The income-tax department, which stumbled upon a few cases of illegal share sales involving high premium payments by companies, has initiated an investigation and drawn up a massive list of private companies since 2005.

Senior I-T officials told dna that the department would soon question companies involved and ask them to justify the premium raised, failing which the amount would be treated as income and will, therefore, be taxed.

The move to tax unexplained premium is aimed at plugging suspicious deals priced at bloated valuation to carry out shady transfer of funds. The move follows the finance ministry's instruction to all chief commissioners of I-T department across the country.


The tax department in Mumbai has initiated the probe, armed with data received from the Registrar of Companies (RoC). According to the data, a copy of which is in possession of dna, there are more than 9,400 companies which have raised premium worth Rs 4.62 lakh crore since 2005 -- in Mumbai alone.

Out of 9,400, the taxman will summon and question only unlisted companies, which is around 90%. There are around 600 companies whose value of share premium raised is more than Rs 100 crore, currently under probe.

"If the share premium charged is in excess of the intrinsic value of shares, there is a ground for imposing the provisions of Section 68 of the Income-Tax Act, 1961, which requires the assessee to explain not only the 'source' of the credit entry but also its 'nature'," said an I-T official.

"The intention is to curb money-laundering and bogus transactions where the premium an investor pays per share cannot be explained," added officials.

According to I-T sources, the department will investigate the identity of investors, sources of funds and the genuineness of deals. Hence they would seek details of respective companies in connection with share premium charged by them.

"We are examining the Company Identification Numbers (CIN) and Permanent Account Number (PAN) available with us. Each one of them would need to justify and give the reason behind raising premium," said a taxman.

"Section 56 of the 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.

"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.

Generally, companies issue shares to co- promoters, financial investors and JV partners, and often these are influenced by shareholder agreements. The pricing is on the basis of either book value of the unlisted company or its discounted cash flow which estimates its future profits. (Income Tax)