Provisions of Sec.56(2)(vii) on allotment of shares

IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, MUMBAI

BEFORE HON’BLE SHRI MAHAVIR SINGH, VP AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM

I.T.A. No.5748/Mum/2017

Assessment Year: 2014-15

Income Tax Officer-13(1)(3) 2nd Floor, Room No.225 Aaykar Bhavan, M.K. Road Mumbai-400 0204

vs

Shri Rajeev Ratanlal Tulshyan 4101, 4th Floor, C-Wing Lodha Bellissimo, J.B. Boricha Marg Lower Parel, Mumbai-400 011

Cross Objection No.118/Mum/2018 (Arising out of I.T.A. No.5748/Mum/2017)

Assessment Year: 2014-15

Shri Rajeev Ratanlal Tulshyan 4101, 4th Floor, C-Wing Lodha Bellissimo, J.B. Boricha Marg Lower Parel, Mumbai-400 011

vs

Income Tax Officer-13(1)(3) 2nd Floor, Room No.225 Aaykar Bhavan, M.K. Road Mumbai-400 020.

Assessee by : Shri Rushabh Mehta- Ld.AR
Revenue by : Shri Gaurav Batham-Ld. CIT-DR

Date of Hearing : 22/07/2021

Date of Pronouncement: 01/10/2021

O R D E R

The assessee has filed cross-objection on following grounds: - 1. (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. (2) 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.

2. On the basis of above tabulation, it was demonstrated that the assessee was offered shares only as per his proportionate entitlement and nothing more and therefore, in terms of the cited decision, the provisions of Sec.56(2)(vii) were not attracted. It was further argued that it was not a case of tax evasion or money laundering but a pure genuine commercial arrangement in the normal course of business. The intention of the provisions was to check evasion of tax and the provisions were introduced as anti-abuse provisions.

3. Applying the ratio of above decision, coordinate bench of Mumbai Tribunal in ACIT V/s Subodh Menon (103 Taxmann.com 15), observed that the provisions of Section 56(2)(vii) does not apply to bona-fide business transaction. The CBDT Circular No.1/2011 dated 06/04/2011 explaining the provision of section 56(2)(vii) specifically states that the section was inserted as a counter evasion mechanism to prevent money laundering of unaccounted income. In paragraph 13.4 thereof, 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". Therefore, the aforesaid transactions, as carried out in normal course of business, would not attract the rigors of provisions of Sec.56(2)(vii).

4. The revenue’s appeal stand dismissed whereas the assessee’s cross-objections stand partly allowed. Order pronounced on 1st October, 2021.

Please find attached the enclosed file for the full judgement