The Income Tax Appellate Tribunal (ITAT), Mumbai bench has held that the anti-abuse provisions under section 56(2)(via) of the Income Tax Act, 1961 shall not be applicable to genuine issue of shares to the existing shareholders.
The assessee, a resident individual is stated to be director and a major shareholder in an entity namely M/s Kennington Fabrics Private Limited (KFPL).During the assessment proceedings, the AO noted that the percentage of share-holding of the assessee in KFPL increased from 90.37% as on 31/03/2013 to 96.88% as on 31/03/2014, opined that there was disproportionateallotment of shares and therefore, the stated provisions would apply in assessee’s case.
ITAT Vice President Mahavir Singh and Accountant Member Manoj Kumar Aggarwal observed that in line with the intent of legislatures, CBDT issued another Circular No. 10/2018 on 31/12/2018 clarifying that keeping in view the legislative intent to apply anti-abuse measures, Section 56(2)(viia) of the Act shall not be applicable in case of receipt of shares as a result of fresh issuance of shares, including by way of issue of bonus shares, rights shares and preference shares.
“Nevertheless, the fact that intent of introducing the provisions was anti-abusive measures still remain intact and there is no reason to depart from the understanding that the provisions were counter evasion mechanism to prevent laundering of unaccounted income. Therefore, the same do not apply to genuine issue of shares to existing shareholders. This position is duly supported by the decision of Bangalore Tribunal in DCIT V/s Dr. Ranjan Pai which is further affirmed by the Hon’ble Karnataka High Court in ITA No. 501 of 2016 dated 15/12/2020. Therefore, on the given facts and circumstances, the impugned additions as made by Ld. AO in the assessment order are not sustainable in the eyes of law,” the Tribunal said.
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