SINDYA SECURITIES AND INVESTMENTS PVT LTD, Chennai V. ACIT CORPORATE CIRCLE-6(2), Chennai

ITA 1816/CHNY/2019

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 2174 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2021
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2016-2017
• Appeal Filed On: 12-06-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Principle of natural justice; Fair market value
• Section: 56; 13; 22; 20

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . . , . , $ BEFORE SHRI JUSTICE P.P.BHATT, PRESIDENT AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER I.T.A.NO.1816/CHNY/2019 ( / ASSESSMENT YEAR: 2016-17) M/S. SINDYA SECURITIES AND INVESTMENTS PVT.LTD., 609, LAKSHMI BHAVAN, 5 TH FLOOR SUNDARAM AVENUE, MOUNT ROAD, NUNGAMBAKKAM, CHENNAI-600 034. VS THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-6(2), CHENNAI. PAN: AALCS 3297B ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. T.BANUSEKAR, C.A /RESPONDENT BY : MR. ABANI KANTA NAYAK, CIT /DATE OF VIRTUAL HEARING : 09.12.2020 /DATE OF PRONOUNCEMENT : 04. 03.2021 / O R D E R PER G.MANJUNATHA, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -15, CHENNAI DATED 29.04.2019 AND PERTAINS TO ASSESSMENT YEAR 20 16-17. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. FOR THAT THE ORDER OF LEARNED CIT(A) IS CONTR ARY TO LAW, FACTS AND CIRCUMSTANCES OF THE CASE TO THE EXTENT PREJUDICIAI TO THE INTEREST OF THE ASSESSEE AND AT ANY RATE IS OPPOSED TO THE PRINCIPLES OF EQUITY, NATURAL JUSTICE AND FAIR PLAY. 2. FOR THAT THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT THE ORDER OF TH E ASSESSING OFFICER IS WITHOUT JURISDICTION. 3 FOR THAT THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT ORDER OF ASSESSMENT IS BAD IN LAW. 2 ITA NO.1816/CHNY/2019 4. FOR THAT THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT NO OPPORTUNITY OF BEING PERSONALLY HEARD WAS PROVIDED TO THE APPELLANT DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 5. FOR THAT THE COMMISSIONER OF INCOME LAX (APPEALS) ERRED N UPHOLDING THE ADDITION OF ` 17,46,25,000/- U/S.56(2)(VIIB). 6. FOR THAT THE COMMISSIONER OF INCOME TAX (APPEALS) FAIRED TO APPRECIATE THAT THE PROVISIONS OF SECTION 56(2)(VIIB) ARE NOT INVOCABLE IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANTS CASE. 7. FOR THAT THE COMMISSIONER OF INCOME LAX (APPEALS) FAILED TO APPRECIATE THAT THE PROVISIONS OF SECTION 56(2)(VIIB) ARE INVOCABLE ONLY WHEN THE CONSIDERATION FOR ISSUE OF SHARES EXCEEDS THE FACE VALUE OF SHARES AND NOT WHEN THEY ARE ISSUED AT FACE VALUE. 8. FOR THAT THE COMMISSIONER OF INCOME LAX (APPEALS) FAILED TO APPRECIATE THAT THE APPELLANT D ID NOT RECEIVE ANY CONSIDERATION EXCESS OF THE FACE VALUE OF SHARES ISSUED. 9. FOR THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAVING ACCEPTED THAT THE SHARES HAVE BEEN ALLOTTED AT FACE VALUE, FAILED TO APPRECIATE T HAT THE PROVISIONS OF SECTION 56(2)(VIIB) ARE THUS NOT INVOCABLE. 