Section 56(2)(viib) was inserted via Finance Act, 2012. The objective of introducing the section was to deter the generation and use of unaccounted money done through subscription of shares of a closely held company, at a value which is higher than the Fair Market Value (FMV) of shares of such company.
By virtue of section 56(2)(viib) of the Act, it states 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 be deemed to be the income of the concerned company chargeable to tax under the head Income from other Sources for the relevant financial year.
Going by the above definition, the key points identified therein can be laid as follows –
Hence the applicability can be summarised as below-
Non – Applicability
Determination of FMV
The FMV of the shares shall be higher of the following:
Treatment by the Assessing Officer
There have been many cases where Assessing Officer disregarded the value ascertained using Discounted Cash flow method in Valuation report and later in Appeals, this was allowed to Assessee. Since Assessee has option to choose any of the two methods given in Rule 11UA, Assessing officer may use a method different from method used by the assessee which may become reason of disagreement.
The same can be seen in the case of; Cinestaan Entertainment (P.) Ltd. New Delhi in the ITAT Delhi Bench and Vodafone M-Pesa Ltd. v. Deputy Commissioner of Income-tax Circle 8(3)(2), Mumbai in the ITAT Mumbai.
Special Case Scenario – A new company particularly in the service sector does not have sufficient capital base at the inception and hence NAV method sometimes becomes impractical to apply. Due to this reason, lot of companies adopt DCF (Discounted Cash flow) method which requires lot of subjective analysis in terms of revenue projections, adoption of discounting factor, risk free rate of interest, inflation rate, etc.
Efforts have been made to help start-ups with the provisions of the said section. Thus, an entity will continue to be recognised as a Start-up, if its turnover for any of the financial years since incorporation and registration has not exceeded Rs. 100 crore in place of earlier benchmark of Rs. 25 crore.
A Start-up will be eligible for exemption under Section 56(2)(viib) of Income Tax Act, if it is a private limited company recognized by DPIIT (Department for Promotion of Industry and Internal Trade) and is not investing in any of the following assets (inter-alia) –
Moreover, consideration received by eligible Start-ups for shares issued or proposed to be issued shall be exempt up to an aggregate limit of Rs. 25 crore.
In addition, consideration received by eligible Start-up for shares issued or proposed to be issued to a listed company having a net worth of Rs.100 crore or turnover of at least Rs. 250 crore will also be exempted.
The aggregate limit of Rs. 25 crore will exclude consideration received by eligible Start-up for the following classes of persons:
ii. Alternative Investment Funds- Category-I registered with SEBI
iii. Listed company having a net worth of Rs.100 Crores or turnover of at least Rs. 250 crore provided that its shares are frequently traded on registered stock exchange
(Author is associated with ‘International Business Advisors, Delhi’ as Senior Analyst-Direct Tax.)