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Article Details
Section 56(2) (viia) of the Income Tax Act, 1961
Section 56(2) (viia) of the Income Tax Act, 1961 talks about transfer of shares of a closely held company.
This section is applicable if the following conditions are satisfied:
1. Recipient is a firm or a closely held company (a closely held company is a company in which the public are not substantially interested i.e. companies other than listed company)
2. The asset which is received is in the form of shares in a closely held company.
3. These shares are received from any person i.e. company, HUF, individual, firm etc.
4. Such shares are received without consideration or for an inadequate consideration.
If this condition are fulfilled then the difference between the fair value of the shares & the value at which the shares are transferred will be taxable in the hands of the recipient.
If we take an example in this case:
Suppose “X” ltd is a public limited company which is not listed (i.e. public are not substantially interested in this company). Another company “Y” ltd. purchase 5000 shares of “X” ltd from Mr. Z at Rs. 15 per share. The fair value (as calculated) of the shares of “X” ltd is Rs. 30.
In this case Rs 75000 (i.e. 30-15*5000) will straight away be taxable in the hands of Y ltd. ,since it has purchased the shares of an unlisted company (X” ltd.)  at a price lower than the fair value of the shares.
Thus we can conclude:
1. That the company whose shares are sold should be an unlisted company private or public & the person purchasing the shares should also be an unlisted company private or public.
2. This clause will not be applicable in case the shares if sold are more than the fair value of the shares. In this example if the shares of “X” ltd are sold more than Rs. 30 then this clause will not be applicable.
3. This clause is not applicable if the shares of a listed company are sold.
4. This clause is also not applicable if the shares are purchased by a listed company.