आयकर अपील य अ धकरण “ए” यायपीठ मुंबई म।

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI

ी डी. ममोहन, उपाय एवं
ी संजय अरोड़ा, लेखा सदय के सम ।

BEFORE SHRI D. MANMOHAN, VP AND SHRI SANJAY ARORA, AM

आयकर अपील सं./I.T.A. No. 4887/Mum/2013

(नधारण वष / Assessment Year: 2010-11)
&
SA No. 192/Mum/2013
(Arising out of ITA No.4887/Mum/2013)
(नधारण वष / Assessment Year: 2010-11)
Sudhir Menon HUF Asst. CIT-21(2),
501, Swapnalok, Marve Road, बनाम/ Bandra, Mumbai
Malad (West), Mumbai-400 064 Vs.

थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAPHS 2147 R

(अपीलाथ# /Appellant) : ($%यथ# / Respondent)

अपीलाथ# क& ओर से / Appellant by : Shri S. E. Dastur &

Ms. Aarti Vissanji
$%यथ# क& ओर से/Respondent by : Shri Surinder Jit Singh

सनु वाई क& तार,ख / : 19.12.2013

Date of Hearing
घोषणा क& तार,ख /
: 12.03.2014
Date of Pronouncement

आदे श / O R D E R
Per Sanjay Arora, A. M.:

This is an Appeal by the Assessee directed against the Order by the Commissioner
of Income Tax (Appeals)-32, Mumbai (‘CIT(A)’ for short) dated 21.05.2013, dismissing
the assessee’s appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961
(‘the Act’ hereinafter) for the assessment year (A.Y.) 2010-11 vide order dated
14.01.2013.
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The issue
2. The principal; rather, the sole issue arising in the instant appeal; the assessee not
pressing its ground no.1 assailing the impugned assessment on the question of
jurisdiction (which we find to have been, though assumed, not pressed even before the
first appellate authority, withdrawing the objection vide letter dated 07.01.2013), is the
validity in law of the assessment as income of the difference between the value of the
shares allotted to the assessee and the consideration paid by it in respect thereof.

The facts
3. We may, to begin with, brief the facts, which are simple and undisputed. The
assessee, holding 15,000 shares (as on 01.04.2009, the beginning of the relevant previous
year) in a company by the name Dorf Ketal Chemicals Pvt. Ltd. (‘DKCPL’ for short), the
entire (or almost the whole) capital in which is held by the family members of the
assessee’s karta’s family, representing 4.98% of the share capital (3,01,316 shares), was
offered 3,13,624 additional shares (which works to about 21 shares for each share held) at
the face value rate of Rs.100/- each, on a proportionate basis. It subscribed to and was
accordingly allotted 1,94,000 of those shares, on 28.01.2010, i.e., along with the other
shareholders, who were allotted - on the same terms, not only the shares similarly offered
to them but also that not subscribed to by the other shareholder/s, as 1,19,624 (313624 –
194000) shares by the assessee. The shares, as stated, were received by the assessee on
10.02.2010. As the book value of the shares of DKCPL as on 31.03.2009 was Rs.1,538/-
per share, which is to be adopted as a measure of their fair market value (FMV) under the
applicable rules (Rule 11U and r. 11UA), the Assessing Officer (A.O.), treating the
difference of Rs.1,438/- per share as the extent of the inadequate consideration, i.e., in
terms of section 56(2)(vii)(c) read with the relevant rules, toward the acquisition of
additional shares, brought the same to tax there-under. The same being confirmed in
appeal, the assessee is in second appeal before us.

Section 56(2)(vii)(c) – A Discussion

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4.1 The issue is principally legal. The relevant provisions, inserted by Finance (No.2)
Act, 2009 w.e.f. 01.10.2009, in their relevant part, read as under:

a) Section 2(24)(xv) of the Act reads as under:

‘CHAPTER I
PRELIMINARY
Definitions.
2. In this Act, unless the context otherwise requires,—
(1) …………
(2) …………
(24) "income" includes—
(i) …………
(ii) …………
(xv) any sum of money or value of property referred to in
clause (vii) of sub-section of section 56;’

b) Section 56(2)(vii) reads as under:

‘CHAPTER IV
COMPUTATION OF INCOME FROM OTHER SOURCES
F.—Income from other sources
Income from other sources.
56. (1) Income of every kind which is not to be excluded from the total
income under this Act shall be chargeable to income-tax under the head
"Income from other sources", if it is not chargeable to income-tax under
any of the heads specified in section 14, items A to E.

