New equity investment treatment in company

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This discussion clarifies the accounting and capital structure implications when a new investor injects significant capital into a private limited company, such as ABC Pvt Ltd. It addresses how the investment is treated, specifically distinguishing between share capital and share premium, and its impact on the existing shareholders' holdings. Furthermore, it delves into potential tax liabilities arising from issuing shares above face value, referencing Section 56(2)(viib) of the Income Tax Act.

Pradeep sen

Pradeep sen (Querist)

11 March 2023 now a days everyone talks about sharktank
my query is related to this
suppose a person invested 1 crore for 1% equity in ABC pvt ltd.
the existing authorised capital of the company is Rs.10Lacs equally holded by A & B. i.e. 50000 shares of Rs.10 each by both of them.
1. what will be the treatment of that equity investment.
2. impact on authorised capital of the company.
3. what will be the capital structure of company.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)

11 March 2023 1 Treat one lakh as capital and balance 99 lakhs as share premium.
2 Reduce share capital of existing share holders by one lakh.
3 As stated above.

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Pradeep sen

Pradeep sen (Querist)

12 March 2023 Sir, is there any restriction or limit on share premium amount.
1% of existing share capital will be Rs.10000.00 in this case.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)

12 March 2023 Yes, Provisions of Section 56(2)(viib) says that when a private limited company issues share at a price which is more than its Face Value then consideration receives in excess of Fair Market Value (FMV) is taxable under the head “Income From Other Source”.
Agreed Rs 10000

Pradeep sen

Pradeep sen (Querist)

13 March 2023 amount received in excess of face value can be taxable under Section 56(2)(viib) in income tax act.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)

13 March 2023 No, amount received in excess of Fair Market Value (FMV) is taxable under the head “Income From Other Source”.

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