ITAT Kolkata Rules Fresh Share Allotment Below FMV Taxable as Income u/s 56(2)(viia)

The Income Tax Appellate Tribunal (ITAT), Kolkata Bench, has delivered a significant ruling regarding the taxability of shares acquired through fresh allotments at prices below their Fair Market Value (FMV). In the case of Gaurav Vinimay Pvt. Ltd. Vs DCIT, the Tribunal held that the scope of Section 56(2)(viia) of the Income Tax Act 1961 is sufficiently broad to encompass the receipt of shares via fresh issuance, rejecting the argument that such transactions constitute "creation" rather than "transfer" of property.

Factual Matrix of the Case

The dispute arose during the assessment proceedings for the Assessment Year 2015-16. The assessee, a private limited company, filed its return of income disclosing a 'NIL' total income and a current year loss amounting to ₹22,93,83,105.

During the scrutiny of the financial year relevant to the assessment year, the Assessing Officer (AO) noted that the assessee had acquired unlisted shares of several group companies. The specific acquisitions scrutinized were:

  • Gujarat NRE Energy Resources Ltd. (Two tranches: 16,51,300 shares and 56,80,000 shares)
  • Madhur Coal Mining Pvt. Ltd. (Two tranches: 1,98,750 shares and 33,35,000 shares)
  • Newage Vinimay Pvt. Ltd. (52,23,000 shares)

Upon analyzing the transaction values, the AO observed that the assessee had subscribed to these shares at a price significantly lower than their Fair Market Value (FMV) as determined under the provisions of the Act. Consequently, the AO issued a show-cause notice inquiring why the differential amount should not be taxed under the anti-abuse provisions of Section 56(2)(viia).

Although the assessee contended that the transaction involving Gujarat NRE Energy Resources Ltd. was not below FMV, the AO proceeded to make an addition of ₹13,53,09,500 under Section 56(2)(viia). Additionally, a sum of ₹2,03,68,000 was added as Short Term Capital Gains by invoking Section 50D, resulting in a total assessed income of ₹15,11,71,870.

Findings of the Lower Authorities

Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) conducted a deep dive into the financial health and structure of the investee companies.