(2) In particular, and without prejudice to the generality of the provisions of

sub-section (1), the following incomes, shall be chargeable to income-tax
under the head "Income from other sources", namely:—
(i) …….
(vii) where an individual or a Hindu undivided family receives, in
any previous year, from any person or persons on or after the 1st day
of October, 2009,—
(a) any sum of money, without consideration, the aggregate
value of which exceeds fifty thousand rupees, the whole of the
aggregate value of such sum;
(b) any immovable property, without consideration, the stamp
duty value of which exceeds fifty thousand rupees, the stamp
duty value of such property;
(c) any property, other than immovable property,—
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(i) without consideration, the aggregate fair market value

of which exceeds fifty thousand rupees, the whole of the
aggregate fair market value of such property;
(ii) for a consideration which is less than the aggregate
fair market value of the property by an amount exceeding
fifty thousand rupees, the aggregate fair market value of
such property as exceeds such consideration :
Provided that where the stamp duty value of immovable property
……
Provided further that this clause shall not apply to any sum of
money or any property received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer or donor, as the case may
be; or
(e) from any local authority as defined in the Explanation to clause
(20) of section 10; or
(f) from any fund or foundation or university or other educational
institution or hospital or other medical institution or any trust or
institution referred to in clause (23C) of section 10; or
(g) from any trust or institution registered under section 12AA.
Explanation. - For the purposes of this clause, -
(b) "fair market value" of a property, other than an immovable
property, means the value determined in accordance with the method as
may be prescribed.
(d) "property" means the following capital asset of the assessee, namely:-
(i) immovable property being land or building or both;
(ii) shares and securities;
(iii) jewellery;
(iv) archaeological collections;
(v) drawings;
(vi) paintings;
(vii) sculptures; or
(viii) any work of art;’

Further, section 49 also stands simultaneously amended by inserting a new sub-section

(4), providing that for the purpose of computing capital gains, if the transaction of receipt
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of an asset is subject to tax under clause (vii) of sub-section (2) of section 56, then the
cost of acquisition of the asset shall be the stamp duty value or the FMV, where the asset
is an immovable property or movable property as the case may be. This would avoid
double taxation, i.e., on the same amount, on the transfer of the relevant capital asset.
Clearly, therefore, the section gets attracted whenever an individual or Hindu
undivided family (HUF) receives without consideration a property (as defined) the FMV
of which is in excess of Rs.50,000/-, or where at a consideration the difference between
the FMV and such consideration exceeds the said amount. The first issue that confronts
us is if the provision/s is at all applicable to a transaction as the one under reference; the
assessee contending it to be only an issue of right shares by the issuing-company
(DKCPL). How could, it is asseverated, a provision brought on the statute to check
bogus capital building or money laundering possibly apply to a case as a present one
which is only a case of a rights issue, i.e., the issue of shares on rights basis, and which
are ordinarily issued at a discount? It would, going by the argument, be equally
applicable to bonus shares, and which is ludicrous indeed, the ld. Authorized
Representative (AR) would continue. Reference in this regard was made by him to the
Budget Speech for 2004-05 on the insertion of section 56(2)(v) (reported at [2004] 268
ITR (St.) 22); Press Note No. 402/92/2006-MC (21 of 2009) issued on the insertion of
section 56(2)(vii) (reported at [2009] 317 ITR (St.) 51); CBDT Circular No. 5 of 2010
dated 03.06.2010, explaining the provision of clause (vii) of section 56(2) inserted by
Finance (No.2) Act, 2009 (reported at [2010] 324 ITR (St.) 293 at 319); Explanatory
Memorandum of the Finance Bill, 2010 inserting clause (vii)(a) to section 56(2) (reported
at [2010] 321 ITR (St.) 110 at pg.123); and CBDT Circular No.1 of 2011 dated
06.04.2011 explaining the said clause, which is effective from 01.06.2010. It was,
according to him, a fit case for applying the ratio and the principles laid down by the
hon’ble apex court in the case of K.P. Varghese vs. ITO [1981] 131 ITR 597 (SC)
inasmuch as the apex court took into account all the relevant factors, including the
purpose for which the relevant provision of section 52 was brought on the statute, as
clarified by the official pronouncements preceding it or in this regard, invoking the rule
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of contemporanea expositio as well as the principles of construction. It, after noting, as

pointed out by Lord Denning, that language is at best an imperfect instrument for the
expression of human thought, referred to the words of Learned Hand that it must always
be remembered that statutes have some purpose or object to accomplish, whose
sympathetic and imaginative discovery is the surest guide to their meaning (at pg. 604).

