After withdrawal of the December 31 circular that would have given breather to Congress party in the National Herald case, the Central Board of Direct Taxes (CBDT) has issued a fresh circular clarifying that the stance taken in the withdrawn circular about fresh issuance of shares would not be a correct approach as it could be subject to abuse and would be contrary to the legislative intent of Section 56(2) of Income-tax Act. Also, any view expressed in the now withdrawn circular shall be considered to have “never been expressed” and should not be taken into account by any Income-tax authority in any proceeding, the CBDT said in the circular dated January 21.
The latest circular states the Board has made a “comprehensive review” related to interpretation of the word “receives” used in Section 56(2)(viia) of the Income-tax Act. “Keeping in view the plain reading as well as the legislative intent of Section 56(2)(viia) and similar provisions contained in Section 56(2) of the Act, being anti-abuse in nature, it has been decided that the view, as was taken in circular 10/2018 (subsequently withdrawn by circular no. 02/2019) that section 56(2)(viia) of the Act would not apply to fresh issuance of shares, would not be a correct approach, as it could be subject to abuse and would need contrary to the express provisions and the legislative intent of Section 56 (2)(viia) or similar provisions contained in section 56 (2) of the Act,” it said.
On January 4, while withdrawing the December circular, the CBDT had stated that it had been brought to the notice of the Board that the matter relating to interpretation of the term “receives” used in section 56(2)(viia) is “sub judice in certain higher judicial forums”. The CBDT had said that “the matter is required to be examined afresh so that a comprehensive circular on the matter can be issued.”
The December 31 circular had clarified the applicability of Section 56(2)(viia) of the Income-tax Act, saying that the provisions of the section “shall not be applicable” in case shares were “received” by a firm or a specified company as a result of the fresh issuance of shares including by way of issue of bonus, rights and preference shares or transactions of similar nature by the specified company.
The December circular had also said that Section 56 (2) (viia) was inserted as an anti-abuse provision in the Finance Act, 2010, that was meant to prevent the transfer of shares in a company for no or an inadequate consideration. However, it stated that it was “never the intention to apply these provisions to fresh issuance of shares” by the specified company by way of issue of bonus shares, rights shares and preference shares or transactions of similar nature. Section 56(2)(viia) of the I-T Act provides for taxation of income where a company, in which public are not substantially interested, or a firm receives shares of a specified company from a person for “no or inadequate consideration”.
The December circular was welcomed by the Congress party as a vindication of its stand in the National Herald case, which relates to acquisition of shares of Associated Journals Ltd (AJL), which published National Herald newspaper, to Young Indian, a Section 25 company incorporated in 2010. In December 2010, AJL decided to transfer its entire equity to Young Indian in lieu of YIL owning its Rs 90 crore debt after which AJL became a fully-owned subsidiary of Young Indian. Young India was owned by four individuals —Rahul Gandhi, Sonia Gandhi, Motilal Vora and Oscar Fernandes. The Congress party had taken a stand that the fresh shares issued by AJL are not taxable and it is now being contested in the court.