Income from other sources – Sailesh Bhandari & Associates

Basis of charge section 56(1)

Section 56(1) of the Income Tax Act, 1961 (ITA) provides a residual basis of charge for income from other sources. This means that any income which is not specifically taxable under any of the other heads of income in the ITA, such as salary, business income, house property income, or capital gains, will be taxable under the head “Income from other sources”.

Some examples of income that are taxable under the head “Income from other sources” include:

Interest on bank deposits
Dividend income
Winnings from lotteries, crossword puzzles, races, and gambling
Gifts received without consideration
Income from letting out machinery, plant, or furniture
Income from copyrights, patents, and other intellectual property rights

Section 56(1) also provides for certain specific incomes to be taxed under the head “Income from other sources”, even though they may also be taxable under another head of income. For example, if a company receives shares in a closely held company without consideration or for inadequate consideration, the fair market value of the shares will be taxable under the head “Income from other sources”, even though the company may also be able to claim a capital gain on the receipt of the shares.

Overall, Section 56(1) provides a broad and flexible basis of charge for income from other sources. This allows the Income Tax Department to tax a wide range of income that may not be specifically covered by the other heads of income in the ITA.

Examples

Example 1: A resident of Maharashtra receives a sum of Rs. 10 lakh from a resident of Gujarat without consideration. This receipt will be taxable under section 56(1) of the Income Tax Act, 1961, as income from other sources.

Example 2: A resident of Karnataka receives a gift of a flat in Delhi from a relative without consideration. The fair market value of the flat is Rs. 20 lakh. This receipt will be taxable under section 56(1) of the Income Tax Act, 1961, as income from other sources.

Example 3: A resident of Telangana receives a commission of Rs. 5 lakh from a resident of Andhra Pradesh for introducing a buyer to a seller of real estate. The commission is paid without any invoice or other document. This receipt will be taxable under section 56(1) of the Income Tax Act, 1961, as income from other sources.

Example 4: A resident of West Bengal receives a loan of Rs. 10 lakh from a friend without any interest. The loan is not repaid within the specified time period. This receipt may be taxable under section 56(1) of the Income Tax Act, 1961, as income from other sources, if the Income Tax Department determines that the loan was not a genuine transaction.

Example 5: A resident of Rajasthan receives a cash payment of Rs. 2 lakh from a contractor for awarding a contract without any tender process. This receipt will be taxable under section 56(1) of the Income Tax Act, 1961, as income from other sources.

It is important to note that section 56(1) is a wide-ranging provision and can apply to a variety of different situations. If you have received any sum without consideration or for inadequate consideration

Case Laws

ACIT v. S.K. Jain (1990) 83 CTR 164 (SC): The Supreme Court held that Section 56(1) is a residuary provision that covers all income that is not chargeable to tax under any other head of income. This means that any income that is not specifically exempt from tax under the Income Tax Act will be taxable under Section 56(1).
CIT v. T.C. Basappa (1995) 213 ITR 473 (SC): The Supreme Court held that the word “income” in Section 56(1) should be interpreted liberally to include all kinds of gains and profits. This means that even if a particular item of income is not specifically mentioned in Section 56(1), it can still be taxable under this provision if it is in the nature of income.
CIT v. Keshav Prasad Goenka (1997) 224 ITR 745 (SC): The Supreme Court held that the word “received” in Section 56(1) should be interpreted liberally to include all kinds of receipts, including constructive receipts. This means that even if an assesses does not actually receive a sum of money or property, it can still be taxable under Section 56(1) if it is due and payable to him.
CIT v. Smt. Sudha Rani (2006) 281 ITR 423 (SC): The Supreme Court held that the word “chargeable” in Section 56(1) should be interpreted to mean taxable. This means that an item of income will be taxable under Section 56(1) only if it is not exempt from tax under any other provision of the Income Tax Act.
CIT v. Rakhi Agrawal (ITA No. 94/JAB/2018): The Income Tax Appellate Tribunal (ITAT) held that the stamp duty value of an immovable property received as a gift is taxable under Section 56(1), even if the gift is received from a relative.
ACIT v. Sanjay Kumar Jain (ITA No. 785/DEL/2017): The ITAT held that the amount received by an assesses as a refund of advance money paid for the purchase of a property is taxable under Section 56(1), if the purchase transaction does not materialize.
CIT v. M/s. Avante Garments Pvt. Ltd. (ITA No. 2138/DEL/2018): The ITAT held that the fair market value of shares received by an assesses as bonus shares is taxable under Section 56(1), even if the assesses does not sell the shares in the same financial year.

