Q. What is the Applicability of Sec.56(2)(x) to Closely held company issuing shares at par through Private Placement whose breakup value is much lower than at par value ?

Question

I am a legal adviser of group of Companies. One of the group company is closely held limited company having share capital with par value of Rs.10/- each. Due to accumulated losses the break up value is bellow Rs.1/- or may be negative. To pay its Bank's outstanding of Rs.3 Crores, company proposes to raise funds through private placement by issuing shares with par value i.e. Rs.10/-.

In this situation as the break up value is much lower than par value i.e. Rs.10/-, whether provisions of Sec. 56(2)(x) of the Income tax Act or any other provision u/s 56(2) is attracted ?

Answer 1

In my view S. 56(209x) is not applicable for issue of shares. S. 56(2)(viib) is applicable for the same, which allows the shares to be issued at par in such case.