Representations were made before the CBDT about the scope of the applicability of Section 56(2)(viia) of the Income Tax Act, 1961 ("IT Act"), insofar as it relates to the "receipt" by a firm or a company (in which the public are not substantially interested) of shares of a company in which the public are not substantially interested, for no or inadequate consideration (with the difference between the actual consideration and the fair market value of such shares, being treated as "income from other sources" in the hands of such recipient firm or company).

These representations sought for a clarification to exclude from such "income from other sources" shares received as a result of the fresh issuance of shares including by way of bonus shares, rights shares and preference shares or transactions of a similar nature by the specified company.

After examination, the CBDT has issued a clarification (copy attached, Circular No. 10/2018, dated 31st December 2018), as follows:

a).   the legislative intent is apparent that clause (viia) was inserted in Section 56(2) of the IT Act as an anti-abuse provision to prevent the practice of transferring (emphasis added) shares of a specified company for no or inadequate consideration.

b).   such legislative intent was never to apply clause (viia) to the fresh issuance (emphasis added) of shares.

c).   as a result, it has been clarified that: (i) Section 56(2)(viia) of the IT Act shall apply in cases where a specified company or firm receives shares through transfer (emphasis added) for no or inadequate consideration; and (ii) Section 56(2)(viia) of the IT Act shall NOT be applicable (emphasis added) in cases of receipt of shares as a result of fresh issuance (emphasis added) thereof.