04 February 2014
Are provisions of Sec 56(2)(viia) or 56(2)(viib) applicable on preference shares also or is it meant for equity shares only? Please suggest, its urgent.
04 February 2014
It is applicable on all shares which has market value. In case of preference shares there are conditions and these cannot be traded in the market. If there is % fixed on preference shares then they will get preference in getting divided and at the time liquidation also they will get preference therefore, in my opinion these are not covered u/s 56. However kindly note the following:
The Finance Act,2012 inserted clause (viib) in section56(2) of the Income-tax Act,1961 (“Act”) with effect from April 1,2012 to bring within the purview of taxation the premium received by a company (other than a “company in which public are substantially interested” [1], on the issue of its shares in excess of the “Fair Market Value” (‘FMV’) of such shares. The FMV was to be the price (a) Arrived at as per the prescribed method OR (b) as may be substantiated to the assessing officer based on the value of the company at the time of issue of the shares. Also, as per the existing clause (viia) of section 56(2), if the consideration paid for the acquisition of shares (of a closely held company) is lower than the FMV of the shares, the delta is treated as income of the company or firm that acquires such shares. Rule 11U and Rule 11UA of the Income - tax Rules, 1962 (‘IT Rules’), amongst other things, prescribed the Net Asset Value Method (based on Balance Sheet values) for arriving at the FMV for the purposes of this clause (viia). No valuation rule was however prescribed for the purposes of clause (viib) of section 56(2). The CBDT has now issued a Notification amending Rules 11U and 11UA of the IT Rules to provide for a valuation method for the purposes of clause (viib) of section 56(2) and also to make other incidental changes . Key amendments to the valuation rules Valuation method for clause (viib) of section 56(2) – Rule 11UA has been amended to allow the company issuing shares to determine the FMV either based on the (a) book value as per the Balance Sheet OR (b) based on the Discounted Free Cash Flow method. Valuer – Rule 11UA has been amended to provide that the valuation for the purposes of clause (viib) has to be certified either by (a) a Fellow member of the Institute of Chartered Accountants of India (FCA) OR (b) by a merchant banker. Also, the FCA certifying the valuation should not be a tax auditor or statutory auditor of the company.
04 February 2014
Thanks Sir. The method for calculating FMV is also given for equity shares only. Would there be any tax implication, if in future preference shares get converted into equity shares?
CAclubindia
