Through this report, we share our views on the prevailing framework/rules under the Income Tax Act, 1961 for determination of Fair Valuation in case of Shares/Securities.

1. Income Tax Regulations on
Fair Valuation of Shares
and Securities
JANUARY
2023
Valuation | Investment Banking
Restructuring | Transaction Services
Transaction Tax | Risk Consulting

2. Given the manner in which Complex Structures are evolving in effecting M&A transactions; and with the
emergence of the Start-up Ecosystem which has given birth to hybrid and intricate financial instruments;
it has become a pressing need for the Revenue/IncomeTax Departments across the globe to upgrade their
tax laws/provisions/rules to ensure that a fair and just mechanism is in place so that any gains/income
which arise/deemed to have arise in the country, are taxed in the hands of an appropriate assessee (be it
the subject company or its investors).
India, in keeping parity with the global approach of taxing income associated with “Transfer of Shares and
Securities” have been upgrading its Income Tax rules pertaining to the same. Needless to mention, the
concept of “Fair Value” and its application is critical for determining the realised/deemed to have realised
gains from such transfer of shares and securities.
Through this report, we are delighted to share our views on the prevailing framework/rules under the
IncomeTax Act, 1961 for determination of fair valuation in case ofTransfer of Shares and Securities.
02
Executive Summary
Rajeev R. Shah
Managing Director & CEO
IncomeTax Regulations on Fair Valuation of Shares and Securities
IncomeTax Regulations on Fair Valuation of Shares and Securities

3. 01 04
Valuation of Quoted Shares and
Securities
02 05
Valuation of Unquoted Equity
Shares
03 07
Taxability under Section 56(2)(viib),
56(2)(x) and 50CA
04 08
Rule 11UA(2)
05 09
Valuation of Shares & Securities
Rule 11UA(2)(a)
06 10
Rule 11UA(1)
07 11
Valuation of Shares & Securities
Rule 11UA(1)(c)
08 12
Rule 11U - Meaning of expressions
used in determination of fair
market value
09 13
Gray Areas
Contents

4. Valuation of
Quoted Shares and Securities
04
Section
Applicable Rule Rule 11UA(1)(c)(a)
Sec 56
Transaction for Applicability Any person receiving the share or security
Method prescribed for computation of
Fair Market Value (FMV)
The FMV of quoted shares & securities is determined in
following manner:
If transaction carried out through any Recognized
Stock Exchange, FMV shall be transaction value as
recorded in such stock exchange,
If transaction carried out by way other than through
any Recognized Stock Exchange, FMV shall be,
lowest price quoted on any Recognized Stock
Exchange on Valuation Date
In cases of where on Valuation Date there is no
trading then, lowest price quoted on any RSE on a
date immediately preceding the Valuation Date
when such shares & securities were traded
IncomeTax Regulations on Fair Valuation of Shares and Securities

5. Valuation of
Unquoted Equity Shares
05
Section
Applicable Rule
Sec 56(2)(viib) Sec 56(2)(x) Sec 50CA
Transaction for
Applicability
Rule 11UA(2) Rule 11UA(1)(c)(b) Rule 11UAA prescribes
Rule 11UA(1)(c)(b)
In case of fresh issuance
of shares
Any person receiving the
share or security
Any person transferring
the share or security
Who can be the
valuer ?
Only Merchant Banker
for DCF, NAV method not
prescribed
Not prescribed Not prescribed
Balance Sheet
based on which
valuation to be
done -
Balance sheet drawn on
the valuation or the last
drawn balance sheet
which is approved at the
AGM by the shareholders
Balance sheet drawn up
on the valuation date,
duly audited by the
auditor of the company
Balance sheet drawn up
on the valuation date,
duly audited by the
auditor of the company
Method prescribed
for computation of
Fair Market Value
(FMV)
DCF Method or Book
value (NAV) calculated
without adjusting for
specified assets, at the
option of the assessee
Book Value calculated
after considering open
market value and Stamp
Duty Value (SDV) for
certain specified assets
Book Value calculated
after considering open
market value and SDV
for certain specified
asset
IncomeTax Regulations on Fair Valuation of Shares and Securities

