The Central Board of Direct Taxes vide Notification No. 61/2017 dated 12 July 2017 has notified final rules for valuation of unquoted equity shares for the purposes of Sec. 56(2)(x) and Sec. 50CA.
As per Erstwhile Rule 11UA of Income Tax Rules 1962, the Fair Market Value (FMV) of unquoted equity shares was calculated on the basis of book value of all assets as reduced the liabilities of the company on the valuation date. Pursuant to this notification the revised calculation of FMV is as below:
FMV = (A + B + C + D – L) × (PV)/(PE)
A = Book value of all assets (other than assets in B, C & D below) in the balance sheet, as reduced by:
- amount of income-tax paid less amount of income-tax refund claimed, and
- amount shown as asset including unamortized amount of deferred expenditure which does not represent value of any asset
B = Price which the jewellery and artistic work would fetch if sold in the open market on the basis of valuation report obtained from a registered valuer
C = FMV of shares and securities as determined in the manner provided in this rule
D = 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 balance sheet, but not including the following amounts:
- paid-up capital in respect of equity shares
- amount set apart for payment of dividends on (preference/equity) shares where such dividends have not been declared before date of transfer at general body meeting of the company
- reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation.
- amount representing provision for taxation, other than amount of income-tax paid less amount of income-tax claimed as refund to the extent of excess over tax payable with
- amount representing provisions made for meeting liabilities (other than ascertained liabilities) and
- amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.
PE = Total amount of paid up equity share capital as shown in the balance-sheet
PV= Paid-up value of such equity shares