THE issues before the Bench are - Whether the provisions of
section 56(2)(vii) apply to all capital assets, including bonus and rights
shares offered on proportionate basis even if the offer price is less than the
fair market value; Whether in case the value of the property in the additional
shares is derived from that of the existing shareholding, it can be presumed
that additional property have been received by the shareholder; Whether in case
there is no disproportionate allotment, shares are allotted pro-rata to the
shareholders, based on their existing holdings, there is any scope for any
property being received by them on the said allotment of shares; Whether in case
the value of additional shares is derived from that of the existing shares, the
decline in the
value thereof can be excluded from valuation; Whether purchase or
transfer implies existence of a property, while the shares, where out of
un-appropriated capital, come into existence only on their allotment and Whether
the consequences can alter the meaning of a statutory provision, even where such
meaning is plain and unambiguous. And the verdict partly goes in favour of the
assessee.
Facts of the
case
The assessee is an HUF, holding 15,000
shares in a company by the name Dorf Ketal Chemicals Pvt. Ltd. (DKCPL). The
entire share capital was held by the family members of the assessee’s karta’s
family, representing 4.98% of the share capital (3,01,316 shares), was offered
3,13,624 additional shares at the face value rate of Rs.100/- each, on a
proportionate basis. It subscribed to and was accordingly allotted 1,94,000 of
those shares, on 28.01.2010, i.e., along with the other shareholders, who were
allotted - on the same terms, not only the shares similarly offered to them but
also that not subscribed to by the other shareholders, as 1,19,624 (313624 –
194000) shares by the assessee. The shares were received by the assessee on
10.02.2010. As the book value of the shares of DKCPL as on 31.03.2009 was
Rs.1,538/- per share, which was to be adopted as a measure of their FMV under
the applicable rules, AO treating the difference of Rs.1,438/- per share as the
extent of the inadequate consideration, in terms of section 56(2)(vii)(c) added
toward the acquisition of additional shares. On appeal, CIT(A) confirmed AO's
order.
The
first issue was regarding the provisions applicable to a transaction as the one
under reference. Assessee was contending it to be only an issue of right shares.
It was contended that in case issue of right shares was being considered as a
instrument of capital budgeting, it would equally applicable to bonus shares. As
per the decision of SC in the case of K.P. Varghese vs. ITO
(2002-TIOL-128-SC-IT), SC took into account all the
relevant factors, including the purpose for which the relevant provision of
section 52 was brought on the statute, as clarified by the official
pronouncements preceding it or in this regard, invoking the rule of
contemporanea expositio as well as the principles of construction.
It
was argued that the word ‘property’ occurring in section 56(2)(vii) was defined
to mean capital assets as specified therein. Though the same lists ‘shares and
securities’, one of the objections raised by the assessee was that the shares
come into existence only on their allotment. However, the right to acquire the
shares at a concessional rate comes into effect on the passing of the necessary
resolution by the Board of Directors (BOD) of the issuer-company. It was agreed
that the shareholders get the right to acquire the additional shares on the
passing of the board resolution, but the receipt of the property was only on
their allotment, on which date the shares, a specified property, was in
existence. In the cases of Shree Gopal and Company vs. Calcutta Stock
Exchange Ltd. and Khoday Distilleries Ltd. vs. CIT (2008-TIOL-213-SC-IT), it had been explained that
allotment was generally neither more nor less than the acceptance by the company
of the offer to take shares. All it means was appropriation out of the
previously un-appropriated capital of a company of a certain number of shares to
a particular person. Till such allotment the shares do not exist as such, and in
a sense come into existence on their allotment. In this view of the matter, the
plea of the rights under reference being not a property specified under the
provision or the provision being sought to be applied by the Revenue to a
non-existing property, was without basis. In fact, before Tribunal even the date
of receipt - which itself implies that the property exists, i.e., whether on
allotment (28.01.2010) or the receipt of shares (10.02.2010), was a bone of
contention. This was rendered inconsequential inasmuch as both the dates fall
during the relevant previous year; and being separated by a small time lag, even
the valuation would not alter to any material extent, and which becomes a
relevant consideration inasmuch as the valuation date was the date of the
receipt of the property. Though, the shares were received on their allotment.
What stands received by the assessee subsequently on 10.02.2010 were the share
certificates, i.e., the document evidencing its title thereto. The two were
different, and the shares as well as the property therein vest in the assessee
on the allotment of the shares, whereat the same stand constructively received;
the payment of which had also been made by that date. The provision of section
56(2)(vii) does not apply to bonus shares, as in that case there is no receipt
of any property by the shareholder, and what stands received by him is the split
shares out of his own holding. There was, 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.
