Income u/s 56(2) of income -tax act

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SURINDER SINGH (Querist)

14 June 2013 A pvt. ltd. company with book value of Rs. 30 per share proposes to issue 5 lacs shares of Rs. 10 each at par .Is the diff. of Rs. 20 per share taxable in shareholder hand as per amended provision of sec. 56(2)(vii).kindly also give the relevant citation/ notification etc. .An early response shall be highly appreciated.Thank you

CA PARAS BAFNA

CA PARAS BAFNA (Expert)

14 June 2013 As per explanation to Section 56(2)(vii) shares are treated as property.
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Section 56(2)(vii) (c)(ii) covers the situation, where the consideration is less than the FMV. Since the difference exceeds 50000/- it will be taxable as income.
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SURINDER SINGH

SURINDER SINGH (Querist)

14 June 2013 If the company capitalises reserves to bring down the F.M.V . will the bonus issue also attract tax u/s 56(2) {shares issued for free }

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

01 August 2024 Under Section 56(2)(vii) of the Income Tax Act, 1961, the tax treatment for shares issued at a premium (or at less than their fair market value) involves specific rules:

### **Issuance of Shares Below Fair Market Value**

1. **Taxability of Difference in Share Price:**
- **Provisions**: As per the amendment to Section 56(2)(vii) by the Finance Act, 2012, if a company issues shares at a price lower than their fair market value (FMV), the difference between the FMV and the issue price is taxable in the hands of the shareholder as "Income from Other Sources" under Section 56(2)(vii)(c).
- **Example**: If the FMV of the shares is ₹30 and the company issues them at ₹10 each, the difference of ₹20 per share would be taxable in the hands of the shareholders.

2. **Relevant Citations and Notifications:**
- **Finance Act, 2012**: This act brought amendments to Section 56(2)(vii) introducing the taxability of the difference between FMV and issue price.
- **Notification No. 60/2012**: Issued by the Ministry of Finance, this notification clarifies the amendments and provides the rules for valuation.

### **Bonus Shares and Taxability**

1. **Bonus Shares Issued from Capitalized Reserves:**
- **Provisions**: Bonus shares are generally issued without any additional payment from the shareholders and are often capitalized from reserves or surplus.
- **Taxability under Section 56(2)(vii):** Bonus shares themselves are not taxed under Section 56(2)(vii) because they are issued at no cost to the shareholders. The section specifically targets shares issued at a price lower than their FMV, not shares given as a bonus.

2. **Conditions:**
- **Taxation on Bonus Shares:** The issue of bonus shares does not attract tax under Section 56(2)(vii) as the provision focuses on the undervaluation of shares at the time of issue, not on shares issued free of cost. However, the FMV of the shares may impact capital gains calculations if the shares are sold later.

### **Summary**

- If a company issues shares at a price below their FMV (e.g., ₹10 when FMV is ₹30), the difference (₹20 per share) is taxable in the hands of the shareholder under Section 56(2)(vii)(c).
- Bonus shares issued from reserves do not attract tax under Section 56(2)(vii) as they are issued free of cost and not at a discounted price.

For further details and the latest amendments, it is advisable to refer to the relevant Finance Act provisions and consult with a tax professional.

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