The Finance Act, 2017 has provided for insertion of a new Section 50CA to the Income Tax Act, 1961 pertaining to valuation of shares of “unquoted shares” as a “Special Provision” to be effective from 01-04-2018. The provision is similar in line to Section 50C of the Income Tax Act pertaining to computation of capital gains arising out of transfer of land and/or building and the consequential income tax liability accruing from such transfer.
Section 50C inter-alia provides as follows:
“Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer:
Now Section 50CA provides as follows:
“Special provision for full value of consideration for transfer of share other than quoted share.
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 in such manner as may be prescribed, the value so determined shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer.
Explanation.—For the purposes of this section, “quoted share” means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.”
If Section 50C and Section 50 CA pertains to computation of income tax liability from a Seller’s perspective Section 56 of the Act deals with income tax liability from a Buyer’s perspective arising from a sale of land/buildings/shares.
Section 56 provides as follows:
“Income from other sources.
56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely :—
(x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—
(c) any property, other than immovable property,—
(A) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
(B) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, 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—
As such, the Ministry of Finance have recently notified the Rules for Valuation of Un-Quoted Shares as per Section 50CA read with Section 56(2) vide notification dated 12th July 2017 by an amendment to the Income Tax Rules, 1962. In terms of the said Notification the valuation of unquoted shares shall be inter-alia 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)”
The values assigned to letters are as follows:
A = book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by,-
(i) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and
ii) 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:-
(i) the paid-up capital in respect of equity shares;
(ii) 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;
(iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
(iv) 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;
(v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
(vi) 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.
Full text of the notification is available at