Section 56(2)(x) of the Income Tax Act ('IT Act') provides that where any person receives any property (including shares of a company) for a consideration less than its fair market value (computed as per the prescribed method), the fair value as exceeding the consideration would be taxable in the hands of the person receiving such property. Clause (XI) of proviso to Section 56(2)(x) of the IT Act read with Rule 11UAC of the IT Rules, provides for prescribed class of persons to whom the provisions of Section 56(2)(x) of the IT Act would not apply.
The Central Board of Direct Taxes (CBDT) vide notification1 dated 29 June 2020 has replaced the said Rule 11UAC of the IT Rules. As per the revised Rule 11UAC, effective from fiscal year 2019-20, the provisions of Section 56(2)(x) of the IT Act would not apply to:
- Any immovable property, being land or building or both, received by a resident of an unauthorised colony in the National Capital Territory of Delhi, where the Central Government has regularised the transactions of such immovable property based on the prescribed documents in favour of such resident
- Any movable property, being unquoted shares, of a company and its subsidiary and the subsidiary of such subsidiary received by a shareholder, where:
- The National Company Law Tribunal ('NCLT'), on an application moved by the Central Government under Section 2412 of the Companies Act, 2013 has suspended the Board of Directors of such company and has appointed new directors nominated by the Central Government; and
- Share of company and its subsidiary and the subsidiary of such subsidiary has been received pursuant to a resolution plan approved by the NCLT under Section 242 of the Companies Act, 2013
- Any movable property, being equity shares of Yes Bank Limited, received by the State Bank of India ('SBI') or other investor banks, allotted under the Yes Bank Reconstruction Scheme (at a price specified in the said Scheme (i.e. at face value of INR 2 and premium of INR 8 per share)
Further, as per Section 50CA of the IT Act, where the consideration received on transfer of unquoted shares, is less than its fair market value (computed as per the prescribed method), such fair value shall be deemed to be the full value of consideration received for the purpose of computing capital gains. The CBDT vide notification3 dated 30 June 2020 has inserted Rule 11UAD to the IT Rules pursuant to which the provisions of Section 50CA of the IT Act would not apply in case of transfer of unquoted shares of a company, its subsidiary and the subsidiary of such subsidiary as enlisted in point 2 above (i.e. where new directors have been appointed by the NCLT and shares have been received pursuant to a resolution plan approved by NCLT).
While the Yes Bank Reconstruction Scheme did provide for exemption to the SBI/ investor banks from any capital gains arising on account of such subscription, the IT Act did not however have any provisions to support the exemption. With the new Rule 11UAC being effective, the exemption from capital gains would now be available even under the IT Act, thus providing clarity on the same. Further, instances where shares of an unlisted company (including share of its subsidiary and subsidiary of such subsidiary) is received pursuant to a resolution plan approved by NCLT under Section 242 of the Companies Act, 2013, have also been excluded from the applicability of Section 56(2)(x) as well as Section 50CA of the IT Act.
1. Notification No. 40/2020/F. No. 370149/143/2019-TPL dated 29 June 2020
2. Oppression and Mismanagement i.e. where a member complains that the affairs of the company or material change in the management/control of the company is prejudicial to public interest
3. Notification No. 42/2020/F. No. 370149/143/2019-TPL dated 30 June 2020
Originally published 01 July 2020
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