VALUATION OF UNQUOTED SHARES –AN ANALYSIS OF SECTION 56 ALONG WITH RULE 11UA
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, is being transacted for inadequate consideration much below the FMV of such property. as per section 56(2)(x) of the I Tax Act specified the following will be taxable in the hands of the recipient:
|
Sr. No. |
What is taxable |
Applicable Valuation as per Rule |
Taxable Value |
|
1 |
Cash Receipt exceeding Rs. 50k by any person without any kind of consideration; |
NA |
Total amount received |
|
2 |
Receipt of immovable property without any kind of consideration; |
NA (AO may refer to valuation officer) |
Stamp duty value of such immovable property |
|
3 |
Receipt of immovable property any kind of consideration; where stamp duty value of such property exceeds such consideration (consideration paid through the banking channel will be considered); |
NA (AO may refer to valuation officer) |
Value = A less higher of the following: (i) Rs. 50k (ii) 5% of total Consideration A= Stamp Duty Value less Consideration |
|
4 |
Receipt of any property other than an immovable property without any kind of consideration; |
Rule 11UA(1) to determine Fair Market Value |
FMV, provided it exceeds Rs. 50k |
|
5 |
Receipt of any property other than an immovable property with consideration; |
Rule 11UA(1) to determine Fair Market Value |
FMV less Consideration provided FMV is exceeded than Rs. 50k |
|
6 |
Company in which the public are not substantially interested receives consideration from the resident person for the issue of equity shares that exceed the face value of equity shares |
Rule 11UA(2) to determine Fair Market Value |
FMV less Consideration provided FMV is exceeded than Rs. 50k. Fair Market Value shall be higher of: (i) As per Rule 11UA(2) (ii) Valuation report submitted by the Company based on assets including intangibles assets of the Company as on valuation date |
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 provides that where consideration for the 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 recognized 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 introduce Rule 11UAA for computing the FMV of unquoted shares of a company for the purpose of Sections 56(2)(x) and 50CA respectively.
Rule 11UA – Determination of fair market value
|
Sr. No. |
Nature of Assets/Property |
FMV will be as under |
Applicable sub-rule no. |
|
1 |
Ornamental pieces (such as rings, necklaces, earrings, and bracelets) Jewellery |
(i) Open market value on valuation date; (ii) Invoice value as on valuation date, provided purchased from the registered dealer; (iii) Valuation Report from a registered valuer. |
11UA(1)(a) |
|
2 |
drawings, paintings, Archaeological collections, sculptures, or any work of art |
(i) Open market value on valuation date; (ii) Invoice value as on valuation date, provided purchased from the registered dealer; (iii) Valuation Report from a registered valuer. |
11UA(1)(b) |
|
3 |
Quoted all kinds of shares and securities |
(i) Transaction value recorded in the recognized stock exchange if purchased through the recognized stock exchange; (ii) If transaction not carried out through recognized stock exchange then FMV will be- (a) Lowest price from the recognized stock exchange on the valuation date, and (b) Lowest price from the recognized stock exchange on the preceding date of valuation date if no transaction on the valuation date. |
11UA(1)(c)(a) |
|
4 |
Unquoted all kinds of equity shares and securities |
FMV of unquoted equity shares = (A+B+C+D – L) × (PV)/(PE) For the definition of terms |
11UA(1)(c)(b) |
|
5 |
Unquoted all kind of shares and securities other than equity shares |
The open market price on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of which such valuation. |
11UA(1)(c)(c) |
|
6 |
Company in which the public are not substantially interested receives consideration from the resident person for the issue of equity shares that exceeds the face value of equity shares |
(A – L)_ x (PV) (PE) For the definition of terms |
11UA(2)(a) |
|
7 |
Company in which the public are not substantially interested receives consideration from the resident person for the issue of equity shares that exceed the face value of equity shares |
The FMV of the unquoted equity shares is determined by a merchant banker as per the Discounted Free Cash Flow method |
11UA(2)(b) |
Note 1:
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)
WHERE:-
A= book value of all the assets (other than jewelry, 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 is shown as an asset including the unamortized amount of deferred expenditure which does not represent the value of any asset;
B = the price which the jewelry and artwork 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 the 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 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 that is not listed in any recognized stock exchange shall be estimated to be the 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.
Surmised Comments: – W. e f from 1-04-2018, when a corporation, which is not a company with a significant interest to the public, receives, in any previous year, from any individual resident, any payment for the issuance of shares that exceeds the face value of those shares, the aggregate consideration earned for those shares that exceed the FMV of the shares. FMV does not mean the real market value of the shares at which the shares could be exchanged between the parties. It is the value of the shares as calculated on the basis of the book value of the assets and liabilities of the company. FMV of unquoted equities calculated by a merchant banker in compliance with the Discounted Free Cash Flow process.
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