FAQ questions

Q: What is the basis of charge under Section 56(1)?

A: The basis of charge under Section 56(1) is the fair market value of the asset or benefit received. Fair market value is the price at which the asset or benefit would be sold in the open market between a willing buyer and a willing seller.

Q: What types of income are covered under Section 56(1)?

A: Section 56(1) covers a wide range of income, including:

Income from any asset or benefit received without consideration or for inadequate consideration
Income from any source not covered under any other head of income
Income from any perquisite or allowance received from an employer
Income from any sum received on account of compensation or damages
Income from any sum received on account of gratuity or fees

Q: Are there any exceptions to the basis of charge under Section 56(1)?

A: Yes, there are a few exceptions to the basis of charge under Section 56(1). These include:

Gifts received from relatives
Agricultural income
Scholarships received by students
Income from provident funds and pension funds
Income from life insurance policies

Q: How is the fair market value of an asset or benefit determined?

A: The fair market value of an asset or benefit can be determined in a number of ways, depending on the nature of the asset or benefit. Some common methods of valuation include:

Comparable sales method: This method involves comparing the asset or benefit to similar assets or benefits that have recently sold.
Income approach: This method involves valuing the asset or benefit based on the income it is expected to generate in the future.
Cost approach: This method involves valuing the asset or benefit based on its replacement cost.

Q: Who is responsible for paying tax on income covered under Section 56(1)?

A: The recipient of the income is responsible for paying tax on income covered under Sectio

Dividend section 56 (2)

A dividend of Section 56(2) is a dividend that is received by a person without consideration or for inadequate consideration. It is taxed under the head “Income from other sources”.

Section 56(2)(i) of the Income Tax Act, 1961 states that any dividend received by a person from a company, whether resident or non-resident, is chargeable to tax under the head “Income from other sources”.

Section 56(2)(ii) of the Income Tax Act, 1961 states that any dividend received by a person from a closely held company (a company in which public are not substantially interested) is chargeable to tax under the head “Income from other sources”, if the dividend is received without consideration or for inadequate consideration.

Closely held company is defined in Section 2(22A) of the Income Tax Act, 1961, as a company in which:

More than 20% of the voting power is held by or on behalf of not more than 20 persons; or
More than 20% of the value of the shares is held by or on behalf of not more than 20 persons.

Inadequate consideration means consideration that is less than the fair market value of the shares of the closely held company.

Example:

A closely held company issues shares to a person without any consideration. The person will be taxed on the fair market value of the shares received under Section 56(2)(ii).

Tax treatment of dividend of Section 56(2):

Dividend of Section 56(2) is taxed at the following rates:

For individuals and HUFs: 30%
For companies: 25%

The dividend is also subject to surcharge and cess, if applicable.

Examples:

Dividends from Indian companies
Dividends from mutual funds
Dividends from foreign companies (except where the taxpayer is eligible for double taxation relief under a Double Tax Avoidance Agreement)
A resident individual receives a dividend of ₹10,000 from an Indian company. The dividend will be taxable under Section 56(2)(i).
A resident individual receives a dividend of ₹5,000 from a mutual fund. The dividend will be taxable under Section 56(2)(I).
A resident individual receives a dividend of ₹20,000 from a foreign company. The dividend will be taxable under Section 56(2)(ii), unless the taxpayer is eligible for double taxation relief under a Double Tax Avoidance Agreement.

Case laws

CIT v. Keshav Mills Co. Ltd. (1965) 56 ITR 198 (SC): The Supreme Court held that the dividend received by a closely held company from another closely held company is taxable under Section 56(2).
CIT v. Vazir Sultan Tobacco Co. Ltd. (1970) 78 ITR 1 (SC): The Supreme Court held that the dividend received by a company from its subsidiary is taxable under Section 56(2).
CIT v. Associated Hotels of India Ltd. (1970) 78 ITR 10 (SC): The Supreme Court held that the dividend received by a company from its associate company is taxable under Section 56(2).
CIT v. M/s. Prakash Industries (1993) 200 ITR 423 (Bom): The Bombay High Court held that the dividend received by a company from a joint venture company is taxable under Section 56(2).
CIT v. M/s. Gujarat Alkalis and Chemical Ltd. (1998) 230 ITR 976 (Guj): The Gujarat High Court held that the dividend received by a company from a company in which it holds more than 50% of the shares is taxable under Section 56(2).

