Under valued consideration on sale of shares are taxable in the hands Firm and Company
Introduction
After various gifts
received by Individual and HUFs brought
under the provisions of Income Tax act, the amount received by the firm and
company are also brought under the ambit of income tax provisions w.e.f.01.06.2010 to carve out the tax evasions carried out through purchase
of shares without consideration or under consideration than the fair value of
the share. This can in other terms be treated as gifts and the taxability of such
Gifts received by firm or Closely Held Company (not being a company in
which public is substantially interested) is governed by the section
56(2)(viia) of the income Tax Act. However gifts received by AOP, BOI and
Trusts are still not covered under the Provisions of Income Tax Act
Provisions
as applicable to taxability of value of shares (Gifts) as per income tax Act
from 01.06.2010 onwards
Tax
is leviable on such gift under the head of Income from other sources’ under
section 56(2) (viia), if it satisfies the following conditions:
A) It is received by Firm or Closely Held
Company includes LLP
B) It is received on or after 01.06.2010
C) It is received from any person or persons whether resident or Non-Resident
D) It is transfer of Shares whether Equity or
Preference
E) It belongs to any of the following category:-
i) Without consideration, the aggregate Fair
Market Value of which exceeds Rs.50,000, the whole of the Fair Market Value of
such shares.
ii)
For a consideration which is less than Fair Market Value of shares by an amount
exceeding Rs.50000, the aggregate Fair Market Value of such shares exceeds such
consideration.
We will try to understand the above noted provisions of Section 56(2)
(viia), as applicable with the help of
certain instances given here under. For
Example, Y ltd is a partnership firm/ closely held company, receives the
following assets:
Tr.No.
|
Particulars of
Transfers
|
Consideration
Amount
|
FMV
|
Remarks
|
1
|
FDR on
|
Nil
|
1500000
|
Not covered u/s
56(2) (viia) as it is transfer of FDR
|
2
|
Shares in X ltd
(Listed Public Company) on
|
Nil
|
1000000
|
Not covered u/s
56(2) (viia) as shares transferred are not of a closely held company
|
3
|
Shares in Z
ltd(Listed Public Company) on
|
50000
|
500000
|
Not covered u/s
56(2) (viia) as shares transferred are not of a closely held company
|
4
|
Shares in A
ltd(closely held company) on
|
Nil
|
1000000
|
Not covered u/s
56(2) (viia) as shares are transferred before
|
5
|
Ø
Shares in B ltd(closely held company) on
Ø
Shares in C ltd(closely held company) on
|
Nil
Nil
|
10000
40000
|
Not covered u/s
56(2) (viia) as aggregate FMV of both transfers of shares does not exceeds
Rs.50000/-
|
6
|
Ø
Shares in D ltd(closely held company) on
Ø
Shares in E ltd(closely held company) on
|
40000
20000
|
70000
40000
|
Not covered u/s
56(2) (viia) as aggregate difference between FMV and cost of acquisitions of
shares does not exceeds Rs.50000/-
|
7
|
Ø
Shares in F ltd(closely held company) on
Ø
Shares in G ltd(closely held company) on
|
Nil
Nil
|
30000
40000
|
Covered u/s
56(2) (viia) as aggregate FMV of both transfers of shares exceeds Rs.50000/-
|
8
|
Ø
Shares in H ltd(closely held company) on
Ø
Shares in K ltd(closely held company) on
|
30000
50000
|
70000
70000
|
Covered u/s
56(2) (viia) as aggregate difference between FMV and cost of acquisitions of
shares exceeds Rs.50000/-
|
Calculation
of Fair Market Value of Shares for the purpose of Section 56(2)viia
As per Rule 11UA(c) the valuation of shares and
securities shall be done as under –
(a) Fair market value of unquoted equity shares
: the fair market value of unquoted equity shares shall be the value, on the
valuation date, of such unquoted equity shares as determined in the following
manner namely :-
The fair market value of unquoted equity shares
= (PV)*(A-L) / (PE)
Where, A= Book value of the assets in Balance Sheet
as reduced by any amount paid as advance tax under the Income-tax Act and any
amount shown in the balance sheet including the debit balance of the profit and
loss account or the profit and loss appropriation account which does not
represent the value of any asset.
L = Book value of liabilities shown in the Balance
Sheet but not including the following amounts:-
(i) the paid-up capital in respect of equity shares;
(ii) the amount set apart for payment of dividends
on preference shares and equity shares where such dividends have not been
declared before the date of transfer at a general body meeting of the company;
(iii) reserves, by whatever name called, other than
those set apart towards depreciation;
(iv) credit balance of the profit and loss account;
(v) any amount representing provision for taxation,
other than amount paid as advance tax under the Income-tax Act, to the extent
of the excess over the tax payable with reference to the book profits in
accordance with the law applicable thereto;
(vi) any amount representing provisions made for
meeting liabilities, other than ascertained liabilities;
(vii) any amount representing contingent liabilities
other than arrears of dividends payable in respect of cumulative preference
shares.
PE = Total amount of paid-up equity share capital as
shown in Balance Sheet.
PV = the paid-up value of such equity shares.
(b) Fair market value of other unquoted shares
and securities: the fair market value of unquoted shares and securities
other than equity shares in a company which are not listed in any recognized
stock exchange shall be estimated to be price it would fetch if sold in the
open market on the valuation date and the assessee may obtain a report from a
merchant banker or an accountant in respect of such valuation.
Some important meanings and points
are as under:
1.
Closely Held Company: A company whose shares of common stock is owned by
relatively few individuals and is generally unavailable to outsiders. Such
companies do not have their shares of ownership offered on stock exchanges
2. Person (Sec.2(31)): The Term includes
Ø
an individual
Ø
a Hindu undivided family
Ø
a company
Ø
a firm
Ø
an association of persons or a body of individuals, whether
incorporated or not
Ø
a local authority
Ø
every artificial juridical person, not falling within any of the
preceding categories
3.
Section 56(2)(viia) does not apply to the following
i) Transfer of shares in closely held Indian company
in scheme of amalgamation between two foreign companies (Section 47(via))
ii) Transfer of shares in closely held Indian
company by demerged foreign company to resulting foreign company (Section
47(vic))
iii) Transfer on reorganization of two
co-operative banks (Section 47(vicb))
iv) Transfer or issue of shares by resulting company
in scheme of demerger to shareholders of demerged company (Section 47(vid))
very nice illustrations
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