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Section 56(2)(viib) - Simple Explanation with Examples

The provision says that when a closely held company (i.e. A company in which shares are held by a small number of shareholders) issues shares at a price which exceeds the Fair Value of shares then the difference between Issue Price and Fair Value is taxable under the head IFOS. However this will only take place when Issue Price of shares is above the Face Value. 

 Let’s understand this by some examples.

1) Face Value - 10 , Issue Price - 15 , Fair Value - 13
, Income = 15-13 = 2

2) Face Value - 10 , Issue Price - 7 , Fair Value - 6
, Income = NIL

3) Face Value - 10 , Issue Price - 11 , Fair Value - 8
, Income = 11-8 = 3

To summarise this you have 2 steps to perform.
First check if the Issue price exceeds Face Value. If yes then this section is attracted.
Second , now check further that is the Issue price exceeding the Fair Value. If yes then their difference will be taxable under IFOS.


 Now there are few exceptions to this section.

1) Shares issued by Venture Capital Undertaking to Venture Capital Fund and Venture Capital Company.
2) Shares issued to alternative investment fund. 
2) Shares issued by Eligible Startup.

A startup is eligible if it fulfils these 3 conditions.
a) It should be recognized by Government
b) It’s Share Capital plus Share Premium must not exceed 25 crore.
c) It should not hold some specified assets such as shares and securities , jewellery , vehicles above Rs 10 lakhs , etc. 

 If a startup claims this exemption  it subsequently violates it any other year , then the income not charged to tax earlier will be taxed in the year of violation and a penalty of 200% will also be imposed due to under reporting of income. 
I hope this clears your all doubts. Please feel free to ask questions in the comment box below.
Cheers 😊😊


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