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500 top firms get I-T notices over preferential allotments

The income-tax department has slapped notices to around 500 top companies seeking justification on their preferential allotment of shares at a substantial premium.

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The income-tax department has slapped notices to around 500 top companies seeking justification on their preferential allotment of shares at a substantial premium.

These companies have received equity funds from their foreign parent, and in some other cases, from investors – both domestic as well as foreign.

The notices are being served under Sections 56, 148 and 133 (6) of Income Tax Act, 1961.

In the notice, taxmen have described the share subscription by foreign investors as taxable income, under Section (56) of I-T Act. Hence share premium received from the foreign shareholder is liable to 30% tax on the surplus payment.

"Section (56) of I-T Act deals with the share premium received (that is consideration received for value of shares issued which exceeds the fair market value of the shares), is charged as income and subjected to tax accordingly," said an I-T official.

But the actual reason for going against these companies indicates their dubious transactions as well.

"We are seeking justification on receipt of the premium under the light of intrinsic value of the shares. Moreover, we suspect that under the mount of share premium, companies are doing hawala transactions, by issuing fake/bogus premiums on shares," an I-T source told dna.

Preferential allotment is the process by which allotment of shares is done on a preferential basis to a select group of investors. These shares can be allotted at a substantial premium, popularly known as share premium. Share premium is the excess amount investors/shareholders pay to the company over and above the face value of the share.

dna has learnt that besides overseas transactions, the domestic ones are also suspicious.

"The income-tax department has come across dozens of Kolkata-based companies that have received funds from Delhi. The probe is still underway," said the source.

"Tax laws allow the department to inquire the identity of an investor, sources of fund and genuineness of a deal. This is why we are questioning the suspicious deals," said a source.

However, under section 68 of the I-T Act, if the Indian subsidiary has established the identity of the foreign investor and the capacity to invest, then valuation and genuineness of the transaction should not be tested.

dna has also learnt that there is a lack of clarity within the department as well, especially after Bombay High court order in the Vodafone case, which clearly said that a shareholder is free to invest at the price of his calling.

"We have raised the issue in front of the revenue secretary on taxing the share premium by private firms. They assured us that the Central Board of Direct Taxes (CBDT) would soon come up with a clarification," said a senior income-tax official.

Apart from share premium by foreign investors, the taxmen are also asking for interest earnings on deemed loans (in outbound remittances), by stating that the Indian company is investing at a premium and hence the premium is a deemed loan and liable for tax.

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