The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) has held that third party shareholders renouncing rights shares in favour of the assessee are liable to tax u/s 56(2).
The appellant, Sri Jigar Jashwantlal Shah filed his return declaring total income of Rs. 86,94,247. During the course of assessment proceedings of M/s Kintechsynergy Limited, it was noticed that the appellant was receiving salary in the capacity of its director and also the appellant was issued 2,00,000 rights shares at face value of Rs. 10. The aggregate fair market value (FMV) of shares allotted to the appellant at Rs. 5,10,00,000/- far exceeded the consideration amount of Rs. 20,00,000/- paid for receipt of shares and as per provisions of section 56(2) of the Act, the same should have been taxed in the hands of the appellant. Accordingly, the Assessing Officer held that the differential amount of Rs. 4,90,00,000/- has escaped assessment in hands of the appellant.
The CIT (Appeals) gave part relief to the assessee in respect of allotment made proportionate to the current shareholding of the assessee (of 1,03,000 shares) relying on the decision of Sudhir Menon (HUF) v. ACIT, but in respect of additional shares received by the assessee on renouncement of rights shares by wife and father of the assessee amounting to 82,200 shares and also 14,800 allotted the assessee as a result of third party shareholders renouncing their rights shares in favour of the assessee, he upheld the disallowance on the ground that the allotment of additional shares was disproportionate to present shareholding of the assessee and hence provisions of s.56(2)(vii) of the Act are applicable. Aggrieved assessee filed appeal before ITAT.
The appellant submitted that the Assessing Officer failed to appreciate that the shares were not ‘received’ by transfer, but allotted by way of rights allotment and hence s.56(2)(vii) of the Act cannot be invoked. AO erroneously held that rights share allotment was disproportionate.
The appellant further submitted that so far as additional allotment of 82,200 shares are concerned, the same have been renounced in favour of assessee by immediate family members, who have been excluded from purview of section 56(2)(vii) of the Act altogether.
The Tribunal observed that the wife and father of the assessee directly transferred their rights shareholding in favour of the assessee, provisions of 56(2)(vii)(c) of the Act could not have been invoked since wife/ father are falling within the definition of “relatives’, which are excluded from within the purview of operation of section 56(2)(vii)(c) of the Act. The Tribunal further observed that, section 56(2)(vii)(c) of the Act cannot be invoked only in the event the allotment of shares is not disproportionate, but in case allocation is disproportionate, section 56(2)(vii)(c) of the Act would come into operation.
The Coram of Ms. Annapurna Gupta, Accountant Member and Sri Siddhartha Nautiyal, Judicial Member has held that “we are of the considered view that section 56(2)(vii)(c) of the Act cannot be invoked in respect of additional 82,200 shares received by the assessee, on account of renunciation of rights issue the by assessee’s wife and father in favour of the assesse”. Further held that “section 56(2)(vii)(c) of the Act would apply in relation to 14,800 allotted the assessee as a result of third party shareholders renouncing their rights shares in favour of the assesse”.Subscribe Taxscan AdFree to view the Judgment