10 FOR THAT THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED IRA APPRECIATE THAT THE ASSESSING OFFICER CANNOT DETERMINE THE FACE VALUE OF A SHARE UNDER ANY PROVISIONS OF THE INCOME TAX ACT. 11. FOR THAT THE COMMISSIONER OF INCOME TAX 3 ITA NO.1816/CHNY/2019 (APPEALS) FAILED TO APPRECIATE THAT THE ASSESSING OFFICER ERRED IN CONCLUDING THAT THE FACE VALUE OF THE PREFERENCE SHARES WAS FIXED AT AN EXORBITANT PRICE, WITHOUT ANY BASIS IN ORDER TO CIRCUMVENT THE PROVISIONS OF SECTION 56(2)(VIIB). 12. FOR THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN NOT CONSIDERING THE EXPLANATIONS AND SUBMISSIONS PROVIDED BY THE APPELLANT. 13. FOR THAT THE APPELLANT OBJECTS TO THE LEVY OF INTEREST U/S.234B AND 234C. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY IS ENGAGED IN THE BUSINESS OF INVESTMENT ACTIVITIES FI LED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2016-17 ON 17.10.201 6 DECLARING NIL TOTAL INCOME. DURING THE YEAR UNDER CONSIDERATI ON, THE ASSESSEE HAD ISSUED 17,500 PREFERENCE SHARES AT FACE VALUE O F ` 10,000/- EACH TO M/S. KALPATHARU INFRASTRUCTURE DEVELOPMENT COMPANY PVT. LTD. THE CASE WAS TAKEN UP FOR SCRUTINY AND DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS SINCE THERE IS INCREASE IN S HARE CAPITAL, THE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO FILE NECESSARY DETAILS INCLUDING ALLOTMENT OF PREFERENCE SHARES ETC. IN RE SPONSE, THE ASSESSEE VIDE LETTER DATED 06.12.2018 SUBMITTED THA T IT HAS ISSUED 17,500 PREFERENCE SHARES WITH FACE VALUE OF EACH ` 10,000/- TO M/S. KALPATHARU INFRASTRUCTURE DEVELOPMENT COMPANY PVT. LTD. FOR 4 ITA NO.1816/CHNY/2019 A TOTAL CONSIDERATION OF ` 17.50 CRORES AND SUCH SHARE CAPITAL HAS BEEN RAISED TO REPAY THE EXISTING LOAN LIABILITY OF THE COMPANY. THE ASSESSEE FURTHER SUBMITTED THAT PROVISIONS OF SECTI ON 56(2)(VIIB) OF THE ACT, HAS NO APPLICATION, BECAUSE THE ASSESSEE H AS NOT ISSUED SHARES AT PREMIUM OVER AND ABOVE FACE VALUE OF SUCH SHARES. THEREFORE, THERE IS NO QUESTION OF APPLICATION OF P ROVISIONS OF SECTION 56(2)(VIIB) OF THE ACT, TO CONSIDER EXCESS CONSIDER ATION AS INCOME OF THE ASSESSEE. THE ASSESSING OFFICER, HOWEVER, WAS NOT CONVINCED WITH THE EXPLANATION OF THE ASSESSEE AND ACCORDING TO HIM, TRANSACTIONS BETWEEN THE ASSESSEE AND M/S. KALPATHA RU INFRASTRUCTURE DEVELOPMENT COMPANY PVT. LTD. IS NOT A SIMPLE COMMERCIAL TRANSACTION OF RAISING SHARE CAPITAL, BE CAUSE THE ASSESSEE HAS ISSUED PREFERENCE SHARES AT FACE VALUE OF ` 10,000/- PER SHARE, WHEREAS FACE VALUE OF EQUITY SHARES WAS FIXED AT ` 10/- PER SHARE. FURTHER, FAIR MARKET VALUE OF SHARE AS O N DATE OF ISSUE WAS AT RS. 4.73, WHICH IS FAR LOWER THAN THE FACE V ALUE FIXED BY THE ASSESSEE. THE ASSESSING OFFICER FURTHER NOTED THAT ALTHOUGH THE PROVISIONS OF COMPANIES ACT, 2013 REQUIRES TO SPECI FY THE PURPOSE OF ISSUE OF PREFERENCE SHARES AND