Facts of the Case

The assessee filed its return of income for Assessment Year 2015-16 on 29.09.2015 declaring nil income and a current year loss of ₹10,31,82,416. The case was selected for limited scrutiny under CASS for large increase in investment in unlisted equities and sale of property reported in Form 26QB. The Assessing Officer completed assessment under Section 143(3) on 29.12.2017 by making an addition of ₹13,23,01,000 under Section 56(2)(viia) in respect of unlisted shares acquired below fair market value through fresh allotment and an addition of ₹3,38,75,800 under Section 50D (later quantified at ₹5,24,71,800 by the CIT(A)) in respect of capital gains on sale of shares of group companies at values below FMV. The CIT(A), NFAC dismissed the appeal, leading to the appeal before the Tribunal.

Issues Involved

Whether provisions of Section 56(2)(viia) apply to fresh allotment of unlisted shares received below fair market value, whether the word “receipt” in Section 56(2)(viia) includes acquisition by allotment and not merely transfer, whether Section 50D could be invoked where shares are sold to related parties at prices below FMV, and whether consideration in such transactions could be regarded as not ascertainable.

Petitioner’s Arguments

The assessee contended that Section 56(2)(viia) applies only to transfer of shares and not to fresh allotment, as shares do not exist prior to allotment and therefore cannot be “received” from another person. Reliance was placed on Supreme Court decisions in Khoday Distilleries Ltd. and Sri Gopal Jalan & Co. to argue that allotment is creation and not transfer. With respect to Section 50D, it was argued that the actual sale consideration was known, determinable and disclosed, and therefore the precondition for invoking Section 50D was not satisfied. It was further contended that Section 50CA, dealing with FMV substitution for unlisted shares, was introduced only from AY 2018-19 and could not be applied retrospectively.

Respondent’s Arguments

The Revenue argued that Section 56(2)(viia) uses the word “receives” and not “transfer”, and therefore covers fresh allotment of shares received at a value below FMV. Reliance was placed on CBDT Circular No. 3/2019 and the Mumbai ITAT decision in Sudhir Memon HUF holding that “receipt” is of wide import and includes allotment. On Section 50D, the Revenue contended that sale of shares to related parties at prices substantially below FMV without contemporaneous supporting evidence rendered the consideration not ascertainable, justifying substitution of FMV under Section 50D as an anti-abuse measure.

Court Order / Findings

The ITAT Kolkata held that Section 56(2)(viia) applies to fresh allotment of unlisted shares received below FMV. The Tribunal observed that a share comes into existence only upon allotment and it is at that stage that the shareholder “receives” the share. Relying on the decision in Sudhir Memon HUF and CBDT Circular No. 3/2019, the Tribunal held that restricting Section 56(2)(viia) only to transfers would amount to impermissible reading down of the provision and defeat its anti-abuse intent. Accordingly, the addition of ₹13,23,01,000 under Section 56(2)(viia) was upheld.

On the issue of Section 50D, the Tribunal held that where shares are sold to related parties at values significantly below FMV without credible supporting documents such as valuation reports or sale agreements, the consideration cannot be regarded as reliably ascertainable. The Tribunal agreed with the CIT(A) that Section 50D, being an anti-abuse provision, was correctly applied and that FMV was rightly deemed as the full value of consideration. The addition of ₹5,24,71,800 under Section 50D was therefore confirmed.

Important Clarification

The Tribunal clarified that Section 56(2)(viia) is attracted on receipt of unlisted shares below FMV irrespective of the mode of acquisition, including fresh allotment, and that the legislative intent is to curb abuse through undervaluation of shares. It further clarified that Section 50D applies where the declared consideration in related-party share transfers lacks reliability or verifiability, and that the mere disclosure of a sale price does not preclude application of Section 50D if the consideration is effectively not ascertainable.

Final Outcome

The appeal filed by the assessee was dismissed in full. The additions of ₹13,23,01,000 under Section 56(2)(viia) and ₹5,24,71,800 under Section 50D for Assessment Year 2015-16 were upheld, and the order of the CIT(A), NFAC was confirmed.

 Source Link- https://itat.gov.in/public/files/upload/1768385822-4UYRxa-1-TO.pdf

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