Section 56(2) of income tax act

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

29 August 2012 The provision of Section 56(2) has been amended to provide for the taxability of the share premium received by the assessee in excess of the fair market value by treating this difference as income of the assessee. The amendment has been proposed by substituting clause (e) in section 56(2).Our company is private limited company. face value per share of our company is Rs.10. Our company's book value per share is around Rs.190. Looking to our better business prospect some investors have invested in our company at Rs.1000/- per share, i.e at premium of Rs.990/-. Now, after introduction of this provision, if we allot further share at Rs. 1000/- or higher price it is not clear to us if the difference between book value and allotment price will be taxable as the price is based on the future prospect of the business which can be justified to a business person but may be difficult to make understand to a revenue officer.

Further if just to save tax, the future allotment of shares are done on book value it will be deterrent to the interest of existing share holder of the company. Also the department can rise objection on past allotments.
Hence we need some guidance on this issue..

Amol S Joglekar

Amol S Joglekar (Expert)
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29 August 2012 The future cash flow based FMV can be determined with the help of some financial expert. (This concept is used elsewhere in RBI guide lines) the difference between FMV and actual allottment price can then be offerred for taxation.

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