ALSO REQUIRES BAS IS FOR FIXATION PRICE, BUT THE ASSESSEE HAS NOT SUBSTANTIATED FACE VALUE OF 5 ITA NO.1816/CHNY/2019 PREFERENCE SHARES AT ` 10,000/- PER SHARE, WHEN THE ASSET BASE OF THE COMPANY IS NOT SUPPORTING SUCH VALUATION. THE ASSESSING OFFICER FURTHER WAS OF THE OPINION THAT THE ASSESSE E HAS ALSO FAILED TO FURNISH CONFIRMATION LETTER FROM PERSON WHO HAS INV ESTED IN SHARE CAPITAL. THE ASSESSING OFFICER HAS DISCUSSED THE IS SUE AT LENGTH IN LIGHT OF SHAREHOLDING PATTERN OF THE ASSESSEE COMPA NY AND INVESTOR COMPANY AND THEIR BUSINESS RELATIONSHIP TO COME TO THE CONCLUSION THAT THE ASSESSEE HAS NOT ESTABLISHED THAT TRANSACT ION IS COMMERCIAL TRANSACTION WHICH PASSED THE TEST OF GENUINENESS IN ORDER TO SIMPLY CONSIDER UNDER THE PROVISIONS OF SECTION 56(2)(VIIB ) OF THE ACT. THEREFORE, HE OPINED THAT EXCESS CONSIDERATION RECE IVED ON ALLOTMENT OF PREFERENCE SHARES OVER AND ABOVE FAIR MARKET VALUE OF SHARES AS ON DATE OF ALLOTMENT IS UNEXPLAINED INCOM E OF THE ASSESSEE AND ACCORDINGLY, BROUGHT TO TAX U/S.56(2)( VIIB) OF THE ACT. 4. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASS ESSEE PREFERRED AN APPEAL BEFORE THE LEARNED CIT(A) . BEF ORE THE LEARNED CIT(A), THE ASSESSEE REITERATED ITS SUBMISSIONS MAD E BEFORE THE ASSESSING OFFICER AND ARGUED THAT THE PROVISIONS O F SECTION 56(2)(VIIB) OF THE ACT HAS NO APPLICATION WHEN SHAR ES ARE ISSUED AT 6 ITA NO.1816/CHNY/2019 FACE VALUE, THEREFORE, MERELY FOR THE REASON THAT F ACE VALUE OF PREFERENCE SHARES IS HIGHER THAN FAIR MARKET VALUE OF SHARES AS PER BOOK VALUE, THE ASSESSING OFFICER CANNOT CONSIDER IT AS SHAM TRANSACTION AND FURTHER, CANNOT HOLD THAT ASSESSE E HAS STRUCTURED TRANSACTION TO CIRCUMVENT THE PROVISIONS OF SECTIO N 56(2)(VIIB) OF THE ACT. THE LEARNED CIT(A), AFTER CONSIDERING RELEVANT SUBMISSIONS OF THE ASSESSEE AND ALSO BY ANALYSIS OF THE FINANCIALS OF ASSESSEE COMPANY CAME TO THE CONCLUSION THAT RECEIPT OF SHA RE CAPITAL BY ALLOTMENT OF PREFERENCE SHARES WITH FACE VALUE OF ` 10,000/- PER SHARE IS NOT BASED ON REALISTIC VALUATION AND THERE FORE, GENUINENESS OF THE SAME IS DOUBTFUL AND UNACCEPTABLE. THE LEAR NED CIT(A) FURTHER NOTED THAT FROM THE FINANCIALS SUBMITTED BY THE ASSESSEE SHARES WERE OVERVALUED AT THE TIME OF ALLOTMENT OF SHARE CAPITAL WITHOUT CONSIDERING THE ACTUAL POTENTIAL OF THE COM PANY. THE LEARNED CIT(A) HAS DISCUSSED THE ISSUE AT LENGTH IN LIGHT OF VARIOUS FACTS INCLUDING FINANCIALS OF THE COMPANY AND HELD THAT ASSESSEE HAS ARTIFICIALLY ENHANCED FACE VALUE OF PREFERENCE SHAR ES TO CIRCUMVENT THE PROVISIONS OF SECTION 56(2)(VIIB) OF THE ACT AN D HENCE, IT CAN BE FAIRLY HELD THAT TRANSACTIONS BETWEEN THE ASSESSEE AND THE INVESTOR FOR RAISING SHARE CAPITAL IS NOT A COMMERCIAL TRAN SACTION BUT A SHAM 7 ITA NO.1816/CHNY/2019 TRANSACTION TO OVERCOME THE TAX LIABILITY ON ACCOUN T OF EXCESS AMOUNT RECEIVED FOR ALLOTMENT OF SHARES. THEREFORE, HE OPINED THAT EXCESS