6. 06
Valuation of
Unquoted Equity Shares
Section Sec 56(2)(viib) Sec 56(2)(x) Sec 50CA
Non-
Applicability
This should not apply to
issue of shares by:
by a venture capital
undertaking from a
venture capital
company or a venture
capital fund or a
specified fund; or
by a company from a
class or classes of
persons as may be
notified by the Central
Government in this
behalf
If conditions specified in
the notification issued
above are not fulfilled
then, the amount of
consideration received in
excess of FMV will
deemed to be the income
of the company in the PY
in which failure took
place.
This should not apply to
any property received
from -
Any relative,
On occasion of
marriage,
Under will or by
inheritance,
In contemplation of
death of payer or
donor,
From any local
authority,
From any fund or
foundation or
university or hospital
or educational
institution
From or by any trust
or institution
By way of transaction
not regarded as
transfer, etc.
From an individual by
a trust created solely
for the benefit of
relatives if the
individuals
As per Rule 11UAD, Sec.
50CA does not apply on
transfer of unquoted
shares of company, and
its subsidiary, and
subsidiary of such
subsidiary when,
Tribunal, on an
application moved by
the Central
Government u/s 241 of
the Companies Act,
2013, has suspended
the Board of Directors
of such company and
has appointed new
directors nominated by
the Central
Government, and
share of such company
and its subsidiary and
the subsidiary of such
subsidiary has been
transferred pursuant to
a resolution plan
approved by the
Tribunal u/s 242 of the
Companies Act, 2013
after affording a
reasonable opportunity
of being heard to the
jurisdictional PCIT or
CIT
IncomeTax Regulations on Fair Valuation of Shares and Securities

7. Taxability under Section
56(2)(viib), 56(2)(x) and 50CA
07
Section
Assessee
Sec 56(2)(viib) Sec 56(2)(x) Sec 50CA
Provision with
respect toTaxability
Taxability in the hands of
Issuer (Company in
which public is not
substantially interested)
Taxability in the hands of
Receiver (i.e., the receiver
of property other than
immovable property)
Taxability in the hands
ofTransferor
When shares are issued
for consideration which
exceeds the face value of
shares for consideration
in excess of Fair Market
Value of such shares
then, the company will
be taxed under the head
income from other
sources.
E.g. Issued at Premium:-
If A Co. Pvt. Ltd. issues
share with a face value of
Rs. 100 at an issue price
of Rs. 130 and the FMV of
such shares is Rs. 120. A
Co. Pvt. Ltd. will be taxed
on Rs. 10 (130-120) under
this section.
E.g. Issued at par:-
If A Co. Pvt. Ltd. issues
share with a face value of
Rs. 100 at an issue price
of Rs. 100, then
provisions of S.56(2)(viib)
will not be attracted,
irrespective of FMV
derived.
Property received without
consideration:
If Aggregate FMV >
50,000, entire FMV is
taxable under IFOS.
Property received for
consideration less than
Aggregate FMV:
Difference between FMV
and Consideration paid
(i.e., FMV – Consideration)
> 50,000 then, entire
difference is taxable under
IFOS.
If consideration
received or accruing as
a result of transfer <
FMV of such share.
FMV will be deemed as
full value of
consideration for the
purpose of calculation
capital gains in the
hands of seller (i.e.,
receiver of
consideration).
E.g.: Mr. P transfers
unquoted shares of S
Pvt. Ltd.To Mr. Q for
Rs. 100.The FMV of
these shares is Rs. 120.
Hence, the FMV of Rs.
120 will deemed as full
value of consideration
while computing capital
gains u/s 50CA.
07
IncomeTax Regulations on Fair Valuation of Shares and Securities

