TAX TALK-09.05.2011-THE HITAVADA
TAX TALK BY CA. NARESH JAKHOTIA
(Chartered Accountant)
“ISSUE OF SHARES BELOW THE FAIR MARKET VALUE: INVESTOR LIABLE TO PAY INCOME TAX”
Query 1]
If a private limited company mobilizes the equity from private investor by issuing shares at par, Is there any provision to tax the difference between the book value & at par price as tax in the hands of investor? If this is so, how the private limited company would be able to mobilize the amount? In such case, why the investor would be required to pay tax without any actual income in his hands? Is it applicable for right issue also? [KDPL]
Query 2]
Kindly advise us on the following:
ABC Pvt. Ltd. plans to issue:
1. Bonus shares in the ratio 1:1
2. Issue of new shares at Rs. 20/- per share
a] Employees
b] Non-employees or former employees.
The fair value of each share is Rs. 40/- per shares.
The question is - Whether the receiving shareholders are liable to tax as they are getting shares free/ below the fair price?
[berarfinance@yahoo.com]
Opinion as to Query No. 1:
When it comes to tax Statues, it is subjected to so much of the Changes, Amendment & Revision that non awareness could drastically impose the additional heavy tax burden on the Tax Payer. The position get further aggravated by virtue of deeming fiction incorporated in the Tax Statute every now & then which makes tax payer liable to pay income tax even though no income actually & in fact accrues in the hands of the Assessee. One such deeming provision is section 56(2) (vii)(c).
Originally cash gift, with few exceptions, in excess of Rs. 25,000/- from non relatives was brought to tax net by the Finance Act-2004. Thereafter F.A-2006 has expanded the scope of taxing gift so as to include the
a. Immoveable property if it is received without consideration
b. Moveable property if
(i) it is received without consideration OR
(ii) It is received at a consideration which is lower than the fair market value of the property.
In the later case, the difference between the fair market value & the sale price would be taxable as income from other source.
As a result of above amendment by the F.A. -2009, the difference between fair market value & the issue price would be taxable as income of the Purchaser/ Investor.
We agree with you that the said amendment would drastically hamper the flow of funds in to private or close held companies intending to mobilize the additional equity fund. In fact, all equity infusions into private companies including private placements, in any manner whatsoever, would get affected, in one way or the other.
Whereas the intention of the Government while enacting the above provision would have been to essentially tax transfer of shares of private companies for inadequate consideration, the way the proposed amendment is worded will make RIGHT ISSUE, preferential issues & most of the acquisitions also taxable in the hands of the Investor.
From our side, we will also be taking up the matter with the relevant Authorities about the injustice that the provision may cause in the growth of the companies.
Till any further favorable amendment/ change is carried out in the Statue, Taxpayer don’t have any other options but to plan the business affairs keeping in mind the present provision of Law.
Opinion as to Query No. 2:
1. Issue of Bonus shares is not at all taxable in the hands of recipient. The same is neither taxable as “Capital Gain Income” nor as “Income from Other Source”.
2. The 2nd part of your query is aptly elaborated in opinion to query No. 1 above. The ABC Pvt Ltd will be issuing shares @ 20/- per Shares whereas the Fair Value of the share comes to Rs. 40/- per shares. This could be by issue of Right Shares or by way of fresh issue of capital to the new investor.
3. The tax treatment in such case would be as under:
a] Issue of New Shares to Employees:
The difference of Rs. 20/- per shares would be taxable as perquisite in the hands of employee.
b] Issue of New Shares to Non-Employees:
The difference of Rs. 20/- per shares (i.e., the issue price & the Fair value would be taxable in the hands of the recipient as “Income from Other source” u/s 56(2)(vii). The way in which the provision is worded, even rights issues of shares, at prices less than the fair market values, would be covered.
Query 3]
I want to ask one query regarding tax deduction. Can I mention my sister child name under 80DD (she is mentally handicapped- 40%) for exemption of tax because my sister is widow and she and her child totally depend on me. Kindly help me.
[riteshkharkar@gmail.com]
Opinion:
1. Deduction under this section is available to an individual/HUF who incurs any expenditure for the medical treatment, training and rehabilitation of a disabled dependant.
2. For the purpose of section 80DD, the term 'dependent' as mentioned above, refers to the spouse, children, parents, brothers & sisters of the individual.
