Finance Act, 2017 inserted two new provisions under the Act- clause (x) under Section 56(2) and section 50CA. The said sections were inserted to deal with a situation where the property, including unquoted shares, are being transacted for inadequate consideration much below the FMV of such property.
Insertion of clause (x) in section 56(2) to provide that receipt of money or specified property by any person for inadequate consideration or without consideration from any person shall be subject to tax
NEW SECTION 50CA
Section 50CA to provide that where consideration for transfer of shares of a company other than a quoted share is less than the FMV of such share, the FMV determined as per the Rules shall be deemed to be the full value consideration for computing income under the head “capital gains”.
Explanation.—For the purposes of this section, “quoted share” means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.’.
AMEND RULE 11UA
Amend Rule 11UA and to introduce Rule 11UAA for computing the FMV of unquoted shares of a company for the purpose of Sections 56(2)(x) and 50CA respectively.
The fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner-
The fair market value of unquoted equity shares =
(A+B+C+D – L) × (PV)/ (PE)
A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by,—
(i)any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and
(ii)any amount shown as asset including the unamortized amount of deferred expenditure which does not represent the value of any asset;
B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer;
C = fair market value of shares and securities as determined in the manner provided in this rule;
D = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property;
L= book value of liabilities shown in the balance sheet, but not including the following amounts, namely:—
(i)the paid-up capital in respect of equity shares;
(ii)the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;
(iii) Reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
(iv)any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
(v) Any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
(vi) Any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;
PV= the paid up value of such equity shares;
PE = total amount of paid up equity share capital as shown in the balance-sheet
New Rule 11UAA prescribes that for the purposes of section 50CA, the FMV of the share of a company other than a quoted share, shall be determined as provided in Rule 11UA(1)(c)(b)/(c), and that the reference to valuation date in the rule 11U and rule 11UA shall mean the date on which such shares are transferred.
the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assesses may obtain a report from a merchant banker or an accountant in respect of which such valuation.