Share allotment under ‘rights issue’ not taxable u/s. 56(2)(vii)(c) if shareholders were relatives : Visakhapatnam ITAT

Share allotment under 'rights issue' not taxable u/s. 56(2)(vii)(c) if shareholders were relatives : Visakhapatnam ITAT

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Share allotment under ‘rights issue’ not taxable u/s. 56(2)(vii)(c) if shareholders were relatives : Visakhapatnam ITAT

Facts:

 

  1. a) Assessee was shareholder in company, JMPP. There were total seven shareholders in company and all of them were close relatives of assessee-Company that issued shares at rate of Rs. 100 per share under rights issue.

 

  1. b) Assessee alone had applied for rights issue and company had allotted shares to assessee. Fair market value of shares was Rs. 416.38 per share.

 

  1. c) Principal Commissioner invoked revision under section 263 for reason that assessee had received shares for value lesser than book value; therefore, provisions of section 56(2)(vii)(c) would be attracted and differential amount between book value and price paid by assessee for shares required to be brought to tax under head ‘income from other sources’

 

  1. d) Aggrieved-assessee filed the instant appeal before the ITAT.

 

The ITAT held in favour of assessee as under:

 

1)Provision of section 56(2)(vii)(c) was brought as an anti-abuse measure, seeks to tax the understatement in consideration as the income in the hands of the recipient as against the donor in the case of Gift Tax Act.

 

2)The transactions between the close relatives are outside the scope of application of section 56(2)(vii)(c). The legislature in its wisdom excluded the transaction of close relatives for the purpose of taxation under the income from other sources.

 

3)Even the gifts received from the close relatives under section 56(2)(v) are outside the scope of section 56(2). Though the shares were allotted to the assessee, the entire shareholding of the company was retained by the family and no share was allotted to the outsiders.

 

4) In this case, though the assessee had received the excess shares, yet renouncement was from the close relatives and the assessee was at liberty to transfer the shares to other relatives or shareholders at any point of time without attracting the tax under section 56(2)(vii)(c). Therefore, surrender of the rights of the close relatives in favour of the another close relative was covered for exemption under section 56(2)(vii)(c).   –  

 

[2019] 101 taxmann.com 122 (Visakhapatnam – Trib.)

 

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