Shares Gifted and recorded at Higher Value in the books – No tax U/s 56(2)(x): ITAT Mumbai

 

The issue before ITAT, Mumbai was whether the difference between the cost of shares gifted by the assessee’s relative (₹2,73,06,266/-) and the fair market value (FMV) recorded by the assessee (₹7,76,25,000/-) can be treated as unexplained credit under Section 68 of the Income Tax Act, 1961.

ITAT Mumbai held as under:

The Tribunal ruled that such a difference cannot be treated as unexplained credit under Section 68, as:
1. The source of the gifted shares (relative of the assessee) was identified and explained.
2. The gift was exempt under Section 56(2)(x) of the Act since it was received from a “relative” as per the Income Tax Act’s definition.

Cases Relied Upon by Revenue and Rebutted:
1. CIT v. Trikamlal Maneklal (Karta of HUF) [(1987) 32 Taxman 479 (Bom.)]:
• This case dealt with capital gains arising from the transfer of capital assets.
• The ITAT clarified that this precedent is irrelevant because the present case does not involve a transfer of shares; instead, it pertains to a gift received, which is specifically exempt under Section 56(2)(x).
2. Utsav Cold Storage (P.) Ltd. v. ITO [(2016) 70 taxmann.com 13 (Jaipur-Trib.)]:
• This case was related to unexplained cash credits.
• The ITAT distinguished this ruling, stating that in Urvi Premal Shah, the nature and source of the gift were fully explained, and the transaction was exempt under the law.

Key Case Relied Upon by Assessee:

Hon’ble Delhi High Court in CIT v. Shiv Dhooti Pearls & Investment Ltd. [(2016) 72 taxmann.com 149 (Delhi)]:
• Principle: When the identity of the donor, the genuineness of the transaction, and the creditworthiness are established, the addition under Section 68 cannot be made.
• Relevance: In the present case, the identity of the donor (relative) and the genuineness of the gift were beyond doubt, and the exemption under Section 56(2)(x) applied.

ITAT’s Conclusion:
• Section 68 is not applicable when the source and genuineness of the credit (gift) are explained.
• Gifts from relatives are specifically exempt under Section 56(2)(x).
• Valuation differences between the cost and FMV cannot be treated as unexplained credit when the gift is genuine and exempt under the Act.

Thus, the addition made by the AO under Section 68 was deleted.