The Jaipur Bench of Income Tax Appellate Tribunal has held that receipt of excess share from close relative is not chargeable to tax under other sources.
The appellate, M/s Prakash Chand Sharma HUF is an existing shareholder of M/s Prakash Deep Finance Co. Ltd. (PDFCL) having 99,500/- shares of Rs. 10/- each amounting to Rs. 9,95,000/- since 2007. During the year PDFCL allotted 3,00,000 shares to the assessee at face value of Rs. 10/- each for Rs. 30 lakhs. The AO however held that FMV of shares u/s 56(2)(vii)(c) read with rule 11UA is Rs. 11.52 per share and this shares were allotted at a value lower by Rs. 1.52 per share. AO made addition of Rs. 4,56,000/- by holding that the contention of appellant that section 56(2)(vii)(c) (ii) is applicable only when an assessee receives any movable property at lower than FMV. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT (A). CIT (A) has rejected the arguments and submissions made by the assesse. Hence appeal filed before the ITAT.
The appellant submitted that in case of HUF, any member thereof falls in the definition of relative, as the shares allotted to the assessee to the extent of 95.35% was from the interest of his relatives, the same ought not be subject to tax and the company since it is Private Limited company and holding the majority of shares by the relatives , where the assesee himself the karta is Director and member of HUF holding major shares in the company. The shares have been allotted to the assessee instead of allotting shares to all the existing shareholders and thus even if it is assumed that the shareholders to whom shares were not allotted have 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 and therefore also section 56(2)(vii)(c) would not get attracted.
The Tribunal followed the view taken by the Coordinate Bench of ITAT in case of ACIT vs. Venkanna Choudhary that “though the shares are allotted to the assessee, the entire shareholding of the company is retained by the family and no share was allotted to the outsiders. In such case, though the assessee had received the excess shares, renouncement was from the close relatives and the assessee is at liberty to transfer the shares to other relatives or shareholders at any point of time without attracting the taxation under s. 56(2)(vii)(c). Therefore, surrender of the rights of the close relatives in favour of the another close relative is covered for exemption under s. 56(2)(vii)(c) of the Act”.
The Coram of Dr. S. Seethalakshmi, and Sri Rathod Kamlesh Jayantbhai, by giving reliance to the decision in the case of ACIT vs. Venkanna Choudhary has held that “we allow the appeal of the assessee and set aside the order of CIT(A) and addition confirmed by the CIT(A) is deleted”.
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