CBDT has issued Circular No. 10/2018 clarifying applicability of section 56(2)(viia) of the Income-tax Act, 1961 for issue of shares by a company in which public are not substantially interested only to withdraw the same after three days vide Circular No. 02/2019 dated 04.01.2019.
Circular No. 10/2018
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
North Block, New Delhi, the 31st of December, 2018
Subject: Clarification regarding applicability of section 56(2)(viia) of the Income-tax Act, 1961 for issue of shares by a company in which public are not substantially interested-reg.
Section 56(2)(viia) of the Income-tax Act, 1961 (`Act’) provides for taxation of income where a company in which public are not substantially interested (‘ specified company’)or a firm receives shares of a specified company from a person for no or inadequate consideration.
2. It has been represented before the Board that the term ‘receives’ used in section 56(2)(viia) of the Act, being of wider import and might lead to taxation of income in the cases where the shares are received by a firm or a specified company as a result of the fresh issuance of shares including by way of issue of bonus shares, rights shares and preference shares or transactions of similar nature by the specified company.
3. The matter has been examined. Clause (viia) was inserted in the section 56(2) of the Act vide Finance Act,2010.The Memorandum explaining the provisions of Finance Bill, 2010 inter alia provided the following legislative intent for insertion of the said clause:-
“…..In order to prevent the practice of transferring unlisted shares at prices much below their fair market value, it is proposed to amend section 56 to also 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)……..”.
4. It is apparent from the legislative intent that clause(viia) was inserted in section 56(2) of the Act as an anti-abuse provision to prevent the practice of transferring shares of a specified company for no or inadequate consideration. Thus, the intention was never to apply these provisions of said clause (viia) to the fresh issuance of shares as mentioned in para 2 above, by the specified company. Keeping in view the legislative intent to apply anti-abuse provision contained in section 56(2)(viia) to transfer of shares for no or inadequate consideration, it is hereby clarified that section 56(2)(viia) of the Act shall apply in cases where a specified company or firm receives the shares of the specified company through transfer for no or inadequate consideration. Hence, the provisions of section 56(2)(viia) of the Act shall not be applicable in cases of receipt of shares by the specified company or firm as a result of fresh issuance of shares as mentioned in para 2 above, by the specified company.
5. Hindi version to follow.
(Vinay Sheel Gautam)
Under Secretary-ITA.I, CBDT
Respected Member
This is with reference to the Tax Connect 5 issued on 4 January 2019 based on CBDT Circular No. 10 of 2018 dated 31 December 2018 regarding the interpretation of the word ‘received’ used in section 56(2)(viia) of the Income Tax Act, 1961 (the ‘Act’). The CBDT issued Circular No. 2 of 2019 dated 4 January 2019 later that evening withdrawing Circular No. 10 of 2018 to the effect that it shall be considered to have never been issued.
The reason cited by the CBDT for such withdrawal is that the interpretation of the term ‘receives’ used in section 56(2)(viia) of the Act is pending before judicial forums and stakeholders have sought clarifications on similar provisions in section 56 of the Act hence the CBDT is of the view that the matter is required to be examined afresh so that a comprehensive circular on the matter can be issued.
Please leave your e mail id for copy of the Circular No. 2 of 2019.