Taxpublishers.in - Monday Corner Answer to the Quiz for the week (13 May 2024)

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Quiz for the week (13 May 2024): Umesh (P) Ltd, Jaipur is a manufacturing company with a paid-up capital of Rs.1000 lacs. On 5th April, 2024 it issued equity shares through private placement for Rs.2000 lacs by issuing 200 lac equity shares of Rs.10 each and the issue price was also Rs.10 per equity share. One of the allottees is Dinesh a non-resident to whom 50,000 equity shares were issued. Briefly discuss the tax consequences of the company’s action of issuing shares. What would be your answer if the shares were issued for Rs.30 but their value as per Rule 11UA was Rs.20 per equity share? Best Answer : The company Umesh (P) Ltd not being a company in which public are substantially interested has issued shares for Rs.20 crores (200 lakh equity shares of Rs.10 each). The issue price is equal to the face value and therefore the company is not hit by section 56(2)(viib) since the consideration received does not exceed the face value of shares. The issue of shares to non-resident would not attract section 56(2)(viib). As regards the residents shareholders to whom the shares are allotted one has to make reference to section 56(2)((x) to ascertain whether the fair market value of shares of the company would exceed its face value. Reference is invited to section 11U wherein the balance sheet of the company as on the valuation date i.e. the date on which the consideration is received by the company has to be drawn and the fair market value of the shares have to be determined under section 11UA. If the company Umesh (P) Ltd has shares in any other company the balance sheet of such other company on the valuation date also has to be drawn and based on that rule 11UA has to be applied for determining the fair market value of those shares. In case the company issues each equity share for Rs.30 when the face value is Rs.10 per equity share, the provisions of section 56(2)(viib) would apply and the company has to ascertain its fair market value as per section 11UA(2) and the tax consequence would be on the company. As regards allotment of shares to non-resident there would be no consequence since section 56(2)(viib) would apply only to residents. The non-resident would be subjected to section 56(2)(x). If the fair market value of the shares of the company Umesh (P) Ltd is more than the issue price of Rs.30 per share then the persons to whom shares are allotted are also liable for tax consequence under section 56(2)(x). For example, if the fair market value of the shares upon valuation is found to be Rs.40 per share and the company has issued the shares for Rs.30 per share, the subscribers to the shares would be liable to tax under section 56(2)(x) for Rs.10 per share. So far as the company is concerned, the difference between the issue price and fair market value would be liable to tax under section 56(2)(viib).

Quiz for the week (13 May 2024):

Umesh (P) Ltd, Jaipur is a manufacturing company with a paid-up capital of Rs.1000 lacs. On 5th April, 2024 it issued equity shares through private placement for Rs.2000 lacs by issuing 200 lac equity shares of Rs.10 each and the issue price was also Rs.10 per equity share. One of the allottees is Dinesh a non-resident to whom 50,000 equity shares were issued. Briefly discuss the tax consequences of the company’s action of issuing shares.

What would be your answer if the shares were issued for Rs.30 but their value as per Rule 11UA was Rs.20 per equity share?

Best Answer :

The company Umesh (P) Ltd not being a company in which public are substantially interested has issued shares for Rs.20 crores (200 lakh equity shares of Rs.10 each). The issue price is equal to the face value and therefore the company is not hit by section 56(2)(viib) since the consideration received does not exceed the face value of shares. The issue of shares to non-resident would not attract section 56(2)(viib).

As regards the residents shareholders to whom the shares are allotted one has to make reference to section 56(2)((x) to ascertain whether the fair market value of shares of the company would exceed its face value. Reference is invited to section 11U wherein the balance sheet of the company as on the valuation date i.e. the date on which the consideration is received by the company has to be drawn and the fair market value of the shares have to be determined under section 11UA. If the company Umesh (P) Ltd has shares in any other company the balance sheet of such other company on the valuation date also has to be drawn and based on that rule 11UA has to be applied for determining the fair market value of those shares.

In case the company issues each equity share for Rs.30 when the face value is Rs.10 per equity share, the provisions of section 56(2)(viib) would apply and the company has to ascertain its fair market value as per section 11UA(2) and the tax consequence would be on the company. As regards allotment of shares to non-resident there would be no consequence since section 56(2)(viib) would apply only to residents. The non-resident would be subjected to section 56(2)(x).

If the fair market value of the shares of the company Umesh (P) Ltd is more than the issue price of Rs.30 per share then the persons to whom shares are allotted are also liable for tax consequence under section 56(2)(x). For example, if the fair market value of the shares upon valuation is found to be Rs.40 per share and the company has issued the shares for Rs.30 per share, the subscribers to the shares would be liable to tax under section 56(2)(x) for Rs.10 per share. So far as the company is concerned, the difference between the issue price and fair market value would be liable to tax under section 56(2)(viib).