3. Expenses towards the treatment of your Sister Children will not enable you to claim the deduction u/s 80DD.
(Chartered Accountant)
“ISSUE OF SHARES BELOW THE FAIR MARKET VALUE: INVESTOR LIABLE TO PAY INCOME TAX”
Query 1]
If a private limited company mobilizes the equity from private investor by issuing shares at par, Is there any provision to tax the difference between the book value & at par price as tax in the hands of investor? If this is so, how the private limited company would be able to mobilize the amount? In such case, why the investor would be required to pay tax without any actual income in his hands? Is it applicable for right issue also? [KDPL]
Query 2]
Kindly advise us on the following:
ABC Pvt. Ltd. plans to issue:
1. Bonus shares in the ratio 1:1
2. Issue of new shares at Rs. 20/- per share
a] Employees
b] Non-employees or former employees.
The fair value of each share is Rs. 40/- per shares.
The question is - Whether the receiving shareholders are liable to tax as they are getting shares free/ below the fair price?
[berarfinance@yahoo.com]
Opinion as to Query No. 1:
When it comes to tax Statues, it is subjected to so much of the Changes, Amendment & Revision that non awareness could drastically impose the additional heavy tax burden on the Tax Payer. The position get further aggravated by virtue of deeming fiction incorporated in the Tax Statute every now & then which makes tax payer liable to pay income tax even though no income actually & in fact accrues in the hands of the Assessee. One such deeming provision is section 56(2) (vii)(c).
Originally cash gift, with few exceptions, in excess of Rs. 25,000/- from non relatives was brought to tax net by the Finance Act-2004. Thereafter F.A-2006 has expanded the scope of taxing gift so as to include the
a. Immoveable property if it is received without consideration
b. Moveable property if
(i) it is received without consideration OR
(ii) It is received at a consideration which is lower than the fair market value of the property.
In the later case, the difference between the fair market value & the sale price would be taxable as income from other source.
As a result of above amendment by the F.A. -2009, the difference between fair market value & the issue price would be taxable as income of the Purchaser/ Investor.
We agree with you that the said amendment would drastically hamper the flow of funds in to private or close held companies intending to mobilize the additional equity fund. In fact, all equity infusions into private companies including private placements, in any manner whatsoever, would get affected, in one way or the other.
Whereas the intention of the Government while enacting the above provision would have been to essentially tax transfer of shares of private companies for inadequate consideration, the way the proposed amendment is worded will make RIGHT ISSUE, preferential issues & most of the acquisitions also taxable in the hands of the Investor.
From our side, we will also be taking up the matter with the relevant Authorities about the injustice that the provision may cause in the growth of the companies.
Till any further favorable amendment/ change is carried out in the Statue, Taxpayer don’t have any other options but to plan the business affairs keeping in mind the present provision of Law.
Opinion as to Query No. 2:
1. Issue of Bonus shares is not at all taxable in the hands of recipient. The same is neither taxable as “Capital Gain Income” nor as “Income from Other Source”.
2. The 2nd part of your query is aptly elaborated in opinion to query No. 1 above. The ABC Pvt Ltd will be issuing shares @ 20/- per Shares whereas the Fair Value of the share comes to Rs. 40/- per shares. This could be by issue of Right Shares or by way of fresh issue of capital to the new investor.
3. The tax treatment in such case would be as under:
a] Issue of New Shares to Employees:
The difference of Rs. 20/- per shares would be taxable as perquisite in the hands of employee.
b] Issue of New Shares to Non-Employees:
The difference of Rs. 20/- per shares (i.e., the issue price & the Fair value would be taxable in the hands of the recipient as “Income from Other source” u/s 56(2)(vii). The way in which the provision is worded, even rights issues of shares, at prices less than the fair market values, would be covered.
Query 3]
I want to ask one query regarding tax deduction. Can I mention my sister child name under 80DD (she is mentally handicapped- 40%) for exemption of tax because my sister is widow and she and her child totally depend on me. Kindly help me.
[riteshkharkar@gmail.com]
Opinion:
1. Deduction under this section is available to an individual/HUF who incurs any expenditure for the medical treatment, training and rehabilitation of a disabled dependant.
2. For the purpose of section 80DD, the term 'dependent' as mentioned above, refers to the spouse, children, parents, brothers & sisters of the individual.
3. Expenses towards the treatment of your Sister Children will not enable you to claim the deduction u/s 80DD.
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