CONSIDERATION RECEIVED IN THE FORM OF SHARE CAPITAL OVER AND ABOVE FAIR MARKET VALUE HAS TO BE ASSESSED U/S. 56( 2)(VIIB) OF THE ACT. AGGRIEVED BY THE LEARNED CIT(A) ORDER, THE ASS ESSEE IS IN APPEAL BEFORE US. 5. THE LEARNED AR FOR THE ASSESSEE SUBMITTED THAT L EARNED CIT(A) HAS ERRED IN LAW, FACTS AND CIRCUMSTANCES OF THE CA SE WHILE CONFIRMING ADDITIONS MADE BY THE ASSESSING OFFICER TOWARDS CONSIDERATION RECEIVED FOR ALLOTMENT OF PREFERENCE SHARES OVER AND ABOVE FAIR MARKET VALUE OF SHARES AS ON DATE OF VAL UE WITHOUT APPRECIATING THE FACT THAT THE PROVISIONS OF SECTIO N 56(2)(VIIB) OF THE ACT WILL COME INTO OPERATION ONLY IN A CASE WHERE S HARES HAS BEEN ISSUED AT A PREMIUM OVER AND ABOVE FACE VALUE OF S UCH SHARES. THE AR FURTHER SUBMITTED THAT IN THIS CASE ASSESSEE HAS ISSUED NON- CONVERTIBLE CUMULATIVE PREFERENCE SHARES WITH FACE VALUE OF ` 10,000/- EACH WITHOUT ANY PREMIUM, THEREFORE, QUEST ION OF APPLICATION OF THE PROVISIONS OF SECTION 56(2)(VIIB ) OF THE ACT IS MISPLACED. HE FURTHER SUBMITTED THAT ALTHOUGH THE ASSESSING OFFICER HAS GIVEN VARIOUS REASONS TO CONSIDER TRANSACTIONS OF ISSUE OF 8 ITA NO.1816/CHNY/2019 SHARES IS NOT A COMMERCIAL TRANSACTION, BUT IF YOU CONSIDER THE MANNER IN WHICH SHARE CAPITAL HAS BEEN RAISED BY A SSESSEE AND PURPOSE OF RAISING SHARE CAPITAL THERE SHOULD NOT B E ANY DOUBT OF WHATSOEVER AS CONSIDERED BY THE ASSESSING OFFICER, BECAUSE ASSESSEE HAS FULFILLED ALL CONDITIONS PRESCRIBED UN DER THE COMPANIES ACT, 2013 AND RULES MADE THEREUNDER FOR ISSUE OF PR EFERENCE SHARES. THE ASSESSEE HAS ALSO FURNISHED NECESSARY EVIDENCES INCLUDING FINANCIALS OF SUBSCRIBER TO SHARE CAPITAL AND EXPLA INED THAT TRANSACTION BETWEEN THE PARTIES IS A GENUINE COMMER CIAL TRANSACTION AND PURPOSE OF ISSUE OF SHARES IS TO CLEAR EXISTING DEBT OF THE COMPANY. FURTHER, THE ASSESSEE HAS REDEEMED PREFER ENCE SHARES IN SUBSEQUENT FINANCIAL YEAR OUT OF CALL OPTION MO NEY RECEIVED, THEREFORE, REASONS GIVEN BY THE ASSESSING OFFICER T O ARRIVE AT A CONCLUSION THAT TRANSACTION IS NOT A SIMPLE COMMERC IAL TRANSACTION IS PURELY ON SUSPICIOUS AND SURMISES MANNER WITHOUT AN Y EVIDENCES. 6. THE LEARNED DR, ON THE OTHER HAND, SUPPORTING TH E ORDER OF LEARNED CIT(A) SUBMITTED THAT THE ASSESSING OFFICER AS WELL AS LEARNED CIT(A) HAS BROUGHT OUT VARIOUS FACTS TO COM E TO THE CONCLUSION THAT TRANSACTION OF ISSUE OF PREFERENCE SHARES IS NOT A 9 ITA NO.1816/CHNY/2019 COMMERCIAL TRANSACTION BETWEEN THE PARTIES, BUT AN ARRANGED TRANSACTION TO CIRCUMVENT THE PROVISIONS OF SECTION 56(2)(VIIB) OF THE ACT. THEREFORE, ARGUMENTS OF THE ASSESSEE THAT IT IS A GENUINE TRANSACTION FOR RAISING SHARE CAPITAL FOR THE PURPO SE OF BUSINESS OF THE COMPANY ARE INCORRECT. THE LEARNED DR DREW OUR ATTENTION TO PAGE 22 OF THE PAPER BOOK 1, IN WHICH UNDER NOTE 13 , THE ASSESSEE HAS MADE DISCLOSURE ABOUT REGULATORY INVESTIGATION IN 2G SCAM AND PMLA AND ARGUED THAT THE ASSESSEE