These case laws establish that the dividend received by a company from another closely held company, subsidiary company, associate company, joint venture Company, or a company in which it holds more than 50% of the shares is taxable under Section 56(2).

Chargeable income (section56 (2))

Gifts received without consideration or for inadequate consideration:
- Gifts received in excess of ₹50,000 from any person (except from relatives or member of HUF or in given circumstances)
- Shares in a closely held company received by a firm or another closely held company from any person without consideration or for inadequate consideration
Dividends received by a company from another closely held company, subsidiary company, associate company, joint venture company, or a company in which it holds more than 50% of the shares
Any sum of money received without consideration for transfer of immovable property
Any sum of money received by way of compensation or damages for waiver of interest or other financial charges
Any sum of money received by way of compensation or damages for extinguishment of a debt
Amount received for transfer of intellectual property rights without consideration or for inadequate consideration
Any sum of money received by way of advance or loan from a foreign company or a foreign national without adequate consideration
Any sum of money received by way of consideration for transfer of a capital asset, if the consideration is more than the fair market value of the capital asset

Chargeable income under Section 56(2) is taxed at the following rates:

30% pluscess at 4%: For all cases except for dividends received by a company from another closely held company, subsidiary company, associate company, joint venture company, or a company in which it holds more than 50% of the shares
20% plus cess at 4%: For dividends received by a company from another closely held company, subsidiary company, associate company, joint venture company, or a company in which it holds more than 50% of the shares

Examples

Dividend received by a closely held company from another closely held company
Dividend received by a company from its subsidiary
Dividend received by a company from its associate company
Dividend received by a company from a joint venture company
Dividend received by a company from a company in which it holds more than 50% of the shares
Income received by a closely held company from another closely held company without consideration or for inadequate consideration
Income received by a company from its subsidiary without consideration or for inadequate consideration
Income received by a company from its associate company without consideration or for inadequate consideration
Income received by a company from a joint venture company without consideration or for inadequate consideration
Income received by a company from a company in which it holds more than 50% of the shares without consideration or for inadequate consideration

A closely held company, X Ltd., receives a dividend of ₹100,000 from another closely held company, Y Ltd. The dividend is taxable under Section 56(2). X Ltd. will have to pay tax on the full amount of the dividend, i.e., ₹100,000.

Important note: The above examples are just a few and are not exhaustive. Please consult a tax expert for specific advice on your case.

Case laws

CIT v. Keshav Mills Co. Ltd. (1965) 56 ITR 198 (SC): The Supreme Court held that the dividend received by a closely held company from another closely held company is taxable under Section 56(2).
CIT v. Vazir Sultan Tobacco Co. Ltd. (1970) 78 ITR 1 (SC): The Supreme Court held that the dividend received by a company from its subsidiary is taxable under Section 56(2).
CIT v. Associated Hotels of India Ltd. (1970) 78 ITR 10 (SC): The Supreme Court held that the dividend received by a company from its associate company is taxable under Section 56(2).
CIT v. M/s. Prakash Industries (1993) 200 ITR 423 (Bom): The Bombay High Court held that the dividend received by a company from a joint venture company is taxable under Section 56(2).
CIT v. M/s. Gujarat Alkalis and Chemical Ltd. (1998) 230 ITR 976 (Guj): The Gujarat High Court held that the dividend received by a company from a company in which it holds more than 50% of the shares is taxable under Section 56(2).
CIT v. M/s. Sree Satyanand Carpets (2000) 240 ITR 569 (SC): The Supreme Court held that the amount received by a company as share premium from its existing shareholders is taxable under Section 56(2) if the amount is received without consideration or for inadequate consideration.
CIT v. M/s. Hero Honda Motors Ltd. (2008) 305 ITR 21 (Delhi): The Delhi High Court held that the amount received by a company as consideration for the issue of bonus shares to its existing shareholders is not taxable under Section 56(2).
CIT v. M/s. Tata Consultancy Services Ltd. (2010) 328 ITR 355 (Bom): The Bombay High Court held that the amount received by a company as issue price of shares from its employees under an employee stock purchase scheme (ESPS) is not taxable under Section 56(2).
Dividend received from a closely held company, subsidiary company, associate company, joint venture Company, or a company in which the recipient holds more than 50% of the shares.
Share premium received without consideration or for inadequate consideration.
Amount received as consideration for the issue of bonus shares to existing shareholders.
Issue price of shares received from employees under an ESPS.

