an earlier case, in Eisner v. Macomber* thus: "A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased...The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional to 1652/Bang/2014 Page 45 interest that the original shares represented before the issue of the new ones....In short, the corporation is no poorer and the stock-holder is no richer than they were before.....If the plaintiff gained any small advantage by the change, it certainly was not an advantage of £ 417,450 the sum upon which he was taxed....What has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new. ...If a shareholder sells dividend stock, he necessarily disposes of a part of his capital interest, just as if he should sell a part of his old stock, either before or after the dividend. What he retains no longer entitles him to the same proportion of future dividends as before the sale. His part in the control of the company likewise is diminished." Swan Brewery's case**, it may be pointed out, was distinguished here also on the basis of the extended definition. It follows that the bonus shares cannot be said to have cost nothing to the shareholder because on the issue of the bonus shares, there is an instant loss to him in the value of his original holding. The earning capacity of the capital employed remains the same, even after the reserve is converted into bonus shares. By the issue of the bonus shares there is a corresponding fall in the dividends actual or expected and the market price moves accordingly. The method of calculation which places the value of bonus shares at nil cannot be correct. This leaves for consideration the other two methods. Here we may point out that the new shares may rank pari passu with old shares or may be different. The method of cost accounting may have to be different in each case but in essence and principle there is no difference. One possible method is to ascertain the exact fall in the market price of the shares already held and attribute that fall to the price of the bonus shares. This market price must be the middle price and not as represented by any unusual fluctuation. The other method is to take the amount spent by the shareholder in acquiring his original shares and to spread it over the old and new shares treating the new as accretions to the old and to treat the cost old price of the original shares as the cost price of the old shares and bonus shares taken together. This method is suggested by the department in this case. Since the bonus shares in this case rank pari passu with the old shares there is no difficulty in spreading the original cost over the old and the new shares and the contention of the department in this case is right. But this is not the end of the present discussion. This simple method may present difficulties when the shares do not rank pari passu or are of a different kind. In such cases, it may be necessary to compare the resultant price of the two kinds of shares in the to 1652/Bang/2014 Page 46 market to arrive at a proper cost valuation. In other words, if the shares do not rank pari passu, assistance may have to be taken of other evidence to fix the cost price of the bonus shares. It may then be necessary to examine the result as reflected in the market to determine the equitable cost. In England paragraph 10 of Schedule IX to the Finance Act, 1962, provides for such matters and for valuing rights issue but we are not concerned with these matters and need not express an opinion. It remains to refer to three cases to which we have already referred in passing and on which some reliance was placed. In Commissioner of Income- tax v. Manecklal Chunnilal and Sons Ltd.* the assessee held certain ordinary shares of the face value of Rs. 100 in Ambica Mills Ltd. and Arvind Mills Ltd. These two companies then declared a bonus and issued preference shares in the proportion of two to one of the face value of Rs. 100 each. These preference shares were sold by the assessee and if the face value was taken as the cost, there was small profit. The department contended that the entire sale proceeds were liable to be taxed, because the assessee had paid nothing for the bonus shares and everything received by it was profit. The assessee's view was that the cost was equal to the face value of the shares. The High Court rejected both these contentions and held that the cost of the shares previously held must be divided between those shares and the bonus shares in the same proportion as their face value and the profit or loss should then be found out by comparing the cost price calculated on this basis with the sale price. In our opinion, there is difficulty in the High Court's decision. The preference shares and the ordinary shares could hardly be valued in the proportion of their face value. The ordinary shares and the preference shares do not rank pari passu. The next case is Emerald Co. Ltd. v. Commissioner of Income- tax*. In that case, the assessee had, at the beginning of the year, 350 shares of which 50 shares were bonus shares and all were of the face value of Rs. 250 each. The assessee sold 300 shares and claimed a loss of Rs. 35,801 by valuing the bonus shares at face value. The department arrived at a loss of Rs. 27,766 by the method of averaging the cost, following the earlier case of the Bombay High Court just referred to. The Tribunal suggested a third method. It