IS PART OF 2G SCA M AND THE ASSESSEE HAD INVESTMENT IN M/S.DECCAN DIGITAL NETWO RKS PVT.LTD. TO THE EXTENT OF 74% OF EQUITY SHARE CAPITAL, WHICH IN TURN HELD 35% SHARE CAPITAL OF AIRCEL LTD. FROM THE ABOVE, IT IS CLEAR THAT ENTIRE PREFERENCE SHARES TRANSACTION IS SHAM TRANSACTION. THE DR FURTHER SUBMITTED THAT IT IS SURPRISING HOW A COMPANY HAVIN G NEGATIVE RESULTS RECEIVED FUNDS FROM M/S. KALPATHARU INFRAST RUCTURE DEVELOPMENT COMPANY PVT. LTD. BY PAYING SUCH A HUGE VALUE FOR PREFERENCE SHARES WITHOUT ANY SUPPORT OF ASSET OR B USINESS. THE DR FURTHER SUBMITTED THAT MANNER IN WHICH PREFERENC E SHARES ARE ISSUED AND CONDITIONS OF ISSUE OF SHARES GIVE RISE TO VARIOUS DOUBTS AND HENCE, REASONING GIVEN BY AUTHORITIES BELOW INC LUDING LEARNED CIT(A) ARE ON SOUND FOOTING, WHICH CLEARLY SHOWS TH AT TRANSACTION OF 10 ITA NO.1816/CHNY/2019 ISSUE OF PREFERENCE SHARES IS SHAM TRANSACTION AND ACCORDINGLY, INVOKED THE PROVISIONS OF SECTION 56(2)(VIIB) OF TH E ACT. 7. PER CONTRA, THE LEARNED A.R FOR THE ASSESSEE SUB MITTED THAT ALTHOUGH THE LEARNED DR REFERRED TO REGULATORY INVE STIGATION UNDER 2G SCAM AND PMLA, BUT IT IS NEITHER THE CONTENTION OF THE ASSESSING OFFICER NOR LEARNED CIT(A) THAT TRANSACTION IS SHAM . FURTHER, THE HON'BLE SUPREME COURT DECISION IN THE CASE OF MCD OWELLS IS ON IMPERMISSIBLE TAX AVOIDANCE ARRANGEMENTS AND THE SAME IS NOT APPLICABLE TO THE CASE OF THE ASSESSEE, BECAUSE THE ASSESSEE HAS MERELY ISSUED PREFERENCE SHARES AT PAR AND REDEEME D THE SAME AT COST IN THE NEXT YEAR. THE AR FURTHER SUBMITTED TH AT THE ALLEGATION OF THE LEARNED DR THAT SHARE PRICE FIXED FOR ISSUE OF PREFERENCE SHARES IS NOT BACKED BY ANY ASSET / BUSINESS OF THE ASSESS EE IS INCORRECT, BECAUSE THE ASSESSEE HAS ISSUED PREFERENCE SHARES TO M/S. KALPATHARU INFRASTRUCTURE DEVELOPMENT COMPANY PVT. LTD. IN ORDER TO RAISE FUNDS TO REPAY LOAN FROM DIRECTORS, WHO HA D SETTLED DUES TO BANK WHICH ORIGINALLY FUNDED THE INVESTMENT MADE BY THE ASSESSEE IN EQUITY SHARES OF M/S.DECCAN DIGITAL NETWORKS PVT . LTD. THEREFORE, IT IS INCORRECT TO SAY THAT ASSESSEE HAS STRUCTURED TRANSACTION TO CIRCUMVENT THE PROVISIONS OF SECTION 56(2)(VIIB) OF THE ACT. 11 ITA NO.1816/CHNY/2019 8. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATE RIAL AVAILABLE ON RECORD AND GONE THROUGH ORDERS OF THE AUTHORITIE S BELOW. THE ASSESSING OFFICER HAS MADE ADDITIONS TOWARDS EXCESS CONSIDERATION RECEIVED FOR ALLOTMENT OF PREFERENCE SHARES OVER AN D ABOVE FAIR MARKET VALUE OF SUCH SHARES AS ON THE DATE OF ISSUE ON THE GROUND THAT ASSESSEE HAS NOT EXPLAINED AND FILED NECESSARY EVIDENCE TO JUSTIFY FACE VALUE OF PREFERENCE SHARES AT ` 10,000/- PER SHARE. THEREFORE, IN ORDER TO VERIFY THE ISSUE, IT IS NECE SSARY TO CONSIDER THE PROVISIONS OF SECTION 56(2)(VIIB) OF THE ACT AND IT S APPLICATION TO THE RELEVANT TRANSACTIONS. THE PROVISIONS OF SECTION 56 (2)(VIIB) OF THE ACT WAS INTRODUCED BY FINANCE