4.2 We shall, before proceeding further, need to first resolve if the provision of section
56(2)(vii) includes the property under reference, i.e., as received by the assessee. This is
as the word ‘property’ occurring therein is defined to mean capital assets as specified
therein (vide Explanation to the provision). Though the same lists ‘shares and securities’,
one of the objections raised by the assessee is that the shares come into existence only on
their allotment. However, the right to acquire the shares at a concessional rate, which is
what is sought to be annexed or targeted by the Revenue through the said provision,
comes into effect on the passing of the necessary resolution by the Board of Directors
(BOD) of the issuer-company. This is also pressed to support the argument of the
provision being never intended to cover a transaction of this nature, i.e., where the shares
are offered to the existing shareholders – though below their market value, on rights
basis.
True, the shareholders get the right to acquire the additional shares on the passing
of the board resolution, but the receipt of the property is only on their allotment, on which
date the shares, a specified property, is in existence [refer: Shree Gopal and Company vs.
Calcutta Stock Exchange Ltd. [1963] 32 Comp. Cas. 862 (SC) and Khoday Distilleries
Ltd. vs. CIT [2008] 307 ITR 312 (SC) (176 Taxmann 142)], wherein it has been
explained that allotment is generally neither more nor less than the acceptance by the
company of the offer to take shares. All it means is appropriation out of the previously
un-appropriated capital of a company of a certain number of shares to a particular person.
Till such allotment the shares do not exist as such, and in a sense come into existence on
their allotment. In this view of the matter, the plea of the rights under reference being not
a property specified under the provision or the provision being sought to be applied by
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the Revenue to a non-existing property, is without basis. In fact, before us even the date
of receipt - which itself implies that the property exists, i.e., whether on allotment
(28.01.2010) or the receipt of shares (10.02.2010), was a bone of contention. This is
rendered inconsequential inasmuch as both the dates fall during the relevant previous
year; and being separated by a small time lag, even the valuation would not alter to any
material extent, and which becomes a relevant consideration inasmuch as the valuation
date under r. 11U(j) is the date of the receipt of the property. In our view though, the
shares are received on their allotment. What stands received by the assessee subsequently
on 10.02.2010 are the share certificates, i.e., the document evidencing its title thereto.
The two are different, and the shares as well as the property therein vest in the assessee
on the allotment of the shares, whereat the same stand constructively received; the
payment of which has also been made by that date.
Coming back to the question posed, i.e., as to how could a transaction as the
present one be possibly covered by section 56(2)(vii)(c), in our view the correct and the
proper question to be asked in the matter instead is: The transaction per se being
ostensibly covered by the clear and unambiguous language of the provision, what is its
import in a case as a present one? Does it, for example, lead to any unintended or absurd
results which, though apparently should not arise, given the clear and precise mandate of
the provision, i.e., to treat gains by way of receipt of property, which are not explicable in
terms of normal human conduct, as income from other sources of the year of receipt (of
the relevant asset). The question being asked, on the other hand, rather than eliciting a
correct answer – which is the purport of any question, obfuscates the issue. The section
without doubt seeks to substitute the FMV as the normative basis for transactions
involving the receipt of property by a person, being an individual or HUF. That is, it
deems the same to be a proper measure of the arm’s length price, which principle ought
to guide or obtain in case of a transaction between two unrelated parties. Exceptions for
transactions between relatives; on inheritance; on the occasion of marriage; in
contemplation of death, etc. are provided, where this rule may not apply in the normal
course, i.e., of human conduct, inasmuch as no consideration is predicated in such cases
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or, put differently, considerations other than financial/monetary come into play. To that
extent the provision is well-founded and adequately excepted. The provision, beginning
with section 56(2)(v) by Finance (No.2) Act, 2004, which had a threshold limit of
Rs.25,000/-, as against the present Rs.50,000/-, has been gradually enhanced in scope
over time to include gifts-in-kind and immovable property as well, with section 56(2)(vii)
taking effect from 01.10.2009 onwards, phasing out sections 56(2)(v) and 56(2)(vi) by
limiting their application to specified periods in the interregnum. In fact, developments
continue unabated, and the provision is further strengthened and broadened, with Finance
Act, 2010 including a firm/company among the eligible recipients, i.e., where the
property involved is shares in unlisted companies, i.e., in which the public is not
substantially interested, as the present one, excluding transactions of business
reorganization, amalgamation, demerger, etc. per clause (viia). The same are explained as
an anti-abuse measure, following the abolition of the Gift Tax Act, 1958, which it is well-
settled, as also explained by the apex court in Khoday Distilleries Ltd. (supra), to,
together with the Wealth Tax Act, 1957 and the Act, form an integrated code. While the
Gift Tax Act had sought to bring to tax the shortfall in consideration in the hands of the
donor, the present provision/s seek to bring the same to tax as income in the hands of the
recipient of the relevant assets. The Revenue in view of the law providing for the FMV as
the normative basis for the acquisition of the property, absolved of proving, a formidable,
if not an impossible task by any standards, that the shortfall in the consideration is
sourced by or on behalf of the recipient of the property, and is thus his income. It is in
fact not difficult to visualize situations where through the medium of additional shares
the controlling interest in a company or business or interest in property – movable or
immovable, is passed on to another at considerations far below the going rate of the
relevant or the underlying assets/interest. Only a pro-rata allotment or, where not so, one
that is adequately priced, would effectively ensure an exchange of the assets or interest
therein at par values. The provision, thus premised, is on a firm, cogent and sound
footing.
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We may, before we conclude our discussion on this aspect of the matter, dilate on
the application of the provision to the transaction of the nature under reference. The
provision, firstly, would not apply to bonus shares, and the argument alluding thereto
arises only on account of misconception in respect thereof. Though the shares under
reference are admittedly not bonus shares, we consider it relevant to dwell thereon, not
only to meet the argument in their respect, made emphatically before us, but also to
