Sec 56(2)(viib)

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swasti (Querist)
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25 October 2012 The new clause (viib) under section 56 of Income Tax Act 1961 provides that where a company in which the public are not substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares and such consideration received exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income tax under the head “Income from other sources”.

Does this clause is applicable on share warrants also i.e. if a company in which the public are not substantially interested issues share warrants at premium, is the premium more than the FMV of shares taxable in the hands of the company?

Please suggest in the matter. Its urgent.

Guest

Guest (Expert)

25 October 2012 private companies can not issue share warrants, only public companies can issue.

so your question is technically incoreect.

but i would like to praise you for good analysis

swasti

swasti (Querist)
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26 October 2012 Thanks a lot Sir. I am having another question. Suppose it is XYZ Ltd in which public is not interested and is a closely held company. Can't it issue share warrants which would be converted into shares? Please suggest.

Guest

Guest (Expert)

27 October 2012 CLOSELY HELD COMPANY ITSELF MEANT PVT.LTD.COMPANY
SO COMPANY IS LIMITED THEN ITS NOT A CLOSELY HELD COMPANY,AND SAID CLAUSE OF SEC.56 NOT APPLICABLE

KINDLY REFER DEFINITION OF CLOSELY HELD COMPANY.

swasti

swasti (Querist)
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27 October 2012 Vivek ji, thanks a lot. Here I am getting some confused. What I meant to say is that XYZ Ltd. is a company which is not a listed company. The shares of the company are with the directors and their relatives. In such a case, can XYZ Ltd. issue share warrants at premium or not and whether Sec 56(2)(viib) is applicable or not?

Guest

Guest (Expert)

30 October 2012 go through certificate of incorporation of your company if it is public company then it can issue share warrnats

2nd thing sec56(2)(viib) is applicable for shares and not any other thing mentioned, so if we follow companies act then there is distinguish between share and share warrants,
so as per my opinion it will not apply for share warrnats

swasti

swasti (Querist)
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31 October 2012 Thanks a lot. What would happen in the year in which the warrants get converted into shares? Would it be taxable in that year or not?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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23 July 2025 You're diving into the complexities of Section 56(2)(viib), particularly with regard to share warrants and their conversion into equity shares. Let’s break down the issue and clear the confusion surrounding your questions about private companies, share warrants, and their tax implications.

1. Can a private company issue share warrants?
Share warrants are typically issued by public companies, not private companies, as per the Companies Act, 2013. Private companies are restricted from issuing share warrants.

According to Section 114 of the Companies Act, 2013, only public companies can issue share warrants.

Therefore, if XYZ Ltd. is a private limited company, it cannot issue share warrants. Only public limited companies (not closely held or private limited) can issue share warrants.

2. Section 56(2)(viib) and its Application to Share Warrants:
Section 56(2)(viib) deals with the issue of equity shares by a company where the consideration received for such shares exceeds the FMV (Fair Market Value) of the shares.

The premium over the face value of the shares that exceeds the FMV is treated as taxable income under the head “Income from Other Sources”.

However, Section 56(2)(viib) explicitly applies to the issue of shares, not share warrants.

Key Points Regarding Share Warrants:
Share warrants are different from shares. A share warrant is essentially a document that entitles the holder to subscribe to a certain number of shares in the future at a predetermined price.

Under Section 56(2)(viib), share warrants are not considered shares, so the provision would not apply directly to the issue of share warrants.

3. What happens when share warrants are converted into shares?
When a share warrant is converted into equity shares, the conversion itself is not treated as a taxable event under Section 56(2)(viib). The conversion of warrants into shares does not trigger tax under Section 56, as the taxation under Section 56(2)(viib) is applicable at the time of issue of shares.

Tax Implications at the Time of Conversion:
At the time of conversion of share warrants into equity shares, there would be no tax implication under Section 56(2)(viib), as this section applies to the initial issue of shares and not the conversion of warrants into shares.

However, when the warrants are issued at a premium, the company must ensure that the premium does not exceed the FMV of the shares at the time of the issue (i.e., the warrant issue date). If the premium is higher than the FMV of shares, taxable income may arise at that point, but the conversion itself won't trigger an additional tax event.

4. What If XYZ Ltd. Issues Shares at a Premium?
If XYZ Ltd. (assuming it is a public company or if it could issue shares) issues equity shares at a premium:

FMV Calculation: The premium must be in line with the FMV of the shares on the date of issue. If the premium exceeds the FMV, then under Section 56(2)(viib), the excess amount would be taxable as income from other sources.

Conversion of Warrants into Shares: If XYZ Ltd. issues share warrants (assuming it is a public company), and these warrants are later converted into shares, the taxability would generally be as follows:

If the conversion is exercised at a premium over the FMV of shares at the time of conversion, there may be a taxable event for the shareholder or the company, depending on the circumstances.

But typically, conversion of warrants into equity shares does not trigger tax under Section 56 because Section 56(2)(viib) applies to shares issued initially and not to the conversion of warrants.

5. Conclusion on Share Warrants and Section 56(2)(viib):
Private companies cannot issue share warrants, so this question is only relevant for public companies.

Section 56(2)(viib) applies only to shares, and not to share warrants. Therefore, share warrants are not subject to the provisions of Section 56(2)(viib), and no tax will arise under this section upon the conversion of warrants into equity shares.

Tax Implication on Share Issuance at Premium: If the company issues shares at a premium above FMV, the excess of the premium over FMV will be taxable under Section 56(2)(viib), but the conversion of share warrants into shares will not trigger tax under this section.

Final Advice:
If XYZ Ltd. is a public company, it can issue share warrants, but the tax implications of Section 56(2)(viib) would apply at the time of issuing shares, not when the warrants are converted into shares.

For a private company, it cannot issue share warrants, so the question would not arise.

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