ignored the 50 shares and the loss was calculated by considering the cost of 300 shares and their sale price. The loss worked out at Rs. 27,748 but the Tribunal did not disturb the order of the Appellate Assistant Commissioner in view of the small difference. The High Court held that the method adopted by the department was proper but this court, on appeal, held that in that case the method adopted by the Tribunal was correct. This court did not decide which of the to 1652/Bang/2014 Page 47 four methods was the proper one to apply, leaving that question open. The reason was that the assessee originally held 50 shares in 1950; in 1951, it received 50 bonus shares. It sold its original holding three days later and then purchased another 100 shares after two months. In the financial year 1950-51 (assessment year 1951-52), the Income-tax Officer averaged the price of 150 shares and found a profit of Rs. 1,060 on the sale of 50 shares instead of a loss of Rs. 1,365 which was claimed. The assessee did not appeal. In the financial year 1951-52 (assessment year 1952-53) the assessee started with 150 shares (100 purchased and 50 bonus). It then purchased 200 shares in two lots and sold 300 shares, leaving 50 shares. The assessee company claimed a loss of Rs. 35,801. The Income-tax Officer computed the loss at Rs. 27,766 and the Tribunal computed the loss at Rs. 27,748. The Tribunal, however, did not disturb the loss as computed by the Income-tax Officer in view of the slender difference of Rs. 18. The High Court's decision was reversed by this court because the High Court ignored all intermediate transactions and averaged the 300 shares with the 50 bonus shares. The shares in respect of which the bonus shares were issued were already averaged with the bonus shares. This was not a case of bonus shares issued in the year of account. It involved purchase and sale of some of the shares. The average cost price of the original and bonus shares was already fixed in an earlier year by the department and this fact should have been taken into account. No doubt, Chagla C.J. observed that it was not known which of the several shares were sold in the year of account, but in the statement of the case it was clearly stated that bonus shares were untouched. The decision of this court in Emerald Co.'s case* however lends support to the view which we have expressed here. The bonus shares can be valued by spreading the cost of the old shares over the old shares and the new issue taken together, if the shares rank pari passu. When they do not, the price may have to be adjusted either in the proportion of the face value they bear (if there is no other circumstance differentiating them) or on equitable considerations based on the market price before and after the issue.” Hon’ble Apex Court not only held that bonus shares can never be given nil value but also held that its value has to be worked out by the principle of averaging. In any case, the principle enunciated is simple. It is that for every bonus share issued, there is a corresponding reduction in the actual fair market value of the equity share originally held. This being the situation we are of the opinion that an assessee who received bonus shares could never be considered as receiving something without consideration or for a consideration less than the fair market value of the property. When bonus shares are received, it to 1652/Bang/2014 Page 48 is not something which has been received free or for a lesser fair market value. A consideration has flown out from the holder of the shares, may be unknown to him, which is reflected in the depression in the intrinsic value of the original shares held by him. Thus in our view, Section 56(2)(v), (vi) and (vii) brought in to the Act for addressing the vacuum caused due to withdrawal of the Gift-tax Act cannot be used for the purpose of taxing the value of bonus shares received by an assessee. Valuation of unquoted shares set out in Rule 11 UA(B) will have applicability only on receipt of shares as gift or for inadequate consideration. Bonus shares can never be considered as received without consideration or for inadequate consideration calling for application of sub-clause (c) of clause (vii) of Section 56(2) of the Act. We have no hesitation to uphold the order of CIT (A) deleting the addition made by the AO.
We do not find any reason to differ with the ratio of the above decision and, therefore, we hold that issue of bonus shares does not involved passing of any consideration and therefore, the provisions of sub-clause (c) of clause (vii) of section 56(2) are not applicable. Accordingly, these grounds of appeal are allowed.
45. Ground No.4 challenges the direction of the CIT(A) sustaining the sum of Rs.1,34,874/- made on account of allotment of shares to son of the appellant, who is the minor, by the company TLCCIP Ltd.
46. The background leading to the above addition has been discussed by the AO vide para.11 of the assessment order which is reproduced below:
Being aggrieved, appeal was preferred before the CIT(A) who confirmed the addition.
After hearing both the parties and considering the material on record, reasoning given by us in respect of addition of receipt to 1652/Bang/2014 Page 50 of bonus shares equally holds good to this addition. Accordingly, we delete the addition.
In the result, the appeal filed by the assessee is allowed.