The Rajkot bench of the Income Tax Appellate Tribunal (ITAT) has held that the provisions of Section 56(2)(vii)(c)(ii) of the Income Tax Act, 1961, do not apply to share allotments by public limited companies in cases of amalgamation.
M/s Rajoo Engineers Ltd., (assessee) is a public limited company engaged in manufacturing plastic extrusion machinery. During the Assessment Year 2014-15, the company amalgamated with three private limited companies, issuing shares to the shareholders of these companies based on a swap ratio. The Assessing Officer (AO) noted discrepancies in the valuation of shares, claiming the swap ratio was skewed to benefit promoters’ related parties.
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The AO applied Section 56(2)(vii)(c)(ii), arguing that the public limited company had allotted shares at a discounted value, indirectly transferring excess benefits amounting to ₹18.74 crores to certain beneficiaries. Therefore, the AO made a protective addition to the income of the assessee.
Aggrieved by the order of the AO, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who deleted the protective addition. The CIT(A) highlighted the judgment of the Gujarat High Court in the case of PCIT vs. Jigar Jashwantlal Shah, which clarified that Section 56(2)(vii)(c)(ii) applies only to individuals and Hindu Undivided Families (HUFs).
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The CIT(A) also observed that the share allotments were part of a court-approved scheme of amalgamation, which does not constitute a “transfer” under the Income Tax Act.
Aggrieved by the CIT(A)’s order, the revenue filed an appeal before the ITAT. The assessee contended that the swap ratio was manipulated to benefit certain shareholders and that Section 56(2)(vii)(c)(ii) should apply to the transactions.
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The two-member bench comprising Dr. Arjun Lal Saini, (Accountant Member) and Dinesh Mohan Sinha (Judicial Member) upheld the CIT(A)’s decision, stating that Section 56(2)(vii)(c)(ii) is restricted to individuals and HUFs.
The Tribunal observed that in cases of amalgamation, the allotment of shares by the amalgamated company to the shareholders of the amalgamating companies is not a “transfer” under Section 47(vii) of the Income Tax Act. Therefore, the provisions of Section 56(2)(vii)(c)(ii) did not apply to such transactions.
The tribunal held that the protective addition made under Section 56(2)(vii)(c)(ii) was unsustainable. The appeal of the revenue was dismissed.
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