Viib) Cannot Be Invoked In The Assessee's Case?" v. Https://Hcservices.ecourts.gov.in/Hcservices

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 4.4.2019 CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE MR.JUSTICE C.V.KARTHIKEYAN Commissioner of Income TaxCorporate Ward 3(4)Chennai ... Appellant/RespondentVs. M/s.Vaani Estates Pvt. Ltd.,No.60, Old No.100, IV Street,Abhiramapuram, Chennai 600 018.PAN: ... Respondent/Appellant Tax Case Appeal filed under Section 260A of the Income TaxAct, 1961 against the order of the Income Tax AppellateTribunal, Madras 'A' Bench, Chennai, dated 27.8.2018 made in ITANo.1352/Chny/2018 against the order of the Commissioner ofIncome Tax (Appeals)-II, No.222, Aayakar Bhavan, Main Building,II Floor, 121, Mahatma Gandhi, Road, Nungambakkam, Chennai 600034 dated 19/3/18 made in ITA No.199/16-17 PAN- ,Assessment Year 2014-15 and against the order of the Income TaxDepartment Office of the Income Tax Officer, Corporate Ward-3(4), IV Floor, Wanaparthy Block Room No.404, 121, M.G.Road,Nungambakkam, Chennai -34, PAN , for the AssessmentYear 2014-2015 order dated 16/11/2016. For Appellant: Mr.M.Swaminathan Senior Standing Counsel assisted by Ms.S. Premalatha (Delivered by DR.VINEET KOTHARI,J) The Revenue has filed this Tax Case (Appeal) under Section260-A of the Income Tax Act by raising the following purportedsubstantial questions of law arising from the order passed bythe Income Tax Appellate Tribunal dated 27.8.2018 by which, the https://hcservices.ecourts.gov.in/hcservices/ learned Tribunal allowed the Assessee's Appeal for theAssessment Year 2014-2015 and held that Section 56(2)(viib) ofthe Act cannot be invoked in the case of the Assessee forbringing to tax the amount brought into the Assessee CompanyMrs.Sasikala Ragupathy, the mother for allotment of EquityShares in her favour with a very high premium of RS.23.32Crores on issuance 10,100 Shares at a premium of RS.23.31crores:- "i) Whether, on the facts and circumstances of thecase and in law, the Tribunal was justified indeleting the addition made under Section 56(2) (viib)? ii) Whether on the facts and circumstances of thecase and in law, the Tribunal was justified inholding that the provisions of Section 56(2) (viib) cannot be invoked in the assessee's case?" 2. The Company was initially formed with the husband andwife, Mr.B.G.Ragupathy and his wife Sasikala Ragupathy, eachholding 5000 shares. Upon the death of Mr.B.G.Ragupathy, hisshares devolved upon the only daughter Mrs.Vani Ragupathy. Inorder to purchase a property in the prime area of Adyar,Chennai, Mrs.Sasikala Ragupathy introduced a sum of RS.23.32Crores in the Company through Banking Channels and from the saidmoney brought into the Company, she was allotted 10100 shares ata premium of RS.23,086/- per share. The Assessing Authorityimposed tax treating the said 'Share Premium' as "Income fromOther Sources" under Section 56(2)(viib) of the Act, which wasconfirmed by the learned Commissioner of Income Tax (Appeals).However, the Tribunal has allowed the Appeal of the Assessee thewith the following observation:- "7.3. It should be also kept in mind thatprovisions of Section 56(2)(viib) of the Actcreates a deeming fiction and while giving effectto such legal fictions all facts and circumstancesincidental thereto and inevitable corollariesthereof have to be assumed. At this juncture weare reminded of the decision of the Hon'bleKolkatta High Court in the case M.D.Jindal v. CITreported in 164 ITR 29, wherein it was held that"legal fictions are created only for a definitepurpose and they are limited to the purpose forwhich they are created and should not be extendedbeyond the legitimate field. But the legal fictionhas to be carried to its logical conclusion withinthe framework of the purpose for which it iscreated.". Further it is apparent from the FinanceMinister's speech that the provisions of Section56(2)(viib) has been enacted to deter thegeneration and use of unaccounted money. At this juncture we are also reminded of the decision ofthe Hon'ble Apex Court in the case Allied MotorsPvt. Ltd., vs. CIT reported in 224 ITR 677,wherein it was held that the Finance Minister'sBudget speech explaining the provisions arerelevant in construing the provisions. Moreover inthe decision rendered by the Hon'bleJurisdictional