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DETERMINATION OF FAIR VALUE OF UNQUOTED SHARES |
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DETERMINATION OF FAIR VALUE OF UNQUOTED SHARES |
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Fair value Section 56 of the Income Tax Act, 1961 (‘Act’ for short) provides for the computation of income from other sources. Section 56(2)(viia) provides that where a firm or a company not being a company in which the public are substantially 01.06.2010 any property, being shares of a company not being a company in which the public are substantially interested,-
Section 56(2)(viib) provides that 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 The expression ‘fair market value’ of a property is defined as other than an immovable property, means the value determined in accordance with the method as may be prescribed. Determination of fair market value Rule 11UA gives the procedure of the determination of fair market value other than immovable property. 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 value of unquoted equity shares = (A - L) x PV/PE’’
The above said provision was applicable to the assessment years previous to the assessment year 2018 - 19. The said rule was substituted vide Notification No. 61/2017, dated 12.07.2017, which came into effect from 01.04.2018. The newly substituted rule provides that 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,
This substituted amendment would be applicable from the Assessment Year - 2018 - 2019. In THE PR. COMMISSIONER OF INCOME TAX -6 VERSUS MINDA SM TECHNOCAST PVT. LTD. - 2023 (8) TMI 1116 - DELHI HIGH COURT, the assessee had purchased 48 % of the equity shares of Tuff Engineering Private Limited from three entities the details of which are furnished as below-
The assessee purchased the above shares @ Rs.5/-. The assessee also produced the certificate issued by the Chartered Accountant who valued the share @ Rs.4.96 under Rule 11UA as applicable for the assessment year 2014 - 15. However the Assessing Officer valued the shares @ Rs.40.72 (Rs.45.72 - Rs.5.00) taking into consideration the provisions of Rule 11UA at the time of passing order. The Assessing Officer, therefore, add the addition of income as per his valuation to the tune of Rs.11,84,46,336/-. Being aggrieved against this order the assessee filed an appeal before the Commissioner of Income Tax (Appeals) upheld the assessment order passed by the Assessing Officer, vide its order dated 16.10.2017. The assessee again filed appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short) against the order of Commissioner of Income Tax (Appeals). The ITAT allowed the appeal and set aside the order of Assessing Officer and confirmed by the Commission of Income Tax (Appeals). Against this order the Revenue filed appeal before the Delhi High Court. The High Court considered the submissions of the Revenue and the assessee. The High Court observed that it is not in dispute that the formula prescribed in Rule 11UA of the 1962 Rules underwent a change, which resulted in the fair market value of unquoted shares being calculated by, inter alia, taking into account, inter alia, the value of assets such as immovable property, which was adopted by “any authority of the government” for the purposes of payment of stamp duty. In other words, if immovable property, such as land, had to be taken into account in arriving at the Fair Market Value of unquoted shares by adopting the formula prescribed in Rule 11UA of 1962 Rules with effect from 01.04.2018, i.e., AY 2018-19, the Assessing Officer would have to factor in the value of such land, by taking into account the circle rate prevailing in the area. The Assessing Officer committed in error in computing the fair market value which was not applicable to the assessment year 2014 - 2015 for the present case. This error was also committed by Commissioner of Income Tax (Appeals). The ITAT corrected the impugned order passed by the Assessing Officer. The High Court found no error on the order of ITAT.
By: Mr. M. GOVINDARAJAN - September 2, 2023
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