Share Premium treatment for start-up companies
Table of Content
- Taxability of excess consideration received on shares issued at a premium
- Exemption to a start-up company
- Who should be considered as a start-up?
- Exemption for the purpose of clause (viib) of sub-section (2) of section 56 of the Act
- Section 56 (2(viib)) doesn’t apply in this case.
- In the light of the above, the following procedure is laid down with regard to the assessment of such startup entities involving the issue of section 56(2)(viib).
1.Taxability of excess consideration received on shares issued at a premium
Any excess premium received by a company is chargeable to tax under the head income
from other sources if the following conditions are satisfied:
(a) Shares (equity or preference shares) are issued by a closely held company;
(b) The consideration for the issue of shares is received from any person (resident or nonresident);
(c) The consideration received for the issue of shares exceeds the face value and fair market
value of shares.
If the above conditions are satisfied, the consideration received exceeding the fair market
value of the share shall be taxable in the hands of the issuer company.
A closely held company(a company in which the public is not substantially interested) is a company in which the public is not substantially interested.
In the following cases, this provision shall not apply:
(a) The consideration is received by a Venture Capital Undertaking from a Venture Capital
Company, Venture Capital Fund, Category-I or Category-II Alternative Investment
Fund (AIF); or
(b) The company is an eligible start-up fulfilling conditions as prescribed in Notification
No. GSR 127 (E) [F.NO.5 (4)/2018-SI], Dated 19-2-2019
Exemption to a start-up company
A start-up recognised by DPIIT gets immunity from the provisions of Section 56(2)(viib)
if it fulfils the conditions specified below.
The aggregate amount of paid-up share capital and share premium of the start-up, after the
issue or proposed issue of shares, should not exceed Rs. 25 crores.
While calculating this threshold limit, the issue of shares to the following persons shall not be included:
(a) A non-resident person;
(b) Venture Capital Company;
(c) Venture Capital Fund; and
(d) A company whose shares are frequently traded within the meaning of SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011 and whose net worth exceeds Rs. 100 crore or turnover exceeds Rs. 250 crores for the financial year preceding the
year in which shares are issued.
Who should be considered as a start-up?
An entity shall be considered as a Startup:
i. Upto a period of ten years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
ii. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees.
iii. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
Exemption for the purpose of clause (viib) of sub-section (2) of section 56 of the Act
4. A Startup shall be eligible for notification under clause (ii) of the proviso to clause (viib) of
sub-section (2) of section 56 of the Act and consequent exemption from the provisions of that clause, if it fulfills the following conditions:
(i) it has been recognised by DPIIT under para 2(iii)(a) or as per any earlier notification on the
Subject
(ii) aggregate amount of paid up share capital and share premium of the startup after issue or
proposed issue of share, if any, does not exceed, twenty five crore rupees:
Provided that in computing the aggregate amount of paid up share capital, the amount of paid up share capital and share premium of twenty five crore rupees in respect of shares issued to any of the following persons shall not be included─
(a) a non-resident; or
(b) a venture capital company or a venture capital fund;
Provided further that considerations received by such a startup for shares issued or proposed to be issued to a specified company shall also be exempt and shall not be included in computing the aggregate amount of paid up share capital and share premium of twenty five crore rupees.
iii) It has not invested in any of the following assets,─
(a) building or land appurtenant thereto, being a residential house, other than that used by the
Startup for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
(b) land or building, or both, not being a residential house, other than that occupied by the Startup for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business;
(c) loans and advances, other than loans or advances extended in the ordinary course of business
by the Startup where the lending of money is substantial part of its business;
(d) capital contribution made to any other entity;
(e) shares and securities;
(f) a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which
exceeds ten lakh rupees, other than that held by the Startup for the purpose of plying, hiring,
leasing or as stock-in-trade, in the ordinary course of business;
(g) jewellary other than that held by the Startup as stock-in-trade in the ordinary course of
business;
(h) any other asset, whether in the nature of capital asset or otherwise, of the nature specified in
sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of
section 56 of the Act.
2. Section 56 (2(viib)) doesn’t apply in this case.
In exercise of the powers conferred by clause (ii) of the proviso to clause (viib) of sub-section (2) of section 56 of the Income-tax Act, 1961 (43 of 1961) and in supersession of the notification
of Government of India in the Ministry of Finance, Department of Revenue, Central Board of Direct Taxes published in the Gazettee of India, Extraordinary, Part-II, Section (3), Sub-section (ii) vide number S.O. 2088(E) dated 24th May, 2018, except as respect things done or omitted to be done before such supersession, the Central Government, hereby notifies that the provisions of clause (viib) of sub-section (2) of section 56 of the said Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the said consideration has been received from a person, being a resident, by a company which fulfils the conditions specified in para 4 of the notification number G.S.R. 127(E), dated the 19th February, 2019 issued by the Ministry of Commerce and Industry in the Department for Promotion of Industry and Internal Trade and published in the Gazette of India, Extraordinary, Part-II, section 3, Sub-Section (i) on 19th February, 2019 and files the declaration referred to in para 5 of the said notification of the Department for Promotion of Industry and Internal Trade.
In the light of the above, the following procedure is laid down with regard to the assessment of such startup entities involving the issue of section 56(2)(viib).
(i) Where the Startup Company has been recognised by the DPIIT but the case is selected under "limited scrutiny" on the single issue of applicability of section 56 (2)(viib), no verification on such issues will be done by the AOs during the proceedings u/s 143 (3)/147 of the I.T. Act, 1961 and the contention of such recognized Startup Companies on the issue will be summarily accepted.
(ii) Where the Startup Company has been recognized by the DPIIT but the case is selected under "limited scrutiny" with multiple issues or under "complete scrutiny" including the issue u/s 56(2)(viib), the issue of applicability of section 56(2)(viib) will not be pursued during the assessment proceedings and inquiry or verification with regard to other issues in such cases shall be carried out by the Assessing Officer, only after obtaining approval of his/her supervisory officer. Due procedure as per I.T. Act shall be followed with regard to other issues for which the case has been selected.
(iii) Where the Startup Company has not got DPIIT approval and the case is selected for scrutiny, inter olio on the grounds of applicability of section 56(2)(viib) or any other issue/s, then also inquiry or verification in such cases shall be carried out by the Assessing Officer, as per due procedure, only after obtaining approval of his/her supervisory officer.
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