Madras High High Court in the caseCIT v. Kay Arr Enterprises and others reported in299 ITR 348 and the decision of the Hon'bleKamataka high Court in the case CIT v. R.NagarajaRao it has been categorically held that "wheretherearetransactionsinvolvingfamilyarrangement with respect to transfer of shares,the corporate veil of the company has to be liftedand inferred that there is no transfer of sharesand accordingly capital gain tax is not exigible."From the above it is apparent that even when thereare transfer of shares physically, in the event offamily arrangements, the Hon'ble High Courts haveheld that the entire transactions has to be viewedlifting the corporate veil and treat thetransaction as if there is no transfer of sharesand hence capital gain tax is not attracted.Similarly we are of the view that in the case ofthe assessee company also the corporate veil isrequired to be lifted and thereafter thetransaction has to be viewed in the light of therelevant provisions of the Act. 7.4. Bearing in mind, the facts of the case, thedecision of the higher Judiciary Authorities citedsupra and the legal principles discussed hereinabove, we are of the considered view thatprovisions of Section 56(2)(viib) of the Act,cannot be invoked in the case of the assesseecompany because by virtue of cash being broughtinto the assessee company' by Mrs.SasikalaRaghupathy for allotment of equity shares withunrealistic premium the benefit has only passed onto her daughter Mrs.Vani Raghupathy and there isno scope in the Act to tax when cash or asset istransferred by a mother to her daughter. Hence wehereby direct the learned AO to delete theaddition made by invoking the provisions ofSection 56(2)(viib) of the Act in the case of theassessee company." 8. In the result appeal of the assessee isallowed." 3. The learned Senior Standing Counsel for the Revenue,Mr.M.Swaminathan submitted that since the shares in questionwere issued at a premium far in excess of the Fair Market Valueof the Share in favour of Mrs.Sasikala Ragupathy, the same wasclearly an "Income from Other Sources" in the hands of theclosely held Company which is covered by Clause (viib) ofSection 56(ii) of the Act. 3. The learned Senior Standing Counsel for the Revenue,Mr.M.Swaminathan submitted that since the shares in questionwere issued at a premium far in excess of the Fair Market Valueof the Share in favour of Mrs.Sasikala Ragupathy, the same wasclearly an "Income from Other Sources" in the hands of theclosely held Company which is covered by Clause (viib) ofSection 56(ii) of the Act. 4. Mr.Vijayaraghavan, learned counsel for the Assessee, onthe other hand, submitted that the Assessing Authority has notheld any enquiry for determination of "Fair Market Value" of theshares in question, which as contended by the Assessee, had goneup subsequently, on account of purchase of a prime property madeby the Company in Adyar, Chennai just before the allotment ofthe Shares in favour of Mrs.Sasikala Raghupathy and theAssessing Authority was bound to compute the Fair Market Valuetaking into account the relevant factors as per Explanation (a)(ii) of Clause (viib) aforesaid. He further submitted thatSection 56(2)(x) and proviso thereto states that the said clausedoes not apply to any sum of money or principal received fromany relative and therefore, the indirect benefit of the saidshare premium paid by the mother on the allotment of share wasimminent benefit conferred upon the daughter. The only othershareholder being a relative, the same could be treated only asgift by mother to the daughter and would not fall within themischief of Section 56(2) Clause (viib) of the Act. Thiscontention, however, was not raised before the Authoritiesbelow. 5. Having heard the learned counsel appearing for theparties and upon perusal of the order passed by the Tribunal, weare of the opinion that before applying the provisions ofSection 56(2)(viib) of the Act, the learned Assessing Authoritywas required to undertake the exercise of determining the FairMarket Value of the Shares as defined in the provisions ofSection 56(2)(viib) of the Act which is quoted below for readyreference:- "Income from other sources.56(1) Income of every kind which is not to beexcluded from the total income under this Actshall be chargeable to income-tax under thehead "Income from other sources", if it is notchargeable to income-tax under any of theheads specified in section 14, items A to E. (2) In particular, and without prejudice tothe generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head"Income from other sources", namely:- ......