Section 56(2) of the it act

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Querist : Anonymous

Querist : Anonymous (Querist)

22 August 2013 Dear Experts,

my client is a PVT Ltd company. and want to issue the equity share to the directors at a premium of Rs. 80/- per share.

face value is 10/- per share
book value is 90/- per share

Can you please advise whether tax u/s 56(2) will applicable on Rs.80/- ?

Regards,
Vijay Jain

CA PARAS BAFNA

CA PARAS BAFNA (Expert)

22 August 2013 In my view Section 56(2) (vii)(c)(ii) would apply to the Director on the difference between the FMV and consideration .(90-80=10)

Querist : Anonymous

Querist : Anonymous (Querist)

23 August 2013 Thanks,

can you please tell the method to calculate FMV ?

Vijay

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)

23 July 2025 Great question, Vijay. You’re referring to the applicability of **Section 56(2)** of the **Income Tax Act** on the **issue of shares by a private limited company to directors at a premium**.

Let’s break it down clearly for you.

---

## 🔍 **Which Clause Applies Here?**

Since the **recipient is an individual (the director)** and the **company is issuing shares at a value lower than FMV**, the relevant clause is:

> **Section 56(2)(vii)** (for years prior to **1 April 2017**)

Or

> **Section 56(2)(x)** (for **transactions after 1 April 2017** — both clauses are materially similar)

---

## ✅ **Applicability in Your Case**

You said:

* Company: **Pvt Ltd**
* Face value: ₹10
* Premium: ₹80 → Issue price = ₹90 per share
* Book value / FMV = ₹90
* Shares issued to: **Directors (Individuals)**

If:

* The **issue price = ₹90**, and
* **FMV = ₹90**

👉 Then **no tax is applicable under Section 56(2)(x)**, because the shares are being issued **at FMV**.

### BUT...

If the company **issues shares at ₹80 (below FMV of ₹90)**, then:

➡️ The **difference of ₹10** (i.e., ₹90 - ₹80) **will be taxable in the hands of the director** as **“Income from Other Sources” under Section 56(2)(x)**, if:

> "...any property (including shares) is received for a consideration which is **less than FMV** by an amount exceeding ₹50,000..."

---

## 🧮 **How to Determine FMV of Unquoted Equity Shares**

As per **Rule 11UA(1)(c)** of the **Income Tax Rules**, FMV of **unquoted equity shares** is calculated using this formula:

> **FMV = (A – L) / PE × PV**

Where:

* **A** = Book value of assets (excluding certain items)
* **L** = Book value of liabilities (excluding equity & related items)
* **PE** = Total paid-up equity share capital
* **PV** = Paid-up value of share being valued

This is effectively the **Net Asset Value (NAV) method** — i.e., **book value per share** based on balance sheet.

---

## ✅ Summary Answer:

| Question | Answer |
| ------------------------------- | ----------------------------------------------------------------------- |
| Is Section 56(2)(x) applicable? | ✅ Yes, **if shares are issued below FMV** |
| What is taxable? | The **difference between FMV and issue price** (if > ₹50,000 aggregate) |
| FMV Calculation | As per **Rule 11UA(1)(c)** using **NAV method** |
| If issued at FMV (₹90)? | ❌ **No tax liability** |

---

## 💡 Suggestions:

* If possible, **issue shares at FMV** (₹90) to avoid tax exposure.
* Keep documentation ready (audited balance sheet, valuation report if required).
* If discount is offered, **consider tax impact in the hands of the director**.

Let me know if you’d like help preparing a **valuation working** under Rule 11UA or a draft **board/shareholder resolution**.

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