8. 08
Rule 11UA(2)
FMV of unquoted equity shares
Rule 11UA (2)
Rule 11UA (2) (a)
(A - L) x (PV)/(PE)
## Refer next slide for details
FMV unquoted
equity shares
determined by a
Merchant Banker as
per the Discounted
Cash Flow (DCF)
method.
OR,
at the discretion of
Assessee
Rule 11UA (2) (b)
IncomeTax Regulations on Fair Valuation of Shares and Securities

9. Valuation of Shares
& Securities Rule 11UA(2)(a)
09
Book value of all Assets (A)
Less Less
Book value
of all
Liabilities (L)
Total amount
of paid-up
equity share
capital (PE)
Paid-up value
of such equity
shares (PV)
Amount of tax paid as
deduction or collection at
source
Advance tax payment (-) the
amount of tax claimed as
refund
Amount shown in the balance-
sheet as asset which does not
represent the value of any asset
Paid-up capital in respect of equity shares
Amount set apart for payment of dividends on
preference shares and equity shares
Amount representing provisions made for meeting
liabilities, other than ascertained liabilities
Amount representing contingent liabilities other than
arrears of dividends payable in respect of cumulative
preference shares
Reserves and surplus, by whatever name called, even if
the resulting figure is negative, other than those set
apart towards depreciation
Amount representing provision for taxation, other than
amount of tax paid as deduction or collection at source
or as advance tax payment as reduced by the amount of
tax claimed as refund under the Income-tax Act, to the
extent of the excess over the tax payable with reference
to the book profits in accordance with the law applicable
IncomeTax Regulations on Fair Valuation of Shares and Securities

10. 10
Rule 11UA(1)
Valuation of shares/securities
Rule 11UA (1) (c)
Valuation of jewellery & Valuation of archaeological collection
Drawings, Paintings, Sculptures Any work of art(artistic work)
Rule 11UA (1) (a) & Rule 11UA (1) (b)
Unquoted Equity Shares (b)
##The FMV on Valuation Date shall be
determined in following manner:
FMV = (A+B+C+D-L)*(PV)/(PE)
FMV is estimated to be price it would
fetch if sold in open market on Valuation
Date.
Assessee may obtain a report from a
Merchant Banker or an Accountant for
such valuation
FMV - estimated price fetched in open market as on valuation date
FMV - if Received by way of purchase from registered dealer on valuation
date - invoice value
FMV - received by any other mode and Value >50,000, then assessee may
obtain report from registered valuer.
## Refer next slide for details
Unquoted Shares & Securities
other than Equity Shares (c)
IncomeTax Regulations on Fair Valuation of Shares and Securities

11. Valuation of Shares
& Securities Rule 11UA(1)(a)
11
(A)
Book value of all assets (other than jewellery, artistic work, shares, securities
and immovable property) as reduced by
Income tax paid less the amount of income tax refund, and
Amount shown as asset including the unamortised amount of deferred
expenditure which does not represent value of any asset
(L)
Book value of liabilities excluding
Paid-up equity share capital
The amount set apart for payment of dividends on preference shares and
equity shares
Reserves and surplus, by whatever name called, even if the resulting figure is
negative, other than those set apart towards depreciation
Amount representing provision for taxation, other than amount of income-tax
paid, less the amount of income-tax claimed as refund, to the extent of the
excess over the tax payable with reference to the book profits in accordance
with the law applicable
Amount representing provisions made for meeting liabilities, other than
ascertained liabilities
Amount representing contingent liabilities other than arrears of dividends
Payable in respect of cumulative preference shares
(B)
price which the jewellery and artistic work would fetch if sold in the open
market based on the valuation report from a registered valuer
(C) FMV of shares & securities in the manner as provided in this rule
(D)
Stamp duty value assessed by any authority of the Government in respect of
the immovable property
(PV) Paid up value of such equity shares
(PE) Total amount of paid-up equity share capital as shown in the balance sheet
IncomeTax Regulations on Fair Valuation of Shares and Securities

