CBDT withdraws circular on share valuation after Cong claims ‘win’

Days after issuing a circular that sought to clarify taxes on valuations, the Central Board of Direct Taxes (CBDT) withdrew it following a Congress party press conference at which it said the move would exonerate Rahul and Sonia Gandhi over income-tax liabilities in the Associated Journals Ltd (AJL) case.

The withdrawal means that the taxman will again start challenging valuations in cases where there was a fresh issuance of shares. Experts said the withdrawal of the circular has created confusion for several companies that had received tax demands on valuations.

“I don’t know why the government is creating so much confusion in the investing space. Just a simple clarification was required so that genuine investments from listed companies, Sebi-registered AIFs (Alternative Investment Funds), holding companies into subsidiaries, angel funds into DIPP-registered startups, other similar investments should have been made exempt,” said Jeenendra Bhandari, partner, MGB, a chartered accountancy firm. “This process of issuing circulars and then withdrawal is confusing to the investment climate.”


Experts said tax regulations had been modified in 2010 to prevent money laundering. The government had inserted a regulation — Section 56(2)(viia) — in the income tax Act to tackle black money transactions in investment situations.

“The section under the income tax Act was originally brought in to curb black money transactions and tax was in the hands of the recipient,” said Girish Vanvari, founder of tax advisory firm Transaction Square. “The withdrawal of the clarification would mean all those who have received tax demands will have to litigate and apply for a stay on the demand.”

ET had on January 3 reported that several companies that had received tax notices and faced tax outgo over valuations would get relief thanks to the clarification issued on December 31. It was withdrawn through another circular issued on the night of January 4.

Experts said the original clarification only dealt with unintended implications of income tax rules. “The unintended consequence of the income tax provision was that it could have been invoked even in case of fresh issue of shares,” said Amit Maheshwari, partner, Ashok Maheshwary and Associates LLP. “This clarification would have been binding on the tax department and hence would have resolved pending litigation under this clause.”

Many experts said the shift on the valuation issue was mainly due to the press conference by Congress.

Party leader Ahmed Patel and Vivek Tankha, head of Congress’ legal cell, had said that the December 31 clarification had vindicated the party’s stand. Tax demands raised on party chief Rahul Gandhi and Sonia Gandhi for receiving shares of AJL’s National Herald were not justifiable, it said.

“This vindicates our position that there never was an issue about issuance of such shares as a taxable event as it was being projected by way of harassment. We thank CBDT for this clarification,” the party member had said.