FAQ 23. Should any consideration for the issue of shares that exceed the fair market value of the shares received by a start-up be reported in clause 29?
Reporting obligation under Clause 29 is triggered if a closely held company issues unquoted shares at a premium. In such case, the excess of the premium over the fair market value of the shares shall be taxable as income from other sources in the hands of the company.
The DPIIT’s recognised start-ups are exempted from the applicability of Section 56(2)(viib) subject to the satisfaction of various conditions prescribed under the notification issued by the DPIIT1. Therefore, Clause 29 shall apply only to closely held companies except DPIIT-recognised start-ups that satisfy the condition for exemption. If the private limited company in question is a DPIIT-recognised start-up eligible for exemption under section 56(2)(viib), the e-mail received from CBDT regarding eligibility for exemption must be verified by the tax auditor, and suitable remarks should be made regarding the applicability of the exemption and the non-applicability of Clause 29.
Section 56(2)(viib) and Notification issued by the DPIIT prescribe various conditions for a start-up to claim exemption from payment of tax under this provision. In case of failure to comply with these conditions, the consideration received from the issue of shares, as exceeding the fair market value of such shares, shall be deemed to be the income of the company chargeable to tax for the previous year in which such failure takes place. When the exemption is withdrawn, it shall be deemed that the company has underreported the income in consequence of the misreporting, and consequently, a penalty of an amount equal to 200% of tax payable on the underreported income shall be levied as per Section 270A.2