The provisions of section 56(2)(viib) of the Act provides for charging of the consideration received for issue of shares by certain companies, where such consideration exceeds the fair market value of such shares. However, the Central Government is empowered to notify that the provisions of this section shall not be applicable to consideration received by a notified company. Certain notifications issued under this sub-clause by the Central Government provide for exemption, subject to the fulfilment of certain conditions. With a view to ensure compliance to the conditions specified in the notification, it is proposed to provide that in case of failure to comply with the conditions, the consideration received for issue of shares which exceeds the face value of such shares shall be deemed to be the income of the company chargeable to income-tax for the previous year in which the failure to comply with any of the said conditions has taken place.
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
[Clause 21]
Extract of Clause 21 of Finance Bill 2019
21. Amendment of section 56.
In section 56 of the Income-tax Act, in sub-section (2),––
(i) in clause (viib), with effect from the 1st day of April, 2020,—
(a) in the proviso, in clause (i), for the words “venture capital fund”, the words “venture capital fund or a specified fund” shall be substituted;
(b) after the proviso, the following proviso shall be inserted, namely:—
“Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the 5 first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the face value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place.”;
(c) in the Explanation, after clause (a), the following clauses shall be inserted, namely:—
‘(aa) “specified fund” means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992;
(ab) “trust” means a trust established under the Indian Trusts Act, 1882 or under any other law for the time being in force;’;
(ii) in clause (viii), for the words, brackets, letters and figures “clause (b) of section 145A”, the words, brackets, figures and letter “sub-section (1) of section 145B” shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2017; 20
(iii) in clause (x),––
(A) in sub-clause (b), in the second proviso, for the words “bank account”, the words “bank account or through such other electronic mode as may be prescribed” shall be substituted with effect from the 1st day of April, 2020;
(B) in the proviso, after clause (X), the following clause shall be inserted with effect from the 25 1st day of April, 2020, namely:—
“(XI) from such class of persons and subject to such conditions, as may be prescribed.”.
Note on Clause 21 of Finance Bill 2019
Clause 21 of the Bill seeks to amend section 56 of the Income-tax Act relating to income from other sources.
Clause (viib) of sub-section (2) of the said section provides that where a company, not being a company in which the public are substantially interested, receives in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall not be charged to tax, if the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund or by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
It is proposed to amend the said clause so as to provide that where a company, not being a company in which the public are substantially interested, receives in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall not be charged to tax, if the consideration for issue of shares is received by a venture capital undertaking from a specified fund.
It is further proposed to define the expression “specified fund”.
It is also proposed to insert a second proviso to the said clause so as to provide that where the provisions of the said clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and the company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the face value of such shares shall be deemed to be the income of the company chargeable to income-tax for the previous year in which such failure has taken place.
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.
Clause (viii) of sub-section (2) of the said section provides that income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A shall be chargeable to tax.
It is proposed to amend the said clause so as to substitute the reference of clause (b) of section 145A with the reference of sub-section (1) of section 145B therein.
This amendment will take effect retrospectively from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent assessment years.
The second proviso to the sub-clause (b) of clause (x) of sub-section (2) of the said section specifies that the first proviso shall apply only in a case where the amount of consideration or a part thereof has been received by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account on or before the date of agreement for transfer of the asset.
It is proposed to amend the said second proviso so as to empower the Board to make rules to provide that the first proviso shall also apply in respect of those cases where the amount of consideration or part thereof has been received by way of any other electronic mode as may be prescribed.
The proviso to the said clause (x) provides that where any person receives, in any previous year, from any person or persons any property without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property or consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, then the aggregate fair market value of such property as exceeds such consideration shall be the income of the person receiving such property.
It is proposed to insert a new clause (XI) in the proviso to the said clause (x) so as to provide that any sum of money or any property received from such class of persons and subject to such conditions, as may be provided by rules shall not be the income of such persons.
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.
