Valuation Requirement under Income Tax
20 November 2019
Valuation of Shares and Securities in case of fresh issuance and transfer of shares under Income Tax Act, 1961
5.1 Valuation of shares and securities u/s 56(2)(viib) (Applicable to company issuing shares and securities)
As per Section 56(2)(viib), where a private company receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value (FMV) of the shares shall be chargeable to income tax under income from other sources.
FMV as on the valuation date (VD) for issuance of shares shall be the value —
as may be determined in accordance with Rule 11UA(2) of Income Tax Rules, 1962; or or as may be substantiated by the company to the satisfaction of the Assessing Officer, whichever is higher.
5.2 Valuation of shares and securities u/s 56(2)(x)(Applicable to recipient of shares and securities)
As per section 56(2)(x)(c) where a person receives any property other than immovable property without consideration or for a consideration less than fair market value of such property by an amount exceeding Rs. 50,000, the difference between fair market value of property and consideration paid, shall be taxable in hands of recipient as income from other source.
We have summarized requirement of valuation, prescribed method for valuation and authorized valuer in different cases of the transactions relating to shares and securities covered under aforementioned sections:
| Valuation of quoted shares and securities | |||
| Type of security | Quoted Shares | Quoted Shares | Quoted Shares |
| Carried through Recognized Stock Exchange | Carried out other than through Recognized Stock Exchange | Carried out other than through Recognized Stock Exchange | |
| Transaction | NA | If valuation date is trading day | If valuation date is non-trading day |
| Applicable Rule | Rule 11UA(1)(c)(a)(i) | Rule 11UA(1)(c)(a)(ii)(a) | Rule 11UA(1)(c)(a)(ii)(b) |
| Fair Market Value | Transaction Value as recorded in stock exchange | Lowest price quoted on any recognised stock exchange on such valuation date | Lowest price quoted on any recognised stock exchange on trading day immediately preceding from valuation date |
| Prescribed Valuer | Not Prescribed | Not Prescribed | Not Prescribed |
| Valuation of unquoted shares and securities | |||
| Type of security | Unquoted equity shares | Unquoted equity shares | Unquoted securities other than equity shares |
| Transaction | In case of fresh issuance of shares | Any person receiving the share or security | Applicable for all cases |
| Applicable section and rule | Section 56 (2) (viib) read with Rule 11UA(2) | Section 56 (2) (x) read with Rule 11UA(1)(c)(b) | Section 56 (2) (viib) and (x) read with rule 11UA(1)(c)(c) |
| Method prescribed for computation of FMV | Discounted Cash Flow method (DCF) or book value method 1at the option of assesse | Book Value method 2 | Not prescribed |
| Valuer | Merchant Banker for DCF. For book value not prescribed | Not prescribed | Merchant Banker or chartered accountant |
1. Book Value Method prescribed under rule 11UA(2)(a) of Income Tax Rules, 1962 (Applicable to company issuing share or securities)
Fair market value of unquoted equity shares= (A-L) × (PV)/(PE)
where,
A= Book value of assets after certain adjustments as defined in rule
L= Book value of liabilities after certain adjustments as defined in rule
PV = Paid up value of such equity share
PE = Total amount of paid up equity share capital as shown in the balance-sheet
As per Rule 11U(b)(i), for the purpose of determining FMV using book value method, Valuation date shall be date on which property or consideration as the case may be is received by the assesse. Audited balance-sheet as drawn up on the valuation date will be considered. If balance-sheet as on valuation date is not drawn up, then balance-sheet drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the annual general meeting of the shareholders of the company may be considered.
2. Book Value Method prescribed under Rule 11UA(1)(c)(b) of Income Tax Rules, 1962 (Applicable to recipient of shares and securities)
FMV = (A+B+C+D-L) × (PV)/(PE)
where,
A= Book value of Assets (other than jewellery, artistic work, shares, securities, immovable property)
B = Fair value of jewellery and artistic work based on valuation report from registered valuer
C = FMV of shares and securities as per Rule 11UA
D = Stamp value of Immovable Property
L = Book value of liabilities after certain adjustments as defined in rule
PV = Paid up value of such equity share
PE = Total amount of paid up equity share capital as shown in the balance-sheet
As per Rule 11U(b)(ii), for the purpose of determining FMV using book value method, For Indian company, Audited Balance Sheet as drawn up on the valuation date shall be required. For other companies, Audited Balance Sheet as drawn up on the valuation date which has been audited by the auditor of the company appointed under the laws in force of the country in which the company is registered or incorporated shall be required.
Valuation date shall be date on which property or consideration as the case may be is received by the assesse.
The reader should note that in case of transfer of unquoted shares by a person at value lesser than fair market value as defined in above rule 11UA (1)(c)(b) and 11UA (1)(c)(c), the fair market value as defined in these rules shall be considered as sale consideration for such transaction. Refer Section 50CA of Income tax act read with Rule 11UAA. Read our latest blog over Implications of COVID on valuations required for Financial Reporting.