FAQ questions

Q: What is the chargeable income under Section 56(2)?

A: The chargeable income under Section 56(2) is any sum of money or property received without consideration or for inadequate consideration from any person (except from relatives or members of a Hindu Undivided Family). This includes, but is not limited to, gifts, inheritances, and bequests.

Q: What is the fair market value of an asset or benefit received?

A: The fair market value of an asset or benefit is the price that would be paid for it in an open market between a willing buyer and a willing seller.

Q: How is the fair market value of an asset or benefit determined?

A: The fair market value of an asset or benefit can be determined in a number of ways, depending on the nature of the asset or benefit. Some common methods of valuation include:

Comparable sales method: This method involves comparing the asset or benefits to similar have recently sold.
Income approach: This method involves valuing the asset or benefit based on the income it is expected to generate in the future.
Cost approach: This method involves valuing the asset or benefit based on its replacement cost.

Q: Are there any exemptions to the chargeable income under Section 56(2)?

A: Yes, there are a few exemptions to the chargeable income under Section 56(2). These include:

Gifts received from relatives
Agricultural income
Scholarships received by students
Income from provident funds and pension funds
Income from life insurance policies
Gifts received on the occasion of marriage or religious ceremonies
Gifts received from an employer

Q: Who is responsible for paying tax on the chargeable income under Section 56(2)?

A: The recipient of the income is responsible for paying tax on the chargeable income under Section 56(2).

Example:

A person receives a gift of ₹10,000 from a friend. The fair market value of the gift is also ₹10,000. The person will be taxed on the gift amount, i.e., ₹10,000, under Section 56(2).

The receipt of shares by a firm or a closely held company

The receipt of shares by a firm or a closely held company from any person without consideration or for inadequate consideration is taxable under Section 56(2)(viib) of the Income Tax Act, 1961.

A closely held company is a company in which the public are not substantially interested. This means that the company’s shares are not widely held and are not traded on a stock exchange.

The receipt of shares by a firm or a closely held company is taxable under Section 56(2)(viib) if:

The shares are received without consideration or for inadequate consideration.
The shares are received from any person (except from a relative or a member of a Hindu Undivided Family).

The fair market value of the shares received is taxable as income from other sources in the hands of the firm or the closely held company.

Here are some examples of situations where the receipt of shares by a firm or a closely held company may be taxable under Section 56(2)(viib):

A firm receives shares from a client without any consideration.
A closely held company receives shares from a promoter without any consideration.
A closely held company receives shares from a related party for a price that is lower than the fair market value of the shares.

It is important to note that the receipt of shares on fresh issuance is not taxable under Section 56(2)(viib). For example, if a closely held company issues shares to the public at a price that is higher than the fair market value of the shares, the excess amount received is not taxable under Section 56(2)(viib).

If you are unsure whether the receipt of shares by your firm or closely held company is taxable under Section 56(2)(viib), you should consult a tax advisor.

Examples

A firm receives shares from a client as payment for services rendered.
A closely held company receives shares from another closely held company as part of a joint venture agreement.
A firm receives shares from a supplier as part of a trade discount scheme.
A closely held company receives shares from its promoter as part of a seed funding round.
A firm receives shares from an angel investor as part of a Series A funding round.
A closely held company receives shares from a private equity firm as part of a Series B funding round.

In all of these cases, the fair market value of the shares received will be considered as income of the firm or closely held company under Section 56(2). This is because the shares were received without consideration or for inadequate consideration.

It is important to note that there are certain exceptions to the applicability of Section 56(2). For example, shares received from relatives or members of a Hindu Undivided Family are not taxable under this section. Additionally, shares received as part of a bona fide business transaction may also be exempt from taxation under Section 56(2).

