Applicability of Right Shares Issuance on Face Value based on Renunciation by Family Members

Case Law Sec.56(2)(vii) of the Income-tax Act, 1961 inapplicable to right-shares issued in proportion to own & relatives shareholding 

Decision by: Hon'ble Gujarat High Court 
Assessee: Jigar Jaswant Shah 
Assessment Year: 2013-14

Brief Facts:

• In Assessment Year 2013-14, the assessee was issued 200,000 right shares at face value of Rs.10 in M/s Kintech Synergy Limited.
• Of the total 200,000 right shares, 103,000 equity shares were issued in proportion to existing shares held by assesseee, 82,200 equity shares were issued from renunciation by his wife & father and 14,800 equity shares were received from renunciation by unrelated third party.
• Assessing Officer issued notice. under Sec.148 of the Act on the ground that the correct Fair Market Value (FMV] of shares allotted to the assessee at Rs.5,10,00,000/- far exceeded the consideration of Rs.20,00,000/- paid for receipt of shares as per the provisions of Sec.56(2) of the Act.
• The Assessing Officer computed the FMV and the shares at Rs.255 per share and hold that the differential amount of Rs. 4,90,00,000/- has escaped assessment in the hands of the assessee under the provisions of Sec.56(2)[vii][c) of the Act, Rs.4,90,00,000/- was taxable under the head of income for other sources.
• Assessee, feeling aggrieved, preferred an appeal before the CIT(A) contending that the Assessing Officer
• The CIT(A) partly allowed the appeal of the assessee holding that to the extent that assessee was allotted right shares proportionate to not existing holding, the provisions of Sec.56(2)(vii)(c) were not applicable and the Fair Market Value for the remaining shares was held to be Rs.205.55 per share. Thus, out of 200,000 shares, proportionate holding to assessee's existing holding (103,000 shares) are not covered by provisions of Sec. 56(2) but in respect of additional shares issued: 

  o On renunciation of shares held by wife & father of assessee: 82,200 shares