CBDT clarifies – Section 56(2)(x) even applies to fresh issue of Shares by the Company. Controversy continues

Any firm or company not being a company in which public are substantially interested received shares of any company below its Fair Market Value (FMV) then the difference between cost of acquisition & its FMV attracts tax in the hands of the firm or company u/s 56(2)(viia). Section 56(2)(viia) was applicable till 01.04.2017 after which scope of section 56(2)(x) was widened so as to include all categories of ‘person’ including firm and company as referred in section 56(2)(viia).

 

After insertion of section 56(2)(viia), there were some doubts about the scope of section 56(2)(viia). Whether it will merely apply to purchase of shares from any other person or will also apply to even fresh issue of shares by the company?  The same doubts are also there for section 56(2)(vii) and now section 56(2)(x).

 

It was clarified in detail by the CBDT vide circular no. 10/2018 that the said section will not apply to fresh issue of shares. The said clarification was well elaborated with prefect justification as well. Para 4 of the said circular is produced hereunder for easy reference:

 

4. It is apparent from the legislative intent that clause(viia) was inserted in section 56(2) of the Act as an anti-abuse provision to prevent the practice of transferring shares of a specified company for no or inadequate consideration. Thus, the intention was never to apply these provisions of said clause (viia) to the fresh issuance of shares as mentioned in para 2 above, by the specified company. Keeping in view the legislative intent to apply anti-abuse provision contained in section 56(2)(viia) to transfer of shares for no or inadequate consideration, it is hereby clarified that section 56(2)(viia) of the Act shall apply in cases where a specified company or firm receives the shares of the specified company through transfer for no or inadequate consideration. Hence, the provisions of section 56(2)(viia) of the Act shall not be applicable in cases of receipt of shares by the specified company or firm as a result of fresh issuance of shares as mentioned in para 2 above, by the specified company.

 

above circular, another circular No. 2/2019 was issued, the relevant part of which is produced hereunder::

2. It has been brought to the notice of the Board that the matter relating to interpretation of the term “receives” used in section 56(2)(viia) of the Income-tax Act, 1961 (the Act) is sub-judice in certain higher judicial forums. Further, representations have been received from stakeholders seeking clarification on other similar provisions in section 56 of the Act.
3. Accordingly, the matter has been reconsidered by the Board. Given the fact that the matter relating to interpretation of the term ‘receives’ used in section 56(2)(viia) of the Act is pending before judicial forums and stakeholders have sought clarifications on similar provisions in section 56 of the Act, the Board is of the view that the matter is required to be examined afresh so that a comprehensive circular on the matter can be issued,
4. In view of the above, the Circular No. 10/2018 dated 31st December, 2018issued from file No. 173/616/2018-1TA-I is hereby withdrawn and the said circular shall be considered to have been never issued.

 

The said circular was mentioning two aspects

1. The issue need examination afresh
2. The circular No. 10/2018 stands withdrawn

 

Present Clarification Dated 21.01.2018:

The subject of the present clarification – F.No. 173/616/2018-ITA quotes the subject as “Applicability of section 56(2)(viia) of the Income-tax Act, 1961 or similar provisions under section 56(2) of the Income-tax Act, 1961 for issue of shares by a company” . The wording itself makes it clear that it applies to section 56(2)(x).

 

Section 56(2)(x) is an advanced version of section 56(2)(vii) which was applicable to individual and HUF only. Now, 56(2)(x) applies to all the categories of the person.

 

In one of the pronouncement by the ITAT, the meaning of the word “receives” was analyzed and was concluded that the provision of section 56(2)(vii) would not apply to fresh issue of shares. CBDT earlier circular was in line with that ITAT pronouncement.

 

It is believed that withdrawn by Circular No. 02/2019 was done to avoid the negative repercussion it may carry for National Herald case involving Mrs Sonia Gandhi and Shri Rahul Gandhi wherein shares were issued at abnormally high price only.

 

The present clarification is in line with the withdrawal Circular No. 02/2019 issued earlier by the CBDT. In Circular No. 2/2019, it was mentioned that “the Board is of the view that the matter is required to be examined afresh so that a comprehensive circular on the matter can be issued”. Present clarification is afresh examination and final opinion of the CBDT.

Circular No. 2/2019 mentioned that

“It has been brought to the notice of the Board that the matter relating to interpretation of the term “receives” used in section 56(2)(viia) of the Income-tax Act, 1961 (the Act) is sub-judice in certain higher judicial forums”.

 

The matter “receive” will continue to the issue full of litigation and the earlier and present clarification will not serve any purpose. The issue now needs to be settled by the judiciary.

 

For ease of reference, all the circulars & clarifications referred above are produced hereunder:

 

F.No. 173/616/2018-ITA.I
Government of India
Ministry of Finance
Department of Revenue
(Central Board of Direct Taxes)

North Block, New Delhi,
Dated the 21st January, 2019

Subject: Applicability of section 56(2)(viia) of the Income-tax Act, 1961 or similar provisions under section 56(2) of the Income-tax Act, 1961 for issue of shares by a company-reg

As mentioned in Circular 02/2019, a comprehensive review of the subject matter relating to interpretation of the term “receives” as used in, inter alia, section 56(2)(viia) of the Income-tax Act, 1961(the Act) and similar provisions contained in section 56(2) of the Act has been made by the Board in view of pendency of this issue in various judicial forums and clarifications sought by stakeholders. Based on the above, the following position is hereby clarified.

