Whether Section 56(2)(vii) does apply strictly to the right Issue of shares?

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Case Summary

Income Tax Officer v. Shri Rajeev Ratanlal Tulshyan

(Income Tax Appellate Tribunal, Mumbai)

I.T.A. No.5748/Mum/2017 with Cross Objection No.118/Mum/2018 | 01-10-2021

section 56(2)(vii)(c)(ii), Mumbai ITAT

Whether Section 56(2)(vii) does apply strictly to the right Issue of shares?

The dispute stems from the fact that the assessee was a director and a major shareholder in an entity namely M/s Kennington Fabrics Private Limited (KFPL).

During the year, KFPL offered right issue and the assessee was allotted 3.95 Crores shares of KFPL at face value of Re.1/- each in the right issue.

However, it was alleged by Ld. AO that the consideration of Re.1/- per share was less than FMV of shares as calculated in accordance with the provisions of Sec.56(2)(vii)(c)(ii) read with rule 11U & 11UA which is Rs. 10.85 per share.

A.O alleged that difference between FMV and the consideration paid by the assessee would be taxable in the hands of the assessee u/s 56(2)(vii).
It was held that in case of proportionate allotment of shares, there would be no taxability u/s 56(2)(vii)(c)(ii).

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