Home » Income Tax » Articles » Analysis of Section 56 (viib) of the IT Act,1961

Section 56 (viib)Section 56 (viib) of Income Tax Act,1961 deals with taxability of capital raised by a company in which public are not substantially interested. As per the said section when such a company issues shares to residents for a value which is more than its fair value than so much of the consideration as exceeds fair market value of the shares being issued will be taxable in hands of the company under income from other sources.

As per explanation (a) to the aforesaid section the fair market value of such shares shall be higher of

i) Value as determined by the prescribed method

ii) Value as substantiated by the company to the satisfaction of the AO, based on the value on the date of issue of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.

Rule 11UA(2), of Income Tax Rules 1962, contains the prescribed method and permits the assessee to opt for either

a) Book value method subject to the prescribed adjustments or

b) Fair value determined by a Chartered Accountant or a Merchant Banker using discounted free cash flow method.

It is pertinent to note that method b pertaining to discounted free cash flow method was brought into rule w.e.f 29.11.2012. Therefore fair market values has to be determined for shares pertaining to which consideration received before 29.11.2012 and those shares on or after 29.11.2012

For consideration received prior to 29.11.2012 fair market value shall be the higher of

a) Book value on the date of consideration or if balance sheet not drawn up to that date than book value as per last audited balance sheet.

b) Value on the date of share allotment.

For consideration received on or after 29.11.2012 fair market value shall be the higher of

a) Book value on the date of consideration or if balance sheet not drawn up to that date than book value as per last audited balance sheet.

b) Value on the date of share allotment.

c) Fair value determined by a Chartered Accountant or a Merchant Banker using discounted free cash flow method.

The relevant date for taxability is date of issue of shares and the relevant date for determination of fair market value of shares is both date of receipt and date of share allotment.

One should also consider the fact that if there is loss from business in the same year than can be set-off against the income as above.

Also the intention of the statute behind this section is to curb black money being converted to white without paying tax but it does not want to discourage genuine business deals that is why it has permitted assessee to issue shares at demonstrable fair value of assets on the day of the share allotment.

ca rishabhkumarArticle written by CA Rishabh Kumar Barmecha.

Author may be reached at 9007909221 or rishabhkumarbarmecha@gmail.com

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