Budget 2012-13 has a very strong provision for curbing black money practices. One of the easiest way to convert black money to white was through share premium of private limited companies which used to create a company, accepting huge premium on a very small paid up capital and then selling the company at very small price per share. Budget 2012-13 has plugged the loophole in the Income Tax Act .
It was a very usual practice to Finance Bill 2012-13 has provided now that share premium in excess of fair market value shall be considered as income u/s section 56(2) of the Income Tax Act. The provision is effective from 01/04/2012 (Assessment year 2013-14 )
It is proposed in the Finance Bill 2012-13 that where a closely held company ( read companies whose IPOs have not come ) receives considerations in any previous year from any resident person as any consideration for issue of shares and it is found that the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration in excess of the fair market value of the shares shall be chargeable to income tax under the head “Income from other sources.
When is excess share premium not taxable ?
It is provided that the new provision u/s 56(2) shall not apply in following cases
- where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund.
If the company substantiate the claim of higher premium to the satisfaction of Assessing Officer that valuation is based on the value of its assets, including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.
Actual provision regarding Share Premium
The provision u/s Section 56(2)( viib) effective from 01/04/2012 is as under
‘(viib) where a company, not being a company in which the public are substantially interested,
receives, in any previous year, from any person being a resident, any consideration for issue of
shares that exceeds the face value of such shares, the aggregate consideration received for
such shares as exceeds the fair market value of the shares:
Provided that this clause shall not apply where the consideration for issue of shares is received
by a venture capital undertaking from a venture capital company or a venture capital fund.
Explanation.—For the purposes of this clause,—
(a) the fair market value of the shares shall be the value—
(i) as may be determined in accordance with such method as may be prescribed; or
(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer,
based on the value, on the date of issue of shares, of its assets, including intangible assets
being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature,
whichever is higher;
(b) “venture capital company”, “venture capital fund” and “venture capital undertaking” shall
have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of
Explanation 1 to clause (23FB) of section 10;’.
This amendment on share premium was overdue .