Ad Free CAclubindia and Daily Updates on your Mobile. Subscribe Now!

Taxability of Shares gifted

Mihir (Student) (98 Points)

16 October 2009

As per the new rules from oct;09 - what value will be treated as Income in case of shares gifted in an unlisted compnay gifted ?

Reply
Follow
Share

5 Replies

Sunil (Trader) (2611 Points)
Replied 16 October 2009

Very tricky and highly debatable. Nothing is specified. You may have to take the value as per the erstwhile Gift Tax Act. On the contrary the valuation may be done by the stamp act of the state concerned. Say it is a Pvt. Ltd. Company. The stamp officer adjudicating the value of stamping for the gift deed usually takes into consideration the market value of the properties the company owns, especially the immovable ones. This is irrespective of book value and liabilities against such properties and irrespective of the valuation of shares of the company as per balance sheet.

There is going to be a lot of litigation especially for the inadequate consideration aspect when such shares are sold. The stamp duty registrar is normally also assessing value of immovable properties owned especally in the state. Now that it is beyond 1/10/2009, problems will start. people were to busy buying properties and these unlisted shares etc. before the new laws came into effect.

Upgrade to CAclubindia Pro. Subscribe Now!

Juzer Sadikot (CA - innovative solutions for Imports and Exports) (1309 Points)
Replied 17 October 2009

Dear Mihir,

Mr. Sunil is absolutely correct. Many of the places I have seen fair valuation is done on the basis of earswhile CCI (Comptroller of Capital Issue) guidelines. So the taxable value may be such value or higher of value derived from all these valuation.

Thanks

Sunil (Trader) (2611 Points)
Replied 17 October 2009

Hi Juzer,

It maybe worthwhile if you can also get hold of gift tax ready recknoners of Singhania or Nabhi (nearly a decade back). They had very good illustrations of valuing the shares of Pvt. Ltd. Companies. After arriving at the value a further deduction of 20% used to be given before arriving at the amount of taxable gift. The Controller of Issues (now replaced by SEBI) used to value the shares for purpose of maximum premium a company could charge for its new issue or an existing company could charge for its public issue or rights issue or FERA Dilution. They were also determining the price that a foreign investor could charge if they wanted to make a public offer of their shares in the market (normally whenever they wanted to exit).

That was in the last century and now laws have undergone too much change. Even state governments have tightened adjudication procedures for stamp value.

No provisions of the erstwhile gift tax act have been exported to or imported by the Income Tax Act. It is to such an extent that the government is not even using the word Gift in these provisions. It is any sum received or any property received. I do not think you can absolutely use these illustrations but they willbe good as a guidance. Eventually if the listed company or private ltd. company owns immovable property, the market value will be taken as determined by the stamps adjudicator before arriving at the share value. After all, these shares are not in demat form and on physical shares there is a share transfer form that has to be stamped as per value arrived at.

Juzer Sadikot (CA - innovative solutions for Imports and Exports) (1309 Points)
Replied 18 October 2009

Dear Sunil Sir,

I have found many instances where reference to valuation of Shares is given by terms of valuation as per CCI guidelines, majorly in FEMA, which are very much in force as of today.

E.g. For FDI (Foreign Direct Investment) pricing guidlines are given to ensure that the non-residents are not given/alloted shares at the prices below price/value as CCI guidelines.

Thanks

Sunil (Trader) (2611 Points)
Replied 18 October 2009

Since gift tax act is abolished and no provisions are exported or imported anywhere, then the valuation method you have found should be acceptable to the department as this is a valuation method in force and since the rules specify nothing for this, a government accepted practice should be accepted.

Earlier, for gift tax purpose lower of the values used to be taken and a further 20% used to be deducted. Now we have to go as per income tax act. Therefore ideally the situation calls for 'what is most beneficial to the assessee' should prevail. Therefore I think what would be the lower of the values in the accepted formulas should be accepted. It is better a clarification is taken on this. As far as movable properties being gifted is concerned, I rarely come accross people making gifts of listed share but there are a lot of gifts and even transactions for inadequate consideration in unlisted and pvt. ltd. companies. Therefore a clarification is due. However, as far as gifting in Pvt. Ltd. companies is concerned or even unlisted companies is concerned, it is usually between close relatives in most cases or as a result of family settlement. That would also be close relatives.

Problem is coming up only when an unlisted company is sold or control by transfer of shares is sold to individual / huf then the problem of inadequate consideration comes up.

We have to always remember that this is taxable at the hands of an individual / huf and not a company or a firm or even the new llps.

Individual / HUF will bear the tax on IFOS if they receive these shares of unlisted companies or private limited companies or they purchase them for a price lower than FMV as per the formula.

Maybe if an employee receives shares of listed / unlisted companies at lower than FMV, he is already paying a tax on perquisites for the ESOP. Therefore he should not be taxed again on IFOS as there is definitely no intention for double taxation.