A ‘startup’ company receives consideration exceed the fair market value of the shares is not chargeable to tax

A ‘startup’ company receives  consideration  exceed the fair market value of the shares  is not chargeable to tax 


A ‘startup’ company receives from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares  is not chargeable to tax under Income from other sources(Refer notification no. Notification No. 45/2016, Dated: June 14, 2016)

F.No.173/103/2016-ITA-I
Government Of India
Ministry Of Finance
Department Of Revenue
Central Board Of Direct Taxes
New Delhi

Notification No. 45/2016, Dated: June 14, 2016

In exercise of the powers conferred by the clause (ii) of the proviso to clause (viib) of sub-section (2) of section 56 of the Income-tax Act, 1961 (43 of 1961), the Central Government, hereby notifies the ‘classes of persons’ for the purposes of the said clause as being the ‘person’ defined under sub-section (31) of section 2 of the said Act, being resident, who make any consideration exceeding the face value for issues of shares of a ‘startup’ company.

Explanation. – For the purposes of this notification, “startup” shall mean a company in which the public are not substantially interested and which fulfills the conditions specified in the notification of the Government of India, Ministry of Commerce and Industry. Department of Industrial Policy and Promotion, number G.S.R. 180(E), dated the 17th February, 2016, published in the Gazette of India, Extraordinary, part II, section 3, sub-section (i), dated the 18th February, 2016.

(Rohit Garg)
Deputy Secretary to the Govt. of India

Extract of Section 56(1)(viib)(ii) of the Income Tax Act, 1961:

Income from other sources.

56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.( Heads of income, A.—Salaries.,B,C.—Income from house property.,D.—Profits and gains of business or profession, E.—Capital gains).

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :—

(viib)		where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:
		Provided that this clause shall not apply where the consideration for issue of shares is received—

(i)		by a venture capital undertaking from a venture capital company or a venture capital fund; or
(ii)		by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Notification No. 45/2016, Dated: June 14, 2016: classes of persons’ for the purposes of the said clause as being the ‘person’ defined under sub-section (31) of section 2 of the said Act, being resident, who make any consideration exceeding the face value for issues of shares of a ‘startup’ company. For the purposes of this notification, “startup” shall mean a company in which the public are not substantially interested and which fulfills the conditions specified in the notification of the Government of India, Ministry of Commerce and Industry. Department of Industrial Policy and Promotion, number G.S.R. 180(E), dated the 17th February, 2016, published in the Gazette of India, Extraordinary, part II, section 3, sub-section (i), dated the 18th February, 2016.

		Explanation.—For the purposes of this clause,—
(a)		the fair market value of the shares shall be the value—

(i)		as may be determined in accordance with such method as may be prescribed; or
(ii)		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, licences, franchises or any other business or commercial rights of similar nature,
		whichever is higher;
(b)		"venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of[Explanation] to clause (23FB) of section 10;]