Background:
Section 50CA: When an assessee transfers an unquoted equity share and the consideration received/receivable is less than "Fair Market Value (FMV)" of such share, the FMV as determined in accordance with Rule 11UA shall be deemed to be the consideration received/receivable as a result of such transfer.
Accordingly, if a seller of an unquoted share sells such shares at a price which is less than FMV, the FMV as determined under Rule 11UA shall be deemed to be regarded as sale consideration.
Section 56(2)(x): When an assessee receives any unquoted equity share for a consideration which is less than FMV of the share, the difference between FMV of such share and actual consideration paid by him (only if it is in excess of Rs. 50,000/-) shall be regarded as his "Income from Other Source" and he will be liable to pay tax on such income.
Accordingly, if buyer of an unquoted share purchases the shares at a price which is less than FMV of such share, the difference between such FMV and consideration actually paid will be regarded as his Income from Other Source.
Therefore, the Income Tax Act mandates that the transaction of an unquoted equity share must take place at a price which is at least equal to the FMV of such shares as determined under Rule 11UA.
Notification No. 61 dated 12.07.2017 which is applicable in relation to Assessment Year 2018 – 19 and subsequent years:
CBDT, vide notification no. 61, has changed the method of calculation of Fair Market value of unquoted equity share. The same is now to be determined as follows:
FMV of unquoted equity shares = (A + B + C + D – L) * (PV) / (PE) where,
A = Book value of all the assets (other than specifically mentioned below) in the Balance Sheet, as reduced by;
- Income Tax paid, less income tax refund claimed, if any;
- Any amount shown as asset including unamortised amount of deferred expenditure which does not represent the value of any asset.
B = Jewellery and Artistic work - The Price it would fetch if sold in the open market on the basis of valuation report obtained from a registered valuer;
C = Shares and Securities - FMV as determined in the same manner as provided in this rule;
Accordingly, if a Company has investment in unquoted equity shares of another Company, the valuation of such shares will have to be carried out in respect of such shares in another Company in the same manner as provided in this rule.
D = Immovable Property – Value adopted for the purpose of payment of stamp duty;
L = Book value of liabilities shown in the Balance Sheet, but does not include –
- Paid up Capital
- Reserves and Surplus (including negative figure)
- Amount set aside for payment of dividend
- Provision for taxation
- Provision for meeting any liability other than ascertained liability
- Contingent liabilities, other than arrears of dividend on cumulative preference shares.
PV = Paid up value of such equity shares;
PE = Total amount of paid up equity shares as shown in Balance Sheet.
Originally published July 2017
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