There will be a change in Valuation Mechanism relating to valuation of unquoted equity shares for the purposes of section 56 and Section 50CA of the Income-tax Act, 1961 as per Draft rules issued by CBDT.
Earlier if Jewellery, artistic work, shares, securities, and immovable property are held as asset by a company whose shares are unquoted, we take Book Value as per balance sheet for the valuation of that company. Now there will be a big shift in the way valuation is being conducted at the time of transfer of the shares of the unlisted company.
CBDT has proposed that in case of valuation for the purpose of Sec 56 and Sec 50CA, following method of valuation will be applied:
- Jewellery and artistic work: 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.
- Shares and securities: fair market value of shares and securities as determined in the manner provided Rule 11UA.
- Immovable property: 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.
It may be noted that in case of cross holding of shares by group companies, there may be a big trouble as for the purpose of valuation of Investment in Shares by one company into another, we need to consider the FMV of another company and on the other hand, for the FMV of that another company we need to value the Investments by that other company into first company as per FMV of that share of first company.
Thus if “A Pvt. Ltd” holds 10000 shares of “B Pvt. Ltd.”, and “B Pvt. Ltd.” Holds 5000 shares of “A Pvt. Ltd.”, if shares of “A Pvt. Ltd” is transferred by one of its share-holder, then newly inserted Sec 50CA will apply for determining the sale consideration which says that sale consideration will be the FMV as per relevant rules. Further for the applicability of newly inserted Sec 56(2)(x), we also need to value the shares of “A Pvt. Ltd.”.
Now as per proposed rule of CBDT, for determining the FMV of shares of “A Pvt. Ltd”, we need to value the investment in “B Pvt. Ltd.” as per these rules and at the time of valuing the shares of “B Pvt. Ltd.”, we need to value the Investment in “A Pvt. Ltd.” Thus there will be a circuitous route in these cases.
The situation will be more complex if let say A co. holds shares in B Co, B Co. holds shares in C Co. and C co. further holds shares in A Co.
Further if any of these companies holds any immovable property, then for determining valuation, we need to look at the Stamp Duty Value.
Method of valuation for all other assets are same as it was earlier except to the extent those assets are covered in above three categories.
Draft of the Proposed Rule for Valuation of Shares can be referred in the following link:
Draft rules on valuation of ‘unquoted shares’ for Sec. 56(2)(x)/50CA
(Disclaimer: This write up is based on the understanding and interpretation of author and the same is not intended to be a professional advice.)
[The author is a Chartered Accountant and can also be reached at goyalcanitin@gmail.com]
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