demonstrate the wholesomeness of the provision, which is in fact what was being sought
to be impugned. Issue of bonus shares is by definition capitalization of its profit by the
issuing-company. There is neither any increase nor decrease in the wealth of the
shareholder (or of the issuing company) on account of a bonus issue, and his percentage
holding therein remains constant. What in effect transpires is that a share gets split (in the
same proportion for all the shareholders), as for example by a factor of two in case of a
1:1 bonus issue. Reference in this regard may be made to the decision in CIT vs. Dalmia
Investment Co. Ltd. [1964] 52 ITR 567 (SC) as well as in Khoday Distilleries Ltd.
(supra), wherein reference stands made to the former, also quoting there-from, besides
inter alia to Hunsur Plywood Works Ltd. vs. CIT [1998] 229 ITR 112 (SC), where the
same were referred to as ‘capitalization shares’. In other words, there is no receipt of any
property by the shareholder, and what stands received by him is the split shares out of his
own holding. It would be akin to somebody exchanging a one thousand rupee note for
two five hundred or ten hundred rupee notes. There is, accordingly, no question of any
gift of or accretion to property; the share-holder getting only the value of his existing
shares, which stands reduced to the same extent. The same has the effect of reducing the
value per share, increasing its mobility and, thus, liquidity, in the sense that the shares
become more accessible for transactions and, thus, trading, i.e., considered from the
holders’ point of view. We may though add a note of caution. There could be a case of
bonus issue coupled with the release of assets (of the issuing company) in favour of the
shareholders. The same would fall to be considered as dividend u/s. 2(22)(a) of the Act.
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Findings
4.3 We may next examine if the provision, being ostensibly applicable, leads to any
addition in the hands of the assessee whose shareholding gets – as a result of the
transaction, in fact reduced from 4.98% to (as stated) 3.17%. The argument as well as the
premise on which we found the issue of bonus shares as not applicable would, to the
extent pari materia, apply in equal measure to the issue of additional shares, i.e., where
and to the extent it is proportional to the existing share-holding. We may though, at the
outset, clarify that the instant issue cannot be called a rights issue. Section 81 of the
Companies Act, 1956 is not applicable to a private company (s.81(3)), so that it is firstly
not obliged to issue shares to the existing shareholders only, and again, even so, on a
proportionate basis. That apart, we state so as the scheme does not have a provision for
the renunciation of rights by the existing shareholders. The same could thus at the option
of the issuing company be offered for allotment to any other, i.e., whether existing
shareholder or not. Thus, though the issue has elements of a right issue inasmuch as the
offer is made in the first instance to the existing shareholders on the basis of their share-
holding on proportional basis, the same cannot be strictly termed as one; the company
appropriating that right, which could be offered to another. A rights issue, as informed by
the ld. AR upon enquiry by the Bench, stands not defined either under the Companies Act
or under the Securities Contracts (Regulation) Act, 1956. The company has, accordingly,
correctly termed the issue, not satisfying all its parameters, as akin to a rights issue,
before the ld. CIT(A), which the ld. AR was before us at pains to dislodge. Nothing,
however, turns on the same, as would apparent from the foregoing discussion, and as we
shall presently see in more detail. We say so as to the extent the value of the property in
the additional shares is derived from that of the existing shareholding, on the basis of
which the same are allotted, no additional property can be said to have been received by
the shareholder. The Revenue argues otherwise, contending that the fall in the value of
the existing holding, if any, is not to be taken into account or reckoning. The argument is
equally misconceived, i.e., as that by the assessee qua the applicability of the provision to
bonus shares. It fails to take into account the nature of the transaction. To exemplify,
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shares in the ratio (say) 1:1 are offered for subscription at the face value of Rs.100/- as
against the current book value of Rs.1,500/- (say). The moment a right share is allotted,
the book value shall fall to Rs.800/- per share. It is easy to see that the new share partakes
a part of the value of the existing share, which is only on the basis of the underlying
assets on the company’s books. The excess (over face value), or Rs.1,400/-, gets
apportioned over two shares as against one earlier, which is already the shareholders’
property. This is also the basis and the premise of the decisions in the case of Dhun
Dadabhoy Kapadia vs. CIT [1967] 63 ITR 651 (SC) and H. Holck Larsen vs. CIT [1972]
85 ITR 285 (Bom), relied upon and referred to by the parties before us. As long as,
therefore, there is no disproportionate allotment, i.e., shares are allotted pro-rata to the
shareholders, based on their existing holdings, there is no scope for any property being
received by them on the said allotment of shares; there being only an apportionment of
the value of their existing holding over a larger number of shares. There is, accordingly,
no question of section 56(2)(vii)(c), though per se applicable to the transaction, i.e., of
this genre, getting attracted in such a case. A higher than proportionate or a non-uniform
allotment though would, and on the same premise, attract the rigor of the provision. This
is only understandable inasmuch as the same would only be to the extent of the
disproportionate allotment and, further, by suitably factoring in the decline in the value of
the existing holding. In the context of the example cited, by taking the difference at
Rs.700/- per share for such shares. We emphasize equally on a uniform allotment as well.
This is as a disproportionate allotment could also result on a proportionate offer, where
on a selective basis, i.e., with some shareholders abstaining from exercising their rights
(wholly or in part) and, accordingly, transfer of value/property. Take, for example, a case
of a shareholding distributed equally over two shareholder groups, i.e., at 50% for each.
A 1:1 rights issue, abstained by one group would result in the other having a 2/3rd
holding. A higher proportion of ‘rights’ shares (as 2:1, 3:1, etc.) would, it is easy to see,
yield a more skewed holding in favour of the resulting dominant group. We observe no
absurdity or unintended consequences as flowing from the per se application of the
provision of s. 56(2)(vii)(c) to right shares, which by factoring in the value of the existing
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holding operates equitably. It would be noted that the section, as construed, would apply
uniformly for all capital assets, i.e., drawing no exception for any particular class or
category of the specified assets, as the ‘right’ shares. No addition u/s. 56(2)(vii)(c) would
thus arise in the undisputed facts of the instant case, and the assessee succeeds.

