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Valuation Rule Amends Introduced To Income Tax Act

18 Dec 2012
The Finance Act 2012 inserted a clause into the Income tax Act 1961 (Act) to bring within the realms of taxation the premium received by a company (other than a company in which public are substantially interested), on the issue of its shares in excess of the Fair Market Value (FMV) of such shares.

However the CBDT has now issued a notification regarding valuation rules, amending some of the rules of the clause. Taxand India summarises the key amendments to the valuation rules.

Valuation method for clause
The company issuing shares is now allowed 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 (DCF) method.

The valuation for the purposes of clause 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.

Valuation date
This has been amended to include the date on which consideration is received by the closely held company towards the shares issued. It may be noted that the valuation date is not the date of issue of shares, but the date of receipt of consideration.

Discover more: Valuation rule amends introduced to Income tax act


Your Taxand contact for further queries is:
Gokul Chaudhri
T. +91 124 339 5040


Taxand's Take

The amendment of the Rules to allow DCF valuation for valuing the equity shares is a welcome change. This will avoid taxation which could have otherwise arisen if only Balance Sheet based book values were allowed to be taken for valuation purposes. Further, in the case of investment by non-resident shareholders, while the clause would not have applied, any indirect downstream investment (eg through a holding company into other operating companies) could have created tax exposures for the downstream operating company, had the DCF method not been allowed.

Taxand's Take Author