M/s. Vanity Cerachem Pvt. Ltd., Vadodara V. ITO, Ward-2(1)(4), Vadodara

MA 5/AHD/2023

AI Insights

The case involves Vanity Cerachem Pvt. Ltd., which filed a Miscellaneous Application against an order of the Income Tax Appellate Tribunal (ITAT) dated 07.12.2022. The original dispute centered on the conversion of unsecured loans into equity shares and the subsequent tax implications under Section 56(2)(viib) of the Income Tax Act, 1961. The assessee argued that no cash consideration was received for the shares issued, as they were issued in exchange for converting loans into equity. The Tribunal had previously dismissed the appeal, agreeing with the Assessing Officer's valuation and tax assessment. The assessee's application sought to rectify what it claimed were oversights in the consideration of legal precedents and facts, particularly the applicability of Section 56(2)(viib) and the fair market value determination under Rules 11U and 11UA.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 129873 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 month(s) 18 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 29-08-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 03-08-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 11-01-2023
• Other Referred Cases: CIT vs. Vaani Estates Pvt. Ltd., Jigar Jashwant Lal vs. ACIT, DCIT vs. Rankin Infrastructure (P) Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: BIREN SHAH
• Keywords: Gift; Fair market value; Set aside

Judgement Text

M.A. No.5/Ahd/2023 (In ITA No.923/Ahd/2018) A.Y. 2014-15 Page 1 of 9 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “A” BENCH, AHMEDABAD BEFORE Ms. SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER MA No.5/Ahd/2023 (In ITA No.923/Ahd/2018) Assessment Year: 2014-15 M/s. Vanity Cerachem Pvt. Ltd., Revenue Survey No.1-25/1, Jt. Block No.199, Dabhasa, Jambusar Road, Vadodara – 391 440. [PAN – AADCV 0948 E] Vs. Income Tax Officer, Ward – 2(10(4), Vadodoara. (Appellant) (Respondent) Assessee by Shri Biren Shah, AR Revenue by Shri J.L. Bhatia, Sr. DR Da te o f He a r in g 04.08.2023 Da te o f P ro n o u n ce m e n t 30.08.2023 O R D E R PER SUCHITRA KAMBLE, JUDICIAL MEMBER : This Miscellaneous Application is filed by the assessee in respect of order dated 07.12.2022 passed by the Tribunal. 2. The Ld. AR submitted that the details of the assessment year-wise has been already given and from the perusal of documents it can be stated that not even a single Rupee was received by the assessee. The Ld. AR further submitted that the Tribunal has not taken into account the decision of Hon’ble Madras High Court in the case of CIT vs. Vaani Estates Pvt. Ltd. (2019) 107 Taxmann.com 15. For the convenience, we are reproducing the Miscellaneous Application filed by the assessee herein below :- “AN APPLICATION U/S. 254[2] OF THE INCOME TAX ACT, 1961: - 1. The present Application is filed by the above-mentioned applicant/appellant for dismissing the appeal of the assessee in limine by order dated 07-12-2022 passed by Hon’ble Tribunal. M.A. No.5/Ahd/2023 (In ITA No.923/Ahd/2018) A.Y. 2014-15 Page 2 of 9 2. The Hon’ble ITAT in its order in para Nos. 7 has observed as under:- “7. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee has not furnished any valuation report under rule 11UA or 11U of the Income Tax Rules, 1961. The assessee’s contention that the loan amount has been converted into equity shares at the rate of Rs.102/- but the basis given for fair market value of shares by the assessee as the contrary effect on the working of the fair market value adopted by the Assessing Officer comes to only Rs.0.62. It is a matter of record that the amount received was in the form of loan liability required to be repaid and, therefore, the conversion into equity share along with share premium on 01.05.2013 cannot be called as cessation of loan liability. The contention of the Ld. AR that the unsecured loan obtained by M/s Gibralter Glass and Ceramics Pvt. Ltd. as the significance relating to interest uninvolved in management itself but the same was also not established by the assessee to any document as regards the transaction relating to share premium. The Assessing Officer has categorically observed that the certificates which were produced before the Assessing Officer does not bear any date or signature. This part was not controverted or no document to that effect was produced before us during the hearing. The Ld. AR at the time of hearing perused the Balance Sheet of M/s Gibralter Glass and Ceramics Pvt. Ltd. wherein pointed out that the shareholding of assessed company and the said company was almost similar but while issuing the share premium, the assessee company has not taken cognisance that each share has been treated as Rs.10/- equity share value and the same was not justified by adopting the value