ITO Vs Rajeev Ratanlal Tulshyan (ITAT Mumbai)
The dispute in ITO vs Rajeev R Tulshyan before the ITAT Mumbai centered on the tax implications of shares allotted to the assessee during a rights issue by Kennington Fabrics Pvt. Ltd. (KFPL) for the Assessment Year 2014–15. The Assessing Officer (AO) had added ₹42.87 crores to the assessee’s income under Section 56(2)(vii)(c)(ii) of the Income Tax Act, arguing that the shares were allotted below fair market value (FMV), which constituted “income from other sources.” The assessee contended that the shares were acquired strictly in proportion to his existing shareholding during two separate rights issues and that the increase in his ownership percentage resulted from other shareholders choosing not to exercise their rights. Citing judicial precedents like Sudhir Menon HUF vs ACIT and relevant CBDT circulars, the assessee argued that proportionate allotments do not amount to receiving property without consideration and should not attract Section 56(2)(vii).
On appeal, the CIT(A) partly accepted the assessee’s claims and reduced the taxable addition to ₹1.51 crores, reasoning that the shares were indeed allotted in proportion but some consideration of disproportionate gain needed to be accounted for. However, upon further appeal, the ITAT Mumbai reviewed the tabulated shareholding data and board resolutions from KFPL and found no evidence of any disproportionate allotment. It held that the rights issues were made in equal proportion to all shareholders and at the same price. The increase in the assessee’s shareholding occurred solely because other shareholders did not subscribe to their entitlements, not due to preferential allotment. The tribunal emphasized that Section 56(2)(vii) was introduced to curb abuse and money laundering—not to penalize genuine business transactions executed under commercial norms. Consequently, it concluded that since the shares were received through a proportionate rights issue, the provisions of Section 56(2)(vii) were not applicable, and no taxable income arose from the transaction.
