QUESTION: In an answer to the query under the title “Is sale below market rate barred” in The Hindu dated September 20, 2010, you have stated that sale below the market rate may be vulnerable for various reasons.
But such concession in purchase from a non-relative would attract tax under Sec. 56(2)(vii) even without having to go into the genuineness.
In this context, I would also like to point out the possible abuse by revenue of Sec. 56(2)(vii)(a) by application of this provision, where a shareholder receives bonus shares or rights shares, especially from unlisted companies, where the net worth or value of the shares as on the date of allotment may not be capable of being determined, where no balance sheet of the company as on date is available.
ANSWER: The answer referred to did not rely on Sec. 56(2)(vii), since the query itself pointed out that the concessional purchase was prior to October 1, 2009, from which date Sec. 56(2)(vii) was applicable.
As for the further question from T. R. Subramanian, Chartered Accountant, Chennai, relating to applicability of Sec. 56(2)(vii) for bonus or rights shares, it is difficult to infer a concession in such cases.
Concession cannot ordinarily be inferred in the case of a contractual rights or matters governed by statute or regulations as under the company law.
In the case of bonus shares, there is no benefit in mere splitting up the existing holding. Lack of consideration for bonus shares has to be compared with the proportionate fall in the value of the original holding. Further, it is a right available to a shareholder by virtue of his holding.
As for rights shares, the value of the shares in listed companies is fixed under the guidelines from the Securities and Exchange Board of India (SEBI).
No inference of concession may be inferable in such cases. Even where the rights shares are received from unlisted companies, they are based on certain valuation generally following SEBI guidelines even where they are not applicable. The rights again are available against original holding. Further, there is fall in value of original holding consequent on rights issues compensating the concession in price, if any. Besides the market value as on date, when shares are allotted, makes sense only for those who renounce their rights for consideration and not those who hold them as investments.
At any rate, hopefully, such arguments would be accepted. As otherwise, there could be no end to inferences, which do not accord with the object behind the deeming provision under Sec. 56(2)(vii), which is to tackle tax evasion by under-stating real consideration.
By and large, only colourable transactions should be vulnerable.