Held that,
++ we
may though, at the outset, clarify that the instant issue cannot be called a
rights issue. Section 81 of the Companies Act, 1956 is not applicable to a
private company (s.81(3)), so that it is firstly not obliged to issue shares to
the existing shareholders only, and again, even so, on a proportionate basis.
That apart, we state so as the scheme does not have a provision for the
renunciation of rights by the existing shareholders. The same could thus at the
option of the issuing company be offered for allotment to any other, i.e.,
whether existing shareholder or not. Thus, though the issue has elements of a
right issue inasmuch as the offer is made in the first instance to the existing
shareholders on the basis of their shareholding on proportional basis, the same
cannot be strictly termed as one; the company appropriating that right, which
could be offered to another. A rights issue, as informed by the AR, stands not
defined either under the Companies Act or under the Securities Contracts
(Regulation) Act, 1956. The company has, accordingly, correctly termed the
issue, not satisfying all its parameters, as akin to a rights issue, before the
CIT(A), which the AR was before us at pains to dislodge. Nothing, however, turns
on the same, as would apparent from the foregoing discussion, and as we shall
presently see in more detail. We say so as to the extent the value of the
property in the additional shares is derived from that of the existing
shareholding, on the basis of which the same are allotted, no additional
property can be said to have been received by the shareholder. The Revenue
argues otherwise, contending that the fall in the value of the existing holding,
if any, is not to be taken into account or reckoning. The argument is equally
misconceived, i.e., as that by the assessee qua the applicability of the
provision to bonus shares. It fails to take into account the nature of the
transaction. To exemplify, shares in the ratio (say) 1:1 are offered for
subscription at the face value of Rs.100/- as against the current book value of
Rs.1,500/- (say). The moment a right share is allotted, the book value shall
fall to Rs.800/- per share. It is easy to see that the new share partakes a part
of the value of the existing share, which is only on the basis of the underlying
assets on the company’s books. The excess (over face value), or Rs.1,400/-, gets
apportioned over two shares as against one earlier, which is already the
shareholders’ property. This is also the basis and the premise of the decisions
in the case of Dhun Dadabhoy Kapadia vs. CIT [1967] 63 ITR 651 (SC) and H. Holck
Larsen vs. CIT [1972] 85 ITR 285 (Bom), relied upon and referred to by the
parties before us. As long as, therefore, there is no disproportionate
allotment, i.e., shares are allotted pro-rata to the shareholders, based on
their existing holdings, there is no scope for any property being received by
them on the said allotment of shares; there being only an apportionment of the
value of their existing holding over a larger number of shares. There is,
accordingly, no question of section 56(2)(vii)(c), though per se applicable to
the transaction, i.e., of this genre, getting attracted in such a case. A higher
than proportionate or a non-uniform allotment though would, and on the same
premise, attract the rigor of the provision. This is only understandable
inasmuch as the same would only be to the extent of the disproportionate
allotment and, further, by suitably factoring in the decline in the value of the
existing holding. In the context of the example cited, by taking the difference
at Rs.700/- per share for such shares. We emphasize equally on a uniform
allotment as well. This is as a disproportionate allotment could also result on
a proportionate offer, where on a selective basis, i.e., with some shareholders
abstaining from exercising their rights (wholly or in part) and, accordingly,
transfer of value/property. We observe no absurdity or unintended consequences
as flowing from the per se application of the provision of s. 56(2)(vii)(c) to
right shares, which by factoring in the value of the existing holding operates
equitably. It would be noted that the section, as construed, would apply
uniformly for all capital assets, i.e., drawing no exception for any particular
class or category of the specified assets, as the ‘right’ shares. No addition
u/s. 56(2)(vii)(c) would thus arise in the undisputed facts of the instant case,
and the assessee succeeds;
++
the foregoing arguments and premises would also meet and state the basis for our
not accepting the Revenue’s argument toward no cognizance being taken of the
existing shareholding – on the strength of which only the additional shares are
allotted to the assessee or the decline in their value consequent to the issue
of additional shares in-asmuch as the same are not the subject matter of
receipt, i.e., to which the provision pertains and is restricted to. It stood
further contended before us that the ratio of the decision in the case of Dhun
Dadabhoy Kapadia would be no longer applicable, i.e., even in principle, so that
the said decline would be of no consequence in view of the specific provisions
being since incorporated u/s 55, providing for the cost of shares under such
situations, as for example a nil cost for bonus shares. The capital asset
received by the assessee, it may be appreciated, are to be valued as on the date
of its receipt. That is, it is only the asset received that is to be valued.