[(viib) where a company, not being a companyin which the public are substantiallyinterested, receives, in any previous year,from any person being a resident, anyconsideration for issue of shares that exceedsthe face value of such shares, the aggregateconsideration received for such shares asexceeds the fair market value of the shares: Provided that this clause shall not applywhere the consideration for issue of shares isreceived- (i) by a venture capital undertaking from aventure capital company or a venture capitalfund; or (ii) by a company from a class or classes ofpersons as may be notified by the CentralGovernment in this behalf.Explanation.-For the purposes of this clause,- (a) the fair market value of the shares shallbe the value- (i) as may be determined in accordance withsuch method as may be prescribed; or (ii) as may be substantiated by the company tothe satisfaction of the Assessing Officer,based on the value, on the date of issue ofshares, of its assets, including intangibleassets being goodwill, know-how, patents,copyrights, trademarks, licences, franchisesor any other business or commercial rights ofsimilar nature, whichever is higher; (b) "venture capital company", "venturecapitalfund"and"venturecapitalundertaking" shall have the meaningsrespectively assigned to them in clause (a),clause (b) and clause (c) of Explanation toclause (23FB) of section 10;" (a) the fair market value of the shares shallbe the value- (i) as may be determined in accordance withsuch method as may be prescribed; or (ii) as may be substantiated by the company tothe satisfaction of the Assessing Officer,based on the value, on the date of issue ofshares, of its assets, including intangibleassets being goodwill, know-how, patents,copyrights, trademarks, licences, franchisesor any other business or commercial rights ofsimilar nature, whichever is higher; (b) "venture capital company", "venturecapitalfund"and"venturecapitalundertaking" shall have the meaningsrespectively assigned to them in clause (a),clause (b) and clause (c) of Explanation toclause (23FB) of section 10;" 6. Mr.Vijayaraghavan, learned counsel for the Assessee hasalso contended that the Assessee would also apply and seeknecessary clarification from the Central Board of Direct Taxesin this regard and therefore, he may be permitted to do so whilethe matter could be remanded back to the learned AssessingAuthority. 7. Having heard the learned counsel for the parties andconsidering the aforesaid provisions, we are of the opinion https://hcservices.ecourts.gov.in/hcservices/ that the learned Assessing authority was required to undertakethe exercise of fact finding by determining the Fair MarketValue of the Shares in question as required in the Explanationto Section 56 as quoted above. That exercise not having beendone, the matter deserves to be remanded back to the learnedAssessing Authority for undertaking the said fact findingexercise. The Assessee will be free to raise all factual andlegal contentions including the point about the said amountbeing treated as 'gift' from mother to daughter. The Assesseemay also seek necessary clarification from the Central Board ofDirect Taxes on administrative side. 8. Therefore, without expressing any opinion on the meritsof the case and answering the questions sought to be raised inthe present Appeal under Section 260A of the Act, we dispose ofthe Appeal filed by the Revenue by remitting the matter back tothe Assessing Authority. No order as to costs. Sd/- Assistant Registrar(CS VI) //True Copy// Sub Assistant Registrarssk.To1. Commissioner of Income Tax Corporate Ward 3(4), Chennai,2. Income Tax Appellate Tribunal, Madras 'A' Bench, Chennai3. The Income Tax Officer, Corporate Ward – 3(4), Chennai. 4.The Commissioner of Income Tax (Appeals)II, No.222, Aayakar Bhavan, Main Building, II Floor, 121, Mahatma Gandhi Road, Nungambakkam,Chennai 600 034.+1cc to Mr.M.Swaminathan, Advocate Sr.32838+1c to Mr.Subbaraya Aiyar, Advocate Sr.33186 TCA No.224 of 2019 na[co]srg 20/06/2019