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Querist : Anonymous

Querist : Anonymous (Querist)

16 October 2013 A pvt ltd company wishes to make a fresh allotment of shares @ Rs 10/- per share. The FMV of shares is Rs 80/- per share. Does this allotment would be covered u/s 56(2)(viia) of the Income Tax Act or this section is meant for only transfer of shares?

Nikhil Kaushik

Nikhil Kaushik (Expert)
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17 October 2013 you shall be covered under 56(2)(viib).

Querist : Anonymous

Querist : Anonymous (Querist)

17 October 2013 Sec 56(2)(viib) applies if the shares are allotted at a price more than FMV. Here the shares are allotted at a price less than FMV. Please suggest.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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17 October 2013 Sorry, i misread.

With regards to ur query, as the law stands, fresh issue of shares should not be an issue.

Please refer to Memorandum to Finance Bill 2010 for legislative intent on the same:

"In order to prevent the practice of transferring unlisted shares at prices much below their fair market value, it is proposed to amend section 56 to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is
a firm or a company (not being a company in which public are substantially interested). Section 2(18) provides the definition of a company in which the public are substantially interested."

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Querist : Anonymous

Querist : Anonymous (Querist)

22 October 2013 Thanks a lot Sir. One more thing that is the same applicable to rights or bonus issue of shares also. Kindly suggest.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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22 October 2013 I don't think rights issue and bonus shares should be covered under 56(2)(viia).

In the case of bonus shares, there is no benefit in mere splitting up the existing holding. Lack of consideration for bonus shares has to be compared with the proportionate fall in the value of the original holding. Further, it is a right available to a shareholder by virtue of his holding.

For rights issue also, there is no lack or reduction in consideration as rights are in same proportion as in the current shareholding.

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Querist : Anonymous

Querist : Anonymous (Querist)

30 October 2013 Thanks a lot Sir.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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30 October 2013 you are welcome swasti.

Querist : Anonymous

Querist : Anonymous (Querist)

30 October 2013 Sir, one more thing. If the rights issue is made at (10 + 40) i.e. at premium, would Sec 56(2)(viib) be applicable.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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31 July 2024 Section 56(2)(viib) is generally not applicable to a rights issue made at a premium if it is offered to existing shareholders and the issue price is not excessively above the FMV.

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