2. Keeping in view the plain reading as well as the legislative intent of section 56(2)(viia) and similar provisions contained in section 56(2) of the Act, being antiabuse in nature, it has been decided that the view, as was taken in circular no. 10/2018(subsequently withdrawn by circular no. 02/2019) that section 56(2)(viia) of the Act would not apply to fresh issuance of shares, would not be a correct approach, as it could be subject to abuse and would be contrary to the express provisions and the legislative intent of section 56(2)(viia) or similar provisions contained in section 56(2) of the Act.
3. Therefore, any view expressed by the Board in Circular No. 10/2018shall be considered to have never been expressed and accordingly, the said circular shall not be taken into account by any Income-tax authority in any proceedings under the Act.

(Rajarajeswari R)
Under Secretary to the Government of India

Copy to:-

1) PS to FM/OSD to FM/PS to MoS(F)/OSD to MoS(F)

2) PS to Secretary (Revenue)

3) Chairman, CBDT & All Members, CBDT

4) All Pr.CCsIT/ Pr.DsGIT

5) All Joint Secretaries/CsIT, CBDT

6) CIT (M&TP), Official Spokesperson of CBDT

7) O/o Pr. DGIT(Systems) for uploading on official websitc

8) Addl.CIT (Database Cell) for uploading on departmental website

(Rajarajeswari. R)
Under Secretary to the Government of India

 

CBDT has issued Circular No. 10/2018 clarifying  applicability of section 56(2)(viia) of the Income-tax Act, 1961 for issue of shares by a company in which public are not substantially interested only to withdraw the same after three days vide Circular No. 02/2019 dated 04.01.2019.

Circular No. 10/2018

Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes

North Block, New Delhi, the 31^st of December, 2018

Subject: Clarification regarding applicability of section 56(2)(viia) of the Income-tax Act, 1961 for issue of shares by a company in which public are not substantially interested-reg.

Section 56(2)(viia) of the Income-tax Act, 1961 (`Act’) provides for taxation of income where a company in which public are not substantially interested (‘ specified company’)or a firm receives shares of a specified company from a person for no or inadequate consideration.

2. It has been represented before the Board that the term ‘receives’ used in section 56(2)(viia) of the Act, being of wider import and might lead to taxation of income in the cases where the shares are received by a firm or a specified company as a result of the fresh issuance of shares including by way of issue of bonus shares, rights shares and preference shares or transactions of similar nature by the specified company.
3. The matter has been examined. Clause (viia) was inserted in the section 56(2) of the Act vide Finance Act,2010.The Memorandum explaining the provisions of Finance Bill, 2010 inter alia provided the following legislative intent for insertion of the said clause:-

“…..In order to prevent the practice of transferring unlisted shares at prices much below their fair market value, it is proposed to amend section 56 to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which public are substantially interested)……..”.

4. It is apparent from the legislative intent that clause (viia) was inserted in section 56(2) of the Act as an anti-abuse provision to prevent the practice of transferring shares of a specified company for no or inadequate consideration. Thus, the intention was never to apply these provisions of said clause (viia) to the fresh issuance of shares as mentioned in para 2 above, by the specified company. Keeping in view the legislative intent to apply anti-abuse provision contained in section 56(2)(viia) to transfer of shares for no or inadequate consideration, it is hereby clarified that section 56(2)(viia) of the Act shall apply in cases where a specified company or firm receives the shares of the specified company through transfer for no or inadequate consideration. Hence, the provisions of section 56(2)(viia) of the Act shall not be applicable in cases of receipt of shares by the specified company or firm as a result of fresh issuance of shares as mentioned in para 2 above, by the specified company.
5. Hindi version to follow.

(Vinay Sheel Gautam)

Under Secretary-ITA.I, CBDT

Circular No. 02/2019

^{F.No. 173/616/2018-ITA-I}
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
(ITA-1 Division)
******

Ncw Delhi, the 04 January, 2019

Sub: Withdrawal of Circular No. 10/2018 dated 31.12.2018 on applicability of section 56(2)(viia) of the Income-tax Act, 1961 for issue of shares by a company in which public are not substantially interested- reg.

Reference is invited to the Circular No. 10/2018 dated 31.12.2018 on the captioned subject.

2. It has been brought to the notice of the Board that the matter relating to interpretation of the term “receives” used in section 56(2)(viia) of the Income-tax Act, 1961 (the Act) is sub-judice in certain higher judicial forums. Further, representations have been received from stakeholders seeking clarification on other similar provisions in section 56 of the Act.
3. Accordingly, the matter has been reconsidered by the Board. Given the fact that the matter relating to interpretation of the term ‘receives’ used in section 56(2)(viia) of the Act is pending before judicial forums and stakeholders have sought clarifications on similar provisions in section 56 of the Act, the Board is of the view that the matter is required to be examined afresh so that a comprehensive circular on the matter can be issued,
4. In view of the above, the Circular No. 10/2018 dated 31st December, 2018issued from file No. 173/616/2018-1TA-I is hereby withdrawn and the said circular shall be considered to have been never issued.
5. A fresh comprehensive circular on the subject shall be issued in due course.

(Rajarajeswari R)
Under Secretary to the Government of India

Copy to:-

1. PS to FM/OSD to FM/PS to MoS(F)/OSD to MqS(F)
2. PS to Secretary (Revenue)

iii. Chairman, cunT & All Members. CBDT

1. All Pr. CCsIT/ Pr. DsGIT
2. All Joint Secretanes/CslT. CBDT
3. CIT (M&TP), Official Spokesperson of CBDT

(Rajarajeswari R)
Under Secretary to the Government of India