CA Kamal Garg
Section 56(2)(viia) of the Income Tax Act, 1961, provides that the following shall be chargeable to income-tax under the head “Income from other sources”:
“where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested,—
(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
(ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration :
Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47.
The FMV of shares of a closely held company shall mean FMV determined in accordance with rules 11U and 11UA.
A careful reading of Section 56(2)(viia) lay down the following essential ingredients for the taxability of unlisted shares received by closely held company or firm or LLP as the case may be:
(1). The shares (equity or preference) received, on or after 1-6-2010, are shares of a company in which the public is not substantially interested;
(2) These unlisted shares may be received from any person or persons and are received either:
- without consideration and the aggregate fair market value (FMV) of such shares received during a previous year exceeds Rs. 50,000; or
- for a consideration which is less than the FMV and the aggregate of differences between FMV and such consideration of all such shares received during a previous year exceeds Rs. 50,000.
(3) Such shares are not received by way of a transaction not regarded as transfer under clause (via)/(vib)/(vic)/(vid)/(vii) of section 47.
Issues that need to be addressed for Section 56(2)(viia):
Issue 1: Allotment of rights shares: In Sri Gopal Jalan & Co. vs. Calcutta Stock Exchange Association Ltd. [1964] 3 SCR 698, it was held that in Company Law the word “allotment” means appropriation out of previously unappropriated capital of a company, of a certain number of shares, to a person and till such allotment, the shares do not exist as such. It is only on allotment that the shares come into existence and in every case the words “allotment of shares” have been used to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person.
Thus, what is to be comprehended is that there is a vital difference between “creation” and “transfer” of shares. As stated hereinabove, the words “allotment of shares” have been used to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person. There is a difference between issue of a share to a subscriber and the purchase of a share from an existing shareholder. The first case is that of creation whereas the second case is that of transfer of chose in action. Allotment is not a transfer. Hence, allotment of rights shares cannot also be taxed under section 56(2)(viia)(ii). However, in case of renunciation of rights shares, the above ratio is not applicable and the provisions of section 56(2)(viia)(ii) can be invoked in the hands of the recipient company or firm or LLP as the case may be.
Issue 2: Receipt of unlisted bonus shares: In Khoday Distilleries Ltd. vs. CIT [2009] 176 Taxman 142, the Supreme Court held that the idea behind the issue of bonus shares is to bring the nominal share capital into line with the excess of assets over liabilities. A company would like to have more working capital but it need not go into the market for obtaining fresh capital by issuing fresh shares. The necessary money is available with it and this money is converted into shares which really means that the undistributed profits have been ploughed back into the business and converted into share capital. Therefore, fully paid bonus shares are merely a distribution of capitalized undivided profit. It would be a misnomer to call the recipients of bonus shares as donees of shares from the company. Thus, even bonus shares cannot also be taxed under section 56(2)(viia)(ii).
Reporting under Form 3CD (Revised):
Clause 28 of Form 3CD (Revised) requires the tax auditors to report as under:
“Whether during the previous year the assessee has received any property, being share of a company not being a company in which the public are substantially interested, without consideration or for inadequate consideration as referred to in section 56(2)(viia), if yes, please furnish the details of the same.”
In accordance with Guidance Note on Tax Audit (2014 Edition) issued by the Institute of Chartered Accountants of India, the tax auditor should adhere to the following audit procedures for reporting under Clause 28 of Form 3CD (Revised):
♦ Obtain a list about the details of shares received, if any, by the assessee;
♦ Examine the receipt of shares from the books of account and other relevant documents. These shares, would be reflected in the books of account either as investments or as stock in trade;
♦ Where such shares are received without consideration, the same may not be reflected in the books of account and hence he need to examine such shares from the relevant documents such as share certificates issued, if any, DEMAT account statement etc.
♦ He should consider the provisions of Rule 11UA(1)(c) for determining:
(a) fair market value of quoted shares and securities received by way of transaction carried out through any recognized stock exchange
(b) fair market value of quoted shares and securities received by way of transaction carried out other than through any recognized stock exchange
(c) fair market value of unquoted equity shares
(d) fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange
♦ In case of the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange, a valuation report has been obtained by the assessee from a merchant banker or an accountant, the auditor should obtain a copy of the same [see SA 620 “Using the work of an Auditor’s expert”]
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 cakamalgarg@gmail.com
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