Question And Answer
Subject: Whether provisions of section 56(2) (x) are applicable to Rights issue of shares ?
Querist: Sree Lekha
Answered by:
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Date: May 23, 2021
Query asked by Sree Lekha

Good evening sir. My query is: Are the provisions of section 56(2)(viib) and 56(2)(x) applicable on rights issue of shares? Mumbai ITAT in two judgements have held that 56(2)(vii)(c) provisions are not applicable to rights issue. So, similarly can it be said that 56(2)(x) provisions are not applicable to rights issue?

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Section 56 (2)(x) of the Act is an anti-abuse provision. Since the transaction of issue of right shares is as per the provisions of the Companies Act and Rules framed thereof, it cannot be said that the transaction is without consideration or without any substance.

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One comment on “Whether provisions of section 56(2) (x) are applicable to Rights issue of shares ?
  1. CA Manoj Gupta says:

    In Sudhir Menon HUF v. Asstt. Commissioner (Appeals) (2014) 148 ITD 260 (Mum ‘A’-Trib) : (2014) 162 TTJ 425 (Mum ‘A’-Trib) an interesting question came up for consideration. In that case a private company issued additional shares to the existing shareholders. The AO sought to tax the difference between fair value and issue price in the hands of assessee invoking section 56(2)(vii) [Predecessor to section 56(2)(x)] . The ITAT Mumbai Bench held that as long as, there is no disproportionate allotment, i.e., shares are allotted pro rata to the shareholders, based on their existing holdings, there is no scope for any property being received by them on the said allotment of shares; there being only an apportionment of the value of their existing holding over a larger number of shares. The Tribunal went ahead to hold that a higher than proportionate or a non-uniform allotment though would, and on the same premise, attract the rigor of the provision. The ITAT Mumbai Bench also held that the provisions will not apply to bonus shares.

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