In ITO v. Rajeev Ratanlal Tulshyan – [2022] 136 taxmann.com 42 (Mumbai – Trib.), the Mumbai Tribunal held that the provisions of section 56(2)(vii) were introduced as an anti-abuse measure and to prevent the laundering of unaccounted income under the garb of gifts after the abolition of the Gift Tax Act.

In line with the intent of legislatures, CBDT issued Circular No. 10/2018 on 31-12-2018 clarifying that section 56(2)(viia) shall not be applicable in case of receipt of shares as a result of fresh issuance of shares, including by way of issue of bonus shares, rights shares and preference shares. However, this circular was later withdrawn.
It was stated by the Board that it would not be a correct approach not to levy section 56(2)(viia) on fresh issuance of shares.

However, the fact that the intent of introducing the provisions was anti-abusive measures remains intact. There is no reason to depart from the understanding that the provisions were counter evasion mechanisms to prevent the laundering of unaccounted income. Therefore, section 56(2)(viia) provisions do not apply to the genuine issue of shares to an existing shareholder. [see ITO v. Rajeev Ratanlal Tulshyan – [2022] 136 taxmann.com 42 (Mumbai – Trib.) at https://www.taxmann.com/post/blog/section-562vii-not-applicable-on-the-issue-of-right-shares-to-existing-shareholders-itat/]