Section 56(2)(vii)(c) Income Tax Act Not Invokable when New Shares is Issued: Gujarat HC [Read Order]

The Gujarat High Court has held that Section 56(2)(vii)(c) Income Tax Act, 1961 is not invokable when new shares are issued. The court held that the issue of new shares by the company as a right is a creation of property, and merely receiving such shares cannot be considered a transfer under Section 56(2)(vii)(c) of the act. The assessee, Jigar Jashwantlal Shah filed the return of income for the Assessment Year 2013-14 declaring income of Rs.86,94,247/- which was processed under Sec.143(1) of the Act.

Thereafter, during the assessment proceedings of M/s. Kintech Synergy Limited, it was noticed that the assessee was receiving salary in the capacity of Director of the said Company and the assessee was issued two lakhs right shares at face value of Rs.10 in M/s. Kintech Synergy Limited. The Assessing Officer issued a notice under Sec.148 of the Income Tax Act on the ground that the correct Fair Market Value (FMV) of shares allotted to the assessee at Rs.5,10,00,000/- far exceeded the consideration of Rs.20,00,000/- paid for receipt of shares and as per the provisions of Sec.56(2) of the Act, the same should have been taxed in the hands of the assessee.

The Assessing Officer computed the FMV and the shares at Rs.255 per share and held that the differential amount of Rs. 4,90,00,000/- has escaped assessment in the hands of the assessee. The Assessing Officer held that under the provisions of Sec.56(2)(vii)(c) of the Act, Rs.4,90,00,000/- was taxable under the head of income for other sources.

On appeal before the CIT(A), it was contended that the Assessing Officer failed to appreciate that the shares were not “received” by transfer but allotted by way of right shares allotment and hence Sec.56(2)(vii)(c) of the Act cannot be invoked. The CIT(A) partly allowed the appeal of the assessee holding that to the extent that the assessee was allotted right shares proportionate to not existing holding, the provisions of Sec.56(2)(vii)(c) were not applicable and the Fair Market Value for the remaining shares was held to be Rs.205.55 per share.

The current shareholding of the assessee of 1,03,000 shares is not covered by provisions of sec.56(2) but in respect of additional shares received by the assessee on renunciation of right shares my wife and father of the assessee, the remaining 82,200 shares and also 14,800 shares allotted to the assessee as a result of third party share-holder renunciation in favour of the assessee, the disallowance on the ground that allotment of additional shares was disproportionate to person share holding of the assessee and hence the provisions of Sec.56(2)(vii)(c) of the Act were not made applicable.

On appeal, the Tribunal, dismissed the appeal filed by the revenue on both counts i.e. firstly, Sec.56(2)(vii)(c) not applying to the right shares proportionate to not existing holdings and secondly Fair Market Value of shares were Rs.205.55 per share. The Tribunal partly allowed the appeal of the assessee holding that the issue of right shares proportionate to the holding of wife and father was not taxable under Sec.56(2)(vii)(c). A division bench comprising Justice Biren Vaishnav and Justice Bhargav D Karia held that “no question of law, much less any substantial question of law would arise from the impugned common judgement and order passed by the Tribunal. Both the appeals are accordingly, dismissed with no orders as to costs. “

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