In-as-much as therefore the value of the additional shares is derived - if only
in part - from that of the existing shares, the decline in the value thereof
cannot be excluded or ignored – though only by following the valuation method
prescribed under the rules – in arriving at the property by way of additional
shares received by the assessee. In our view, the same, on the contrary,
provides statutory support, i.e., in principle, to our decision in-as-much as it
clarifies that the values of the two, i.e., the original and the additional
financial assets (which is how the same are referred to in the said provision)
are interlinked and, accordingly, a gain cannot be computed independent of each
other. It is in fact in acknowledgment thereof that the Legislature has
considered it proper and necessary to provide for determination of cost in such
cases, i.e., for uniform application. The same though would operate for the
purpose of computing capital gains, which would arise on the subsequent transfer
of such assets. We have already noted an internal consistency between the two
sets of provisions in-as-much as section 49(4) stands simultaneously
incorporated to deem the value adopted or taken for the purpose of section
56(2)(vii) (or (viia)) as the cost of acquisition of the relevant asset (refer
para 4.1). In fact, the argument becomes irrelevant in view of our decision
holding that section 56(2)(vii) shall not have effect, irrespective of the value
at which the additional shares are allotted, where and to the extent they are so
on the strength of and against the existing shareholdings, made uniformly or
subject to adequate pricing. Much was made before us of the Revenue not treating
the transaction as a rights issue of shares, as well as of the power of the
tribunal in entertaining such a plea, even where taken before it for the first
time, including qua the admission of additional evidence. We have already
clarified the same to be not a rights issue, i.e., in the strict sense of the
term, also stating our reasons, on the basis of admitted facts, therefore. The
plea is also rendered inconsequential in view of our afore-said decision. This
would also meet the assessee’s argument of it becoming, as a result of the
transaction, poorer in-as-much as the value of his holding witnesses a decline
after taking into account the payment made for the acquisition of the additional
shares. The said argument thus, rather than detracting from lends further
support to our decision. The assessee’s argument, with reference to the shares
in the resulting company received by a shareholder on demerger, which is without
consideration, would thus also be of no moment. The same is again misconceived
in-asmuch as the shareholder only receives the value of his existing holding in
the form of the shares in the resulting company;
++ we
may next meet the various arguments advanced by either side. The assessee claims
of section being not per se applicable as neither is there any transfer in its
favour nor is the issuer-company the owner of the shares, which stand acquired
by way of subscription. We are unable to appreciate the argument. How else, we
wonder, is the issued capital in a company supposed to be acquired? The section
nowhere stipulates ‘transfer’ as the prescribed mode of acquisition. The
transfer of a capital asset is even otherwise a relevant consideration in
respect of income by way of capital gains, chargeable u/s.45. A parallel, if at
all, in-as-much as the provision, which is to be considered as valid, was
required to be placed in perspective and within the scheme of the Act, could be
drawn to the deeming provisions of its Chapter VI titled ‘Aggregation of income
and set off or carry forward of loss’. An investment or asset found not
recorded, wholly or partly, in the books of account maintained by the assessee
(for any source of income), and in respect of acquisition or ownership of which
he is unable to furnish a satisfactory explanation, i.e., as to the nature and
source of acquisition, the value thereof or the excess (unrecorded) value, as
the case may be, is deemed as the assessee’s income. The receipt of an asset by
the assessee, and in his own right, is, on the other hand, the very basis or the
edifice on which the provision of section 56(2)(vii) rests, so that it proceeds
on the basis or the footing of the burden of the Revenue being satisfied. The
receipt of a capital asset is accordingly made the basis or the condition for
the charge to tax as income, unless falling under any of the excepted
categories, and which it would be noted is a valid basis u/s. 2(45) r/w s.5. It
is this in fact that had led us to state earlier of the receipt (of an asset) as
having been adopted as the basis or the condition of deeming as income u/s.
56(2)(vii) (or clauses (v) and (vi)), and of the provision as being on a firm
footing. What the provision essentially does is to widen the scope of the
afore-referred provisions of Chapter VI, which is essentially a statutory
recognition of the rules of evidence, even further. A share does not exist prior
to its allotment, and in that sense comes into existence only on its allotment.
Allotment of a share is only the appropriation of the authorized share capital,
being un-appropriated, to a particular person. In nutshell, the difference
between the issue of a share to a subscriber and a purchase of a share from an
existing shareholder is the difference between the creation and transfer of a
chose in action. How could, therefore, purchase be equated with allotment? In
fact, the purchase or transfer implies existence of a property, while the
shares, where out of un-appropriated capital, come into existence only on their
allotment. It becomes, thus, in the context of the provision, completely
irrelevant and of no consequence that the shares in the issuing company are not
its property, and that it does not become, therefore, any poorer as a result of
the allotment of shares therein. ‘Receipt’ is a word or term of wide import, and
would include acquisition of the subject matter of receipt – defined capital
assets in the present context, by modes other than by way of transfer as well.
