Tax amount if applicable

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

03 December 2012 Issue shares more than fair market value to NRI by newly established company, so my question is that company needs to pay the tax on higher amount or not?
Please reply...

Thanks & Regards

CA. Subhash Dangi

CA. Subhash Dangi (Expert)
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03 December 2012 Fair Market Value to be considered as “full value of consideration”
• A new provision is proposed to be inserted (section 50D) under which Fair
Market Value of capital asset (on the date of transfer) is to be considered as
“full value of consideration” for transactions where sales consideration is not ascertainable or cannot be determined and taxable in the hands of the
transferor assessee.
• The proposed new provision will take effect from AY 2013-14.

• However, in case such transfer is of an asset which is share of an unlisted
company, then the same amount (i.e. the fair market value of such shares)
would be deemed to be income both in the hands of the transferor (consideration for the purposes of capital gains) and the recipient (under section 56(2)(vii) or 56(2)(viia) of the Act.

Implications for non-resident recipients:

Section 56(2)(viia) does not make any distinction between resident and non-resident companies/ firms. Therefore, receipt of any shares of a closely held company by a non-resident without consideration or for an inadequate consideration would be taxable as ‘Income from other sources’ under the IT Act.

However, if the non-resident is a resident of a foreign country with which India has entered into a Double Tax Avoidance Agreement (DTAA), his taxability in India would depend on the relevant DTAA. Under the DTAA, the said income may be governed by the Article dealing with ‘Other Income’. It may be noted that the DTAAs entered by India with countries like Czech Republic, Germany, Hungary, Mauritius, etc., provide that ‘Other Income’ earned by a resident of a Contracting State shall be taxable only in the Contracting State where the taxpayer is resident, except if the tax-payer carries on business in the other Contracting State through a permanent establishment (PE) or the person provides independent personal services from a fixed base situated therein. In other words, section 56(2)(viia) may not apply to a non-resident, if he does not have a PE or fixed base in India.

If the non-resident is a resident of a foreign country with which India has not entered into a DTAA, then the provision of section 56(2)(viia) of the IT Act would apply and income earned by such non-resident would be subject to tax in India.

Querist : Anonymous

Querist : Anonymous (Querist)

04 December 2012 Thank you so much sir. I also want to ask that if suppose our fair value of the new established company is 180 and if we allot share to Foreign investors @ 480 premium and 10 Rs. face value than its difference amount i.e (480-180) is taxable on company part???

Thank u again & Regards

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CA. Subhash Dangi

CA. Subhash Dangi (Expert)
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04 December 2012 Yes, it is taxable on Issuing Company.

Querist : Anonymous

Querist : Anonymous (Querist)

04 December 2012 ok sir... thanks a lot