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Urgent please

murli (Article Assistant) (25 Points)

10 May 2015

Hello Everyone, i just want to know that, if an convertible preference shares is issued at premium than by the private limited company, than how fair market value of the shares will be arrived for taxability in 56(2)(7) purpose. As 56(2)(7), give reference to rule 11 UA for its valuation purposes, and rule 11UA says that fair market value of unquote shares other than equity share will be the value which the share can fatch in the open market, but nowhere method of calculation is prescribed. So, please give your valuable suggestions regarding valuation method. Thanks in Advance.

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pavan kumar (CA Final , CMA Final) (202 Points)
Replied 14 May 2015

Notification No 52/2012 [F No 142/19/2012-SO (TPL)]/SO 2805(E) dated November 29, 2012

The CBDT has now issued a Notification amending Rules 11U and 11UA of the IT Rules to provide for a valuation method for the purposes of clause (viib) of section 56(2) and also to make other incidental changes.
Key amendments to the valuation rules
- Valuation method for clause (viib) of section 56(2) – Rule 11UA has been amended to allow the company issuing shares to determine the FMV either based on the (a) book value as per the Balance Sheet OR (b) based on the Discounted Free Cash Flow method.
- Valuer – Rule 11UA has been amended to provide that the valuation for the purposes of clause (viib) has to be certified either by (a) a Fellow member of the Institute of Chartered Accountants of India (FCA) OR (b) by a merchant banker. Also, the FCA certifying the valuation should not be a tax auditor or statutory auditor of the company.
- Balance Sheet to be used for NAV valuation – The meaning of the phrase “Balance Sheet” has been amended to provide that for the purposes of clause (viia) of section 56(2) (transfer of shares at a price lower than the FMV), the Balance Sheet, as of the valuation date, has to be audited by the statutory auditor of the company. However, for the purposes of section 56(2)(viib), a company can use the Balance Sheet drawn on a date preceding the valuation date which has been approved and adopted in the annual general meeting, if the balance sheet on the valuation date is not drawn up. It may be noted that hitherto, the Rules did not require the Balance Sheet to be audited by the statutory auditor.
- Valuation date - “Valuation date” as per Rule 11U has been amended to include the date on which consideration is received by the closely held company towards the shares issued [in the context of section 56(2)(viib)]. It may be noted that the valuation date is not the date of issue of shares, but the date of receipt of consideration.
-Changes to the NAV method – Rule 11UA has been amended to provide for the following changes in the components of the NAV method for valuation of equity shares -