taxability u/s 56(2)(vii)

[SANJAY RAWAL]

Fair market value of share  per rule 11UA of  Income Tax Act, 1961 is Rs 50.00 against a face value of Rs10.00.It issues fresh Equity share at face value of Rs 10.00. Will the difference between Fair Market Value aand issue price be taxable u/s 56(2)(vii)

[Surender Gupta]

Where the transaction is falling within the mischief of section 56(2)(vii) or (viia), that difference between Fair Market value and issue price shall be taxable read with rule 11UA. However, the difference amount should be exceeding Rs. 50,000/-

[DEV KUMAR KOTHARI]

Applying / subscribing for  shares and / or getting allotment of shares
cannot be called  ' received property ' in the context of S. 56 (2) (vii)
and (viia).

In case of receives  property - there should be an existing owner of
property who gives property to another person. In case of allottment, there
is no such situation- the shares are not owned by company, they come into
existence on allotment. There is no person who gives and no person who receives shares that were in existance earlier.

Therefore, in case of  initial issue /  right issue,/ preferential issue  or
bonus issue the deemed income rule of S. 56 will not apply.

However, as usual disputes are likely to take place.

In case  of allotment to employee - there can be case of perquisite also if
shares of employer company is issued  TO EMPLOYEES  at lower price as compared to issue price for otehr persons.

AI Summary

Taxability of share allotment: whether FMV excess over issue price is treated as taxable income under deemed receipt rules.
Taxability under section 56(2)(vii) is treated by one view as applying where the difference between Fair Market Value and issue price on allotment of shares is taxable under the valuation rule, subject to a monetary threshold; an alternative view holds that allotment of newly issued shares is not "received property" and so the deemed income rule does not apply, though employee allotments may still attract perquisite treatment if issued at lower price.