Section 56(2)(viii)(c)(ii) does not apply to money/ property received from close relatives
Facts and Issue of the case
This appeal by the assessee is directed against the order of the ld. CIT(A), National Faceless Appeal Centre, Delhi [hereinafter referred to as (NFAC)] for the AY 2008-09.
At the outset of hearing, the Bench observed that there is delay of 180 days in filing the appeal by the assessee for which the ld. AR of the assessee filed a condonation application dated 3012.2021 along with affidavit of CA of the assessee dated 30.12.2021 mentioning therein that delay in filing the appeal by the assessee is occurred due to lockdown and not functioning of the income tax side. Thus, the ld. AR of the assessee prayed that the assessee is prevented by sufficient cause in late filing the appeal before ITAT and the delay occurred may kindly be condoned.
During the course of hearing, the ld. DR has no objection to assessee application for condonation of delay and prayed that court may decide the issue as deem fit and proper in the case.
Brief facts of the case are that the assessee is an existing shareholder of M/s Prakash Deep Finance Co. Ltd. (in short PDFCL) having 99,500/- shares of Rs. 10/- each amounting to Rs. 9,95,000/- since 2007. During the year PDFCL allotted 3,00,000 shares to the assessee at face value of Rs. 10/- each for Rs. 30 lakhs on 31.03.2014. The AO however held that FMV of shares u/s 56(2)(vii)(c) read with rule 11UA as on 31.03.2014 is Rs. 11.52 per share and this shares were allotted at a value lower by Rs. 1.52 per share. Accordingly, he made addition of Rs. 4,56,000/- (3,00,000*1.52) by holding that the contention of assessee that section 56(2)(vii)(c) (ii) is applicable only when an assessee receives any movable property at lower than FMV but the allotment of shares by the company cannot be equated with receipt of shares is not correct as change of name or words will not deter the applicability of legal provisions.
The AO arrived the findings as held that provisions of section 56(2)(vii)(c)(ii) of the IT act read with provisions of Rule-11UA of the IT Act, 1962 are clearly applicable in this case. Therefore, an amount of Rs. 4,56,000/- is hereby added to total income of the assessee. Total income of the assessee is Rs. 47,07,380/-
Assessed u/s 144/147 of the I.T. Act, 1961 at total income of Rs. 47,07,380/-. Issued copy of order and demand notice to the assessee. Penalty proceedings U/s 274 r.w.s. 271(1)(c) is being initiated separately for concealing income by the assessee.
Being aggrieved by the assessment order, the assessee preferred an appeal before the ld. CIT(A). Before the ld. CIT(A), the assessee has reiterated its arguments in written submission of the order. The ld. CIT(A) for the reasons stated in his order has rejected the arguments and submissions made by the assessee. Aggrieved by the CIT(A) order, the assessee is in appeal before us.
Observation of the court
Court has heard both the parties, perused materials available on record and gone through orders of the authorities below. We are of the considered view that in the present case the question arises:
whether Tax to be paid by the shareholders or the company?
In the present case since the explanation (e) of section 56(2)(vii) which provides that in case of HUF, any member thereof falls in the definition of relative, as the shares allotted to the assessee to the extent of 95.35% was from the interest of his relatives, the same ought not be subject to tax and the company since it is Private Limited company and holding the majority of shares by the relatives , where the assesee himself the karta is Director and member of HUF holding major shares in the company. The shares have been allotted on 31.03.2014 to the assesse instead of allotting shares to all the existing shareholders and thus even if it is assumed that the shareholders to whom shares were not allotted have given up their right of allotment in shares to other shareholders, it is a case of transfer of right in shares by one relative to another relative and therefore also section 56(2)(vii)(c) would not get attracted.
whether there is a difference between allotment of shares and receipt of shares ?
We appreciate the view and arugment placed by the Ld AR for assessee that the company has allotted the shares to an existing shareholder. This is not akin to receipt of shares in as much as there is a distinction between allotment of shares and receipt of shares. Receipt is the action of receiving something or the fact of its being received whereas allotment is defined as the portion or share of something. For receipt of share there should be shares in existence and a person holding such share transferring it to another person. As against this in case of allotment of shares, it comes into existence after it is allotted and there is no transfer of shares from one person to another person. Therefore allotment of shares cannot be equated with receipt of shares because in case of receipt of shares the property is already in existence whereas in case of allotment of shares the property comes into existence after it is allotted.
Whether assesses comes under the definition of Relative?
The definition of close relative given in the act under section 56(2)(vii)(c) of the act in Explanation is as under:
(e) “relative” means,-
in case of an individual-
- spouse of the individual;
- brother or sister of the individual;
- brother or sister of the spouse of the individual;
- brother or sister of either of the parents of the individual;
- any lineal ascendant or descendant of the individual;
- any lineal ascendant or descendant of the spouse of the individual;
- spouse of the person referred to in items (B) to (F); and
in case of a Hindu undivided family, any member thereof;]
There is no dispute in the contention of the assessee is that all the shareholders are relatives and 95% of the shares have been within the relatives . The transaction between the close relatives is not taxable under the head ‘income from other sources u/s 56(2) of the Act. We are of the opinion that the section 56(2)(vii)(c) has no application and the company is liable to be taxed . The opinion and well known facts that in a private limited company major percentage of shares are holded by the relatives only.
Whether it is fresh allotment of shares or existing allotment of shares?
The contentions of the Ld AR for the asssesee is that the company has allotted the shares to an existing shareholder. Where the receipt of shares in as much as there is a distinction between allotment of shares and receipt of shares. Receipt is the action of receiving something or the fact of its being received whereas allotment is defined as the portion or share of something. For receipt of share there should be shares in existence and a person holding such share transferring it to another person. There is no dispute that existing shareholders prior to fresh allotment was the assessee and his relatives and the provisions of section 56(2)(viii)(c)(ii) shall not apply in case of money or any property received from any close relative .In the present case it is fresh allotment of shares.
Court is of the opinion discussing the above issues and respectfully following the view taken by the Coordinate Bench of ITAT in case of ACIT vs. Venkanna Choudhary  180 ITD 166 (Visakhapatnam-Trib.) dated 30-09- 2019. Taking into consideration the facts, circumstances of the case and also the decision in the case of ACIT vs. Venkanna Choudhary (Supra) we allow the appeal of the assessee and set aside the order of CIT(A) and addition confirmed by the CIT(A) is deleted.
In the result, the appeal of the assessee is allowedPrakash-Chand-Sharma-HUF-Vs-ITO-ITAT-Jaipur