| Nov-09-2021

Share Transfer with no consideration chargeable to Income Tax

In Shri Rajeev Ratanlal Tulshyan v. Income Tax Officer [I.T.A. No.5748/Mum/2017 & Cross Objection No. No.118/Mum/2018 AY 2014-2015 dated October 01, 2021], the Income Tax Appellate Tribunal (“ITAT”), Mumbai Bench ruled that Share Transfer without consideration or at a price lower than Fair Market Value (“FMV”) is chargeable to income tax.

Shri Rajeev Ratanlal Tulshyan ("the Appellant") has filed an Appeal impugning the Order of the Learned Commissioner of Income Tax (Appeals), Mumbai ["CIT (A)"] dated June 16, 2017 in the matter of Assessment framed by the Assessing Officer (AO) under Section 143 (3) of the Income Tax Act, 1961 ("the IT Act") on December 30, 2016.

The Appellant, was a director and a major shareholder in an entity namely M/s Kennington Fabrics Private Limited (“KFPL”). During the year, KFPL offered the right issue and the Appellant was allotted ₹ 3.95 Crores shares of KFPL at face value of ₹ 1/- each in the right issue.

However, it was alleged by the AO that the consideration of ₹ 1/- per share was less than Fair Market Value (“FMV”) of shares as calculated in accordance with the provisions of Section 56(2) (vii) (c) (ii) of the IT Act read with Rule 11U & 11UA of Income Tax Rules, 1962 and therefore, the difference between FMV and the consideration paid by the Appellant would be taxable in the hands of the Appellant under Section 56(2)(vii) of the IT Act.

The provisions of Section 56(2) (vii) of the IT Act were anti-abuse provisions inserted post abolition of the Gift Tax Act. The same is evident from CBDT Circular No. 05/2010 dated June 03, 2010 which provided that Section 56 of the IT Act is being introduced as an anti-abuse measure.

The same is fortified in CBDT Circular No. 01/2011 dated April 06, 2011 which also provided that these provisions are anti-abuse provisions that were applicable only if an individual or an Hindu Undivided Family (“HUF”) is the recipient. Therefore, transfer of shares of a company to a firm or a company, instead of an individual or a HUF, without consideration or at a price lower than the fair market value does not attract the anti-abuse provision.

After taking perusal of all the facts and evidences, the Honorable ITAT relied upon DCIT V/s Dr. Ranjan Pai [431 ITR 250/197 DTR 314/ 318 CTR 603/ 278 Taxman 138 (Karn) (HC)] and observed that the 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 a counter evasion mechanism to prevent the laundering of unaccounted income. Therefore, the same does not apply to genuine issues of shares to existing shareholders.

The ITAT held that transfer of shares of a company to a firm or a company, instead of an individual or a HUF, without consideration or at a price lower than the fair market value does not attract Section 56(2)(vii) of the IT Act.  

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