CBDT pulls out circular to avoid its use in Herald case

Mumbai: A circular issued by the Central Board of Direct Taxes (CBDT) on December 31, 2018 was withdrawn on January 4, as it would have implications in the ongoing National Herald case involving top Congress leaders.

The Supreme Court is scheduled to hear the National Herald case on January 8.

The CBDT circular had stated that the provisions of section 56(2) (viia) of the Income Tax Act, 1961 shall not be applicable to fresh issue of shares by closely held company to a company or a firm.

The CBDT had further clarified that this would include within its ambit issuance of bonus shares, right shares and preference shares by the specified company.

This would have been a big relief in all those cases where fresh capital has been issued to a company or a firm. In essence, it would have meant that fresh issuance of shares would not have been taxable.

Withdrawing the circular CBDT said, “It has been brought to the notice of the board that the matter relating to interpretation of the term ‘receives’ used in section 56(2)(viia) of the Income Tax Act, 1961 is sub judice in certain higher judicial forums. Further, representations have been received from stakeholders seeking clarification on other similar provisions in section 56 of the Act.”

“Given that the matter relating to interpretation of the term ‘receives’ used in section 56(2) (viia) of the Act is pending before judicial forums and stakeholders have sought clarifications on similar provisions in section 56 of the Act, the board is of the view that the matter is required to be examined afresh so that a comprehensive circular on the matter can be issued,” CBDT circular said.

“In view of the above circular issued on December 31 is withdrawn and the said circular shall be considered to have been never issued,” the CBDT added.

“The circular (CBDT circular of December 31, 2019 which was withdrawn) will provide a much awaited relief in case of fresh issue of shares by closely held companies and bring to rest litigations on this issue,” said a Mumbai-based law firm Baker Tilly DHC.

“Various representations were received by CBDT that the term ‘receives’ used in Section 56(2)(viia) of the Act, being of wider import might lead to taxation of income in the cases where the shares are received by a firm or a specified company as a result of the fresh issuance of shares, including by way of issue of bonus shares, rights shares and preference shares or transactions of similar nature by the specified company,” said Baker Tilly DHC.