Bombay HC: Proportionate Rights Share Allotment Below Market Value Does Not Automatically Create Taxable Income

Aadrikaa Legal Services (ALS)- Law I Litigation I Arbitration

Date: 23.10.2026

Bombay HC: Proportionate Rights Share Allotment Below Market Value Does Not Automatically Create Taxable Income

The Bombay High Court has set aside reassessment proceedings against Grasim Industries Limited for AY 2020–21, holding that the Revenue’s notice was time-barred and that a proportionate rights-share allotment cannot be taxed merely because the issue price was below the assessed fair market value.

The dispute: Vodafone Idea rights shares

Grasim subscribed to 230,90,26,052 rights equity shares of Vodafone Idea Limited (VIL) during FY 2019–20 at Rs. 12.50 per share. The allotment was made proportionately to existing shareholders, and Grasim’s percentage holding in VIL remained unchanged.

The Income Tax Department later alleged that the shares had a fair market value of Rs. 13.925 per share on the allotment date. On that basis, it treated the Rs. 1.425 per-share difference as a taxable benefit under Section 56(2)(x) of the Income-tax Act, 1961. The proposed escaped income was Rs. 329.04 crore.

Grasim challenged:

• the show-cause notice issued on 24 March 2026 under Section 148A(1);
• the order dated 30 June 2026 under Section 148A(3); and
• the consequential reassessment notice issued under Section 148.

Court’s first finding: the reassessment process was out of time

The Court held that a valid Section 148A(1) notice must be accompanied by the information that suggests income has escaped assessment. Simply stating an amount allegedly representing escaped income is not enough.

In this case, the initial notice did not explain:

• the nature of the VIL rights-share transaction;
• how the Rs. 329.04 crore figure had been calculated; or
• that the Department intended to invoke Section 56(2)(x) based on the difference between the issue price and fair market value.

Those essential particulars were supplied only on 27 May 2026. For AY 2020–21, the five-year limitation period for issuing the Section 148A notice expired on 31 March 2026. The Court ruled that information supplied after the deadline could not retrospectively cure an incomplete notice issued earlier.

The judgment reinforces that the opportunity to respond under Section 148A must be meaningful, not a procedural formality. Tax authorities must disclose the transaction, legal basis and computation supporting an allegation of escaped income within the statutory time limit.

Court’s second finding: Section 56(2)(x) did not apply to this rights issue

The Court also rejected the substantive basis for reassessment. Section 56(2)(x) generally taxes property received for inadequate consideration where the shortfall from fair market value exceeds the prescribed threshold. However, the Court held that the provision could not be applied mechanically to Grasim’s proportionate rights-share allotment.

The Court’s reasoning rested on three features of the transaction:

1. Fresh shares arise on allotment. Rights shares issued by a company are created upon allotment; they are not necessarily pre-existing property transferred from another person.
2. The allotment was proportionate. Grasim received shares in proportion to its existing holding, and its ownership percentage did not change. The Revenue did not identify any disproportionate gain.
3. A market-price comparison alone does not establish taxable benefit. A rights issue at a lower subscription price affects the value of existing shares as well. Therefore, the difference between the issue price and a market value determined on allotment does not automatically represent income to the subscriber.

The Court noted that the Income-tax Act separately provides rules for determining the cost of acquisition of rights shares. In particular, for rights shares subscribed to by an eligible shareholder, the statutory cost is generally the amount actually paid. These provisions support an assessment of the transaction’s legal and economic character rather than treating every below-market rights issue as taxable income.

Why the ruling matters

The decision provides important protection for taxpayers facing reassessment based on a rights issue:

• Complete disclosure is mandatory. A reassessment notice must include the underlying information and material, not just a conclusion or a proposed addition.
• Timing cannot be repaired later. If foundational information is provided after the limitation period expires, the original notice may be invalid.
• Proportionate rights issues require contextual analysis. Taxability under Section 56(2)(x) cannot be based solely on a comparison between subscription price and fair market value.
• No automatic taxable benefit arises where ownership remains unchanged. The Revenue must identify a real disproportionate advantage or another basis that fits the statutory conditions.

Outcome

The Bombay High Court allowed Grasim’s writ petition and set aside the Section 148A notice, the order determining that reassessment was warranted, and the consequential Section 148 notice. The Court did not examine Grasim’s other objections because the proceedings failed both on limitation and on the inapplicability of Section 56(2)(x) to the facts of the proportionate rights allotment.

The ruling is confined to the facts before the Court, particularly the proportionate allotment and the absence of any identified disproportionate benefit. Its broader message is clear: reassessment must comply strictly with statutory notice requirements, and anti-abuse provisions cannot be applied without examining the true nature and effect of the transaction.

Listen to this on our #YouTube Channel

Aadrikaa Legal Services is a trusted legal and regulatory support partner providing end-to-end legal solutions to law firms, corporate organizations, and businesses across India. We specialize in paralegal services, litigation support, tax and regulatory matters, delivering reliable, efficient, and result-oriented legal assistance.

Our services include comprehensive paralegal support, drafting and documentation, legal research, case management, litigation handling, and representation support across various judicial and quasi-judicial forums. We also assist in direct and indirect tax matters, customs, GST, corporate regulatory compliance, and legal advisory.

Source: Bombay High Court

Disclaimer

Handy Download:

Write to us at office@aadrikaalaw.com

Tel: +91-11-4999 2707

www.aadrikaalaw.com