Genuine issue of Shares to Shareholders not to be considered under Anti-Abuse Provisions of the Income Tax Act

Income Tax Officer v. Shri Rajeev Ratanlal Tulshyan [I.T.A. No.5748/Mum/2017]

Facts:

1. During the year under consideration, a company offered a right issue and the assessee was allotted 3.95 Crores shares of KFPL at face value of Re.1/- each in the right issue.

2. However, it was alleged by AO that the consideration of Re.1/- per share was less than fair market value (FMV) of shares as calculated in accordance with the provisions of Sec.56(2)(vii)(c)(ii) read with rule 11U & 11UA and therefore, the difference between FMV and the consideration paid by the assessee would be taxable in the hands of the assessee u/s 56(2)(vii).

The ITAT held as below:

1. Hon Supreme Court in Khoday Distilleries Ltd. (CA No.6654 of 2008), held that allotment of shares is a creation of shares and not a transfer of share. Sec 56(2)(vii)(c) uses the word ‘received’ which cannot be equated with allotment.

2. In the case of Sudhir Menon HUF vs ACIT (45 taxmann.  com 176) it was held that as long as there was no disproportionate allotment i.e. shares are allotted pro-rata to the shareholders, the provisions of Sec.56(2)(vii)(c) would not get attracted.

3. A higher than proportionate or a non-uniform allotment though would, and on the same premise, attract the rigor of the provision.

4. Anti-abuse provisions under section 56(2) of the IT Act shall not be applicable to genuine issue of shares to the existing shareholders.