Analysis of Section 56 read with Rule 11UA – Valuation of Property, Unquoted Equity Shares or Equity Shares of a Company in which public are not substantially interested:

Section 56(2)(x) of Income tax Act, 1961 provides that following will be taxable in the hands of recipient:

Sr. No. What is taxable Taxable Value Applicable Valuation Rule
1 Receipt in cash exceeding Rs. 50,000 by any person without any consideration; Total amount received NA
2 Receipt of immovable property without consideration; Stamp duty value of such immovable property NA

(AO may refer to valuation officer)

3 Receipt of immovable property with consideration where stamp duty value of such property exceeds such consideration (consideration paid through banking channel will be considered); Value = A less higher of the following:

(i) Rs. 50,000

(ii) 5% of Consideration

A = Stamp Duty Value less Consideration

NA

(AO may refer to valuation officer)

4 Receipt of any property other than immovable property without any consideration; Fair Market Value, provided it is more than Rs. 50,000 Rule 11UA(1) to determined FMV
5 Receipt of any property other than immovable property with consideration; Fair Market Value less Consideration, provided FMV is more than Rs. 50,000 Rule 11UA(1) to determined FMV
6 Company in which public are not substantially interested receives consideration from resident person for issue of equity shares that exceeds face value of equity shares Fair Market Value less Consideration, provided FMV is more than Rs. 50,000.

FMV shall be higher of:

(i)  As per Rule 11UA(2)

(ii)  Valuation report submitted by the Company based on assets including intangibles assets of the Company as on valuation date

Rule 11UA(2) to determined FMV

Provided that this clause shall not apply to any sum of money or any property received—

(I) from any relative; or

(II) on the occasion of the marriage of the individual; or

(III) under a will or by way of inheritance; or

(IV) in contemplation of death of the payer or donor, as the case may be; or

(V) from any local authority as defined in the Explanation to clause (20) of section 10; or

(VI) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or

institution referred to in clause (23C) of section 10; or

(VII) from or by any trust or institution registered under section 12A or section 12AA 15[or section 12AB]; or

(VIII) by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution

referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or

(IX) by way of transaction not regarded as transfer under clause (i) or clause (iv) or clause (v) or clause (vi) or clause (via) or clause

(viaa) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vii) of section 47; or

(X) from an individual by a trust created or established solely for the benefit of relative of the individual; 

“Property” means the following capital asset of the assessee, namely:—

(i) immovable property being land or building or both;

(ii) shares and securities;

(iii) jewellery;

(iv) archaeological collections;

(v) drawings;

(vi) paintings;

(vii) sculptures;

(viii) any work of art; or

(ix) bullion;

“jewellery” includes—

(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.

“relative” means,—

(i) in case of an individual—

(A) spouse of the individual;

(B) brother or sister of the individual;

(C) brother or sister of the spouse of the individual;

(D) brother or sister of either of the parents of the individual;

(E) any lineal ascendant or descendant of the individual;

(F) any lineal ascendant or descendant of the spouse of the individual;

(G) spouse of the person referred to in items (B) to (F); and

(ii) in case of a Hindu undivided family, any member thereof;

“stamp duty value” means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property;

Rule 11UA – Determination of fair market value 

Sr. No. Nature of Property applicable sub-rule no. Fair Market Value (FMV) will be as under
1 Jewellery 11UA(1)(a) (i)    Open market value on valuation date;

(ii)   Invoice value as on valuation date, provided purchased from registered dealer;

(iii) Valuation Report from registered valuer.

2 Archaeological collections, drawings, paintings, sculptures or any work of art 11UA(1)(b) (i)    Open market value on valuation date;

(ii)   Invoice value as on valuation date, provided purchased from registered dealer;

(iii) Valuation Report from registered valuer.

3 Quoted shares and securities 11UA(1)(c)(a) (i)   Transaction value recorded in recognized stock exchange, if purchased through recognized stock exchange;

(ii)  If transaction not carried out through recognized stock exchange then FMV will be-

(a)  Lowest price from recognized stock exchange on valuation date, and

(b)  Lowest price from recognized stock exchange on preceding date of valuation date if no transaction on valuation date.

4 Unquoted equity shares and securities 11UA(1)(c)(b) FMV of unquoted equity shares = (A+B+C+D – L) × (PV)/(PE)

For definition of terms refer Note 1

5 Unquoted shares and securities other than equity shares 11UA(1)(c)(c) Open market price on valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of which such valuation.
6 Company in which public are not substantially interested receives consideration from resident person for issue of equity shares that exceeds face value of equity shares 11UA(2)(a) (A – L)_ x  (PV)

(PE)

For definition of terms refer Note 2

7 Company in which public are not substantially interested receives consideration from resident person for issue of equity shares that exceeds face value of equity shares 11UA(2)(b) The FMV of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash Flow method

 Note 1:

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) 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 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 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 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;

PV = the paid up value of such equity shares;

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

Note 2:

A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;

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 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 tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, 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; or

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