Case Law Details
Jigar Jashwantlal Shah Vs ACIT (ITAT Ahmedabad)
Now, we shall deal with the issue of whether section 56(2)(vii)(c) of the Act can be invoked in respect of additional 82,200 shares received by the assessee since the assessee’s wife and father did not exercise the rights issue and renounced the right in favour of the assessee. It is a well settled principle of law that what cannot be done directly cannot be done indirectly as well. Had the wife and father of the assessee directly transferred their rights shareholding in favour of the assessee, provisions of 56(2)(vii)(c) of the Act could not have been invoked since wife/ father are falling within the definition of “relatives’, which are excluded from within the purview of operation of section 56(2)(vii)(c) of the Act. Consequently, such renunciation of rights shares, by way of not exercising the right to subscribe to them in favour of the assessee, in our view, would not attract the provisions of section 56(2)(vii)(c) of the Act. The Vishakhapatnam ITAT in the case of Kumar Pappu Singh v ITO [2019] 101 taxmann.com 122 (Visakhapatnam – Trib.)held that since transaction of transfer of shares was within family and close relatives, proviso to section 56(2)(vii)(c) could not be applied for taxing income under head ‘income from other sources’. Again, the Vishakhapatnam ITAT in the case of ACIT Y. Venkanna Choudary [2019] 112 taxmann.com 71 (Visakhapatnam – Trib.) held that where prior to allotment of shares of company to assessee, there were only two shareholders, viz., assessee and his brother, and whatever excess benefit was passed on to assessee was out of shareholding held by his brother, provisions of section 56(2)(viii)(c)(ii) would not apply. Considering the above, we are of the considered view that section 56(2)(vii)(c) of the Act cannot be invoked in respect of additional 82,200 shares received by the assessee, on account of renunciation of rights issue the by assessee’s wife and father in favour of the assessee.
Now, on the issue of whether section 56(2)(vii)(c) of the Act can be invoked in respect of 14,800 allotted to the assessee as a result of third party shareholders declining to apply for rights shares in favour of the assessee, the issue for consideration is whether in the instant facts it can be concluded whether there has been disproportionate allotment of shares in favour of the assessee, in which case the position, in our considered view is clear that section 56(2)(vii)(c) of the Act can be invoked. The Ld. DR has relied on observations of the Ld. Assessing Officer in the assessment order wherein he has observed that the assessee has gained both quantitatively as well as qualitatively, and as a result of such renunciation, his shareholding in the company has increased from 29.90% to 53.22%, thereby giving him the controlling interest in the company. Thereby, there has been a disproportionate allotment of rights shares in favour of the assessee. We are of the considered view that renunciation of rights shares by third party shareholders in favour of the assessee, allowing the assessee to gain controlling interest has resulted in disproportionate allocation of rights shares in favour of the assessee and therefore, in respect of these shares, section 56(2)(vii)(c) of the Act shall apply, and income would taxable in the hands of the assessee. It would have been a different matter had the other parties not exercised their right of subscription to these rights shares, resulting in higher or controlling shareholding resulting in hands of the assessee. That, in our view, would not be disproportionate allocation, since the shareholders were allocated shares in proportion to their shareholding and only because some shareholders decided not to subscribe to rights shares offered to them in proportion to their shareholding, this itself would not make the allocation disproportionate, even if by way of non-exercise of rights, the assessee’s shareholding has substantially increased as compared to other shareholders. However, in the instant case, renunciation of rights in favour of the assessee by third party (unrelated shareholders) does lead to disproportionate allocation in favour of the assessee, thereby leading to invocation of section 56(2)(vii)(c) of the Act. The Hon’ble ITAT in the case of Sudhir Menon (supra), Smt Veena Goyal (supra) and Rajeev Ratanlal Tulshyan (supra) have upheld the principle that section 56(2)(vii)(c) of the Act cannot be invoked only in the event the allotment of shares is not disproportionate, but in case allocation is disproportionate, section 56(2)(vii)(c) of the Act would come into operation. Accordingly, in our view, section 56(2)(vii)(c) of the Act would apply in relation to 14,800 allotted the assessee as a result of third party shareholders renouncing their rights shares in favour of the assessee.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
These two appeals filed by assessee and revenue against the order of the ld. Commissioner of Income Tax (Appeals)-2, Ahmedabad in Appeal no. CIT(A)-2/39/AC. Cir. 2(1)(2)/2016-17 vide order dated 21/04/2017 passed for the assessment year 2013-14.
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