The valuation rules are specified under Rule 11U, Rule 11UA, Rule 11UAA and Rule 11UB for various provisions under the Income-tax Act, 1961 (‘the Act’) which cover valuation options in case of various assets including equity shares and other securities. These rules specify the methodology to be adopted at the time of arriving at fair market value in different scenarios and also the eligible person who can issue such valuation report. Among the various provisions of the Act, the provision u/s 56(2)(viib) states that where a company other than a company in which public are substantially interested, issue shares at more than fair market value to a resident person, then the differential value between such issue price and fair market value will be considered as income for such Company under provision of section 56(2)(viib) of the Act.
The methodology to be adopted for the purpose of arriving at the fair valuation of such shares under this section has been specifically stated under rule 11UA(2) separately for equity shares and shares other than equity shares. Sub clause (b) under this sub-rule states that the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or a Chartered Accountant in respect of such valuation. This has been amended vide Notification No. 23/2018-Income Tax dated 24 May 2018 by CBDT which states as follows:
‘2. In the Income-tax Rules, 1962 (hereinafter referred to as the principal rules), in rule 11U, clause (a) shall be omitted.
3. In the principal rules, in rule 11UA, in sub-rule (2), in clause (b), the words “or an accountant” shall be omitted.’
The word accountant has been omitted under Rule 11U and Rule 11UA(2)(b) which implies that for the purpose of section 56(2)(viib), in case of shares other than equity shares, the fair valuation certified by only merchant bankers will be valid after the date of publishing of such notification.