Genuine issue of Shares to Shareholders not to be considered under Anti-Abuse Provisions of the IT Act

The Income Tax Appellate Tribunal (ITAT) has ruled that genuine issuances of shares to existing shareholders are not subject to the anti-abuse provisions under Section 56(2) of the Income Tax Act. This decision aligns with the legislative intent clarified by CBDT Circular No. 10/2018, which states that these provisions do not apply to fresh share issuances, including bonus, rights, and preference shares. The Tribunal found that the respondent's increased shareholding was largely due to relatives not exercising their rights, and therefore, the anti-abuse measures were inappropriately applied.

In Income Tax Officer v. Shri Rajeev Ratanlal Tulshyan [I.T.A. No.5748/Mum/2017 A.Y. 2014-15 dated October 01, 2021] [along with cross objection filed by Shri Rajeev Ratanlal Tulshyan("the Respondent")], the Income Tax Officer ("the Appellant") filed an appeal for the Assessment Year ("AY") 2014-2015 arising out of an Order passed by Learned Commissioner of Income Tax (Appeals), Mumbai ["CIT (A)"] dated July 16, 2017 in the matter of the assessment framed by the Learned Assessing Officer ("AO") under Section 143(3) of the Income Tax Act, 1961 ("the IT Act") on December 30, 2016.

In the case, the Appellant raised the following grounds:

• The CIT (A) erred in restricting the addition of ₹ 42,87,75,000/- to ₹ 1,50,87,320/- under section 56(2)(vii)(c)(ii) of the IT Act, without appreciating the fact that the addition was made as income from other sources totaling to ₹ 42,87,75,000/-.
• The CIT (A) erred in restricting the addition without appreciating the fact that the Respondent had failed to discharge its onus of explaining the charging at ₹ 10.85 per share.

In the cross-objection filed by the Respondent, the following grounds were raised:

• The CIT (A) erred in not appreciating that the Respondent had applied for and was allotted shares in right issue only to the extent to which he was entitled to in proportion of his existing-shareholding and therefore section 56(2)(vii)(c)(ii) of the IT Act ought not have been invoked.
• The CIT (A) erred in not appreciating that the Respondent had been in fact "allotted" the right shares on creation which cannot be equated to as "received" as envisaged under Section 56(2)(vii)(c)(ii) of the IT Act.
• The CIT (A) erred in facts and law in not appreciating that the rise in shareholding of the Respondent is substantially due to inaction on part of his relatives to exercise the right issue of shares offered to them and that the addition made to that extent ought to have been excluded from the rigors of section 56(2)(vii)(c)(ii) of the IT Act.

After taking all the facts and evidences in perusal, the Income Tax Appellate Tribunal ("ITAT"), Mumbai Bench pronounced its judgment in line with the intent of legislatures, the Central Board of Direct Taxes (CBDT) issued an Circular No. 10/2018 on December 31, 2018 clarifying that keeping in view the legislative intent to apply anti-abuse measures, Section 56 (2) of the IT Act shall not be applicable in case of receipt of shares as a result of fresh issuance of shares, including by way of issue of bonus shares, rights shares and preference shares. Inferring from these observations, the Tribunal held that the anti-abuse provisions under section 56(2) of the IT Act shall not be applicable to genuine issue of shares to the existing shareholders.