4.4 The foregoing arguments and premises would also meet and state the basis for our
not accepting the Revenue’s argument toward no cognizance being taken of the existing
shareholding – on the strength of which only the additional shares are allotted to the
assessee or the decline in their value consequent to the issue of additional shares in-as-
much as the same are not the subject matter of receipt, i.e., to which the provision
pertains and is restricted to. It stood further contended before us that the ratio of the
decision in the case of Dhun Dadabhoy Kapadia (supra) would be no longer applicable,
i.e., even in principle, so that the said decline would be of no consequence in view of the
specific provisions being since incorporated under section 55 of the Act, providing for the
cost of shares under such situations, as for example a nil cost for bonus shares. The
capital asset received by the assessee (shares in the present case), it may be appreciated,
are to be valued as on the date of its receipt. That is, it is only the asset received that is to
be valued. In-as-much as therefore the value of the additional shares is derived - if only in
part - from that of the existing shares, the decline in the value thereof cannot be excluded
or ignored – though only by following the valuation method prescribed under the rules –
in arriving at the property by way of additional shares received by the assessee. The
provision of section 55(2)(aa) provides for the cost of a capital asset, being a share or
security, which the assessee becomes entitled to subscribe to by virtue of his holding such
a capital asset. In our view, the same, on the contrary, provides statutory support, i.e., in
principle, to our decision in-as-much as it clarifies that the values of the two, i.e., the
original and the additional financial assets (which is how the same are referred to in the
said provision) are interlinked and, accordingly, a gain cannot be computed independent
of each other. It is in fact in acknowledgment thereof that the Legislature has considered
it proper and necessary to provide for determination of cost in such cases, i.e., for
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uniform application. The same though would operate for the purpose of computing
capital gains, which would arise on the subsequent transfer of such assets. We have
already noted an internal consistency between the two sets of provisions in-as-much as
section 49(4) stands simultaneously incorporated to deem the value adopted or taken for
the purpose of section 56(2)(vii) (or (viia)) as the cost of acquisition of the relevant asset
(refer para 4.1). In fact, the argument becomes irrelevant in view of our decision holding
that section 56(2)(vii) shall not have effect, irrespective of the value at which the
additional shares are allotted, where and to the extent they are so on the strength of and
against the existing shareholdings, made uniformly or subject to adequate pricing. Much
was made before us of the Revenue not treating the transaction as a rights issue of shares,
as well as of the power of the tribunal in entertaining such a plea, even where taken
before it for the first time, including qua the admission of additional evidence. We have
already clarified the same to be not a rights issue, i.e., in the strict sense of the term, also
stating our reasons, on the basis of admitted facts, therefor. The plea is also rendered
inconsequential in view of our afore-said decision. This would also meet the assessee’s
argument of it becoming, as a result of the transaction, poorer in-as-much as the value of
his holding witnesses a decline after taking into account the payment made for the
acquisition of the additional shares. The said argument thus, rather than detracting from
lends further support to our decision. The assessee’s argument, with reference to the
shares in the resulting company received by a shareholder on demerger, which is without
consideration, would thus also be of no moment. The same is again misconceived in-as-
much as the shareholder only receives the value of his existing holding in the form of the
shares in the resulting company. We have in fact already noted that these provisions, i.e.,
clause (vii), together with clauses (v) and (vi) preceding it, and clauses (viia) and (viib)
following it, of section 56(2), exclude transactions of business reorganization, merger,
demerger, etc. (refer para 4.2). As shall be noted, it is only the shares or interest in a
company in which public is not substantially interested, arbitrage or leveraging of interest
in which, being largely outside the public domain, that the provision/s seek to capture for
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Sudhir Menon HUF vs. Asst. CIT

