Issuing shares for a price exceeding its FMV is taxable in the hands of the company: Angel Tax

Issuing shares for a price exceeding its FMV is taxable in the hands of the company: Angel Tax


Issuing shares for a price exceeding its FMV is taxable in the hands of the company: Angel Tax

 A person doesn’t know how much he has to be thankful for until he has to pay taxes on it- Anonymous

Numbers of initiatives are taken in last couple of years to control the menace of black money.Provisions are incorporated in the Income Tax Act-1961 not only to control the generation & circulation of black money but also to control its flow in to white economy by unscrupulous mechanism. 

One such measure is the introduction of section 56(2)(viib) more popularly known as the ‘Angel Tax’ provision. Angel tax refers to income tax payable on capital raised by unlisted companies by issuing shares wherein actual value realised against issue of shares exceeds its fair market value.

By virtue of section 56(2)(viib), where a company (not being a company in which the public are substantially interested) receives from any resident person any consideration for issue of shares value of which exceeds the Fair Market Value (FMV) of such shares then the difference between the actual consideration received & its FMV is deemed as income of the recipient company & is chargeable to tax as “Income from Other Source”. For instance the company has issued shares for Rs. 25/- (Shares with face value of Rs. 10 each at a premium of Rs. 15/-) as against its FMV of Rs. 12/- then Rs. 13/- will be taxable as income in the hands of the company as income. Action against black money is an on-going process. In an attempt to control it, even certain amount is made taxable even though it is not actually ‘income’ in common parlance.

The FMV of the shares shall be higher of the following:

  1. The value as determined in accordance with the Rule 11U and 11UA of the Income Tax, Rules, 1962 or,
  3. Any other value as may be substantiated by the company to the satisfaction of the Assessing Officer based on the value, on the date of issue of shares of its assets, including intangible assets being goodwill, know-how,  patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.


Rule 11UA referred above provides for the mode of computation of FMV of unquoted equity shares on the valuation date in the following manner [in any mode -(a) or (b) elaborated below at the option of the Company]:

  1. FMV of unquoted equity shares shall be calculated simply by ascertaining “Book value of Assets (Less) Book value of Liabilities.” Items which need to be included in the book value of assets & book of liabilities is given in Rule 11UA. [Carefully note the word ‘Book Value’]
  2. The fair market value of the unquoted equity shares as determined by a Merchant Banker as per Discounted Free Cash Flow (DCF) Method. Earlier, CA’s were also permitted to determine the FMV of such equity shares. However, w.e.f 24.05.2018, only Merchant Banker is authorized to determine the FMV of such equity shares.


Exemption from above referred rules is provided (a) on investments by venture capital funds or (b) investments in certain eligible start-ups. However, definition of start-ups for this purpose is very restrictive & is eligible only for the first 7 years subject to the conditions that it 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. Further, its turnover should not exceed Rs. 25 crore. This makes only a few companies eligible for the exemption. In such cases, cases, nothing would be taxable even if the company issues equity shares exceeding its FMV


There is other side of the story as well. As discussed above, if share are issued by the company for a price exceeding its FMV then difference is taxable in the hand of company u/s 56(2)(viib). However, if the shares are issued by such company below its FMV, then the amount is taxable u/s 56(2)(x) in the hands of the person investing the amount. In short, if share are issued at higher price then difference would be taxable in the hands of the company and if it is issued at a lower price then the difference would be taxable in the hands of the shareholder.


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CA. Naresh Jakhotia

Chartered Accountants

Nagpur ! Mumbai ! Kolkata !  Pune ! Goa

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