The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) has recently held that a shareholder cannot be taxed under Section 56(2)(vii) of the Income-tax Act, 1961 when the shares are allotted to him on a proportionate basis, even if such shares are allotted at lower than the fair market value under Section 56(2)(vii) (Ruling).
As per Section 56(2)(vii) of the IT Act, if a person (as specified) received certain specified properties (which includes unquoted shares) for nil or inadequate consideration, the difference between FMV (computed as per prescribed method) of such property and the consideration paid, if any, was taxed as income in the hands of the recipient under income from other sources, provided the difference exceeded INR 50,000.
The assessee, an Indian resident was the promoter and director of an Indian Private Limited Company. For the relevant period, he subscribed to only a portion of the total additional shares offered to him at the face value of INR 100 per share. The per share FMV of such subscribed shares, as per section 56(2)(vii) was INR 1538.64. while the shares were offered for allotment and subscribed as such in the month of September 2009, the shares were actually issued and allotted on 28 January 2010. The provisions of section 56(2)(vii) were applicable from 1 October 2009 only.
While concluding the assessment proceedings, the Assessing Officer considered the difference between the FMV (INR 1538.64) and the price paid (INR 100), as the Taxpayer’s income for each share subscribed by him, under section 56(2)(vii) of the IT Act. As the Taxpayer was a director of the Company the Assessing Officer taxed the difference as a perquisite (salary) under section 17 of the IT Act.
The Tribunal noticed the decision in the case of the assessees’ brother wherein the Tribunal dismissed the tax department’s appeal and held that as there was no disproportionate allotment of shares via-a-vis the Taxpayer’s existing percentage of shareholding in the Company, receipt of shares at a lower than the section 56(2)(vii) prescribed fair market value cannot be taxed in the Taxpayer’s hands under section 56(2)(vii) of the IT Act. The Tribunal clarified that the ‘disproportionality’ cited in the Sudhir Menon HUFcase is to be read as disproportionality on the higher side, i.e. acquisition of additional shares which effectively increases the overall percentage shareholding of the shareholder in the Company.
The Tribunal also held that in the current facts (and as in the facts of Sudhir Menon HUF case) the Taxpayer’s shareholding was in fact reduced after the issue of additional shares (from 34.57% to 33.30%) as he only partially accepted the offer given to him, section 56(2)(vii) of the IT Act should not be invoked.