Valuation of Equity shares are gaining importance now a days as Tax department has started sending notices to various Private Limited Companies and Unlisted Public Companies to justify the share premium received from the shareholders. Further, Tax Department has also started sending notices to various Individual assessee for purchasing of shares on price lower than its fair Market Value (‘FMV’).
Difference between the Fair Market Value of Shares and Actual Consideration paid is treated as Income from Other Sources under Section 56 of the Income Tax Act and Taxed is levied at applicable rate. Accordingly, it is utmost important to obtain Valuation Report before entering into any such transactions.
Rule 11UA(1)(c)(b) of the Income Tax Rules, 1962 has prescribed method for determination of Fair Market Value of Unquoted Equity Shares which is as follows:
the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:— 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,—
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:—
PV= the paid up value of such equity shares;
PE = total amount of paid up equity share capital as shown in the balance-sheet