Section 56(2)(vii) not applicable on the issue of right shares to existing shareholders: ITAT

Case Details: ITO v. Rajeev Ratanlal Tulshyan - [2022] 136 taxmann.com 42 (Mumbai - Trib.)

Judiciary and Counsel Details

• • Mahavir Singh, Vice President and Manoj Kumar Aggarwal, Accountant Member
  • Gaurav Batham, Ld. CIT-DR for the Appellant. 
  • Rushabh Mehta, Ld. AR for the Respondent.

Facts of the Case

Assessee was a director and a major shareholder in an entity namely, KFPL. During the relevant year, KFPL offered the right issue, and the assessee was allotted shares of KFPL at face value of a certain amount.

The Assessing Officer (AO) alleged that consideration of face value per share was less than fair market value (FMV) of shares and, therefore, the difference between FMV and consideration paid by the assessee would be taxable under section 56(2)(vii)(c)(ii).
CIT(A) reversed the order of AO. Aggrieved-AO filed the instant appeal before the Mumbai Tribunal.

ITAT Held

The Mumbai Tribunal held that the provisions of section 56(2)(vii) were introduced as an anti-abuse measure and to prevent the laundering of unaccounted income under the garb of gifts after the abolition of the Gift Tax Act.

In line with the intent of legislatures, CBDT issued Circular No. 10/2018 on 31-12-2018 clarifying that section 56(2)(viia) shall not be applicable in case of receipt of shares as a result of fresh issuance of shares, including by way of issue of bonus shares, rights shares and preference shares. However, this circular was later withdrawn.
It was stated by the Board that it would not be a correct approach not to levy section 56(2)(viia) on fresh issuance of shares.

However, the fact that the intent of introducing the provisions was anti-abusive measures remains intact. There is no reason to depart from the understanding that the provisions were counter evasion mechanisms to prevent the laundering of unaccounted income. Therefore, section 56(2)(viia) provisions do not apply to the genuine issue of shares to an existing shareholder.

Case Review

• • Sudhir Menon HUF v. Asstt. CIT [2014] 45 taxmann.com 176/148 ITD 260 (Mum.) (para 4)
  • Asstt. CIT v. Subodh Menon [2019] 103 taxmann.com 15/175 ITD 449 (Mum.) (para 4.2)
  • Dy. CIT v. Dr. Rajan Pai [IT Appeal No. 1290 (Bang.) of 2015, dated 29-4-2016] (para 4.4) followed.

List of Cases Referred to

• • Sudhir Menon HUF v. Asstt. CIT [2014] 45 taxmann.com 176/148 ITD 260 (Mum.) (para 1.3)
  • Dy. CIT v. Dr. Rajan Pai [IT Appeal No. 1290 (Bang.) of 2015, dated 29-4-2016] (para 3.3)
  • Khoday Distilleries Ltd. v. CIT [2009] 176 Taxman 142/[2008] 307 ITR 312 (SC) (para 3.3)
  • Asstt. CIT v. Subodh Menon [2019] 103 taxmann.com 15/175 ITD 449 (Mum.) (para 4.2)
  • Pr. CIT v. Dr. Ranjan Pai [IT Appeal No. 501 of 2016, dated 15-12-2020] (para 4.4) .