Raising Funds at a Premium? A Cautionary Advisory for Indian Startups ????

Raising Funds at a Premium? A Cautionary Advisory for Indian Startups ????There is huge confusion about the fair market value of shares & tax implications due to the overvaluation of startups. Delhi ITAT has recently delivered a judgment pertaining to shares issued at a premium. The key takeaway from ITAT judgment is the fair market value of shares which can be only determined based on future forecasts. Here's a brief summary of the judgment:

1?? Background: The matter under consideration involved the assessment of the premium value on shares, its justification, and corresponding tax implications.

2?? Decision: The ITAT upheld that the valuation of shares issued at a premium must be supported by a robust valuation methodology, aligning it with market conditions.

3?? Impact: This ruling sets a precedent, emphasizing transparency and fairness in the valuation of share premiums, and could affect future transactions in the region.

?? Key Takeaways: Careful adherence to valuation guidelines is now more critical than ever. Ensure collaboration with financial experts to understand the full impact on your business or investments.??? Understanding the Recent Judgments on Shares Issued at Premium: Key TakeawaysThe Delhi High Court and ITAT have recently passed judgments shedding light on the subject of shares issued at a premium.

Here are the essential insights that businesses and investors need to know:

1. ACIT vs. Vriddhi Infra Developers Pvt. Ltd.?(ITA No. 166/Del/2023): In this case, the ITAT held that the issue of shares at a premium is a capital transaction and does not give rise to income. The ITAT also held that the FMV of shares is determined as per Rule 11UA of the Income Tax Rules.

2. DCIT vs. Ansal Housing & Construction Ltd.?(ITA No. 316/Del/2023): In this case, the ITAT held that the genuineness of the transaction of issue of shares at a premium can be questioned by the tax authorities if there is no reasonable explanation for the premium.

3. DCIT vs. M/s Neola Global Pvt. Ltd.?(ITA No. 232/Del/2023): In this case, the ITAT upheld the addition made by the tax authorities on the ground that the issue of shares at a premium was not genuine. Capital Transaction: The issuance of shares at a premium is considered a capital transaction and does not result in income. This underscores the non-revenue nature of such transactions. Tax Implications: The share premium received by a company will only be taxable if it goes beyond the fair market value (FMV) of the shares. This has clear implications for businesses assessing their taxable income.FMV Determination: The judgment reiterates that the FMV of shares must be ascertained according to Rule 11UA of the Income Tax Rules. Adhering to this rule is essential for compliance. Genuineness of Transactions: Make sure the Valuation is not exceeding FMV (Fair Market Value)? .#DelhiHighCourt ?#ITAT ?#SharesAtPremium ?#TaxLaw ?#CorporateFinance ?#Enterslice