Draft Rules on Valuation of Unquoted Equity Share (Section 56/ 50CA Income-tax)

CBDT’s Draft rules relating to “Valuation of Unquoted Equity Share” based on Fair Market Value (FMV) for the purposes of section 56 and section 50CA of the Income-tax Act, 1961

Finance Act 2017 has inserted Section 50CA relating to special provisions for determining the value of consideration in the case of transfer of unquoted shares. While computing tax liability on capital gains, if it is found that the valuation is lower than the fair value, both parties will be liable to additional tax based on fair value from 1 Apr. 2018 and onwards.

Accordingly, the CBDT has issued draft rules relating to “Valuation of Unquoted Equity Share” for the purposes of section 56 and section 50CA of the Income-tax Act, 1961, i.e. valuation of unquoted equity shares based on fair market value instead of book value, and has invited comments/ suggestions from stakeholders, as under:

CBDT’s Draft rules on “Valuation of Unquoted Equity Share” (Section 56 and 50CA Income-tax)

In exercise of the powers conferred by section 50CA and sub-section 2 of section 56 read with section 295 of the Income-tax Act, 1961 ( 43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-

1. (1) These rules may be called the Income-tax (…th Amendment), Rules, 2017. (2) They shall come into force from the 1st day of April, 2018 and shall apply in relation to assessment year 2018-19 and subsequent years.

2. In the Income-tax Rules, 1962 (hereafter referred to as the Principal rules), for subclause (b) of clause (c) of sub-rule(1) of Rule 11UA, the following sub-clause shall be substituted, namely:-

“(b) 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, namely:—

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 jewellery, artistic work, shares, securities and immovable property) 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 unamortised 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, 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;

(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 incometax 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;

PE = total amount of paid up equity share capital as shown in the balance-sheet;

PV= the paid up value of such equity shares;”

3. In the principal rules, in Chapter H, after Rule 11UA, the following Rule shall be inserted, namely:-

“11UAA. For the purposes of section 50CA, the fair market value of the share, not being a quoted share, shall be determined in the manner provided in sub-clause (b) of clause (c) of sub-rule(1) of Rule 11UA.

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