Volume 3, Issue 18

1st Sep, 2010

Tax Alert
A New Clause pertaining to Gifted Shares

The Finance Act 2010 has inserted a new clause (viia) in section 56(2) of the Income-tax Act, 1961 which provides for the tax treatment of shares acquired by firms and certain companies either free of cost or for inadequate consideration. The provisions of the newly inserted clause form the subject matter of this Tax Alert.

The important aspects of the newly inserted provisions are as under:

  • These provisions are applicable to partnership firms and companies other than a company in which public are substantially interested. Simply put, these provisions are applicable to all firms, private companies and closely held public companies.
  • The asset acquired should be shares of a private company or a closely held public company.
  • The shares are acquired without any consideration or for a consideration which falls short of their fair market value by ` Rs. 50,000/- or more.
  • Where the shares are acquired without any consideration, the fair market value of shares is treated as Income from Other Sources in the hands of the receiver. Where the shares are acquired for inadequate consideration, the difference between the fair market value and the actual consideration will be considered as ‘Income from Other Sources’, provided that the difference is more than ` 50,000.
  • These provisions are applicable from 1st June 2010 onwards.


This provision does not apply in case of acquisition of shares by way of:

  • Transfer of shares of an Indian company by an amalgamating foreign company to the amalgamated foreign company, in a scheme of amalgamation
  • Transfer of shares of an Indian company by a demerged foreign company to the resulting foreign company, in a scheme of demerger
  • Transfer of shares by a shareholder of a co-operative bank in a scheme of business re-organisation
  • Transfer by a shareholder of the shares held by him in an amalgamating company in consideration for the allotment of shares in amalgamated company

Fair Market value

The fair market value shall be determined as per Rule 11 and Rule 11UA of the Income-tax Rules, 1962.

The fair market value of unquoted equity shares = (A – L) ×  (PV)



A = Book value of the assets in Balance Sheet as reduced by:
  1. Any amount paid as advance tax under the Income Tax Act
  2. Debit balance of the Profit and Loss Account or the Profit and Loss Appropriation Account as per Balance Sheet
  3. Any other amount in the Balance Sheet which does not represent the value of any asset
L = Book value of liabilities shown in the Balance Sheet but not including the following amounts:

  1. The paid-up equity capital
  2. The amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company
  3. Reserves, by whatever name called, other than depreciation reserve
  4. Credit balance of Profit and Loss Account
  5. Provision for taxation, other than amount paid as advance tax under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto
  6. Any amount representing provisions made for meeting liabilities, other than ascertained liabilities
  7. Any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares
PE = Total amount of paid up equity share capital as shown in Balance Sheet.
PV = The paid up value of such equity shares.

The fair market value of shares other than equity shares shall be estimated to be price it would fetch if sold in the open market on the valuation date. The assessee may obtain a report from a merchant banker or a Chartered Accountant in respect of such valuation.

Where the inadequate consideration is treated as income from other sources as per this provision, the fair market value determined to compute the income chargeable to tax shall be considered as the cost of acquisition of such shares, irrespective
of the actual cost of acquisition.

SKP’s Comments

The objective behind introduction of this provision is to charge to tax the gains arising on transfer of unlisted shares for a consideration much lower than the fair market value. It is important to take into account the above provisions before any exercise of share transfer or business restructuring.