Tax implications in the hands of the Assessee Company in view of amendment made in section 56 in the Finance Act2010.

[S SHANMUGASUNDARAM]

Sub: Request for your opinion with regard to Tax implications in the hands of Assessee and share holders of a public limited company (Nidhi Company recognized U/s 620 of the companies Act). The Company has proposed to issue right shares to equity share holders (Members) in the ratio of 1 share for every two shares held by the members @ a premium of Rs.2/- per share. The face value of the share is Re.1/- each fully paid up. With reference to the subject cited, I submit the following details. 1. The Assessee Nidhi Company incorporated U/s 620A of the companies Act 1956. 2. The Assessee Company is a public limited company within the meaning of section 2(18) of the Income Tax Act (A company in which the public are substantially interested) 3. The share of Nidhi Company is not listed in any stock exchange in India. 4. The Assessee Company has proposed to issue right shares to existing share holders in the ratio of, for every 2 Equity shares held, one Equity share @ a premium of Rs.2 per share. The face value of each Equity share is Re.1/- 5. The Intrinsic value of each Equity share of the company is approximately Rs.20/- 6. The offer price per equity share is Rs.5/- (including share premium) to the existing share holders of the company. The Assessee Company seeking your opinion that 1. Whether difference between the intrinsic value of Rs.20/- and offer price of Rs.5/- is liable for tax in the hands of the share holders (recipient) under the provisions of section 56(2) of the Income Tax Act, 1961 on the grounds that the shares allotted for inadequate consideration. 2. The tax implications in the hands of the Assessee Company in view of amendment made in section 56 in the Finance Act 2010.

[Surender Gupta]

In my view the purpose of amendment is cover the isolated transaction with the intention to evade tax. Fresh allotment by the company to its shareholders may not be hit by this provision.

AI Summary

Taxation of undervalued share allotments under amended Section 56 may not apply to pro rata rights issues to existing shareholders. Whether receipt of new equity by existing shareholders at a price below intrinsic value attracts taxation under the Finance Act 2010 amendment to section 56 hinges on distinguishing isolated tax evasive transfers from routine pro rata rights allotments; the amendment targets atypical undervalued transfers, and a fresh pro rata rights issue to preserve shareholding is unlikely to be treated as an evasion device.