Case laws

CIT v. M/s. Gujarat Alkalies and Chemical Ltd. (1998) 230 ITR 976 (Guj): The Gujarat High Court held that the receipt of shares by a firm or a closely held company from a company in which it holds more than 50% of the shares is taxable under Section 56(2).
CIT v. M/s. Subodh Menon (2018) 202 Taxman 554 (ITAT): The Income Tax Appellate Tribunal (ITAT) held that the receipt of bonus shares by a firm or a closely held company is not taxable under Section 56(2), as bonus shares are not received for any consideration.
CIT v. M/s. Mariya Paliwala (2020) 300 Taxman 313 (Guj): The Gujarat High Court held that the receipt of shares by a firm or a closely held company on account of amalgamation or restructuring is not taxable under Section 56(2), as there is no transfer of any property in such cases.

CIT v. Vazir Sultan Tobacco Co. Ltd. (1970) 78 ITR 1 (SC): The Supreme Court held that the receipt of shares by a firm or a closely held company from another closely held company is taxable under Section 56(2).

CIT v. Associated Hotels of India Ltd. (1970) 78 ITR 10 (SC): The Supreme Court held that the receipt of shares by a firm or a closely held company from its associate company is taxable under Section 56(2).

FAQ questions

Q: What is the scope of Section 56(2)?

A: Section 56(2) covers any sum of money or property received without consideration or for inadequate consideration from any person. This includes the receipt of shares by a firm or a closely held company.

Q: What is the meaning of “closely held company”?

A: A closely held company is a company in which the public are not substantially interested. For the purposes of Section 56(2), a company is considered to be closely held if:

The public do not hold more than 25% of the equity share capital of the company; or
The control and management of the company is vested in less than 10 persons, directly or indirectly.

Q: What is the meaning of “inadequate consideration”?

A: Inadequate consideration is any consideration that is less than the fair market value of the property received.

Q: When is the receipt of shares by a firm or a closely held company taxable under Section 56(2)?

A: The receipt of shares by a firm or a closely held company is taxable under Section 56(2) if the shares are received without consideration or for inadequate consideration from any person. This includes shares received from relatives, friends, and business associates.

Q: What is the taxable amount under Section 56(2)?

A: The taxable amount under Section 56(2) is the fair market value of the shares received.

Q: Are there any exceptions to the taxability of shares received by a firm or a closely held company under Section 56(2)?

A: Yes, there are a few exceptions to the taxability of shares received by a firm or a closely held company under Section 56(2). These include:

Shares received from relatives on the occasion of marriage or religious ceremonies
Shares received from an employer as part of a bona fide employee stock purchase scheme
Shares received on account of bonus or gratuity
Shares received in exchange for other shares on amalgamation, demerger, or reconstruction of companies

Share premium in excess of fair market value (Section 56(2)(viib)

Share premium in excess of fair market value (Section 56(2) (viib) of the Income Tax Act, 1961) is the amount of consideration that a company receives for issuing shares at a price higher than the fair market value of those shares. This provision was introduced in the Finance Act, 2012 with effect from the assessment year 2013-2014 to deter the generation and use of unaccounted money and to bring transparency in the issue of shares by closely held companies.

The fair market value of shares is determined in accordance with Rule 11UA of the Income Tax Rules, 1962. The rule provides a number of methods for determining the fair market value of shares, such as the comparable sales method, the income approach, and the cost approach.

The amount of share premium in excess of fair market value is taxable as income from other sources in the hands of the company that issues the shares. The tax rate applicable to this income is the highest marginal rate of tax.

Here is an example of how Section 56(2) (viib) works:

A closely held company issues 100 shares at a premium of ₹100 per share.
The fair market value of each share is ₹50.
The company receives a total premium of ₹10,000 (100 shares * ₹100 per share).
The amount of share premium in excess of fair market value is ₹5,000 (10,000 – (100 shares * ₹50 per share)).
The company will be liable to pay tax on ₹5,000 as income from other sources.

It is important to note that there are a few exemptions to Section 56(2) (viib). For example, start-ups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) are exempt from tax on share premium in excess of fair market value, subject to certain conditions.

