Important Definition for the Understanding the provisions
“Quoted Shares” means shares quoted on any recognized stock exchanges with regularity from time to time, where the quotation of such shares is based on current transaction made in ordinary course of business.
“Unquoted Shares” means shares other than above for example-Shares of Private Limited company, Shares of Hedge Funds, Shares of Private Equity Fund etc. To be precise the shares that are not Quoted on any recognized stock exchanges.
“The Fair Market Value of unquoted shares” means the Value determined as per Rule 11UAA.
“RULE 11 UAA”
Rule 11 UAA provides the calculation of Fair Market Value as follows-
Option 1
FMV of Equity Shares= (A+B+C+D-L) *(Paid Up Value of Unquoted Equity Shares)/((Total Paid up Equity Share Capital)
Where-
A=Book Value of all Assets including Fixed Assets, Current Assets and Investments except jewelry, artistic Work, Shares & Securities and Immoveable properties.
Following shall not be included in “A”
- Advance Tax (+) TDS (+) TCS (-) Income tax Refund Claimed (Means Any Income tax refundable as per IT Returns will be Treated as ASSET)
- Debit Balance in Profit & Loss Account
- Miscellaneous Expenditure
- Discount on issue of Debentures not written off
- Unamortized amount of Deferred Expenditure not representing any asset.
B= FMV of the jewelry and artistic Work based on Valuation report of a registered valuer;
C= FMV of shares and securities computed as per this rule
D= Stamp duty Value of the immoveable property
L = Book Value of Liabilities Including
1. Preference share capital
2. Debentures
3. Loans (Secured and Unsecured)
4. Current Liabilities and ascertained Provisions
5. Depreciation Reserve
6. Dividend payable on equity shares and preference shares if such dividend has been declared before the date of transfer at AGM
7. Correct Provision for taxation-[Advance Tax (+) TDS(+) TCS(-) Income tax Refund Claimed]
8. Arrears of dividend payable in respect of cumulative preference shares even if shown as contingent liabilities
Not to Include in “L”
1. Equity share Capital
2. Dividend payable on equity shares and preference shares if such dividend has not been declared before the date of transfer at AGM.
- Credit Balance in Profit & Loss Account
1. Any Reserve eg: General Reserve, Workmen Compensation Reserve, Foreign Exchange, Fluctuation Reserve.
2. Excess provisions including excess provision for tax.
3. Provision for unascertained liabilities
- Contingent Liabilities
Option 2
Alternatively, Rule 11UAA also has an option to take Fair Market value of Unquoted equity shares as determined by Merchant Banker as per the Discounted Free Cash Flow Method.
“balance sheet” in relation to any company, Means –
1. For the Purpose of Section 56 (2) (Viib)The balance sheet of such company (Including the notes annexed thereto and forming part of the accounts) as drawn up on the Valuation date which has been audited by the auditor of the company appointed under section 24 of the companies Act, 2013 and where the balance sheet on the valuation date is not drawn up, The balance sheet (including the notes annexed thereto and forming part of the accounts)drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the annual general meeting of the Shareholders of the Company;
2. For the purposes of Section 56 (2) (X) and 50CA, the balance sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor of the company.
“Merchant Banker” means category I merchant banker registered with Security and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992.
“Registered Dealer” means a dealer who is registered under Goods and Service Act;
“Registered Valuer” Shall mean the Valuer appointed by Central Government for the purpose of Income tax Act,1961
“Valuation Date” means the date on which the property or consideration as the case may be, is received by Assessee.
“Relative”
In case of an Individual
1. Spouse of Individual
2. Brother or sister of the individual
- Brother or sister of the spouse of the individual
1. Brother or sister of either of the parents of the individual
2. Any lineal ascendant or descendant of the individual
3. Any lineal ascendant or descendant of the spouse of the individual
- Spouse of the person referred to in clause (ii) to (vi)
In case of HUF, any member thereof
Implications on Transfer of shares other than Quoted Shares for consideration lower than Fair Value
Applicable to Seller
“Section 50 CA” Special provisions for full consideration for Transfer of shares Other than Quoted Shares (Added by Finance Act, 2017)
Where the consideration received or accruing as a result of the transfer by an assessee of a Capital Asset, being share of a company other than a quoted share, is less than the fair market value of such share determined as per Rule 11UAA, the value so determined shall for the purposes of section 48, be determined to be full value of consideration received or accruing as a result of such transfer.
Analysis of Section 50CA
- Section 50CA has been inserted to provide that where consideration for transfer of shares of a Company (Other than Quoted Share) is less than the fair Market Value (FMV) of such shares determined in accordance with the prescribed manner, The FMV shall be deemed to be the full value of consideration for the purposes of Computing Income under the head “Capital Gains”.
In short-
1. There is a transfer of a capital asset by an assessee.
2. The Capital asset is a share in a Company other than Quoted Share.
3. Consideration Received or Accruing as a result of such Transfer.
4. The consideration received or Accruing is less than Fair Market Value of such Share.
5. The Fair market Value shall be Deemed to be the Consideration or Accrued Consideration for such Transfer.
Applicable to Buyer
Section 56 (2) (X) Purchase/Gift of Unquoted shares Received by any Person
The following shall be taxable under head “Income from Other Sources” as applicable to Unquoted shares
Any Property, Other than Immovable property-
- Without Consideration, the AGGREGATE Fair Market Value of which exceeds Rs. 50,000, the whole of the aggregate fair Market Value of such property;
- For a consideration which is less than AGGREGATE fair Market Value of the Property by an amount exceeding Rs. 50,000, the aggregate fair market value of such property as exceeds such consideration
Provided that this clause shall not apply to any sum of money or any property received (Referred as Specified Person)-
- From any relative; or
- On the occasion of the marriage of the individual or
- Under a will or by way of Inheritance; or
- In contemplation of death of the payer or donor, as the case may be or
- from any local authority as defined in the section 10(20); or
- 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 Section 10(23C); or
- from any trust or institution registered under Section 12AA; or
- by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C); or
- by way of transaction not regarded as transfer under certain clauses Section 47
- from an individual by a trust created or established solely for the benefit of relative of the individual
- from such class of persons and subject to such conditions as may be prescribed
Conclusion
Implication of Section 50CA & Section 56 (2) (X) on transfer of unquoted Shares for a consideration less than Fair Market Value
The transaction of sale of Unquoted equity shares will result in double taxability of the difference between the FMV and the transaction Value once in the hands of the “Seller” under “Section 50CA under the Head Capital gain” and again in the hands of the “Buyer” under “Section 56(2) (x) under the head Income from Other Sources”
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