The Bombay High Court on Thursday quashed a ₹329 crore income tax claim against Grasim Industries Ltd over its subscription to Vodafone Idea Ltd rights shares. According to reports from Essential Business Intelligence, a division bench of Justices B. P. Colabawalla and Farhan P. Dubash set aside the reassessment proceedings on two grounds: the department failed to provide the information underpinning its allegation within the statutory limitation period, and Section 56(2)(x) of the Income Tax Act did not apply to the proportionate rights allotment on the facts of the case. The court held that the difference between the subscription price and fair market value did not, by itself, establish an equivalent economic benefit, and the department had identified no disproportionate benefit to Grasim.
As reported by Essential Business Intelligence, Grasim had subscribed to 230.9 crore Vodafone Idea shares at ₹12.50 apiece in FY20. The tax department valued the shares at ₹13.925 each on the allotment date and treated the ₹1.425 difference per share, aggregating ₹329.04 crore, as a benefit taxable under Section 56(2)(x). The court ruled that the tax department could not treat the difference between the issue price and fair market value as taxable income merely because the shares were allotted below market price, and that the nature of the transaction was undisputed, making it unsustainable for the department to initiate proceedings on an unsustainable statutory basis.
According to the court ruling reported by Essential Business Intelligence, the department issued a show-cause notice on March 24, 2026, but disclosed the transaction details, valuation calculation and statutory basis for the proposed tax only on May 27. The limitation period had expired on March 31. The bench stated that the amount of ₹329,03,62,124/- stated in the impugned notice is the result of a computation, it does not, by itself, disclose the information on which that computation rests. The court added that supplying the missing information after the deadline could not retrospectively validate the notice. The court also rejected the department's argument that it could examine taxability at a later stage of reassessment, holding that since the nature of the transaction was undisputed, the department could not defer the issue for determination at a subsequent stage.
As reported by Essential Business Intelligence, the court distinguished the allotment of newly created shares from the acquisition of existing shares transferred by another person. The judges noted that Vodafone Idea's rights issue was offered proportionately to existing shareholders, and Grasim's percentage holding remained unchanged after the allotment. The bench referred to Section 55(2)(aa), which prescribes the cost of acquisition of rights shares as the amount actually paid, while clarifying that the provision does not itself create an exemption from Section 56(2)(x). The court observed that a rights allotment must be examined in the context of the shareholder's existing interest in the company, as issuing additional shares also affects the value of existing shares. The court said the department had identified neither an acquisition of pre-existing shares from another person nor any disproportionate benefit to Grasim.
According to Essential Business Intelligence, the ruling provides important guidance for listed companies, promoters and holding companies participating in rights issues, particularly where shares are offered at a discount to their prevailing market price. The court confined its conclusion to the facts before it, rather than granting a blanket exemption for all rights issues, emphasizing that tax authorities must provide the substantive basis for reopening an assessment within the prescribed period. The court quashed the show-cause notice, the order permitting reassessment and the consequential reassessment notice, while leaving Grasim's other grounds of challenge open.