ACT, 2012 W.E.F. 01.04.20 13 TO BRING INTO TAX CONSIDERATION FOR ISSUE OF SHARES THAT EXCEEDS FACE VALUE OF SUCH SHARES AS INCOME OF THE ASSESSEE. A PLAIN READING O F SECTION 56(2)(VIIB) MAKES IT VERY CLEAR THAT IF A COMPANY IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED ISSUED SHARE CAPITAL A ND RECEIVED CONSIDERATION IN EXCESS OF FACE VALUE OF SUCH SHARE S, THEN AGGREGATE CONSIDERATION RECEIVED OVER AND ABOVE FAI R MARKET VALUE OF SUCH SHARES IS ASSESSABLE AS INCOME OF THE ASSES SEE. IN OTHER WORDS, IN ORDER TO INVOKE SECTION 56(2)(VIIB) OF TH E ACT, SHARES SHOULD BE ISSUED OVER AND ABOVE FACE VALUE OF SUCH SHARES. IN THIS 12 ITA NO.1816/CHNY/2019 CASE, THE ASSESSEE HAS ISSUED SHARES AT FACE VALUE OF ` 10,000/- PER SHARE. THEREFORE, IN A SIMPLE TERM THE PROVISIONS O F SECTION 56(2)(VIIB) HAS NO APPLICATION, IF SHARES ARE NOT I SSUED WITH PREMIUM. BUT, THE CASE OF THE ASSESSING OFFICER WAS THAT IT IS NOT A CASE OF SIMPLE COMMERCIAL TRANSACTION BETWEEN THE PARTIES, BUT A TRANSACTION ARRANGED TO CIRCUMVENT THE PROVISIONS O F SECTION 56(2)(VIIB) OF THE ACT. THE ASSESSING OFFICER, TO A RRIVE AT SUCH CONCLUSION HAS GIVEN VARIOUS REASONS INCLUDING THE MANNER IN WHICH SUCH SHARES WERE ISSUED AND TERMS & CONDITIONS OF I SSUE OF SUCH SHARES. THEREFORE, IT IS ESSENTIAL TO SEE WHETHER T RANSACTION OF ISSUE OF PREFERENCE SHARES IS COMMERCIAL TRANSACTION BETW EEN TWO PRUDENT PERSONS OR A SHAM TRANSACTION ARRANGED BY PARTIES T O OVERCOME THE PROVISIONS OF SECTION 56(2)(VIIB) OF THE ACT. 9. THE ASSESSEE HAS ISSUED 17,500 PREFERENCE SHA RES AT FACE VALUE OF ` 10,000/- EACH IN FINANCIAL YEAR 2015-16 TO M/S. KALPATHARU INFRASTRUCTURE DEVELOPMENT COMPANY PVT. LTD. ADMITTEDLY, THE ASSESSEE AND M/S. KIDCO ARE RELATED PARTIES, BECAUSE BOTH THE COMPANIES ARE HAVING COMMON DIRECT ORS AND FUNCTIONING IN SAME PREMISES. FURTHER, ASSESSEE SHA RE CAPITAL WAS 13 ITA NO.1816/CHNY/2019 ORIGINALLY CONSISTING OF EQUITY SHARES ALONE, HOWEV ER, ASSESSEE HAS AMENDED ITS SHARE CAPITAL CLAUSE IN MEMORANDUM OF A SSOCIATION VIDE AGM HELD ON 2.1.2014, WHERE SHARE CAPITAL HAS BEEN DIVIDED INTO EQUITY SHARES AND PREFERENCE SHARES. FURTHER, THE ASSESSEE HAS RETAINED FACE VALUE OF EQUITY SHARES AT ` 10/- PER SHARE, BUT FACE VALUE OF PREFERENCE SHARES HAS BEEN FIXED AT ` 10,000/- PER SHARE. ADMITTEDLY, AT THE TIME AMENDMENT TO SHARE CAPITAL AND ALSO AT THE TIME OF ISSUE OF PREFERENCE SHARES, NET WORTH OF AS SESSEE COMPANY WAS NEGATIVE, WHICH IS EVIDENT FROM THE FACT THAT T HE ASSESSING OFFICER HAS COMPUTED NEGATIVE FACE VALUE OF ` -4.73 PER SHARE. THEREFORE, IN THIS FACTUAL BACKGROUND, IF YOU EXAMI NE THE AMENDMENT CARRIED OUT TO SHARE CAPITAL CLAUSE AND F IXATION OF FACE VALUE OF 10,000 EQUITY SHARES, CERTAINLY DOUBT ARIS ES ABOUT THE MANNER IN WHICH SUCH SHARE CAPITAL WAS AMENDED AND FACE VALUE OF PREFERENCE SHARES WAS FIXED. ADMITTEDLY, EXCEPT CE RTAIN PRIVILEGES INCLUDING