Section 56(2)(viib) — Income from Other Sources

Section 56(2)(viib) of the Income-tax Act, 1961, addresses the taxation of share premium received by a closely held company. This section applies when a company issues shares at a price exceeding the fair market value (FMV) of the shares. The excess amount over the FMV is considered as 'income from other sources' and is taxable in the hands of the company. The provision aims to curb the practice of companies receiving unaccounted money under the guise of share premium. The statutory test involves determining the FMV of the shares, which can be done using methods prescribed under the Act, such as the Discounted Cash Flow (DCF) method or the Net Asset Value (NAV) method. The burden of proof lies with the company to justify the share premium received. This section is significant in practice as it ensures transparency and accountability in the valuation of shares and prevents tax evasion through inflated share premiums.

Common Litigation Flashpoints

1. Dispute over the method used for determining FMV
2. Challenges in justifying the premium received
3. Disagreement on the applicability of section to certain transactions
4. Interpretation of 'closely held company'

Judgments on Section 56(2)(viib) — Income from Other Sources

• Assistant Commissioner of Income-tax vs M/s Chiripal Poly Films Ltd. — ITAT,
  The DCF method is an acceptable method for share valuation under Rule 11UA, and the onus under Section 68 is discharged if the assessee provides sufficient documentation to prove identity, creditworth
• Maxopp Investment Ltd vs Commissioner of Income Tax, New Delhi — SC,
  Section 14A mandates the disallowance of expenditure incurred in relation to exempt income, applying the principle of apportionment.
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.
• Aditya Birla Nuvo Limited vs The Deputy Director of Income-tax — HC,
  The beneficial ownership of shares, despite being registered in the name of a permitted transferee, determines the taxability of capital gains in India.