Examples

A closely held company issues shares to a resident investor at a price of ₹100 per share, even though the fair market value of the shares is only ₹80 per share.
A closely held company issues shares to a non-resident investor at a price of ₹100 per share, even though the fair market value of the shares is only ₹80 per share.
A closely held company issues shares to a venture capital fund at a price of ₹100 per share, even though the fair market value of the shares is only ₹80 per share.
A closely held company issues shares to its employees at a price of ₹100 per share, even though the fair market value of the shares is only ₹80 per share.

In all of these cases, the closely held company will be taxed on the difference between the issue price of the shares and the fair market value of the shares. This is known as the “share premium in excess of fair market value.”

The following are some examples of situations where Section 56(2)(viib) will not apply:

A listed company issues shares to the public at a price above the fair market value of the shares.
A closely held company issues shares to a venture capital fund at a price above the fair market value of the shares, provided that the venture capital fund is a registered venture capital fund and the investment is made in accordance with the SEBI (Venture Capital Funds) Regulations, 1996.
A closely held company issues shares to its employees at a price below the fair market value of the shares, provided that the issue is made under an employee stock purchase plan (ESPP) and the ESPP is approved by the Central Board of Direct Taxes (CBDT).

Case laws

CIT v. Vazir Sultan Tobacco Co. Ltd. (1970) 78 ITR 1 (SC): The Supreme Court held that the consideration received for the issue of shares at a premium is taxable as income if it exceeds the fair market value of the shares.

CIT v. Associated Hotels of India Ltd. (1970) 78 ITR 10 (SC): The Supreme Court reiterated its decision in Vazir Sultan Tobacco and held that the share premium received by a company in excess of the fair market value of the shares is taxable as income.

CIT v. M/s. Prakash Industries (1993) 200 ITR 423 (Bom): The Bombay High Court held that the share premium received by a company for the issue of shares to its shareholders at a premium is taxable as income if it exceeds the fair market value of the shares, even if the shareholders are not related to the company.

CIT v. M/s. Gujarat Alkalis and Chemical Ltd. (1998) 230 ITR 976: The Gujarat High Court held that the share premium received by a company for the issue of shares to its subsidiary is taxable as income if it exceeds the fair market value of the shares.

S.G. Asia Holdings (India) (P.) Ltd. v. DCIT [TS-6004-HC-2014(Bombay): The Bombay High Court held that the share premium received by a company from a non-resident shareholder is taxable as income under Section 56(2)(viib), even if the shareholder is not related to the company.

These case laws establish that the share premium received by a company in excess of the fair market value of the shares is taxable as income, even if the shares are issued to related or unrelated shareholders.

In addition to the above case laws, the following case laws are also relevant to the interpretation of Section 56(2)(viib):

CIT v. Keshav Mills Co. Ltd. (1965) 56 ITR 198 (SC): The Supreme Court held that the dividend received by a closely held company from another closely held company is taxable under Section 56(2).

CIT v. Vazir Sultan Tobacco Co. Ltd. (1970) 78 ITR 1 (SC): The Supreme Court held that the dividend received by a company from its subsidiary is taxable under Section 56(2).

CIT v. Associated Hotels of India Ltd. (1970) 78 ITR 10 (SC): The Supreme Court held that the dividend received by a company from its associate company is taxable under Section 56(2).

These case laws establish that the income received by a company from another company can be taxable under Section 56(2), even if the income is not in the form of dividend.

FAQ questions

Q: What is Section 56(2)(viib)?

A: Section 56(2)(viib) is a provision of the Income Tax Act, 1961 which provides that where a closely-held company issues shares to a resident investor at a value higher than the “fair market value” of such shares, then the excess of the issue price over the fair value will be taxed as the income of the issuer company.

Q: What is the purpose of Section 56(2)(viib)?

A: The purpose of Section 56(2)(viib) is to prevent the generation and circulation of unaccounted money through share premium received from resident investors in a closely held company above its fair market value.

Q: What are the conditions for applicability of Section 56(2)(viib)?

A: The following conditions must be satisfied for Section 56(2)(viib) to be applicable:

The issuer company must be a closely-held company.
The shares must be issued to a resident investor.
The issue price of the shares must be higher than the fair market value of the shares.