of Rs.102/-. As per the requirement of Section 56(2)(viib), the fair market value of the shares has to be determined as per Rule 11U and 11UA of the Rules. But the assessee failed to do so and, therefore, the CIT(A) has rightly confirmed the addition thereby observing that the assessee received share premium over and above the fair market value is liable to be assessed as income of the assessee under Section 56(2)(viib) of the Act. There is no need to interfere with the same. At the time of hearing, the ld. AR referred various decisions including the decision of Ahmedabad Tribunal reported in 142 taxmanann.com 200 (Jigar Jashwant Lal vs. ACIT) wherein the issue was M.A. No.5/Ahd/2023 (In ITA No.923/Ahd/2018) A.Y. 2014-15 Page 3 of 9 totally different as there were additional shares allotted to the assessee therein. The said decision will not be applicable in the present case. The decision of Tribunal in the case of DCIT vs. Rankin Infrastructure (P) Ltd. will not be applicable as the determination of optional fully convertible debentures was the issue before the Mumbai Tribunal which is not similar to the present case. Hence, appeal filed by the assessee is dismissed. “ 3. The applicant/appellant most respectfully submits that the facts of the case are as under: - During the year under assessment, assessee company has issued 263000 equity shares having face value of Rs.10/- each at premium of Rs.102/- per share to M/s Gibralter Glass and Ceramics Pvt. Ltd. for Rs. 2,68,26,000/-. Further, Assessee company has borrowed money as unsecured loan / repaid of loan from M/s Gibralter Glass and Ceramics Pvt. Ltd as below, Sr no Assessment Year Nature of receipt/ payment Receipt Payment Closing Ref Pb Pg no 1 2010-11 Through Bank 1,30,00,000 - 1,36,80,547 158 Interest Income 6,80,547 2 2011-12 Through Bank 58,00,000 56,40,000 1,51,91,441 159 Interest Income 13,50,894 3 2012-13 Through Bank 2,15,25,000 - 3,98,08,343 160 Interest Income 30,91,902 4 2013-14 Through Bank 3,00,000 1,50,00,000 2,90,44,023 161 Interest Income 39,95,680 M.A. No.5/Ahd/2023 (In ITA No.923/Ahd/2018) A.Y. 2014-15 Page 4 of 9 5 2014-15 Through issue of equity share - 2,65,00,000 0 162 Through Bank - 25,00,000 Through JV - 44,023 Out of the unsecured loan balance as on 31.03.2013 of Rs 2,90,44,023, Rs.2,68,26,000/- were converted into share capital by way of issue of equity shares and no consideration is received in cash in the current assessment year. There was conversion of unsecured loan into the equity shares for the year under consideration. 4. During the hearing, AR of the assessee argued that section 56(2)(Viib) will not be applicable in the case of the assessee, as assessee company has not received any amount against issuance of equity shares because such shares are issued in exchange of unsecured loan outstanding as opening balance for the year under consideration. For the application of section 56(2)(Viib) there are two specific conditions 1) Amount against issue of share shall be received consideration and 2) It must be received in previous year. Section 56(2)(Viib) is reproduced hereunder for ready reference, 56(2)(Viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received— (i) by a venture capital undertaking from a venture capital company or a venture capital fund 56 [or a specified fund]; or (ii) by a company from a class or classes of persons as may be notified 57 by the Central Government in this behalf: 58 [Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market M.A. No.5/Ahd/2023 (In ITA No.923/Ahd/2018) A.Y. 2014-15 Page 5 of 9 value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has under reported the said income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year.] Explanation.—For the purposes of this clause,— (a) the fair market value of the shares shall be the value— (i) as may be determined in accordance with such method as may be prescribed 59 ; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; 60 [(aa) "specified fund" means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) 60a [or regulated under the International Financial Services Centres Authority Act, 2019 (50 of 2019)]; (ab) "trust" means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force;] (b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of 61 [Explanation] to clause (23FB) of section 10;] However in the facts of the case of the assessee, neither of the above referred conditions are fulfilled that is assessee has not received any consideration against issue of shares to M/s Gibralter Glass and Ceramics Pvt. Ltd in the previous year. Hence, it was argued that, in the case of assessee, section 56(2)(viib) itself is not applicable. Further, in support of assessee company’s contention, during the course of hearing AR has relied upon the direct decision of Mumbai ITAT in the case of M.A. No.5/Ahd/2023 (In ITA No.923/Ahd/2018) A.Y. 2014-15 Page 6 of 9 DCIT Vs Rankin Infrstructure Pvt Ltd. being reported in [2022] 142 taxmann.com 37 in which it is stated that section 56(2)(Viib) of the act, will be applicable only if there are “RECEIPT OF CONSIDERATION” DURING THE PREVIOUS YEAR. Relevant para of the said decision is reproduced hereunder, 10. Considered the rival submissions and material placed on record, we observe that originally assessee has issued Optionally Fully Convertible Debentures to M/s. Ranon Infrastructure Pvt. Ltd., and allotted OFCDs on 4-4-2011, 21-7-2011 and 21-3-2012. The above issue prices of the OFCDs includes share premium. During this assessment year assessee has only converted OFCDs into non- cumulative preference shares at the same price of OFCD. Therefore, since assessee has converted the OFCDs into non-cumulative preference share during this assessment year the Assessing Officer has invoked the provisions of section 56(2)(viib) of the Act by interpreting that, section 56(2)(viib) of the Act does not contemplate receipts of funds but it deals only with issues of shares. Further, we observe that the Ld.CIT(A) has addressed this issue in detail in his order in Para No 5.13 of the order and he held, the section 56(2)(viib)of the Act is clear that the words used in the section are "where a company, not being a company in which the public are substantially interested, receives in any previous year.......". Therefore, the words used are receives. He decided the issue in favour of the assessee. In our view, the "receives" means not only issue of shares but also receipts of share consideration during the same assessment year. One cannot interpret the law merely on the basis of issue of shares or from receipt of consideration, it has to be issue of shares and receipt of consideration during the same assessment year. It is needless to say that issue of shares includes allotment of shares. In our considered view, Ld.CIT(A) has discussed this issue elaborately in his order and we do not find any reason to interfere with the findings of the Ld.CIT(A). Accordingly, ground raised by the revenue is dismissed. Above mentioned decision was discussed/ read while arguing the case and neither departmental representative nor Hon’ble Bench has objected or distinguished with the facts of the assessee’s case. Further, from paper book page no 158-163, it was shown that no consideration was received in the previous year by the assessee against issue of shares. However, in order passed by the Hon’ble Bench has by inadvertent mistake through oversight, the proposition relied upon by the assessee as per provision of section 56(2)(viib) and in Mumbai ITAT decision in the case of DCIT Vs Rankin Infrstructure Pvt Ltd. being reported in [2022] 142 taxmann.com 37, has not been considered in the perspective it was relied upon during the course of hearing. The Mumbai ITAT decision referred supra has been dealt with by Hon’ble bench as under, M.A. No.5/Ahd/2023 (In ITA No.923/Ahd/2018) A.Y. 2014-15 Page 7 of 9 “Decision of Mumbai tribunal (Stated supra) will not applicable as the determination of optional fully convertible debentures was the issue before the Mumbai Tribunal which is not similar to the present case. “ At this juncture, it is pertaining to mentioned that, case referred by AR of the assessee was not to supporting which kind of financial instrument was issued but it was referred to state the applicability of section 56(2)(Viib) of the Act, and following finding from para 10 of Mumbai ITAT was read and relied during the course of hearing, Further, we observe that the Ld.CIT(A) has addressed this issue in detail in his order in Para No 5.13 of the order and he held, the section 56(2)(viib)of the Act is clear that the words used in the section are "where a company, not being a company in which the public are substantially interested, receives in any previous year.......". Therefore, the words used are receives. He decided the issue in favour of the assessee. In our view, the "receives" means not only issue of shares but also receipts of share consideration during the same assessment year. One cannot interpret the law merely on the basis of issue of shares or from receipt of consideration, it has to be issue of shares and receipt of consideration during the same assessment year. It is needless to say that issue of shares includes allotment of shares. In our considered view, Ld.CIT(A) has discussed this issue elaborately in his order and we do not find any reason to interfere with the findings of the Ld.CIT(A). Accordingly, ground raised by the revenue is dismissed. Hence, as stated above, inadvertently by oversight, the Hon’ble Bench has not followed the Judgment of Mumbai ITAT on proposition for which it was relied upon during the course of hearing and the same is apparent mistake on record and the same shall be rectified by recalling the order. 