tax purposes. A demerger stands, further, also specifically excluded from the definition of
dividend per clause (v) of section 2(22).

4.5 We may next meet the various arguments advanced by either side. The assessee
claims of section being not per se applicable as neither is there any transfer in its favour
nor is the issuer-company the owner of the shares, which stand acquired by way of
subscription. We are unable to appreciate the argument. How else, we wonder, is the
issued capital in a company supposed to be acquired? The section nowhere stipulates
‘transfer’ as the prescribed mode of acquisition. The transfer of a capital asset is even
otherwise a relevant consideration in respect of income by way of capital gains,
chargeable u/s.45. A parallel, if at all, in-as-much as the provision, which is to be
considered as valid, was required to be placed in perspective and within the scheme of the
Act, could be drawn to the deeming provisions of its Chapter VI titled ‘Aggregation of
income and set off or carry forward of loss’. An investment or asset found not recorded,
wholly or partly, in the books of account maintained by the assessee (for any source of
income), and in respect of acquisition or ownership of which he is unable to furnish a
satisfactory explanation, i.e., as to the nature and source of acquisition, the value thereof
or the excess (unrecorded) value, as the case may be, is deemed as the assessee’s income.
The apex court in Chuharmal vs. CIT [1988] 172 ITR 250 (SC) explained that the
provision of section 110 of the Indian Evidence Act, 1872, raising a presumption of
ownership in favour of the person in possession (in-as-much as possession is a prima
facie proof of ownership) is applicable under tax jurisprudence as well, so that the onus to
show that he was not the actual owner is upon such a person. It, accordingly, found
nothing amiss in the charge to tax as income, the assets, properly valued, where
unexplained (or not satisfactorily explained) in terms of the nature and source of their
acquisition. The principle stands in fact dwelt with and explained at length by it over a
number of decisions even prior thereto. The receipt of money, speaking in the context of
a credit entry appearing in the assessee’s books of account, even as there was no
provision corresponding to section 68 of the Act in the earlier 1922 Act, it explained, is
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itself an evidence against the assessee of being in receipt of income, so that the onus to
show that it is not so is upon him (refer: A. Govinda Rajulu Mudaliar v. CIT (1958) 34
ITR 807 (SC); Sreelekha Banerji vs. CIT [1963] 49 ITR 112 (SC); Kale Khan
Mohammad Hanif vs. CIT [1963] 50 ITR 1 (SC); CIT v. Durga Prasad More (1971) 82
ITR 540 (SC)). Section 68, on one hand, and sections 69/69A/69B/69C on the other are
pari materia, both seeking explanation for the assets, being recorded in the first case and
not or only partly so in the other. No doubt, the onus under the latter category of sections
is on the Revenue. However, the onus on the Revenue is limited only to showing the
assessee to be the owner or in possession of the relevant asset. In fact, even this is to be
regarded as discharged where it is able to exhibit circumstances that lead to the inference
of the assessee being the owner, even as clarified by the apex court in K.P. Varghese
(supra) (also refer C.K. Sudhakaran vs. ITO [2005] 279 ITR 533 (Ker)). The receipt of an
asset by the assessee, and in his own right, is, on the other hand, the very basis or the
edifice on which the provision of section 56(2)(vii) rests, so that it proceeds on the basis
or the footing of the burden of the Revenue being satisfied. The receipt of a capital asset
is accordingly made the basis or the condition for the charge to tax as income, unless
falling under any of the excepted categories, and which it would be noted is a valid basis
u/s. 2(45) r/w s.5 of the Act. It is this in fact that had led us to state earlier of the receipt
(of an asset) as having been adopted as the basis or the condition of deeming as income
u/s. 56(2)(vii) (or clauses (v) and (vi)), and of the provision as being on a firm footing.
What the provision essentially does is to widen the scope of the afore-referred provisions
of Chapter VI, which is essentially a statutory recognition of the rules of evidence, even
further. The explanation referred to therein is dispensed with where the receipt is in
respect of a capital asset, as defined, and, further, does not fall under any of the excepted
categories in-as-much as the same is regarded as not normative or outside the realm of
accepted human behavior, based on preponderance of probabilities (of human conduct).
To argue of the receipt as being a synonym for transfer, or of it as not flowing from its
owner, is, thus, inconsistent, both in the context of the provision as well as its clear
language. Reference in this context was also made by the ld. AR to section 122 of the
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Transfer of Property Act, 1882 and section 25 of the Indian Contract Act, 1872. A
transaction could be either with or without consideration. Consideration signifies a price,
so that it is a case of transfer, which the impugned transaction is not, while if considered
as without consideration, the transaction is void in law, being not a gift in-as-much as the
company is not the owner of its shares. The argument seeks to support the contention that
the transaction in order to qualify as valid in law has to be a case of transfer in-as-much
as the consideration implies price, so that the word ‘receipt’ occurring in section
56(2)(vii) has to be read as a synonym for or equated with ‘purchase’ or ‘transfer’. The
shares under question being not acquired through transfer, the transactions falls outside
the ambit of section 56(2)(vii). We are completely unimpressed. The argument, attractive
on its face, fails miserably the moment the nature of the transaction, i.e., the allotment of
the shares (through which the relevant shares stand acquired or received), upon which
only the shares come into existence and are received by the allottee thereof, is clarified.
The same has been subject to dilation and elucidation by the apex court inter alia in
Shree Gopal and Company (supra) and Khoday Distilleries Ltd. (supra) relied upon by
the parties themselves before us. As stated explicitly in the former case, a share is a chose
in action. A chose in action implies the existence of some person entitled to the rights,
which are rights in action as distinct from rights in possession, and, until the share is
issued, no such person exists. A share does not exist prior to its allotment, and in that
sense comes into existence only on its allotment. Allotment of a share is only the
appropriation of the authorized share capital, being un-appropriated, to a particular
person. In nutshell, the difference between the issue of a share to a subscriber and a
purchase of a share from an existing shareholder is the difference between the creation
and transfer of a chose in action (refer pgs.865, 866). How could, therefore, purchase be
equated with allotment? In fact, the purchase or transfer implies existence of a property,
while the shares, where out of un-appropriated capital, come into existence only on their
allotment. It becomes, thus, in the context of the provision, completely irrelevant and of
no consequence that the shares in the issuing company are not its property, and that it
does not become, therefore, any poorer as a result of the allotment of shares therein.
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‘Receipt’ is a word or term of wide import, and would include acquisition of the subject
matter of receipt – defined capital assets in the present context, by modes other than by
way of transfer as well. We find no reason to limit or restrict the scope of the word
‘receipt’ in the provision to cases of ‘transfer’ only. Doing so would not only amount to
reading down the provision, which the tribunal is even otherwise not competent to, being
not a court of law, but reading it in a manner totally inconsistent with the unambiguous
language and the clear intent (of the Legislature) conveyed thereby, but also its context as
well as the drift of section, in complete violence thereto.
In the case of issue of bonus shares (as also on demerger), no property is being
conveyed to the shareholder in-as-much as the property therein is comprised in the
existing shareholding of the allottee. There is as such no case of a gift; the shareholder
only receiving his own property, albeit in a different form. A ‘right’ share, on the other
hand, is placed differently. To the extent it is allotted to a person not against his existing
shareholding or, even so, albeit disproportionately, there is, depending on the terms of the
allotment, which is the mode of acquisition and, thus, it’s receipt, scope for value or
property being passed on to him, which cannot be said to be in lieu of or as recompense
of his existing property. The section would, as afore-stated, therefore, apply, though the
extent of income, if any, chargeable there-under would depend on the actual allotment
and its terms. Thus, considering the assessee’s case from this angle also leads us to the
same conclusion.
We may at this stage advert to the erstwhile section 52 of the Act or, to put it more
precisely, its interpretation as made by the apex court in K.P. Varghese (supra), on which
heavy reliance was placed by the ld. AR before us. We have perused the judgment; its
ratio/s being binding on us. Though the apex court per a detailed judgment discussed
various aspects of the matter, referring to the official pronouncements explaining the
provision, in the final analysis, what prevailed with it is that the provision, as being read
and applied by the Revenue, exceeded its mandate. The provision is not a charging
section. As explained by it, it does not create any fictional receipt; does not deem as
received something which is in fact not received. It merely provides a statutory best
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Sudhir Menon HUF vs. Asst. CIT

