INCOME TAX ACT, 1961

Section 56(2)(vii)(c) Section 17

Income from other sources - Perquisite under section 17(1) - Applicability of section 56(2)(vii)(c) inserted w.e.f. 1-10-2009 - Assessee being employee of company issuing shares

AO stated that the assessee at the beginning of the year was holding 7,28,664 shares of a closely-held company, namely, M/s. D at face value of Rs. 100 per share. During the year the assessee increased his stake to 28,22,696 shares by acquiring 20,94,032 shares @ Rs. 100 per share, i.e., the face value for a consideration of Rs. 20,94,03,200. M/s. D was closely held company of the assessee, who was also a director of the company. The AO worked out the fair market value of the share at Rs. 1438.64 per share. The difference in share value was brought to tax under section 56(2)(vii)(c). AO further stated that without prejudice to the above, if it was held that section 56 was not applicable, the above transaction was to be considered under section 17 of the IT Act in view of the fact that the assessee was working as a director of M/s. D and was in receipt of income from salary. Being a salaried employee, shares allotted by company were to be treated either as perquisite or profit in lieu of salary. Accordingly, AO made addition under section 56(2)(vii)(c). Held: In the instant case, the transaction of issue of shares was carried out to comply with a covenant in the loan agreement with the bank to fund the acquisition of the business by the subsidiary in USA, therefore, such a bona fide business transaction cannot be taxed under section 56(2)(vii), especially when there was not even a whisper about money laundering by the AO in the assessment order. Further, the consideration for the shares was received through banking channel. This object behind introduction of section 56(2)(vii) should be borne in mind. Moreover, the provisions of section 56(2)(vii) were applicable only from 1-10-2009. The contract between the company and the shareholder for issue by the company of shares was completed before 1-10-2009. Accordingly, the provisions of section 56(2)(vii) do not apply to assessee as the contract was executed prior to 1-10-2009. Shares were offered and allotted to the assessee by the company by virtue of the assessee being a shareholder of the company. Therefore, the provisions of section 17 were also not applicable. Circular No. 710, dated 24-7-1995 also supports the assessee's stand. Shares were offered to the assessee and other shareholders at a uniform rate of Rs. 100 and therefore, the difference between the fair market value and issue price could not be brought to tax as a perquisite under section 17. In view of the above, there was no infirmity in the order of CIT(A).

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