Question ID : 28547

Valuation of shares

1. “A” Company is a Subsidiary of “B” Co. 2. ‘’A” Co. Proposes to allot Shares to “B” Co. Both “A” “B” Co. are Domestic Companies Resident in India. 3. The Method of Valuation adopted by “A” co. is “NET ASSET VALUE METHOD” as defined under Rule 11UA (2) of Income tax Rules, 1962, as Currently DCF method of Valuation is under Scrutiny under Income Tax Department. 4. However a new Section 56 (2) (x) has been inserted in Finance Act 2017. Such Section Specifies where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017, Any property, other than immovable property,— (A) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property, (B) For a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration Shall be treated as Income from Other Sources of the Assesse. The Word “Property” mentioned in the above sub section includes Shares securities. 5. The Fair Market Value of Shares for the purpose of above sub section is to be determined as per rule 11UA (1) (C)(b) of Income Tax rules 1962. 6. In our above case “B” Co. is hit by 56 (2) (x) and “A” Co. is hit by 56(2) vii (b). The method of determination of Fair market value for the above two sub sections is different. How can we allot Shares in such a case where we adopt NAV method and neither the issuing company nor the Share Holder will suffer any Tax Liability under Sec. 56.

posted by Prashanth Karanth on Apr 1 2018 12:00AM