FIRST PREFERENCE OVER DIVIDEND AND REPAYM ENT OF CAPITAL, THERE ARE NO SPECIAL PRIVILEGES TO PREFERENCE SHARE HOLDERS. THEREFORE, WHILE EXAMINING ALLOTMENT OF PREFERENCE SHARES, THIS FACTOR NEEDS TO BE CONSIDERED. MOREOVER, PROVISIONS OF SECTION 55 OF THE COMPANIES ACT, 2013 AND RULE 9 OF COMPANIES (S HARE CAPITAL 14 ITA NO.1816/CHNY/2019 AND DEBENTURES) RULES, 2014 DEALS WITH ISSUE AND RE DEMPTION OF PREFERENCE SHARES, AS PER WHICH BEFORE ISSUE OF PRE FERENCE SHARES ASSESSEE SHOULD SPECIFY PURPOSE OF ISSUE OF PREFERE NCE SHARES AND ALSO JUSTIFY THE VALUE OF SUCH SHARES. IN THIS CAS E, THE ASSESSEE HAS JUSTIFIED PURPOSE OF ISSUE OF PREFERENCE SHARES AS PER WHICH PREFERENCE SHARE CAPITAL WAS RAISED TO REPAY THE EX ISTING DEBT OF THE COMPANY, BUT THE ASSESSEE HAS NOT EXPLAINED THE BAS IS FOR FIXING FACE VALUE OF PREFERENCE SHARES AT ` 10,000/- PER SHARE, ALTHOUGH RULE 9 OF COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2014 SAYS SO. THEREFORE, IT IS VERY ESSENTIAL TO DECIDE WHETHER ASSESSEE HAS JUSTIFIED BASIS OF FIXING SHARE PRICE OF PREFER ENCE SHARES AT ` 10,000/- OR NOT, MORE PARTICULARLY, WHEN THE FINANC IALS OF THE COMPANY WAS NOT SUPPORTING SUCH VALUATION. ADMITTE DLY, THE ASSESSEE WAS HAVING NEGATIVE NET WORTH AND THERE IS NO SIGNIFICANT BUSINESS ACTIVITY EXCEPT INVESTMENTS IN EQUITY SHAR ES OF M/S.DECCAN DIGITAL NETWORKS PVT. LTD. IN FACT, A MAJOR SHARE CAPITAL OF THE COMPANY HAS BEEN INVESTED IN M/S.DECCAN DIGITAL NET WORKS PVT.LTD. FURTHER, M/S.DECCAN DIGITAL NETWORKS PVT. LTD HAD I NVESTED IN EQUITY SHARES OF M/S. AIRCEL LTD. IT IS AN ADMITTED FACT T HAT THAT AIRCEL LTD. IS ALMOST A DEFUNCT COMPANY. FURTHER, IT IS WELL KNOWN FACT THAT 15 ITA NO.1816/CHNY/2019 INVESTMENT OF ASSESSEE COMPANY IN THE SHARES OF M/S .DECCAN DIGITAL NETWORKS PVT. LTD IS NOT HAVING ANY VALUE O R VALUATION. THEREFORE, UNDER THESE CIRCUMSTANCES, FIXING SHARE PRICE AT ` 10,000/-PER PREFERENCE SHARE IS NOT BASED ON ANY SC IENTIFIC METHOD OR METHOD PRESCRIBED UNDER RULE 11UA OF INCOME TAX RULES, 1962. FURTHER, THE ASSESSEE HAS NOT FILED ANY VALUATION R EPORT OR EVIDENCE TO JUSTIFY VALUE OF SHARES. THE ASSESSEE HAS ALSO N OT EXPLAINED BASIS FOR FIXING DIFFERENT SHARE PRICE FOR EQUITY SHARES AND PREFERENCE SHARES. THE ASSESSEE HAS ALSO NOT FILED ANY EVIDENC E TO EXPLAIN HOW A PRUDENT BUSINESSMAN WOULD INVEST IN A COMPANY , WHERE ITS NET WORTH IS NEGATIVE AND BOOK VALUE OF SHARES IS F AR LESS THAN THE FACE VALUE OF PREFERENCE SHARES. THEREFORE, UNDER T HESE CIRCUMSTANCES, IT IS VERY DIFFICULT TO ACCEPT THE A RGUMENTS OF THE ASSESSEE THAT TRANSACTION OF ISSUE OF PREFERENCE SH ARES IS A NORMAL COMMERCIAL TRANSACTION AND PURPOSE OF RAISING CAPIT AL IS FOR GENUINE BUSINESS PURPOSE OF THE COMPANY. WE, FURTHER, ARE O F THE CONSIDERED VIEW THAT FROM SEQUENT OF EVENTS AND MAN NER IN WHICH PREFERENCE SHARE CAPITAL WAS RAISED, INCLUDING TERM S OF REPAYMENT, RATE OF