IN THE EVENT OF SHARES ISSUED AND TRANSFERRED

The difference between the sale consideration obtained by him and the cost of acquiring such shares must be paid as capital gain when an owner of unquoted equity shares ("Shares") in a company transfers the shares to any person (or the inflation indexed cost, wherever applicable). It is crucial to verify that the "Sale consideration" the seller receives from the buyer is at least equal to or more than the shares' "Fair Market Value" ("FMV"), as that term is defined in Rule 11UA of the Income Tax Rules.

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Please be aware that Rule 11UA

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(1) is applicable when determining the fair market value of property other than immovable property under Section 56 of the IT Act. While Rule 11UA

(2) is appropriate where Section 56(viib) is involved (i.e. shares issued by the company at premium).

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The process for determining the fair market value of the following property is outlined in Rule 11UA(1).

valuation of jewellery, archaeological collections, drawings, paintings, sculptures, or any other type of artistic creation.

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b) Shares and other securities valuation

A) The quoted share and security fair market value

B) The unquoted equity share fair market value (see formula).

C) The fair market value of securities other than equity shares and unquoted shares. [The assessee may obtain a report from a merchant banker or an accountant in respect of such valuation; the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any RSE shall be estimated to be price it would fetch if sold in the open market on the valuation date.]

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When shares are issued by the company at a premium under Section 56(viib) of the IT Act, Rule 11UA(2) lays out two possibilities for determining the fair market value of unquoted equity shares, allowing the assessee to choose which method is best for them.

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Option (a): Use the calculation in this option to determine the fair market value of unquoted equity shares.

Option (b): The discounted free cash flow method used by a merchant banker to calculate the fair market value of unquoted equity shares.

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With the foregoing discussion, it is evident that the fair market value of unquoted equity shares shall be established in cases where shares of unquoted equity shares are transferred using the method provided in Rule 11(UA)(1)((c) (b).

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No report from a merchant banker or accountant is required in relation to such appraisal. For Rule 11UA(2), an assessee must get a report from a merchant banker if he chooses to value unquoted equity shares using the discounted free cash flow method.

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IF THE SHARES WERE ISSUED BY THE COMPANY AT PREMIUM UNDER SECTION 56(VIIB) OF IT ACT, THE FAIR MARKET VALUE OF THE UNQUOTED EQUITY SHARES.

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The value of such unquoted equity shares on the valuation date as determined in the manner under (a) or (b), at the assessee's discretion, is the value of such unquoted equity shares as defined in accordance with Rule 11UA(2), namely; -

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Option (a): "Book value of Assets (Less) Book value of Liabilities" shall be used to determine the fair market value of unquoted equity shares. Value at Fair Market of Unquoted Shares = (A-L) X (PV) (PE) A stands for the book value of the assets on the balance sheet, except those listed below. L = The book value of the liabilities listed on the balance sheet, excluding those items noted below. PV stands for the paid-up value of these equity shares, and PE stands for the total amount of paid-up equity share capital as stated on the balance sheet. The following sums must be disregarded when determining the book value of assets: Tax paid in advance, tax deducted or collected at source, or any sum paid in tax less any refunds sought under the Income Tax Act.

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Option (b): The discounted free cash flow method used by a merchant banker to calculate the fair market value of the unquoted equity shares. Previously, a Chartered Accountant could also estimate the FMV of these stock shares. The FMV of these equity shares can only be calculated by a merchant banker as of May 24, 2018, as the Chartered Accountant no longer has this authority. IN THE CASE OF SECTION 56(2)(x), OTHER THAN UNDER SECTION 56(viib) OF IT ACT, THE FAIR MARKET VALUE OF THE UNQUOTED EQUITY SHARES. If shares of unquoted equity are transferred in accordance with section 56(2)(x) of the IT Act, the fair market value of the unquoted equity shares shall be established in accordance with Rule 11(UA)(1)((c) (b).

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No report from a merchant banker or accountant is required in relation to such appraisal. The fair market value of unquoted equity shares shall be the value of such unquoted equity shares on the valuation date as determined in the manner described in Rule 11(UA)(1)((c)(b): Calculating "Book value of Assets & Others (Less) Book value of Liabilities" will yield the fair market value of unquoted equity shares. The formula for the fair market value of unquoted shares is (A+B+C+D-L)X(PV) (PE) A stands for the book value of the assets on the balance sheet, except those listed below.

L = The book value of the liabilities listed on the balance sheet, excluding those items noted below. B is the selling price that the artwork and jewellery would achieve if they were sold on the open market in accordance with the valuation report provided by a registered valuer. C stands for the fair market value of the shares and other securities as calculated in accordance with this regulation. D stands for the value accepted, assessed, or assessable by any government entity for the purpose of paying stamp duty on the immovable property. PE is the balance-total sheet's amount of paid-up equity share capital. PV stands for such equity shares' paid-up value.

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The following amounts must be excluded when determining the book value of assets (other than jewellery, works of art, shares, securities, and real estate): any income taxes paid, if any, less any income tax refunds claimed, if any; and any unamortized amount of deferred expenditure that does not represent the value of any asset.

The following sums must be removed from the calculation of liabilities' book values: the paid-up capital for equity shares; the amount set aside for dividends on preference or equity shares; reserves and surplus, by whatever name called, even if the resulting figure is negative; any amount representing a provision for taxation, other than the amount of tax paid as reduced by the amount of tax claimed as refund; any amount representing a provision made for meeting liabilities, other than ascertained liabilities; and any amount representing a provision for depreciation.

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