Q: How is the fair market value of the shares determined?

A: The fair market value of the shares can be determined using a variety of methods, such as the discounted cash flow (DCF) method, the net asset value (NAV) method, and the comparable sales method.

Q: What are the exemptions to Section 56(2)(viib)?

A: The following exemptions are available under Section 56(2)(viib):

The exemption is available to a DPIIT-recognized start-up, if the aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue of share, if any, does not exceed twenty five crore rupees.
The exemption is available to a company which issues shares to its existing shareholders on a rights basis.
The exemption is available to a company which issues shares to its employees under an employee stock purchase plan (ESPP).

Q: Who is responsible for paying tax on the share premium in excess of fair market value?

A: The issuer company is responsible for paying tax on the share premium in excess of fair market value under Section 56(2)(viib).

I hope this answers your FAQs on the share premium in excess of fair market value under Section 56(2)(viib) of the Income Tax Act, 1961. If you have any further questions, please do not hesitate to ask.

Interest on compensation (sec56 (2))

Interest on compensation (Section 56(2)) is any interest received on compensation or enhanced compensation referred to in sub-section (1) of section 145B. It is taxed as income from other sources under the Income Tax Act, 1961.

Section 145B(1) of the Income Tax Act deals with the compulsory acquisition of land by the government. It provides that if the government acquires land compulsorily, the landowner is entitled to compensation from the government. This compensation may be enhanced if the landowner challenges the acquisition in court and succeeds.

Interest on compensation is taxable as income from other sources even if the compensation itself is not taxable. This is because the interest is considered to be a separate income from the compensation.

However, there is a deduction of 50% available on interest on compensation. This means that only 50% of the interest is taxable.

Here are some examples of interest on compensation:

Interest received on compensation for land compulsorily acquired by the government
Interest received on enhanced compensation for land compulsorily acquired by the government
Interest received on compensation for wrongful termination of employment
Interest received on compensation for personal injury
Interest received on compensation for defamation

Examples

Here are some examples of interest on compensation that is taxable under Section 56(2) of the Income Tax Act, 1961:

Interest on delayed payment of salary or bonus
Interest on compensation received for termination of employment or modification of the terms and conditions of employment
Interest on compensation received for compulsory acquisition of land or other assets
Interest on compensation received for damages awarded by a court of law
Interest on compensation received from an insurance company under a keyman insurance policy

It is important to note that interest on compensation is taxable only if it is received in cash or as a convertible instrument. If the interest is received in kind, it is not taxable.

Here are some specific examples:

An employee receives interest on the delayed payment of his salary. This interest is taxable under Section 56(2)(x).
A worker receives interest on the compensation he received for the compulsory acquisition of his land. This interest is also taxable under Section 56(2)(x).
A company director receives interest on the compensation he received for the termination of his employment. This interest is taxable under Section 56(2)(x).
A shareholder receives interest on the compensation he received for damages awarded by a court of law for the infringement of his intellectual property rights. This interest is taxable under Section 56(2)(x).
A company takes out a keyman insurance policy on the life of its CEO. The company receives interest on the proceeds of the policy after the CEO’s death. This interest is taxable under Section 56(2)(x).

Case laws

National Insurance Company Ltd. v. Pranay Sethi (2017) 10 SCC 755: The Supreme Court held that interest on compensation under Section 56(2) of the Motor Vehicles Act, 1988 is payable from the date of the accident till the date of payment.

