2026 (1) TMI 1564 - AT - Income Tax

Undervalued allotment and related party sale of unlisted shares: FMV difference and deemed consideration upheld as taxable.

Fresh allotment of unlisted shares at consideration below fair market value attracts taxation under the provision treating the excess of FMV over ... Addition u/s 56(2)(viia) - Shares acquired by the appellant on allotment of the Shares by subscribing thereto - scope of the word 'receipt' - Whether provisions of Section 56(2)(viia) could not be applied in the case of a direct allotment of Shares by a company? - application of provisions of Section 50D in the matter of Sale of Shares by the appellant. HELD THAT:- It is difficult to agree with the argument of the Ld. AR that section 56(2)(viia) of the Act applies only for the receipt of share and not for the allotment of share since only on allotment of shares, the shareholder receives the shares and not prior to the allotment. As decided in Sudhir Memon HUF [2014 (3) TMI 534 - ITAT MUMBAI] a share does not exist prior to its allotment and the purchase or transfer implies existence of the property and the shares out of un-appropriated capital comes into existence only on their allotment. It has also been held that ‘receipt’ is a word of wide import and would include the acquisition of the subject matter of receipt by modes other than by way of transfer as well and, therefore, there is no reason to limit or restrict the scope of the word 'receipt' in the provision to cases of 'transfer’ only, as doing so would not only amount to reading down the provision, which the Tribunal is even otherwise not competent to do, being not a court of law, but reading it in a manner totally inconsistent with the unambiguous language and the clear intent of the legislature would be in complete violence thereof. Addition applying the provisions of section 50D - capital gains arising from the transfer of shares of the group companies to the related parties - Addition made by the AO under the head 'Short-Term Capital Gain' by invoking the provisions of section 50D is justified - AR could not counter the findings of the Ld. CIT (A) by any cogent reason. Further, the Ld. DR reiterated that this was an antiabuse provision. Since the Ld. AO has adopted the fair market value of the scrip as worked out by the assessee and the shares were sold to group companies, therefore, the provisions of section 50D correctly applicable. Appeal filed by the assessee is dismissed. Issues: (i) Whether the differential between fair market value and actual consideration on allotment of unlisted shares attracts tax under Section 56(2)(viia) of the Income-tax Act, 1961; (ii) Whether Section 50D of the Income-tax Act, 1961 can be invoked to deem fair market value as full value of consideration where shares were sold to related parties and the declared consideration is held to be not ascertainable.Issue (i): Whether Section 56(2)(viia) applies to fresh allotment of shares when allotment consideration is lower than FMV.Analysis: Section 56(2)(viia) charges receipt of shares where consideration is less than FMV. The provision does not limit application to transfers from existing shareholders. Legislative materials and administrative clarification (Circular No. 3/2019, CBDT) treat the provision as an anti abuse measure covering fresh issuance at undervalued prices. Coordinate tribunal authority has interpreted the term 'receive' broadly to include acquisition by allotment where shares come into existence only on allotment. The assessing authority and the appellate authority applied FMV differences determined under applicable valuation rules to the allotments in question and relied on absence of exclusion in the statutory language.Conclusion: Section 56(2)(viia) applies to fresh allotment of shares when consideration is less than FMV; the addition under Section 56(2)(viia) is upheld (against the assessee).Issue (ii): Whether Section 50D can be applied to deem FMV as full value of consideration where shares were sold at values below FMV to related parties and the declared consideration is treated as not ascertainable.Analysis: Section 50D deems FMV to be full value of consideration where the actual consideration received or accruing from transfer of a capital asset is not ascertainable. The assessing and appellate authorities found lack of contemporaneous supporting evidence (agreements, independent valuations) for the declared sale prices and noted related party sales raising doubts on genuineness. Section 50D is an anti abuse provision distinct from but complementary to later provisions addressing undervaluation; application to AY 2015 16 was treated as permissible where consideration is not ascertainable.Conclusion: Section 50D applies where the consideration is not ascertainable; the addition under Section 50D is upheld (against the assessee).Final Conclusion: Both challenged additions-under Section 56(2)(viia) (allotment undervaluation) and under Section 50D (deemed consideration on sale)-are upheld on the facts and evidence before the authorities; the appeal is dismissed.Ratio Decidendi: Where shares are received by allotment at consideration below FMV, Section 56(2)(viia) applies to tax the difference as income from other sources; where declared consideration for transfer of shares is not supported by contemporaneous evidence and is therefore not ascertainable, Section 50D permits deeming FMV as the full value of consideration for computing capital gains.