judgment assessment of the consideration actually received by the assessee, and brings to
tax the capital gains on the footing that the FMV of the capital asset represents the actual
consideration received by the assessee as against the consideration declared or disclosed
by him. Accordingly, once it is established that the consideration actually received by the
assessee is more than what is declared or disclosed by him, the Revenue is not required to
show the precise extent of the understatement or the exact consideration received by the
assessee – an impossible task in most cases. That is to say that unless, therefore, the
primary condition of an inaccurate or incorrect disclosure or declaration; rather, an under-
statement thereof, was satisfied, the section, which again provided a surrogate measure in
the form of the FMV of the relevant asset, as does section 56(2)(vii), could not be
invoked. Not doing so would, in its words, would be to read into the statutory provision
something which is not there. It is not difficult to see that the Revenue, in applying the
provision of section 52(2) in the manner it did, i.e., without establishing the condition of
its invocation, was putting the cart before the horse. The process led to a fundamental
flaw in-as-much as it proceeded to estimate – which is a process integral to assessment –
something (consideration) that could not be said to exist, i.e., created a fictional receipt,
which was beyond its scope.
One could possibly argue that section 52(2) being no longer on the statute, all this
is not relevant, and the abiding legacy of the decision, and the purpose for which it was
referred to was inter alia its relevance on the principle of contemporanea expositio and
the statement of the objects per the extant official communications. The argument is, in
the context of the present case, misconceived. This is as we have firstly pointed out a
fundamental infirmity in the interpretation placed on or accorded to section 52(2) by the
Revenue. Section 52(1), which again only enabled the A.O. to substitute the FMV as the
consideration as against that declared by the assessee on transfer, subject to his having
reason to believe that the transfer was effected with the object of evading or reducing the
liability to tax u/s.45, was not adversely commented upon by the apex court. It is easy to
see that all the official pronouncements notwithstanding, the apex court would or rather
could not have opined in the manner it did but for the fundamental flaw observed by it in-
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as-much as the provision has to be read within its legal framework, giving a purposeful
meaning to its clear words. No such infirmity inflicts the section under reference or has
been shown to exist. We have already found receipt as a valid basis for deeming income,
which is supported by the principles of common law jurisprudence. That ‘income’ under
the Act is a word or term of wide import, and would include anything which comes in or
results in gain is also well settled. The provision casts exceptions, again as afore-noted,
where in the normal course considerations other than financial/monetary are at play, so
that it applies to commercial transactions for which an arm’s length basis can be
reasonably regarded as the normative basis for conducting or concluding transactions.
Further, even the official pronouncements, which are not to be read as one does a statute,
do not in any manner detract from or operate to dilute the rigor of the section; the same
itself explaining it as an anti-abuse measure. The reason is not far to fathom; it being well
neigh impossible, even as observed by the apex court in K.P. Varghese (supra), for the
Revenue to exhibit the actual consideration that exchanges hands. Why, this in fact is the
basis for the transfer pricing legislation, which is by now an integral part of the tax law
of most countries. That the provision may operate harshly in some cases is no reason for
it to be not read in the manner it ought to be, i.e., given its clear mandate. The
proposition, apart from being well settled, has been sought to be advanced before us by
the Revenue by relying on the decision in the case of Turner Morrison & Co. Ltd. vs. CIT
[1953] 23 ITR 152 (SC). In fact, even the assessee’s case is limited to right shares only,
and does not speak of any other capital asset covered by the provision, including shares
and securities. We have already explained that to the extent the shares subscribed to are
right shares, i.e., allotted pro-rata on the basis of the existing share-holding (as on a cut-
off date), the provision, though per se applicable, does not operate adversely. A
disproportionate allotment, which cannot, therefore, strictly be regarded as right shares,
though could be allotted under a rights issue, would however invite the rigor of the
provision, i.e., to that extent. It is to be noted that the fresh shares rank parri passu with
the existing holding and, therefore, we see no reason why the provision shall not apply
with full force in such cases.
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Conclusion
4.6 We may finally discuss the issue from the stand point of interpretation of statutes,
which was urged before us with reference to some case law, viz., C.W.S. (India) Ltd. vs.
CIT [1994] 208 ITR 649 (SC); CIT vs. J. H. Gotla [1985] 156 ITR 323 (SC); Addl. CIT
vs. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC), besides in the
case of K. P. Varghese (supra), also concluding the matter. The gist thereof, or atleast to a
substantial extent, stands in fact already brought out in the earlier part of this order while
discussing the several arguments urged before us. All that is logical relevant, yielding
insight into the purpose and object for and toward which the amendment stands brought,
should be admissible. A casus omissus cannot be readily inferred, and the courts eschew
supplying the same except in the case of clear necessity. The court cannot read anything
into a statutory provision which is plain and unambiguous; a statute being an edict of the
Legislature. The language employed in a statue is a determinative factor of the legislative
intent, the foundational basis of any interpretation, is to be found from the words used by
the Legislature itself. The principle is in fact well settled and trite (refer Padmasundra
Rao and others vs. State of Tamil Nadu [2002] 255 ITR 147 (SC); and Britannia
Industries Ltd. vs. CIT [2005] 278 ITR 546 (SC). As explained in Surat Art Silk Cloth
Mfrs. Assoc. (supra) (pg.17), the consequences cannot alter the meaning of a statutory
provision where such meaning is plain and unambiguous, though could certainly help to
fix its meaning in case of doubt and ambiguity. The amendment/s under reference, as
explained in the Finance Minister’s speech itself while introducing the provision, follows
the abolition of the Gift Tax Act which, as also observed earlier, sought to bring the
difference in the consideration to tax in the hands of the donor. That the said Act,
together with the Wealth Tax Act and the Act form an integrated code is well settled.
‘Income’ under the Act, it is again well settled, is a word of widest amplitude, and could
include gains derived in any manner. To our mind, therefore, the provisions/s, though no
doubt a charging provision, is an extension of the deeming provisions of Chapter VI of
the Act, laying down the statutory rules of evidence, incorporating the principles of
common law jurisprudence. In sum, as also in fine, the provision, brought as an anti-
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Sudhir Menon HUF vs. Asst. CIT

