[Opinion] Allotment of Shares Is a Taxable Event?

CA Pilar Shivanand Nayak & CA Puja Borar – [2024] 165 taxmann.com 358 (Article)

1. Allotment is an appropriation to a person of a certain number of shares. Such appropriation is made out of the previously un-appropriated capital of a company. Allotment of shares is a capital account transaction. From the allottee’s perspective, he gets an asset (i.e. shares of the company).

2. Receipt of an asset cannot be equated with receipt of income . Such convergence can happen only through specific provisions of the statute. Under the Income-tax Act, 1961 (the Act), sections 56 read with 2(24) creates a charge of tax on ‘receipt’ of stipulated assets. Clause x(c) therein interalia provides that receipt of shares without or for inadequate consideration is chargeable to tax as income in the hands of recipient. This write-up attempts to unravel whether allotment of fresh issue of shares would be a ‘receipt’ visualized in section 56(2)(x)(c)?

A. Meaning of receive/receipt

3. The Act is silent on the meaning of receipt. The dictionary meaning of the term ‘receive’ is “to come into possession of or get from some outside source”. Judicially, it was held that income is received when it reaches the assessee. The Supreme Court observed that “receipt” of income is when the recipient gets the money under his own control. Applying this principle, the receipt of shares should mean the event when the share reaches a person or comes under his control. The question is whether ‘allotment’ of shares be such event?

4. The Supreme Court in CIT v. Madan Gopal Radhey Lal ruled that allotment of shares indicate the ‘creation’ of shares by appropriation out of the un appropriated share capital to a particular person. Till such allotment, the shares do not exist. Thereby, on allotment of shares, the allottee becomes undisputedly the first person to be in control of such share. The allotment of shares (by the company) and receipt thereof (by the shareholder) are simultaneous. Allotment necessarily results in receipt of shares from the company. However, every receipt may not be on allotment of shares. The receipt of shares could be on account of purchase, exchange, assignment etc. Irrespective of such means, every receipt of share is arguably enveloped in section 56(2)(x)(c).

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