Share Transfer without consideration or at a Price lower than FMV chargeable to Income Tax: ITAT [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) ruled that Share Transfer without consideration or at a price lower than Fair Market Value (FMV) is chargeable to income tax.

The assessee, Rajeev Ratanlal Tulshyan 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 assessee was allotted 3.95 Crores shares of KFPL at face value of Re.1/- each in the right issue.

However, it was alleged by AO that the consideration of Re.1/- per share was less than fair market value (FMV) of shares as calculated in accordance with the provisions of Sec.56(2)(vii)(c)(ii) read with rule 11U & 11UA and therefore, the difference between FMV and the consideration paid by the assessee would be taxable in the hands of the assessee u/s 56(2)(vii).

The provisions of Section 56(2)(vii) were anti-abuse provisions inserted post abolition of the Gift Tax Act. The same is evident from CBDT Circular No. 05/2010 dated 03/06/2010which provided that Section 56 is being introduced as an anti-abuse measure. The same is fortified in CBDT Circular No. 01/2011 dated 06/04/2011 which also provided that these provisions are anti-abuse provisions that were applicable only if an individual or a 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.

The coram headed by the Vice President, Mahavir Singh, and Accountant Member, Manoj Kumar Aggarwal relied upon DCIT V/s Dr. Ranjan Pai 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 Income Tax Act.

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