abuse measure, only seeks to tax the understatement in consideration as the income in the
hands of the recipient (of the corresponding asset) as against the donor in the case of Gift
Tax Act, since no longer in force, particularly considering the burden that the Revenue
would otherwise be called upon to discharge, i.e., to prove otherwise, even as the receipt
of the asset by the assessee is established. No ambiguity or absurdity or unintended
consequence has been either observed by us or brought to our notice, even as we have
endeavoured to examine the provision from all angles; it being well excepted, also
excluding cases of business reorganization. The provision is well founded, even as it is
settled that hardship in a case would not by itself lead to supplying casus omissus or
reading down the provision. In fact, we have also observed the same to be in accord with
the trend in the legislative field in the recent past where in view of the increasing
complexity of business or economic transactions, fair market value, also providing rules
for its determination, is being increasingly adopted for uniform application as a basis for
commercial transactions for the purpose of taxing statutes. The reliance on the argument
made in this regard would thus be of no assistance to the assessee. No property however
being passed on to the assessee in the instant case, i.e., on the allotment of the additional
shares, no addition in terms of the provision itself shall arise in the facts of the case. We
accordingly answer the question raised at the beginning of this order (refer para 2) in the
negative.

Decision
5.1 In view of the foregoing, therefore, the provision of s. 56(2)(vii)(c), in the facts
and circumstances of the case, shall not apply and, hence, the amount of
Rs.27,89,02,160/- cannot be assessed as income in the hands of the assessee on the
ground of inadequate consideration. This answers ground nos. 2 to 4. Ground # 1 stands
dismissed as not pressed. We decide accordingly.

5.2 The assessee has also moved a stay application. In view of our having decided the
appeal itself, the same becomes infructuous.
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Sudhir Menon HUF vs. Asst. CIT

Result
6. In the result, the assessee’s appeal is partly allowed and stay application is
dismissed as infructuous.
Order pronounced in the open court on March 12, 2014

Sd/- Sd/-
(D. Manmohan) (Sanjay Arora)
उपाय / Vice President लेखा सदय / Accountant Member
मुंबई Mumbai; 2दनांक Dated : 12.03.2014
व.3न.स./Roshani, Sr. PS

आदे श क" #त%ल&प अ'े&षत/Copy of the Order forwarded to :

1. अपीलाथ# / The Appellant
2. $%यथ# / The Respondent
3. आयकर आयु4त(अपील) / The CIT(A)
4. आयकर आयु4त / CIT – concerned
5. 7वभागीय $3त3न:ध, आयकर अपील,य अ:धकरण, मुंबई / DR, ITAT, Mumbai
6. गाड< फाईल / Guard File
आदे शानस
ु ार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar)

आयकर अपील य अ धकरण, मंब
ु ई / ITAT, Mumbai