As we all know there is an amendment made by Finance Act, 2018 in method of calculation of FMV of unquoted shares in Rule 11UA, therefore today I am covering this method of calculating FMV of unquoted shares.

Introduction:

The fair market value of the shares=

(i) as may be determined in accordance with such method as may be prescribed, or

(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares

As per Rule 11UA of the Income-tax Rules, 1962, the FMV of unquoted shares is to be determined as under:

The fair market value of unquoted equity shares =

(A+B+C+D – L)× (PV)
PE

where,

A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by,—

  • any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and
  • 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:—

  • the paid-up capital in respect of equity shares;
  • 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;
  • reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
  • 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;
  • any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
  • 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:

  1. 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 an accountant in respect of which such valuation.

2. Irrespective of above valuation, the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner:

a) the fair market value of unquoted equity shares =

(A-L) x PV
PE

                      where,

 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:

      • the paid-up capital in respect of equity shares;
      • 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;
      • reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
      • 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;
      • any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
      • 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;

b) the fair market value of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash Flow method.

Conclusion-  With effect from the 1st day of April, 2018 where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares. FMV does not imply the actual market value of the shares at which shares may be transacted between parties. It is the value of shares as determined based on book value of the assets and liabilities of the company.

Author – Savan Somani, Designation: Corporate Manager Taxation, Email: somanisavan@gmail.com

Republished with Amendments

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6 Comments

  1. Nidhi Jain says:

    Hi do you have any practical valuation scenario of any company with you, i need one to see and understand. Can you please share that to me.
    Thanks

  2. Mahender Goel says:

    If there is negative reserve & surplus in a co what s
    will be the treatment whether it wii be added in the liabilited .

    1. vswami says:

      OFFHAND
      Prima facie, question raised is so provocative as to have inspired anyone, -including the author of the write up- to take it seriously as warranted, try and explore, to a well-founded and acceptable conclusion!
      Obviously, reference is to a typical case of ‘Lost Capital’ .
      Going by the contents of the writer’s conclusion, rightly rerached, assumptions are that for arriving at ‘fmv’,-
      the shareholding could be sold, provided a willing buyer could be found; and
      such buyer will be willing also to risk and pay a price (‘consideration’), so that the computation provision in IT Act, will work, and rightly be applied.
      Be that as it may, in the aftermath of a recent order of the ITAT(Bang), that has brought to surface certain very fundamental issues of a grievous nature. So grave in that, in almost all the decided cases there has been an abject oversight, if not gross failure, to understand and have the governing provisions interpreted in proper light, with lacer sharp focus on the true implications, as obviously intended by the legislature.
      If so interested /inquisitive, suggest looking up the Article recently displayed on this website, titled, – “REDUCTION OF EQUITY SHARE CAPITAL” – TAX IMPLICATION- A Study In Comparison
      Welcome anyone to spare and share, openly, independent thoughts and viewpoints, if any, for enlightenment!
      NOTE: The viewpoints shared in that Article, indisputably, may be found to be of relevance to both unquoted and quoted “shares” in a company.

  3. Ankit Batra says:

    Dear Sir,

    Pl. clarify, the calculation of provision made in respect of income tax appearing in the balance sheet of past years

  4. Rakesh says:

    This method of computing is applicable for section 56 (viia) and not 56 (viib) as mentioned on the heading.

    My view is that the newly inserted section by the Finance Act, specifically mentions that there is an element of goodwill in the valuation of the company and consequently book value cannot be taken as representative of the valuation of the company.  not sure if the notification under 56 viib is out as yet

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