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Taxability of Shares for consideration other than for cash

vijay krishnan (article ) (30 Points)

07 March 2010

A private limited company has issued shares to directors/promoters for consideration other than for cash. I wanted to know about the taxability in the hands of directors and company. If taxable, under which head of income (for directors/promoters)

The directors/promoters genuinely have no source to pay tax. Can the tax be postponed until actual disposal of shares?

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16 Replies

Chintan Shah (-) (534 Points)
Replied 07 March 2010

Dear friend Vijay,

Section 17(2)(vi) reads as under:

the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee.

specified security means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and, where employees stock option has been granted under any plan or scheme therefor, includes the securities offered under such plan or scheme;

Hence, such shares would be taxable in the hands of directors as perquisites, provided they are employees of the company (eg a managing director). However if they are not employees of the company than the same would be taxable under the head income from other sources u/s 56 of the act.

There would be no taxability in the hands of the company since there is no income that has accrued or arisen to the company.

Regards,

Chintan

Max Payne (employed) (2569 Points)
Replied 08 March 2010

Hi vijay,

Chintan has explained the tax treatment of ESOP/sweat equity....

I think the case is that the director has transferred some asset to the company against which he has been allotted shares...

The taxability arises in the year of transfer of the asset by directors to company.. Not the year of actual allotment or transfer of allotted shares..

The same is chargeable under capital gains to the directors, normally...

What is the nature of asset transferred, u dint specify...

P.S. This does not look like ESOP/sweat equity to me...

CA Rahul Khatter (Chartered accountant) (97 Points)
Replied 08 March 2010

as my point of view chintan is rite .

becoz he also mentioned sweat equity shares which is issued to directors for consideration other than cash or at conssetional rates ...

so i think chintan is rite .

if i m wrng plz guide me

thank u

rahul

shankar.m.p (ipcc student) (192 Points)
Replied 08 March 2010

chintan is right ..

Max Payne (employed) (2569 Points)
Replied 08 March 2010

Ok buddies,

its not like i got anything to gain here, (but knowledge)

But the question says that the allotment is for consideration other than cash.

NOT at a concessional rate or free of cost by an employer or former employer to an employee... but for proper consideration.

It appears that, this is a case of transfer of assets, in lieu of which, shares have been allotted to the directors...

Sweat equity is given for what? Land and Building/Plant and machinery/motor car/stock in trade?? NO!

Sweat equity is for IPR yaar....

Pls tell me if i am wrong :P

Somshekar (Rankholder) (-) (158 Points)
Replied 08 March 2010

consideration other than cash can be interpreted as no consideration paid or paid which is not in cash. the clarity on question is required.

Chintan Shah (-) (534 Points)
Replied 08 March 2010

Sweat equity shares are also alloted for consideration other than cash... Its for a consideration in form of IPR or know how. Ofcourse if the consideration that the directors have paid to the company is in the form of capital asset such as land or building, etc. than there is a transfer on the part of the directors of a capital asset and therefore capital gains would be computed. The full value of sale consideration would be the Fair market value of the shares that are alloted to the directors. This is because Section 48 doesnot speak about monetary consideration. Even shares is consideration and its FMV would become the full value of consideration.

Chintan Shah (-) (534 Points)
Replied 08 March 2010

And yes when the directors transfer the shares, the FMV of the shares as on the date of allotment would be considered as the cost of acquisition since that is the value of the asset forgone by the directors in order to acquire the shares.

vijay krishnan (article ) (30 Points)
Replied 09 March 2010

Thank you all for the responses

The scenario is as follows

A Pvt Ltd Company has issued shares worth Rs 30 lakh each to two of the promoters(directors) otherwise than for cash consideration, in appreciation of the efforts taken by them for promoting the company. Both of them are highly qualified professionals who resigned their good job and spent two years time in planning, doing research, contacting relevant resource persons in and abroad etc etc for the purpose of starting a new line of activity which is research oriented Biotechnology Products.

Rajat Singhal CA,CS,CFA (Senior Manager (F&A)) (254 Points)
Replied 09 March 2010

Hii Vijay,

In the above case Chintan is correct and it would be taxable in the hands of promoters u/s 56.

Thanks & Regards

Rajat

vijay krishnan (article ) (30 Points)
Replied 09 March 2010

Sir ,

thank you for the suggestion, i have one more query regarding this

Its true that promoters have received shares. But they have not received any cash .So do they have to pay tax from their pocket ? In this case promoters does not have any source to pay tax.

Is it possible to deffer the payment of tax ?

Chintan Shah (-) (534 Points)
Replied 09 March 2010

Dear friend vijay,

Defferment of tax is not possible. Even in case of ESOP to employees the employees donot get cash, but even though there is tax which has to be paid. It has to be paid from director's pockets. They have to raise the funds somehow... Department does not sympathize with the assessee in respect of undisputed amounts. Only if the amount is disputed and you are in appeal than you can get a stay that too against the demand u/s 156, if raised. Otherwise no defferment is possible under any other provisions of the Act..

Regards,

Chintan

vijay krishnan (article ) (30 Points)
Replied 09 March 2010

In this case directors will have to take loan to pay tax .. Is there any way out ..for genuine cases like this ?

Chintan Shah (-) (534 Points)
Replied 09 March 2010

Vijaybhai,

If the directors don't have enough funds, you can postpone the allotment of shares. Currently you can give them option to subscibe particular number of shares, which they can excersise at a given date. The tax will arise in their hands only when they exercise the option and shares are alloted to them. Therefore, tax liability can be conviniently posponed.

Regards

Chintan