Acquisition of shares at below FMV not taxable as Other Income when held as stock-in-trade.
The recent decision in the case of Utility Supply considers the applicability of section 56(2)(viia) of the Income-tax Act, 1961, to shares acquired below fair market value (FMV) when such shares are held as stock-in-trade, rather than capital assets.
The tax officer invoked section 56(2)(viia) and added the difference between FMV and purchase price to the taxpayer’s income under the head ‘Income from Other Sources.’
The taxpayer contended that section 56(2)(viia) was introduced as an anti-abuse provision. The legislative history links section 56(2)(viia) to section 56(2)(vii)—which clearly applies only to capital assets. Accordingly, section 56(2)(viia) should not apply to genuine business transactions involving trading stock.
The Mumbai Bench of the Tribunal accepted the taxpayer’s interpretation, relying on legislative intent, CBDT circulars, and judicial precedents.