RETURN AND PERIOD OF SHARES, IT CAN BE EASI LY CONCLUDED THAT TRANSACTION OF ISSUE OF PREFERENCE SHARE CAPITAL IS ARRANGED 16 ITA NO.1816/CHNY/2019 TRANSACTION IN THE NATURE OF SHAM TRANSACTION TO OV ERCOME THE AMENDED PROVISIONS OF SECTION 56(2)(VIIB) OF THE IN COME TAX ACT, 1961. IN THIS REGARD IT IS VERY ESSENTIAL TO RECOLL ECT THE LAND MARK DECISION OF HONBLE SUPREME COURT IN THE CASE OF MC DOWELL & CO LTD. VS COMMERCIAL TAX OFFICER(1985) 154 ITR 148, W HERE IT WAS HELD THAT THE TAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS W ITHIN THE FRAMEWORK OF LAW. COLOURABLE DEVICES CANNOT BE PART OF TAX PL ANNING AND IT IS WRONG TO ENCOURAGE OR ENTERTAIN THE BELIEF THAT IT IS HONOUR ABLE TO AVOID THE PAYMENT OF TAX BY RESTORING TO DUBIOUS METHODS. IT IS THE OBLI GATION OF EVERY CITIZEN TO PAY THE TAXES HONESTLY WITHOUT RESORTING TO SUBTERFUGES . COURTS ARE NOW CONCERNING THEMSELVES NOT MERELY WITH THE GENUINENESS OF A TRA NSACTION, BUT WITH THE INTENDED EFFECT OF IT FOR FISCAL PURPOSES. NO ONE C AN NOW GET AWAY WITH A TAX AVOIDANCE PROJECT WITH THE MERE STATEMENT THAT THER E IS NOTHING ILLEGAL ABOUT IT. THE HONBLE COURT FURTHER OBSERVED THAT IT IS NEITH ER FAIR NOR DESIRABLE TO EXPECT THE LEGISLATURE TO INTERVENE AND TAKE CARE OF EVERY DEVICE AND SCHEME TO AVOID TAXATION. IT IS UP TO THE COURT TO TAKE STOCK TO DE TERMINE THE NATURE OF THE NEW AND SOPHISTICATED LEGAL DEVICES TO AVOID TAX AND CO NSIDER WHETHER THE SITUATION CREATED BY THE DEVICES COULD BE RELATED TO THE EXIS TING LEGISLATION WITH THE AID OF 'EMERGING' TECHNIQUES OF INTERPRETATION WAS DONE IN RAMSAY, BURMA OIL AND DAWSON, TO EXPOSE THE DEVICES FOR WHAT THEY REALLY ARE AND TO REFUSE TO GIVE JUDICIAL BENEDICTION. 17 ITA NO.1816/CHNY/2019 10. IN THIS VIEW OF THE MATTER AND CONSIDERING FA CTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT ASSESSEE HAS FAILED TO EXPLAIN AND JUSTIFY ISSUE OF PREFERENCE SHARES WITH A FACE VALUE OF ` 10,000/- PER SHARE WHEN THE FAIR MARKET VALUE OF THE SHARES OF THE COMPANY IS ` -4.73 PER SHARE. THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT THE REASONS GIVE N BY THE ASSESSING OFFICER TO TREAT THE TRANSACTION AS A COL URABLE DEVICE TO CIRCUMVENT THE PROVISIONS OF SECTION 56(2)(VIIB) OF THE ACT, APPEARS TO BE ON SOUND FOOTING. HENCE, WE ARE INCLINED TO U PHOLD THE ORDER OF THE LEARNED CIT(A) IN UPHOLDING ADDITIONS MADE TOWA RDS EXCESS CONSIDERATION RECEIVED TOWARDS ALLOTMENT OF PREFER ENCE SHARES OVER AND ABOVE THE FAIR MARKET VALUE OF SHARES UNDER SEC TION 56(2)(VIIB) OF THE ACT AND DISMISS APPEAL FILED BY THE ASSESSEE . 11. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH MARCH, 2021 SD/- SD/- ( . . ) ( . ) (JUSTICE P.P.BHATT) (G. MANJUNATHA) / PRESIDENT ' / ACCOUNTANT MEMBER $ /CHENNAI, % /DATED 4 TH MARCH, 2021 DS 18 ITA NO.1816/CHNY/2019 )* +* /COPY TO: 1. APPELLANT 2. RESPONDENT 3. , ( ) /CIT(A) 4. , /CIT 5. * 1 /DR 6. /GF .