Applicability of Gift Taxation on allotment of shares – ITAT
Facts of the Case:
The Assessee is an HUF and was an existing shareholder of PDFCL (M/s Prakash Deep Finance Co. Ltd.). During the year 2013-14 PDFCL allotted 3 lakh shares to the Assessee only at face value of Rs. 10 each which was less than its FMV (fair market value) which amounted to Rs.11.52 as computed under Section 56(2)(vii)(c) read along with Rule 11UA of Income Tax Act (IT Act).
Assessing Officer (AO) made an addition of Rs. 4.56 Lakhs (Rs.1.52*3 lakh shares) to the income of Assessee
However, Assessee was of the view that aforementioned provisions were not applicable to him because of the following reasons:
Allotment of shares cannot be equated with receipt of shares.
95.35% of the shareholders of PDFCL, are the members of HUF, and the karta of the HUF is the director of the companies which are the remaining shareholders of PDFCL. Thus, these members of HUF are covered under the meaning of relatives given under explanation(e) to proviso of Section 56(2)(vii) of IT Act. Hence, even if it was assumed that the shareholders to whom shares were not allotted had given up their right of allotment in shares to other shareholders, it is a case of transfer of right in shares by one relative to another relative.
Hence this appeal before ITAT:
Whether there is a difference between allotment of shares and receipt of shares?
Whether in the instance case, it was fresh allotment of shares or existing allotment of shares since PDFCL had its authorised number of shares which it could allot?
Whether Assessee (i.e., HUF) comes under definition of Relative with respect to other shareholders i.e., (Members of HUF including Karta)?
Hence ITAT Held:
For receipt of share there should be shares in existence and a person holding such share transferring it to another person. As against this in case of allotment of shares, it comes into existence after it is allotted and there is no transfer of shares from one person to another person. Therefore, allotment of shares cannot be equated with receipt of shares because in case of receipt of shares the property is already in existence whereas in case of allotment of shares the property comes into existence after it is allotted.
It may also be noted that section 56(2)(vii) is a deeming provision which deems certain receipt in the hands of recipient as income thus “Casus Omissus” cannot be supplied to a deeming provision and hence it has to be construed literally. Therefore, the word ‘receives’ used in the section cannot be equated to ‘allotment’.
Further, authorized share capital has no distinctive number. Only when it is issued/allotted, a distinctive number is given to the shares. Hence, having authorized share capital would not mean that the shares which are subsequently issued/allotted are already existing.
There is no dispute in the contention of the Assessee that 95.35% the shareholders of the company are relatives as all are the members of HUF and hence even if it was assumed that the shareholders to whom shares were not allotted had given up their right of allotment in shares to other shareholders, it is a case of transfer of right in shares by one relative to another relative.
