Tax alert which summarizes a recent ruling of the Mumbai Income Tax Appellate Authority (ITAT) in the case of Sudhir Menon [HUF] (Taxpayer) on whether allotment of “additional” shares, on the basis of existing shareholding and at a value less than the fair value, results in taxation under the Gift Tax provision of the Indian Tax Law (ITL).
The ITAT analyzed the tax implications under the following categories, i.e., (a) where the allotment is on a proportionate basis, and (b) where the allotment is on a disproportionate basis. The ITAT ruled that both, proportionate as well as disproportionate allotments, fall within the ambit of the Gift Tax provision under the ITL. As regards “proportionate” allotment, the ITAT ruled that there should be no adverse tax implications as it is similar to the issue of bonus shares, whereby, a share is split and the total value, post issue of additional shares, in the hands of the shareholder, remains the same. Accordingly, there should be no additional Gift tax liability under the ITL. However, in cases of “disproportionate” issue of additional shares, the Gift Tax provision stands attracted.
This ruling provides an insight into the Gift Tax provision of the ITL. The ITAT has ruled on a very contentious issue as to whether fresh allotment of shares falls within the meaning of the term “property” that can be “received.”Further, the ITAT has bifurcated tax implication on allotment of additional shares under two baskets, i.e., proportionate allotment and disproportionate allotment. Where allotment of additional shares is proportionate to existing shareholding, the ruling clarifies that there should be no adverse implication under the Gift Tax provision. However, in cases of disproportionate allotment of additional shares, the ruling seems to indicate that the Gift Tax provision may apply on such quantum, which is over and above the proportionate entitlement of the shareholder.
Impact of this ruling will need to be considered while undertaking any business reorganization or restructuring which may involve issue of additional shares.
The ITAT analyzed the tax implications under the following categories, i.e., (a) where the allotment is on a proportionate basis, and (b) where the allotment is on a disproportionate basis. The ITAT ruled that both, proportionate as well as disproportionate allotments, fall within the ambit of the Gift Tax provision under the ITL. As regards “proportionate” allotment, the ITAT ruled that there should be no adverse tax implications as it is similar to the issue of bonus shares, whereby, a share is split and the total value, post issue of additional shares, in the hands of the shareholder, remains the same. Accordingly, there should be no additional Gift tax liability under the ITL. However, in cases of “disproportionate” issue of additional shares, the Gift Tax provision stands attracted.
This ruling provides an insight into the Gift Tax provision of the ITL. The ITAT has ruled on a very contentious issue as to whether fresh allotment of shares falls within the meaning of the term “property” that can be “received.”Further, the ITAT has bifurcated tax implication on allotment of additional shares under two baskets, i.e., proportionate allotment and disproportionate allotment. Where allotment of additional shares is proportionate to existing shareholding, the ruling clarifies that there should be no adverse implication under the Gift Tax provision. However, in cases of disproportionate allotment of additional shares, the ruling seems to indicate that the Gift Tax provision may apply on such quantum, which is over and above the proportionate entitlement of the shareholder.
Impact of this ruling will need to be considered while undertaking any business reorganization or restructuring which may involve issue of additional shares.
No comments:
Post a Comment