Introduction: Unlisted public companies and private companies registered under companies Act, 2013 or erstwhile Companies Act, 1956 occupies large chunk in numbers in number of incorporated companies. As per MCA data as of January 2023 about 1.4million companies registered with the MCA, or 95% of active registered companies, were private companies.
Unquoted Equity shares
Income tax Act 1961 (Hereinafter called ‘Act’) lays down transfer of unquoted equity shares should be as per fair market value (FMV).
Unlike listed shares which are traded in stock exchanges at regular interval, prices are transparent and reasonable volume takes place, thus FMV of listed shares shall be the price traded in stock exchange. Whereas unlisted shares are traded in person or through brokers or third party, price of securities are opaque and ambiguous. So unquoted equity shares are to be valued separately as per income tax rules for arriving FMV.
Before arriving FMV, Let us see the meaning of unquoted equity shares?
Act has negatively defined it. As per Rule 11U “Quoted shares or securities” means a share or security quoted on any recognized stock exchange with regularity from time to time, where the quotations of such shares or securities are based on current transaction made in the ordinary course of business.
All unlisted equity shares having period of holding up to 24months shall be treated as short term capital assets. Others are long term capital assets. [Sec. 2(42(A)]
Valuation of Unquoted Equity shares
FMV for the purpose of capital gain tax computation formula has been lay down in Rule 11UA(1)(c)(b)
FMV = (A + B + C + D – L) × (PV)/(PE)
A – book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance sheet as reduced by—
i. Net Income tax paid/refund
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 – FMV 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. 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 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
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-paid-up value of such equity shares
PE-total amount of paid-up equity share capital as shown in the balance sheet.
Transferor may obtain a report from a merchant banker or chartered accountant for the purpose of FMV calculation.
In some circumstances transfer may takes place in value other than FMV, In such cases section 50CA Deemed full value of consideration comes into play. As per Section 50CA if consideration received or accruing as a result of transfer < FMV of such share transferred, value shall be determined in the prescribed manner. [i.e. Rule 11UA(1)(c)(c)]
Benefit of indexation cost is available for transfer on long term capital asset (incl. unlisted equity share) as per the CII of respective year.
Exemptions to capital gains
Finally, is there any exemption available from capital gain of unquoted shares?
Yes, if gains are invested as mentioned in Section 54F, but this exemption is available only to Individuals and HUF.
Conditions to avail this exemption are
i. Assessee should
-
- Purchase one residential house situated in India within a period of 1 year before or 2 years after the date of transfer or
- Construct one residential house India within 3 years from the date of transfer.
ii. Cost of new asset would be restricted to Rs.10 crores for the purpose of this section.
iii. He/she should not own more than ONE residential house on the date of transfer. (i.e. Only one residential house should be owned as on date of transfer)
iv. Assessee should not
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- Purchase any other residential house in India within a period of 2 years or
- Construct any other residential house in India within 3 years from the date of transfer of original asset.
Conclusion: Navigating capital gain taxation on unlisted equity shares involves understanding the complexities of valuation, potential exemptions, and adherence to specific conditions. Investors and taxpayers should seek professional advice for accurate compliance.
For any further information or clarifications, Author can be reached at cavpk22@gmail.com
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