Provisions of Section 56(2)(vii)(C) of the Income-tax Act are not applicable in case of allotment of shares, it is only applicable in case of transfer of shares

 

Case Law

In the case of PCIT v/s Jigar Jashwantlal Shah [(2023) 154 taxmann 568 (Gujarat)], Hon’ble Gujarat High Court held that provisions contained in section 56(2)(vii)(c) are applicable only in case when an Individual or HUF receives any property for consideration which is less than the FMV not when the shares were allotted. As under allotment, the shares were not received from any person which is the fundamental requirement of section 56(2)(vii)(c).

Further, it was observed that in order to apply the provisions of section 56(2)(vii)(c), there must be an existence of property before receiving it. As per advanced Law Lexicon Dictionary, the term’ receive’ has been defined as ‘To receive means to get by a transfer, as to receive a gife, to receive a letter or to receive money and involves an actual receipt.’Issue of new shares by company as a right-shares is creation of property and merely receiving such shares cannot be considered as a transfer under section 56(2)(vii)(c).

Further, reference was invited to the case of Khoday Distilleries Ltd. v. CIT [2009] 176 Taxman 142[2008] 307 ITR 312, after referring to the decision in the case of Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. [1963] 33 Comp. Case 862, where in Hon’ble Supreme Court held that the word’allotment’means appropriation out of previously unappropriated capital of a company, of a certain number of shares to a person and till such allotment, the shares do not exist as such. Therefore, it is only on allotment that the shares come into existence.In every case, the words ‘allotment of shares’ having used to indicate the creation of shares appropriation out of unappropriated share given to a particular person.