Valuation Rules for determination of Fair Market Value under section 56 - Income Tax - Ready Reckoner - Income Tax

VALUATION RULES Different Properties Valuation of Property Immovable Property 1. SECTION 56(2)(vii) Immovable property received without consideration: INCOME FROM OTHER SOURCES = SDV, where SDV exceeds ₹ 50,000. Immovable property received for a consideration, which is less than the stamp duty value of the property by ₹ 50,000: INCOME FROM OTHER SOURCES = SDV - actual consideration. Note:- Where the date of the agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of the agreement may be taken for the purposes of this sub-clause 2. SECTION 56(2)(x)(b) If received without consideration and Stamp Duty Value (SDV) is greater than ₹ 50,000, then SDV will be considered as INCOME FROM OTHER SOURCES In case of inadequate consideration, INCOME FROM OTHER SOURCES = SDV - Actual consideration, provided that the difference between SDV and actual consideration is greater than higher of (a) ₹ 50,000 or (b) 5% of the consideration (for A.Y. 2019-20 and 2020-21) or 10% of the consideration (From A.Y. 2021-22) Determination of Fair market value of property for the purposes of section 56 of the Act, other than immovable property [ Rule 11U and Rule 11UA of Income Tax Rules ] a. Jewellery, b. archaeological collection, drawings, paintings, sculptures or any work of art (referred as artistic work) . If purchased from registered dealer: the Invoice value shall be FMV In any other case: The price which it would fetch if sold in the open market on the valuation date. If the value of properties exceed ₹50,000 then the assessee may obtain the report of registered valuer. [ Rule 11UA(1)(a) (b) ] SHARES 1. The Fair market value of quoted equity share [ Rule 11UA(1)(c)(a) ] 2. The Fair market value of unquoted equity share [ Rule 11UA(1)(c)(b) ] 3. The Fair market value of unquoted equity share ( applicable only in the case of Section 56(2)(viib) [ Rule 11UA(2) ] Section 56(2)(viib) - Closely held company 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. 1 The fair market value of unquoted equity shares [ Rule 11UA(2) ] 1.1 Where the consideration received by the assessee is from a resident shall be the value, on the valuation date, of such unquoted equity shares, as shall be determined under sub-clause (a), sub-clause (b), sub-clause (c) or sub-clause (e), of rule 11UA(2), at the option of the assessee. 1.2 Where the consideration received by the assessee is from a non resident under sub-clauses (a) to (e) of rule 11UA(2), at the option of the assessee. Illustration : If a venture capital undertaking receives a consideration of fifty thousand rupees from a venture capital company for issue of one hundred shares at the rate of five hundred rupees per share, then such an undertaking can issue one hundred shares at this rate to any other investor within a period of ninety days before or after the receipt of consideration from venture capital company. 2. Determination valuation date :- Where the date of valuation report by the merchant banker for the purposes of rule 11UA(2) is not more than ninety days prior to the date of issue of shares which are the subject matter of valuation, such date may, at the option of the assessee, be deemed to be the valuation date. where such option is exercised under this rule 11UA(2), the provisions of clause (j) of rule 11U shall not apply. [ Rule 11UA(3) ] What are the inclusions and exclusions in Assets Liabilities for the purpose of valuation of unquoted equity shares? Assets Include book value of all assets including fixed assets, current assets and investments. Not to include Advance tax + TDS + TCS Income tax refund claimed. Debit balance of Profit Loss Account Miscellaneous expenditure not written off Discount on issue of Debenture not written off Unamortised amount of deferred expenditure not representing any asset. Liabilities Includes Preference share capital Debentures Loans (secured and unsecured) Current Liabilities and ascertained provisions Depreciation Reserve Dividend payable on equity and preference shares if the same has been declared at AGM before the date of transfer Correct provision for Taxation (Advance Tax + TDS +TCS Income Tax refund claimed) Arrears of dividend payable in respect of cumulative preference shares even if shown as contingent liabilities. Not to include Equity Share capital Dividend payable on equity and preference shares if such dividend has not been declared before the date of transfer at AGM Credit balance of Profit Loss Account Any Reserve e.g. General Reserve, Workmen Compensation Reserve, Foreign Exchange, Fluctuation reserve Excess provisions including excess provision for Tax Provision for unascertained liabilities Contingent Liabilities Note:- Chartered Accountant cannot determine the value of share.