No revenue tax on the allocation of free shares: Excessive Courtroom of Karnataka

Income tax - Allocation of free shares - High Court of Karnataka - Taxscan

The Excessive Courtroom of Karnataka dominated that the honest market worth of the free shares calculated based on guidelines 11U and 11UA of the revenue tax guidelines can’t be thought of as revenue from different sources based on Article 56 (2) (vii) of the Revenue Tax Regulation. .

The choice was made in the popular attraction underneath s. 260A of the Revenue Tax Regulation, by the tax authorities, in opposition to the order of the ITAT, Bengaluru Bench, contemplating that the conversion of the reserve into capital, by the receipt of free shares, didn’t suggest the discharge of income and, due to this fact, the provisions of Part 56 (2) (vii) of the IT Act don’t apply to the assessed particular person.

The assessed particular person argued that the intention of Part 56 (2) (vii) of the IT Regulation is to impose a profit obtained by the shareholder and since, no profit accruing to the shareholder when of the issuance of free shares, the identical can’t be imposed.

Contemplating varied choices on this regard, together with Revenue Tax Commissioner, Mumbai v. Basic Insurance coverage Company, the division bench composed of J. Alok Aradhe et. JHTNarendra Prasad held “The problem of free shares by incorporation of reserves is barely a reallocation of firm funds. There isn’t a inflow of recent funds or

enhance in capital employed, which stays unchanged. The overall funds accessible from the corporate stay the identical and the problem of free shares doesn’t entail any change within the capital construction of the corporate. Thus, there are not any additions or modifications to the revenue making equipment and the full funds accessible from the corporate stay the identical. In essence, when a shareholder obtains free shares, the worth of the unique share held by him decreases and the market worth in addition to the intrinsic worth of two shares collectively shall be an identical or nearly an identical to the worth of the share. authentic. share earlier than the problem of free shares. “

The court docket additional noticed that the petitioner had nothing within the file to permit this premium to be deducted.

the shares have been transferred for the aim of evading tax, in order to profit from part 56 (2) (vii) (c) of the Revenue Tax Act.

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