5 SECONDLY, Hon’ble tribunal has held that the contention of the assessee by stating that as per the requirement of section 56(2)(Viib) of the Act, the fair market value of the shares has to be determined as per Rule 11U and Rule 11UA of the rules, but assessee company failed to do so. Therefore, CIT(A) has rightly confirmed the addition. However, assessee company has relied on the decision of High court of Madras in the case of CIT Vs. Vaani Estates Pvt. Ltd. being reported in [2019] 107 taxmann.com 15, filed before the Hon’ble bench and DR office on 21.06.2021, wherein it is stated that before applying provisions of section 56(2)(Viib), assessing authority is required to undertake exercise of determining fair market value of shares as provided in provisions of section 56(2)(viib), if assessee could not give valuation report during the course of assessment proceeding. Relevant para of the said decisions is reproduced hereunder, 7. Having heard the learned counsel for the parties and considering the aforesaid provisions, we are of the opinion that the learned Assessing authority was required to undertake the M.A. No.5/Ahd/2023 (In ITA No.923/Ahd/2018) A.Y. 2014-15 Page 8 of 9 exercise of fact finding by determining the Fair Market Value of the Shares in question as required in the Explanation to Section 56 as quoted above. That exercise not having been done, the matter deserves to be remanded back to the learned Assessing Authority for undertaking the said fact finding exercise. The Assessee will be free to raise all factual and legal contentions including the point about the said amount being treated as 'gift' from mother to daughter. The Assessee may also seek necessary clarification from the Central Board of Direct Taxes on administrative side. Hence, following the judgment of Madras High Court referred as above, its onus on AO as well to determine the fair market value of shares, if he is not satisfied with the working submitted by the assessee. Hence, in that case, the appeal shall required for set aside to the Assessing Officer for fresh valuation of fair market value of shares. However, the above referred decision, which was filed before the Hon’ble Bench, has not been followed or considered in the order passed by the Hon’ble Bench, inadvertently by oversight and the same is apparent mistake on record and the same shall be rectified by recalling the appeal and oblige. 6. In view of the above-mentioned circumstances the basic argument of the assessee upon which the whole appeal stands, which has not been considered by the Hon’ble I.T.A.T. in its order. 7. This being a reasonable cause in the interest of the natural justice and equity, otherwise it may cause great injustice and hardship to the applicant. Needless to say, for this act of kindness, the applicant as is duty bound shall forever pray and remain grateful. 8. It is, therefore, humbly submitted that the Hon’ble Bench of I.T.A.T. may kindly correct the mistake apparent from record by recalling the appeal and oblige. For this act of kindness, the assessee as is duty bound shall remain obliged. Date:- 03.01.2023 For, M/s. Vanity Cerachem Pvt. Ltd., Place:- Ahmedabad. Sd/- DIRECTOR ______________________ [AUTHORISED PERSON] M.A. No.5/Ahd/2023 (In ITA No.923/Ahd/2018) A.Y. 2014-15 Page 9 of 9 3. The Ld. DR submitted that the Miscellaneous Application filed by the assessee is in fact calling upon review in respect of order dated 07.12.2022 and the same may be dismissed. 4. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that at the time of hearing the assessee has given the decision in the case of Jigar Jashwant Lal vs. ACIT passed by the Ahmedabad Tribunal as well as decision of Chennai Tribunal in case of Vaani Estates Pvt. Ltd. vs. ITO, 98 Taxmann.com 92 alongwith decision of Hon’ble Madras High Court in the case of CIT vs. Vaani Estates Pvt. Ltd. It appears that while deciding the issues, though in the finding only decision of Ahmedabad Tribunal was mentioned, the decision of Hon’ble Madras High Court was also taken into account and that can be seen from the paragraph no.7 that all the decisions including those mentioned in the order dated 07.12.2022 was considered and, therefore, the present Miscellaneous Application filed by the assessee is in fact seeking review of the order and, therefore, it is not permissible. Hence, Miscellaneous Application of the assessee is dismissed. 5. In the result, Miscellaneous Application filed by the assessee is dismissed. Order pronounced in the open Court on this 30 th August, 2023. Sd/- Sd/- (WASEEM AHMED) (SUCHITRA KAMBLE) Accountant Member Judicial Member Ahmedabad, the 30 th day of August, 2023 PBN/* Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY TRUE COPY Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad