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Valuation of shares- Section 56(2)(viib)

Issue/Justification

The Finance Act, 2012 had inserted clause (viib) in section 56(2) to provide that if the consideration for shares is in excess of the fair value of the shares, the aggregate consideration received in excess of the fair value determined as per method prescribed or substantiated by the company to the Assessing Officer based on the value of its assets, would be taxable as the income of a closely held company.

The detailed suggestions regarding the draft rule which prescribes for determination of fair market value of shares was submitted by ICAI to the Board. In furtherance to the same, it is submitted that the provisions of this clause should not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Such exemptions have been provided in relation to section 56(2)(viia).

Suggestion

(i) A proviso similar to the proviso to section 56(2)(viia) should be incorporated in section 56(2)(viib) as well. Further, the proviso should also cover transactions not regarded as transfer under sections 47(vi) and 47(vib).

(ii) Valuation Report from an `Accountant’ may be admissible so as to determine the fair market value of unquoted equity shares.

(SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)

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