Bonafide business transaction cannot be taxed U/s. 56(2)(vii)

ACIT Vs Shri Subhodh Menon (ITAT Mumbai)

Conclusion: Difference between alleged fair market value of share and the subscribed value of shares cannot be assessed as income u/s 56(2)(vii)(c) as the transaction of issue of shares was carried out to comply with a covenant in the loan agreement with the bank to fund the acquisition of the business by the subsidiary in USA, therefore, such a bonafide business transaction could not be taxed under section 56(2)(vii) especially when there was not even a whisper about money laundering by the AO in the assessment order.

Held: Assessee held 34.57% of the total issued share capital of a closely held company namely M/s D Pvt. Ltd. having face value of Rs.100 per share. During the year under consideration, assessee’s subsidiary company in USA intended to acquire the chemical business and to finance the acquisition, the subsidiary entered into a loan agreement requiring the promoters of the company to increase the total net worth of the company. In order to comply with this covenant in the loan agreement, the board of directors of the company passed a resolution to issue 63,00,000 shares at the face value of Rs 100 to the existing shareholders in proportion to their holding in the company. Based on the existing shareholding, assessee was offered 21,78,204 shares at face value of Rs. 100 however, assessee accepted the part offer of the shares of only to the extent of 20,94,032 shares. On 21^stSeptember, 2009 the company informed its shareholders about the acceptance by them of the shares offered by the company. Post-acceptance the value of each share of the company was Rs. 184 per share.  In the assessment order, A.O worked out the fair market value of the share at Rs.1438.64 per share and the difference in share value was brought to tax u/s 56(2}(vii)(c). It was held the provisions of section 56(2)(vii) did not get attracted as assessee applied for and was allotted a lesser than the proportionate shares offered to him. It was not a case of “disproportionate allotment of shares”. In the instant case, the transaction of issue of shares was carried out to comply with a covenant in the loan agreement with the bank to fund the acquisition of the business by the subsidiary in USA, therefore, such a bonafide business transaction could not be taxed under section 56(2)(vii) of the Act especially when there was not even a whisper about money laundering by the AO in the assessment order. Also, the consideration for the shares was received through banking channel. Moreover, the provisions of section 56(2)(vii) were applicable only from 1^stOctober, 2009. On 21^st September, 2009, the company informed the shareholders about the acceptance of shares offered by the company. Accordingly, the provisions of section 56(2)(vii) did not apply to as the contract was executed prior to 1st October 2009. In the instant case, the shares were offered to assessee and other shareholders at a uniform rate of Rs. 100 and therefore, the difference between the fair market value and issue price could not be brought to tax as a perquisite under section 17 of the Act.

FULL TEXT OF THE ITAT JUDGEMENT

These are appeals filed by the Revenue against the order of CIT(A)-50, Mumbai dated 29/12/2015 for A.Y.2010-11 in the matter of order passed u/s.143(3) of the IT Act.

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