Sec. 56(2)(viib) does not apply when shares are issued to current shareholders in proportion to existing holdings

Case Details: Chhattisgarh Metaliks and Alloys (P.) Ltd. v. Income-tax Officer - [2023] 147 taxmann.com 441 (Raipur-Trib.)

Judiciary and Counsel Details

• • Ravish Sood, Judicial Member & Rathod Kamlesh Jayantbhai, Accountant Member
  • Abhishek Mahawar, CA for the Appellant.
  • G.N. Singh, Sr. DR for the Respondent.

Facts of the Case

Assessee was a private limited company engaged in manufacturing, casting, rolling & dealing in Iron & steel products. In the relevant assessment year, the assessee received share application money from existing shareholders.

The case was selected for scrutiny, and during the proceeding, the Assessing Officer (AO) noticed that the shares were issued at a value of Rs. 100 per share, while the Fair Market Value of unquoted shares was Rs. 85 per share. Unsatisfied by the explanation offered by the assessee, the AO proceeded to make an addition under section 56(2)(viib).

The matter reached the Raipur Tribunal.

ITAT Held

The Tribunal held that the shares were offered to the existing shareholders on a pro-rata basis, and the shareholding percentage remained the same before and after the allotment of such shares.

Further, allotting shares to existing shareholders in proportion to their existing shareholding (akin to the issue of right shares) neither results in any increase nor decrease in the shareholder’s wealth (or of the issuing company) on account of a bonus issue. Also, their percentage holding therein remains the same. Moreover, when share gets split (in the same proportion for all the shareholders), such allotment of additional shares would be akin to changing a one thousand rupees note for two five hundred rupees notes.

Therefore, the provisions of section 56(2)(viib) in the assessee’s case were not triggered.

List of Cases Reviewed

• • Sudhir Menon, HUF v. Asstt. CIT [2014] 45 taxmann.com 176/148 ITD 260/162 TTJ 425 (Mum. – Trib.) (para 14)
  • ITO v. Rajeev Ratanlal Tulshyan [2022] 136 taxmann.com 42/193 ITD 860/[2021] 92 ITR (T) 332 (Mum. – Trib.) (para 14) followed.

List of Cases Referred to

• • Sudhir Menon, HUF v. Asstt. CIT [2014] 45 taxmann.com 176/148 ITD 260/162 TTJ 425 (Mum. – Trib.) (para 9)
  • ITO v. Rajeev Ratanlal Tulshyan [2022] 136 taxmann.com 42/193 ITD 860/[2021] 92 ITR (T) 332 (Mum. – Trib.) (para14).