As we all know that the interpretation of section 56(2)(viib) has been the topic of numerous debates amongst the user of this section and certain aspects remained unclear, leading to controversies. Therefore, today I am covering this topic of Share premium in excess of fair market value to be treated as income.

The extract of Section 56(2)(viib) are as under:

“56(2)(viib) 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:

Provided that this clause shall not apply where the consideration for issue of shares is received—

(i) by a venture capital undertaking from a venture capital company or a venture capital fund [or a specified fund]; or

(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

Following second proviso shall be inserted after the existing proviso to clause (viib) of sub-section (2) of section 56 by the Act No. 23 of 2019, w.e.f. 1-4-2020 :

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 first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market 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 and, it shall also be deemed that the company has under-reported the income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year.

Explanation.—For the purposes of this clause,—

(a) the fair market value of the shares shall be the value—

(i) as may be determined in accordance with such method as may be prescribed; or

(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature,

whichever is higher;

Following clauses (aa) and (ab) shall be inserted after clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 by the Act No. 23 of 2019, w.e.f. 1-4-2020 :

 (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 I or 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 (15 of 1992);

(ab) “trust” means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force;

(b) “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10;”

Applicability of This Provision

This clause is applicable when

  • Shares are issued by a Closely held company;
  • Amount is received from a Resident Only
  • Issue price is in excess of Fair market value of shares

Valuation of Fair Market Value

Fair market value of shares is higher of the following

  • Fair market value of shares calculated in accordance with Rule 11UA of the Income Tax Rules, 1962. Taking care of definitions as provided in rule 11U of the Income Tax Rules, 1962.
  • As substantiated by the company to the satisfaction of Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.

This section not applicable in following cases:

Where the consideration for issue of shares is received—

  (i) by a venture capital undertaking from a venture capital company or a venture capital fund [or a specified fund] or

 (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

Important Amendment in this section:

With a view to ensure compliance to the conditions specified in the notification, it is 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.

Republished with Amendments

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2 Comments

  1. prashant says:

    Can we issue shares less than Fair market Value or Book Value.  Suppose in a company Book Value is Rs. 100/-, can we issue share to Directors at Rs. 50/- considering the director is adding value to the business. 

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