Receipt of shares below fair market value is taxable; allotments at undervalue treated as income under the statute.

Section 56(2)(viia) applies to receipt of shares of a closely held company even when those shares arise by fresh allotment; where consideration paid is less than the aggregate fair market value, the difference is taxable as income. The statutory language treats 'receives' broadly and does not require pre existing property in the allotter; administrative guidance (Circular No. 3/2019) and tribunal reasoning support application to allotments at undervalue. Valuation under Rule 11UA was applied to determine fair market value, and additions based on fund rotation and accommodation entry findings were sustained, resulting in taxability of the differential.

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Issues: Whether the provisions of Section 56(2)(viia) of the Income-tax Act, 1961 apply to shares received by a closely held company pursuant to fresh allotment at a price lower than their fair market value.

Analysis: Section 56(2)(viia) taxes receipt of shares of a closely held company where consideration is less than aggregate fair market value. The statutory text does not confine the term 'receives' to transfers from existing shareholders and contains no pre-condition requiring the shares to have pre existence as property of the allotter. Administrative clarification (Circular No. 3/2019 dated 29.01.2019) affirms that the provision applies to fresh issuance of shares to prevent abuse. Tribunal reasoning treating 'receipt' as a term of wide import and recognizing that shares may come into existence only on allotment supports applying the provision to allotments made at undervalue. The impugned orders relied upon relevant factual findings (financials indicating fund rotation and accommodation entries) and applied Rule 11UA for valuation to determine FMV and the differential chargeable under section 56(2)(viia).

Conclusion: Section 56(2)(viia) of the Income-tax Act, 1961 applies to fresh allotment of shares; the addition under section 56(2)(viia) made on account of allotment of shares at consideration below fair market value is sustained and the appeal is dismissed.

Ratio Decidendi: Where shares of a closely held company are allotted to a recipient at a consideration less than their fair market value, such receipt falls within Section 56(2)(viia) of the Income-tax Act, 1961, and the differential is taxable as income from other sources.

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