Section 56(2)(viib) of the Income Tax Act, 1961, provides that there shall be chargeable to income-tax under the head “Income from other sources” the following:
“……………(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
(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
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 said 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;
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.
The status of company at the time of receipt of consideration is relevant and not its status at the time of allotment of shares. Hence, if the company was not closely held company at the time of receipt of consideration, no taxability under clause (viib) arises. Further, if the company was closely held company at the time of receipt of consideration but is converted to a widely held company at the time of allotment of shares the question of taxability under clause (viib) needs to be considered.
As observed in point (i) above, since clause (viib) applies to consideration received from a resident, the residential status at the time of receipt of consideration by company and not residential status at the time of allotment is relevant. Hence, as person from whom the consideration was received was non-resident at the time of receipt of consideration, no question of taxability under clause (viib) arises.
The word “any” is used in Clause (viib) and it refers to “any consideration for issue of shares” and hence will take in its scope consideration received in kind as well. It is worthwhile to note here that clause (viib) consideration only deciphers about of how fair market value of shares will be determined. The clause is silent on how the consideration in kind will be valued for comparison with fair market value of shares.
The proviso to section 68 states that any explanation offered by assessee-company, being a closely held co., in respect of share application money/share premium/share capital credited in its books shall be deemed to be not satisfactory unless the resident in whose name such credit is recorded also offers a satisfactory explanation about the nature and source of such sum so credited. Therefore, if the explanation that amounts represent share capital/share premium/share application is deemed unsatisfactory, then Revenue cannot resort to section 56(2)(viib) which can be invoked only when amounts received are established to represent consideration for issue of shares. Nor can the assessee-company without discharging the additional onus under section 68 insist that section 56(2)(viib) be applied as that is more beneficial. Thus, it appears that double taxation under both provisions is not possible.
Proviso to Section 68 read as under:
“Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—
(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory….”
It has been held in Subhlakshmi Vanijya (P.) Ltd. v. Commissioner of Income-Tax-I, Kolkata,  60 taxmann.com 60 (Kolkata – Trib.), that this Proviso to Section 68 casting onus on closely held company to explain source of share capital is applicable with retrospective effect.
As per the wordings of the clause, it follows that mere receipt of consideration will attract taxability under section 56(2)(viib) and hence subsequent refund is irrelevant for the purpose of this clause.
If FMV exceeds the consideration whether a deduction of ‘loss’ will be allowed is the not adequately deal in the Act. An inference can be drawn from Section 92(3) of the Act which provides that transfer pricing provisions (which contemplate a rewrite of international transactions and specified domestic transactions by substituting arm’s length price for actual transfer price) can be invoked only where it benefits the revenue and not where it benefits the assessee. In the absence of a clear provision, along the lines of section 92(3) in section 56(2)(viib), it is possible to argue that where FMV exceeds consideration, the difference can be claimed as a loss since loss is nothing but negative income.
The above article is contributed by CA Kamal Garg having professional and academic interests in IFRS, Accounts, Auditing and Corporate Laws arenas. He can be approached at email@example.com
(Republished with Amendments by Team Taxguru)