MAY 06, 2020

By CA Shubham Agarwal

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.

The CBDT on 05 May, 2017 issued a draft notification that proposed to 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.

On 12 July 2017, the CBDT has issued final notification in this regard. The final rules are largely similar to the draft rules and are applicable to all transactions taxable during financial year's ending commencing on or after 01 April, 2017. Thus, in case of transaction involving transfer of unquoted shares, the aforesaid computational mechanism seeks to tax the same differential amount of consideration and FMV in hands of both tax payers i.e., the transferor and transferee.

Statutory Provision for deriving FMV:

Calculation of FMV of unquoted equity shares = (A+B+C+D-L) x PV/PE, where

A - Book value of all the assets (except those mentioned at B, C and D below) as reduced by income tax paid (net of refund) and unamortized deferred expenditure

B - Fair market value of jewellery and artistic work based on the valuation report of a registered valuer

C - Fair market value of shares or securities as determined according this rule

D - Stamp duty valuation in respect of any immovable property

L - Book value of liabilities, excluding paid up equity share capital, amount set apart for undeclared dividend, reserves and surplus, provision for tax, provisions for unascertained liabilities and contingent liabilities

PV - Paid up value of equity shares

PE - Total amount of paid up equity share capital as shown in the balance sheet.

Further Explanation

B = the price that 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 = FMV of shares and securities as determined according to 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 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;

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

viii) PV= the paid up value of such equity shares;

Conclusion:

The new method of calculation of FMV of unquoted equity shares is based on adjusted Net Asset value Method with certain assets on FMV and remaining assets based on book value.

Format for Determination of Fair Market Value under Rule 11UA: