08 December 2021
We have a section 8 company with share capital. Its member are willing to transfer its share to another resident individual at fair market value, which is higher than the share par value. How this will be taxable in Income Tax? Is there any exemptions or another exclusions for share transfer of section 8 company. Do you have any judgement for share transfer of section 8 companies.
11 July 2024
In the context of a Section 8 company (formerly Section 25 company) under the Companies Act, 2013, which is a not-for-profit entity, the transfer of shares and its tax implications are governed by specific provisions. Here’s a detailed overview:
### Tax Implications of Share Transfer in a Section 8 Company:
1. **Taxability under Income Tax Act, 1961**: - When shares of a Section 8 company are transferred between residents at a price higher than the face value (par value), the difference between the fair market value (FMV) and the cost of acquisition is considered as capital gains. - **Calculation**: Capital gains are computed as the selling price (FMV) minus the indexed cost of acquisition (adjusted for inflation using Cost Inflation Index).
2. **Exemptions**: - **Exemption under Section 47**: Generally, transfers of shares between residents of a Section 8 company are exempt from capital gains tax under Section 47 of the Income Tax Act, provided certain conditions are met: - The transfer is between residents of India. - The transfer is at FMV which is determined as per the guidelines under the Income Tax Act. - The shares are listed on a recognized stock exchange in India, or in a transaction which is otherwise recognized by the Central Government.
3. **Case Laws and Judgments**: - While specific judgments relating to share transfers in Section 8 companies may not be readily available, the principles governing exemptions under Section 47 and other provisions of the Income Tax Act are generally applicable. - Courts and tribunals often refer to the intent and nature of Section 8 companies as not-for-profit entities and may interpret tax provisions in alignment with these principles.
### Steps for Share Transfer:
- **Valuation**: Determine the fair market value of the shares to be transferred. This can be done through a registered valuer to ensure compliance and accuracy. - **Documentation**: Prepare and execute a share transfer deed (Form SH-4 under the Companies Act) signed by both parties (transferor and transferee). - **Filing**: File the share transfer deed along with relevant documents (like board resolution, share certificates, etc.) with the ROC within the stipulated time frame. - **Compliance**: Obtain necessary compliance certificates and update the Register of Members of the company.
### Conclusion:
In summary, while the transfer of shares in a Section 8 company may attract capital gains tax on the difference between FMV and cost of acquisition, exemptions under Section 47 are typically available if the transaction meets specified conditions. It’s advisable to consult with a tax advisor or chartered accountant to ensure compliance with all regulatory requirements and to maximize available exemptions under the Income Tax Act.
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