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Applicability of section 56(2)(viib) of it act in case of ri

14 April 2015

Dear Member,

I have a query with respect to applicability of Sectioin 56(2)(viib) of IT Act, 1961.

Whether Sectioin 56(2)(viib) of IT Act, 1961 is applicable in case of Right Issue of Shares by Private Limited Company.

For example- A Company wants to issue shares @ Rs 2500 (Face value- Rs. 10) per share under Right Issue. Whether Section 56(2)(viib) will be applicable in this case and Company will have to get its shares valued as per Rule 11U/11UA.

Thanks in advance.

CS Rajeev Nayak

+91 9873457184

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2 Replies

Saurabh Maheshwari (B.com,ACA) (5923 Points)
Replied 14 April 2015

Ya Section 56(2)(vii)(b) shall apply in that case also because it applies to all cases(without any exception) where the shares are issued by a closely held compnay to a resisdent, then the issue value in excess of valuation as per Rule 11UA to be taxed in the hands of issuer p.ltd company.

CA HAYEDAR SHAIKH (Practice ) (622 Points)
Replied 14 April 2015

Dear Rajeev,

It applies to the above refered case.

Go through the following for better understanding -

Section 56(2)(viib) of the Income tax Act ('the Act') provides that where a closely held company issues shares to a resident, for an amount received in excess of the fair market value of the shares, then the said excess portion will be regarded as income of the Company and charged to tax under the head ‘Income from other sources’. The said fair market value is defined as higher of the value arrived at on the basis of the method prescribed under Rule 11UA of the Income-tax Rules, 1962 (‘the Rules’) or the value as substantiated by the Company to the satisfaction of the Assessing Officer under Explanation to section 56(2)(viib).