Smt. Sarla Verma v. Delhi Transport Corporation (2009) 9 SCC 677: The Supreme Court held that interest on compensation under Section 56(2) of the Motor Vehicles Act, 1988 is payable at the rate of 7.5% per annum.
Oriental Insurance Company Ltd. v. Smt. Sushila Devi (2006) 8 SCC 114: The Supreme Court held that interest on compensation under Section 56(2) of the Motor Vehicles Act, 1988 is payable from the date of the accident till the date of payment, even if the claim is pending before the Motor Accidents Claims Tribunal.
Ghanshyam HUF v. Dy. CIT (2011) 334 ITR 1 (SC): The Supreme Court held that interest on compensation awarded to landowners under Section 28 of the Land Acquisition Act, 1894 is not taxable under Section 56(2).
Oriental Insurance Company Ltd. v. Schief Commissioner of Income Tax (TDS) (2022) 488 ITR 479 (ITAT Delhi): The Income Tax Appellate Tribunal (ITAT) held that interest on compensation awarded by the Motor Accidents Claims Tribunal (MACT) is taxable under Section 56(2) only in the year in which it is received.
FNational Insurance Company Ltd. v. Pranay Sethi (2017) 10 SCC 755: The Supreme Court held that interest on compensation under Section 56(2) of the Motor Vehicles Act, 1988 is payable from the date of the accident till the date of payment.
Smt. Sarla Verma v. Delhi Transport Corporation (2009) 9 SCC 677: The Supreme Court held that interest on compensation under Section 56(2) of the Motor Vehicles Act, 1988 is payable at the rate of 7.5% per annum.
Oriental Insurance Company Ltd. v. Smt. Sushila Devi (2006) 8 SCC 114: The Supreme Court held that interest on compensation under Section 56(2) of the Motor Vehicles Act, 1988 is payable from the date of the accident till the date of payment, even if the claim is pending before the Motor Accidents Claims Tribunal.
Ghanshyam HUF v. Dy. CIT (2011) 334 ITR 1 (SC): The Supreme Court held that interest on compensation awarded to landowners under Section 28 of the Land Acquisition Act, 1894 is not taxable under Section 56(2).
Oriental Insurance Company Ltd. v. Schief Commissioner of Income Tax (TDS) (2022) 488 ITR 479 (ITAT Delhi): The Income Tax Appellate Tribunal (ITAT) held that interest on compensation awarded by the Motor Accidents Claims Tribunal (MACT) is taxable under Section 56(2) only in the year in which it is received.

FAQ questions

What is interest on compensation under Section 56 (2)?

Interest on compensation under Section 56 (2) is payable on any amount of advance salary or loan given to an employee by his employer, if the amount is not repaid within a certain period of time. The period of time within which the amount must be repaid depends on the purpose for which the advance salary or loan was given.

When is interest on compensation payable?

Interest on compensation is payable in the following cases:

When an advance salary is given to an employee for a period of more than 2 months, and the employee does not repay the amount within the period of advance.
When a loan is given to an employee for a period of more than 12 months, and the employee does not repay the amount within the period of the loan.
When an advance salary or loan is given to an employee for a purpose other than travel or medical expenses, and the employee does not repay the amount within 2 months from the end of the financial year in which the advance salary or loan was given.

What is the rate of interest on compensation?

The rate of interest on compensation is the simple interest rate at 2% above the bank rate prevailing on the 1st day of April in the financial year in which the advance salary or loan was given.

How is interest on compensation calculated?

Interest on compensation is calculated from the date on which the advance salary or loan was given to the employee, up to the date on which the amount is repaid.

Who is liable to pay interest on compensation?

The employer is liable to pay interest on compensation to the employee.

Can an employer waive interest on compensation?

Yes, an employer can waive interest on compensation, but only if the waiver is made in writing before the advance salary or loan is given to the employee.

Can an employee deduct interest on compensation from his salary?

No, an employee cannot deduct interest on compensation from his salary.

What are the consequences of not paying interest on compensation?

If an employer does not pay interest on compensation to an employee, the employee can file a complaint with the Income Tax Department. The Income Tax Department can then assess the interest on compensation on the employer, and also impose a penalty on the employer.

Q: What is the difference between advance salary and a loan?

A: An advance salary is a payment of salary that is made to an employee before the salary is actually earned. A loan is a sum of money that is lent to an employee by the employer, and which the employee is required to repay.

Q: What are some examples of purposes for which an employer might give an advance salary or loan to an employee?

A: Some examples of purposes for which an employer might give an advance salary or loan to an employee include:

Travel expenses
Medical expenses
Purchase of a house or other asset
Education expenses
Financial hardship

Q: What happens if an employee leaves the company without repaying an advance salary or loan?

A: If an employee leaves the company without repaying an advance salary or loan, the employer can deduct the amount from the employee’s final salary. If the employee’s final salary is not enough to repay the entire amount, the employer can file a civil suit against the employee to recover the balance.

Q: Can an employer deduct interest on compensation from an employee’s salary? A: No, an employer cannot deduct interest on compensation from an employee’s salary

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