Share premium - Finance Bill proposes to tax it as income from other sources

By TIOL News Service

NEW DELHI, MAR 16, 2012: SECTION 56(2) provides for the specific category of incomes that shall be chargeable to income-tax under the head “Income from other sources”.

The provision has been amended to provide for the taxability of the share premium received by the assessee in excess of the fair market value by treating this difference as income of the assessee. The amendment has been proposed by substituting clause (e) in section 56(2).

The new clause will apply where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares. In such a case if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income tax under the head “Income from other sources”. However, this provision shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund.

Further, it has also been proposed to provide the company an opportunity to substantiate its claim regarding the fair market value. Accordingly, it has been proposed that the fair market value of the shares shall be the higher of the value –

(i) as may be determined in accordance with the method as may be prescribed; or

(ii) 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, licenses, franchises or any other business or commercial rights of similar nature.

This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years.