Issue of Shares at Premium more than Fair Market Value (FMV) (Section 56 (2)(viib)

If it is a public limited company,then no tax is payable

However if it is a private limited Company,

we will consider Fair Market Value (FMV)of Shares

Suppose FMV is Rs 14,then Rs 1 per share(Rs 15-Rs 14) is taxable as Income from Other Sources as per this section

Suppose FMV is more than or equal to Rs 15,then no amount  is taxable as Income from Other Sources

This section is only applicable if shares are issued at premium

hence,there will not be any Income from other Sources

FMV in this case is irrelevant

-ea- 

I f a Company issues Share at a Premium

and

receives Consideration for it

and such amount is more than Fair Market Value (FMV)

then

Such Consideration-FMV is taxable

as Income from Other Sources

How to determine FMV?

FMV is HIGHER OF

Value determined as per prescribed method

or

Value as satisfaction of Assessing Officer as on date of issue of shares taking into account value of tangible and intangible assets

Non Applicability  

This provision is not applicable in case

• Shares are Issued at discount
• Company receiving Consideration is a company in which public is substantially interested i.e.a public company(It is applicable only to private limited company
• Consideration is received from Venture Capital Company or Venture Capital Fund or Other Notified Company

EXAM QUESTION

The following are the details of the shares issued by the following closely held companies.

Discuss the applicability of provisions of section 56(2)(viib) in the hands of these companies:

 -a-

Amount is taxable only if

Both conditions should be satisfied

Shares must be issued at premium (Issue Price>Face value)

+

Consideration should be greater than FMV (Issue Price > FMV)