The court quashed reassessment proceedings over Grasim’s Vodafone Idea rights shares, ruling that a paper gap between issue price and fair market value is not taxable where ownership proportions remain unchanged.
The Bombay High Court has ruled that a shareholder cannot be taxed on the gap between the issue price and fair market value of proportionately allotted rights shares when the shareholder’s stake in the company does not change and no separate windfall is shown.
A division bench of Justices B.P. Colabawalla and Farhan P. Dubash allowed Grasim Industries’ petition challenging reassessment proceedings linked to its subscription to Vodafone Idea’s rights issue. The tax department had sought to treat an alleged benefit of about Rs 329 crore as taxable under Section 56(2)(x) of the Income-tax Act, after valuing the shares at Rs 13.925 each while Grasim had subscribed at Rs 12.50.
The court said the provision could not be used simply because the subscription price was lower than the fair market value. In its view, the crucial question in a rights issue is whether the shareholder has gained anything disproportionate, not merely whether a price difference exists on paper. Because Grasim’s holding percentage was said to have remained unchanged, the bench found no identifiable economic advantage that could justify taxation on the alleged spread.
The judges also rejected the department’s argument that the taxability question could be left for a later stage in the reassessment process. Since the nature of the transaction was not in dispute, the court said the department could not begin proceedings on a basis that was legally unsustainable and then postpone the real issue. The bench further held that the reassessment had not been initiated within the prescribed time limit.
As a result, the high court quashed the show cause notice, the order permitting reassessment and the follow-on reassessment notice. Other arguments raised by Grasim were left open, but the ruling is likely to be watched closely by companies and investors involved in rights issues, where share allotments are intended to preserve existing ownership proportions rather than confer a fresh advantage on any one holder.
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