Income Tax Dept warns public against cash dealings of Rs 2 lakh or more saying that the receiver of the amount will have to cough up an equal amount as penalty.

section 56(2)(viia) shall not be applicable in cases of fresh issuance of shares

The Central Board of Direct Taxes (CBDT) vide its circular 10/2018 dated 31st December, 2018 has clarified that the provisions of section 56(2)(viia) shall not be applicable in cases of receipt of shares by the specified company or firm as a result of fresh issuance of shares including by way of issue of bonus shares, right shares and preference shares, by specified company. Gist of the circular is as under:-

Section 56(2)(viia) of the Income-tax Act, 1961 provides for taxation of income in case where a closely held company or a firm receives a shares of a closely held company from a person for inadequate or without consideration.

Clause (viia) of section 56 was inserted by Finance Bill, 2010. Section 56 was amended to include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which public are substantially interested).

It has been observed by the Central Board of Direct Taxes (CBDT) that the term ‘receives’ used in the section 56(2)(viia) is being imported by the Assessing Officer (AO) in a wider manner which results in the taxation of Income in the cases where shares are received by closely held company or firm due to issue of fresh shares. It also includes issue of shares by way of bonus shares, right shares, preference shares or transactions of similar nature.

Referring to the Memorandum to Finance Bill, 2010, the CBDT has said that the clause (viia) of Section 56 was inserted as an anti-abuse provision to prevent the practice of transferring shares of a closely held company for inadequate or no consideration. The intention of legislature was never to apply said provisions to fresh issue of shares by a closely held company.

Keeping in view the legislative intent, the CBDT has clarified that the provisions of section 56(2)(viia) shall not be applicable in cases of receipt of shares by closely held company or firm as a result of fresh issue of shares by closely held company.

Share This!



No comments:

Post a Comment