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Blog posts tagged in sec 56

As per Section 56 (viib) of the Income Tax Act, 1961, 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 that 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 treated as income in the hands of the Company.

This clause shall not apply where the consideration for issue of shares is received,

  1. by a venture capital undertaking from a venture capital company or a venture capital fund; or
  2. by a company from a class or classes of persons as may be notified by the Central Government in this behalf.

In this behalf, government vide notification number 45/2016, dated 14th June 2016, notified,  “person being resident, who make any consideration exceeding the face value for issues of shares of a start up company” as class of persons for whom above clause shall not apply. This is wonderful news to the start-ups, as the government opens the doors to issue the shares at a value more than its market value by lifting the hindrance made through above provisions.

For the purpose of this clause, a Company shall be considered as start up company up to five years from the date of its incorporation/ registration and if its turnover for any of the financial years has not exceeded Rs. 25 crore.

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