Genuine issue of share to shareholders does not attract taxability under provision of section 56(2)(vii) of Income Tax Act.
Shri Rajeev Ratanlal Tulshyan
Income Tax Officer
[I.T.A. No.5748/Mum/2017 & Cross Objection No. No.118/Mum/2018 AY 2014-2015 dated October 01, 2021]
Fact of Case
The Appellant has majority of stake in M/s Kennington Fabrics Private Limited (KFPL), holding 87.5 lakhs shares as on 31-03-2013 which constitute 90.37% shareholding the company, during the year 2013-14, the company offered right issue to the shareholders in ratio of 7:8 vide board resolution dated 09-08-2013 and 5:8 vide board resolution dated 06-03-2014 at face value Re.1/-.
Number of shares offered in 1st offer 87.50 * 8/7 = 100 lakhs shares and assessee fully subscribed 100 lakhs share,
In second issued shares offered to him 187.5 * 8/5 = 300 lakhs shares where assessee subscribed 295 lakhs shares, after second issue the assessee was holding 482.5 lakhs shares which constituted 96.88% of companies total shareholding.
Present appeal is filed by revenue arise out of the order of Ld. Commissioner of Income-Tax (Appeals)-21, Shri Rajeev Ratanlal Tulshyan Assessment Year: 2014-15 2 Mumbai, [in short referred to as ‘CIT(A)’] dated 16/06/2017 in the matter of assessment framed by learned Assessing Officer (AO) u/s 143(3) on 30/12/2016. The revenue has filed revised grounds which read as under:
- On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the addition of Rs.42,87,75,000/- to Rs.1,50,87,320/- under section 56(2)(vii)(c)(ii) of the Income-tax Act, without appreciating the fact that the addition was made as income from other sources totaling to Rs.42,87,75,000/-.
- On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the addition without appreciating the fact that the assessee has failed to discharge its onus of explaining the charging @ Rs.10.85 per share with proper explanations and supporting evidences.
The assessee has filed cross-objection on following grounds: -
- A) The Id. CIT(A) erred in facts and law in applying the provisions of section 56(2)(vii)(c)(ii) of the Act and confirming the addition to the extent of Rs.1,50,87,320/-.
B) The Id. CIT(A) erred in facts and law in not appreciating that the appellant had applied for and was allotted shares in right issue only to the extent to which he was entitled to in proportion of his existing-shareholding and therefore section 56(2)(vii)(c)(ii) ought not have been invoked.
C) The Id. CIT(A) erred facts and law in not appreciating that the appellant had been in fact "allotted" the right shares on creation which cannot be equated to as "received" as envisaged u/s. 56(2)(vii)(c)(ii) of the Act.
- Without prejudice and without accepting the applicability of the provisions of section 56(2)(vii)(c)(ii) of the Act, the Id. CIT(A) erred in facts and law in not appreciating that the rise in shareholding of the appellant is substantially due to inaction on part of his relatives to exercise the right issue of shares offered to them and that the addition made to that extent ought to have been excluded from the rigors of section 56(2)(vii)(c)(ii) of the Act.
The assessee, inter-alia, relied on the decision of Mumbai Tribunal in Sudhir Menon HUF (supra) wherein it was held that in case of proportionate allotment of shares, there would be no taxability u/s 56(2)(vii)(c)(ii).However, in case of disproportionate allotment of shares, there provisions may get attracted.
However, Ld. AO noticing that the percentage of share holding of the assessee in KFPL increased from 90.37% as on 31/03/2013 to 96.88% as on 31/03/2014, opined that there was disproportionate Shri Rajeev Ratanlal Tulshyan Assessment Year: 2014-15 4 allotment of shares and therefore, the stated provisions would apply in assessee’s case. Accordingly, Ld. AO worked out intrinsic value per share as on 31/03/2013 at Rs.11.85 per share on the basis of formula laid down in Rule 11U and 11UA.
Findings of ITAT
It was evident that allotment of shares was dis-proportionate, in view of the fact that assessee shareholding increased from 90.37% to 96.88%. the said conclusion overlooked the fact that company offered two right issue during FY 2013-14 in ratio of 7:8 & 5:8 at face value of Re.1/- and on both the occasions shares have been offered in same ratio and price to all the existing shareholders where assessee subscribed his entitlement whereas other shareholder’s didn’t subscribed, Resultantly shareholding of the assessee increased at the year end.
Therefore, on the given facts and circumstances, the impugned additions as made by Ld. AO in the assessment order are not sustainable in the eyes of law. By deleting the same, we allow Ground Nos. 1(a) & 1(b) of assessee’s cross-objections which render other grounds of cross-objections as infructuous. The revenue’s appeal stand dismissed.
The revenue’s appeal stand dismissed whereas the assessee’s cross-objections stand partly allowed.