Taxability on Gift of Shares received or consideration for shares received by Company
We have seen taxability on the Gifts received by Individual or HUF by any person related or unrelated. Now its time put some light on the taxability of Gifts received by Firm or Closely Held Company (not being a company in which public are substantially interested).
Taxability on Company arises only when Company receives gift of shares, same has been segregated into two sections:
- Section 56(2)(viia): Gift of shares received by Firm or Closely Held Company
- Section 56(2)(viib): Consideration paid in excess of FMV by company to any person in exchange of shares.
Before going further first you should know the meaning of closely held company
Closely Held Company: A company whose ownership (shares of stock, in the case of a corporation) belongs to relatively few, instead of having its shares publicly traded (offered to anyone who meets the asking price) is said to be closely-held. Such companies do not have their shares of ownership offered on stock exchanges.
Now Let’s see each section one by one.
Section 56(2)(viia) comes into force by Finance Act, 2010 w.e.f 1st June, 2010 which provides that taxability in case a firm or closely held company (not being a company in which public are substantially interested) receives in any previous year from any person or persons shares of a closely held company (not being a company in which public are substantially interested)-
- Without consideration, the aggregate FMV of which exceeds Rs.50,000, the whole of the FMV of such shares
- For a consideration which is less than FMV of shares by an amount exceeding Rs.50,000, the aggregate FMV of such shares exceeds such consideration.
For example, Say Mr.A gifts shares of Company ABC worth Rs.1 crore to Company XYZ where company ABC is controlled by company XYZ, then Rs. 1 crore is taxable in the hands of Company XYZ u/s 56(2)(viia).
Points to remember
- Section 56(2)(viia) shall not apply where shares are received in scheme of amalgamation or demerger.
- However, AOPs, BOIs, Trust is still not covered under this act, i.e. gift of shares received by AOP/BOI/Trust is not taxable at all.
- Further, if debentures or any other security of the company except shares is gifted then also this section is not applicable.
- Section 56(2)(viia) only covers share means if gold or any other asset is gifted then this section does not apply.
Section 56(2)(viib) as introduced by Finance Act, 2012, w.e.f Assessment Year 2013-14, provides that where a company (not being a company in which public are substantially interested) receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds that FMV of the shares, then the amount which exceeds the FMV shall be considered as Income from other Source in hands of the receiving company.
Points to remember
- Section 56(2)(viib) shall not apply where consideration for issue of shares is received:
- By a Venture Capital Undertaking from a venture capital company or a venture capital fund. Venture Capital Undertaking, Venture Capital Company and Venture Capital Fund are governed by rules of SEBI.
- By a Company from a class or classes of persons, as may be notified by Central Government.
- Section 56(2)(viib) does not apply if a widely held company issues shares at a premium. The section applies only if a closely held company issue shares at a premium.
- Section 56(2)(viib) also not apply where a closely held company issues shares to a Non-Resident at a premium in excess of FMV.
Both the above sections were introduced to nullify the modus-operandi of converting black money into white money.