Section 56(2)vii

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

14 June 2014 what are tax implications of buying share of a company having shares of some other company bought at less than FMV (before 56(2)vii was applicable
please reply at rishabhrj18@gmail.com

Nikhil Kaushik

Nikhil Kaushik (Expert)
Follow

14 June 2014 it is not covered under 56(2)(vii) but under 56(2)(vii)(a)

the tax implication is simple. If the difference between purchase price and FMV is more than Rs 50000, then the difference between FMV and purchase price shall be taxed in the hands of the purchasing company under "income from other sources"

Message likes : 1 times

Querist : Anonymous

Querist : Anonymous (Querist)

17 June 2014 sir read my question carefully
m buying shares of a company at FMV having shares bought less than fmv at that time when 56(2)viia was not applicable

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
Follow

23 July 2025 Your query relates to Section 56(2)(vii) and tax implications when you buy shares of a company that itself holds shares of another company, which were acquired below FMV before Section 56(2)(viia) became applicable.

Let’s clarify step by step:

✅ Your Scenario (Simplified)
You're buying shares of Company A at Fair Market Value.

Company A holds shares of Company B, which were acquired below FMV before Section 56(2)(viia) became applicable (i.e., before June 1, 2010).

You’re wondering: Are there any tax implications for you due to the old low-cost acquisition of Company B's shares by Company A?

🔍 Key Provisions
1. Section 56(2)(vii) (Now 56(2)(x))
This section taxes individuals/HUFs if they receive property (including shares) for inadequate consideration.

✅ Since you’re buying shares at FMV, Section 56(2)(vii) doesn’t apply to you — there's no undervaluation.

2. Section 56(2)(viia) (applicable to companies/firms receiving unlisted shares for less than FMV, introduced from 1 June 2010)
Company A may have acquired shares of Company B before 1 June 2010, when Section 56(2)(viia) wasn’t in force.

So, Company A had no tax liability at that time for buying shares at less than FMV.

Now you're acquiring shares of Company A, not Company B.

🧾 Your Tax Position
You're buying shares of Company A at FMV, so:

✅ No tax under Section 56(2)(vii)/(x) on you.

✅ Company A’s past acquisition of undervalued shares before 1 June 2010 is grandfathered (i.e., not taxable under 56(2)(viia)).

💡 Important Notes
Later, when you sell your shares in Company A, the cost of acquisition = price you paid.

If Company A sells shares of Company B, Company A may face capital gains, but that’s not your issue unless you're a shareholder receiving dividends or buybacks.

No retrospective application of Section 56(2)(viia) — so tax cannot be imposed for transactions done before its effective date.

✅ Conclusion
Issue Tax Impact
You buying shares at FMV ❌ No tax under Section 56(2)(vii)/(x)
Company A’s earlier purchase of shares at undervalue (before June 2010) ❌ Not taxable — pre-Section 56(2)(viia)
Future capital gains (on resale) ✅ Taxable as capital gains in your hands

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now