PCIT Vs Jigar Jashwantlal Shah (Gujarat High Court) Appeal No. 80 of 2023
Facts:
- The assessee was issued 2 lakh rights shares for Rs.10 each. Out of these shares, 103,000 shares were received by the assessee proportionate to his existing shareholding; 82,200 shares were issued to him on the renunciation of rights by his relatives; and 14,800 shares were issued to the assessee on the renunciation of rights by third parties.
- The AO computed the FMV of the shares at Rs.255 per share, and taxed the differential amount of Rs.4,90,00,000/- in the hands of the assessee under the deemed income provision.
- The crux of the matter in this case was whether the allotment of new shares by a company, particularly through right shares, falls under the purview of Section 56(2)(viic).
Note: The explanatory note to the Finance Bill of 2010 has clarified that Section 56(2)(viic) should be applied only in cases involving the transfer of shares.
Hon Gujarat HC held as below:
- The deemed income provision would not apply to the proportionate allotment of 103,000 shares to the assessee, since in a fresh issuance of shares, it cannot be said that there is a transfer of pre-existing shares.
- The deemed income provision would only apply to a transfer of shares, and an allotment of new shares cannot be regarded as a transfer.
- Regarding the issue of 82,200 shares received by the assessee due to renunciation of rights by the wife and father, the principle is that what cannot be done directly cannot be done indirectly.
If they had directly transferred these shares to the assessee, Section 56(2)(viic) would not have been applicable due to the exemption for transactions among relatives. Therefore, the renunciation of right shares by the wife and father in favor of the assessee did not attract the provisions of Section 56(2)(viic).
Conclusion:
Hon HC, distinguishes between the creation of shares and their transfer, leading to the conclusion that this provision should not apply to fresh issuances of shares by a company.
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