Utility Supply Private Limited Vs DCIT (ITAT Mumbai)
Mumbai: In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Mumbai, has held that shares held by a company as “stock-in-trade” in the normal course of its business are not subject to addition under Section 56(2)(viia) of the Income Tax Act, 1961. The tribunal’s decision in the case of Utility Supply Private Limited Vs DCIT clarifies the scope of this anti-abuse provision, asserting it is not intended to tax regular business transactions.
The central question before the tribunal was whether shares maintained as stock-in-trade for trading purposes could be subjected to tax under Section 56(2)(viia). This section, introduced with effect from June 1, 2010, aimed to prevent the laundering of unaccounted income by taxing the receipt of shares of a closely held company for no consideration or inadequate consideration by a firm or a company.
The tribunal noted that Section 56(2)(viia) was introduced as an extension of Section 56(2)(vii), which initially applied only to individuals and Hindu Undivided Families (HUFs). The legislative intent behind these provisions, as highlighted by Circular No. 05/2010 and Circular No. 1/2011 issued by the Central Board of Direct Taxes (CBDT), was to counter tax evasion and bring certain transactions in kind into the tax net. However, these circulars also clarified that the provisions were not meant to tax transactions undertaken in the normal course of business or trade, where the profits are already taxable under specific heads of income.
