Consideration for Issue of Shares by a Company

ISSUE FOR CONSIDERATION

Receipt of consideration for issue of shares by a company, not being a company in which the public are substantially interested, in excess of the face value of such shares, is taxable in the year of receipt, to the extent of the amount that exceeds the fair market value of the shares, as per the provisions of clause (viib) of sub-section (2) of s.56 of the Income-tax Act, 1961.

This provision does not apply to the receipts by a venture capital undertaking from a venture capital company or a fund or a specified firm besides the receipts by a company from a class of notified persons, for example a start-up company.

Rules 11U and 11UA provide for the method of determining the fair market value of the shares by following the Net Asset Value method or the Discounted Cash Flow method. In the alternative, the fair market value shall be such value as is substantiated by the company to the satisfaction of the AO based on the value of its assets.

An interesting issue has arisen in respect of applicability of S.56(2)(viib) of the Act, where shares are issued by a closely held company at a premium on conversion of loans into share capital.

The Chandigarh Bench of the Income Tax Appellate Tribunal held that such a conversion of a loan