Share premium in excess of the fair market value to be treated as income
Finance Bill, 2012
Section 56(2) provides for the specific category of incomes that shall be chargeable to income-tax under the head “Income from other sources”.
It is proposed to insert a new clause in section 56(2). The new clause will apply 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. In such a case if the consideration received for issue of shares 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 chargeable to income- tax under the head “Income from other sources. However, this provision shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund.
Further, it is also proposed to provide the company an opportunity to substantiate its claim regarding the fair market value. Accordingly, it is proposed that the fair market value of the shares shall be the higher of the value—
(i) as may be determined in accordance with the 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 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.
However, no consequential amendment was made to Section 2(24) (meaning of “Income”), so as to include the excess of consideration received over the fair market value of shares within the scope of “Income”.
This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years.
Finance Bill, 2012 as passed by Lok Sabha
In view of above, a new clause (xvi) shall be inserted in Section 2(24) wef April 1, 2013 to provide that any consideration received for issue of shares, as exceeds the fair-market value of the shares referred to in Section 56(2)(viib), shall be treated as ‘Income’.
The exemption from above provision is extended to those issuer-companies as well which belong to a class or classes of persons as may be notified by the Central Government in this behalf.