The case of assessee was re-opened and notice was issued under section 148 as alleged that the aggregate FMV of shares allotted to the assessee far exceeded consideration amount paid for receipt of shares. The Assessing Officer held that the differential amount had escaped assessment which should have been taxed under provisions of section 56(2). Further, the assessing officer also taxed differential amount on shares alloted on account of renouncement of rights by wife & father of the assessee.

On the assessee appeal, the Commissioner (Appeals) and the Tribunal provided partial relief. Aggrieved by the order, the department filed appeal before the High Court.

On the first issue the Hon’ble High Court held that the provisions of section 56(2) would not be applicable to the issue of new shares considering that (i) Explanatory note to the Finance Bill, 2010, clarifies that section 56(2)(vii)(c) ought to be applied only in the case of transfer of shares. (ii) Allotment of new shares cannot be regarded as transfer of shares (iii) There must be an existence of property before receiving to apply the provisions of section 56(2)(vii)(c) (iv) Issue of new shares by company as a right shares is creation of property and merely receiving such shares cannot be considered as a transfer.

On the second issue the Hon’ble High Court held that issue of shares in the name of wife and father of the assessee would not hit by section 56(2)(vii)(c) as both would be covered by definition of “relative” and the exempt from ambit of the said provision. (AY.  2013-14)