Share Premium in excess of the Fair Market Value to be treated as Income [Section 56(2)(viib)]

Section 56(2)(viib) is applicable as follows –

1. Recipient is a company (not being a company in which the public are substantially interested).

2. It receives consideration for issue of shares (preference shares or equity shares) from a resident person.

3. The consideration received for issue of shares exceeds the face value of such shares. In other words, shares are issued at a premium.

If the above conditions are satisfied, the aggregate consideration received for such shares as exceeds the fair market value of the shares, shall be chargeable to income-tax in the hands of recipient-company under section 56(2)(viib) under the head “Income from other sources”.

The above provisions are not applicable in the following two cases –

1. where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund; or

2. where the consideration for issue of shares is received by a company from a class or classes of person as notified† by the Central Government.

The fair market value of the shares shall be the higher of the value—

1. as may be determined in accordance with the method given in rules 11U and 11UA ; or

2. as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value 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.