We find no reason to limit or restrict the scope of the word ‘receipt’ in the
provision to cases of ‘transfer’ only. Doing so would not only amount to reading
down the provision, which the tribunal is even otherwise not competent to, being
not a court of law, but reading it in a manner totally inconsistent with the
unambiguous language and the clear intent (of the Legislature) conveyed thereby,
but also its context as well as the drift of section, in complete violence
thereto;
++ we
have already found receipt as a valid basis for deeming income, which is
supported by the principles of common law jurisprudence. That ‘income’ under the
Act is a word or term of wide import, and would include anything which comes in
or results in gain is also well settled. The provision casts exceptions, again
as afore-noted, where in the normal course considerations other than
financial/monetary are at play, so that it applies to commercial transactions
for which an arm’s length basis can be reasonably regarded as the normative
basis for conducting or concluding transactions. Further, even the official
pronouncements, which are not to be read as one does a statute, do not in any
manner detract from or operate to dilute the rigor of the section; the same
itself explaining it as an anti-abuse measure. In fact, even the assessee’s case
is limited to right shares only, and does not speak of any other capital asset
covered by the provision, including shares and securities. We have already
explained that to the extent the shares subscribed to are right shares, i.e.,
allotted pro-rata on the basis of the existing share-holding (as on a cutoff
date), the provision, though per se applicable, does not operate adversely. A
disproportionate allotment, which cannot, therefore, strictly be regarded as
right shares, though could be allotted under a rights issue, would however
invite the rigor of the provision, i.e., to that extent. All that is logical
relevant, yielding insight into the purpose and object for and toward which the
amendment stands brought, should be admissible. The court cannot read anything
into a statutory provision which is plain and unambiguous; a statute being an
edict of the Legislature. The language employed in a statue is a determinative
factor of the legislative intent, the foundational basis of any interpretation,
is to be found from the words used by the Legislature itself. The principle is
in fact well settled and trite (refer Padmasundra Rao and others vs. State of
Tamil Nadu (2002-TIOL-986-SC-MISC-CB); and Britannia
Industries Ltd. vs. CIT (2005-TIOL-125-SC-IT). As explained in Surat
Art Silk Cloth Mfrs. Assoc., the consequences cannot alter the meaning of a
statutory provision where such meaning is plain and unambiguous, though could
certainly help to fix its meaning in case of doubt and ambiguity. The
amendment/s under reference, as explained in the Finance Minister’s speech
itself while introducing the provision, follows the abolition of the Gift Tax
Act which, as also observed earlier, sought to bring the difference in the
consideration to tax in the hands of the donor. That the said Act, together with
the Wealth Tax Act and the Act form an integrated code is well settled. ‘Income’
under the Act, it is again well settled, is a word of widest amplitude, and
could include gains derived in any manner. To our mind, therefore, the
provisions/s, though no doubt a charging provision, is an extension of the
deeming provisions of Chapter VI of the Act, laying down the statutory rules of
evidence, incorporating the principles of common law jurisprudence. In sum, as
also in fine, the provision, brought as an anti-abuse measure, only seeks to tax
the understatement in consideration as the income in the hands of the recipient
as against the donor in the case of Gift Tax Act, since no longer in force,
particularly considering the burden that the Revenue would otherwise be called
upon to discharge, i.e., to prove otherwise, even as the receipt of the asset by
the assessee is established. No ambiguity or absurdity or unintended consequence
has been either observed by us or brought to our notice, even as we have
endeavoured to examine the provision from all angles; it being well excepted,
also excluding cases of business reorganization. The provision is well founded,
even as it is settled that hardship in a case would not by itself lead to
supplying casus omissus or reading down the provision. In fact, we have also
observed the same to be in accord with the trend in the legislative field in the
recent past where in view of the increasing complexity of business or economic
transactions, fair market value, also providing rules for its determination, is
being increasingly adopted for uniform application as a basis for commercial
transactions for the purpose of taxing statutes. The reliance on the argument
made in this regard would thus be of no assistance to the assessee. No property
however being passed on to the assessee in the instant case, i.e., on the
allotment of the additional shares, no addition in terms of the provision itself
shall arise in the facts of the case. We accordingly answer the question raised
at the beginning of this order in the negative. In view of the foregoing,
therefore, the provision of s. 56(2)(vii)(c), in the facts and circumstances of
the case, shall not apply and, hence, the amount of Rs.27,89,02,160/- cannot be
assessed as income in the hands of the assessee on the ground of inadequate
consideration. This answers ground nos. 2 to 4. Ground # 1 stands dismissed as
not pressed. We decide accordingly. The assessee has also moved a stay
application. In view of our having decided the appeal itself, the same becomes
infructuous. In the result, the assessee’s appeal is partly allowed and stay
application is dismissed as infructuous.
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