12. Merchant
Banker
Means category I merchant banker registered with Securities and Exchange Board
of India established under section 3 of the Securities and Exchange Board of India
Act, 1992.
Valuation
Date
Means the date on which the property or consideration, as the case may be, is
received by the assessee.
Rule 11U - Meaning of
used in determination of fair market value
12
Meaning of some important terms used above
Termt
Property
(As per Section
56 - Income from
Other Sources)
Meaning
Means the following capital asset of the assessee, namely
Immovable property being land or building or both
Shares and securities
Jewellery
Archaeological collection
Drawings
Paintings
Sculptures
Any work of art, or
Bullion
Balance Sheet i.
ii.
For Rule 11UA(2), the audited balance-sheet of such company (including the
notes) as drawn up on the valuation date and where the audited balance-sheet
on the valuation date is not drawn up, the balance-sheet (including the notes)
drawn up as on a date immediately preceding the valuation date which has
been approved and adopted in the AGM, and
In any other case,
in relation to an Indian company, the audited balance-sheet of such
company (including the notes) as drawn up on the valuation date, and
in relation to a company, not being an Indian company, the balance-sheet of
the company (including the notes) as drawn up on the valuation date which
has been audited by the auditor of the company, if any, appointed under the
laws in force of the country in which the company is registered or
incorporated
IncomeTax Regulations on Fair Valuation of Shares and Securities

13. Gray Areas
13
Applicability
of Section
56(2)(viib) to
Valuation of
Preference
Shares or
unquoted
shares or
securities other
than unquoted
equity shares
In the case of Ginni Global (P
.) Ltd. v. ACIT 1 , it was
decided by the Hon'ble JaipurTribunal that section
56(2)(viib) of the Act does not make any distinction
between equity shares and preference shares.
In the case of Microfirm Capital (P
.) Ltd. v. DCIT2 it
was contended by the assessee that the
Redeemable Preference Shares, being quasi debt
instruments, are not covered by the provisions of
Section 56(2)(viib) of the Act.The Hon'ble Kolkata
Tribunal rejected this contention of the assessee
and held that a perusal of Section 56(2)(viib) of the
Act, takes us to a conclusion that all types of
shares are covered by this Section.
Therefore, the judicial precedents rest the
argument in favor of applicability of Sec 56(2)(viib)
of the Act to both cases, thereby drawing a parity
on taxation on issue of equity and preference
shares.
Gray Area
Treatment of
DeferredTax
Asset /Liability
(DTA/DTL)
Issue Solution
There is no specific
reference to treatment
of DTA/DTL in the rule.
Section 56(2)(viib)
mentions about issue
of shares. On a plain
reliance, it could be
perceived that the
provision does not
bring any distinction
between equity and
preference shares.The
Act uses the term
“Shares”
, which would
automatically imply
both equity and
preference. Whereas
Rule 11UA(2) mentions
only about valuation of
unquoted equity shares.
Views taken by valuation professionals:
DTA/DTL to be considered on as is where is
basis as recorded in the books of accounts for
estimating value of unquoted equity shares.
DTA is a notional line item which does not
represent any tangible/intangible asset. Since
DTA is fictitious in nature, one may not
consider the same while estimating value of
unquoted equity shares as per Rule 11UA of
the IncomeTax Rules.
For DTL, it is was held in the case of Vardhman
Entertainment & Hospitality Pvt. Ltd Vs.
ACIT-2(3)(1) that DTL is not an ascertained
liability but only a notional amount shown in
accounts to comply with the prescribed
Accounting Standards. Hence, the same may
be ignored.
IncomeTax Regulations on Fair Valuation of Shares and Securities

14. Gray Areas
14
Company in
which public
is not
substantially
interested
Even though a company has been
incorporated as a private limited
company, it will deem to be a public
company as per section 2(71) of
Companies Act, 2013 if it is a subsidiary
of a company which is a public
company. Hence, a private limited will
qualify as a ‘company in which public
are substantially interested’ and as a
result section 56(2)(viib) of the Act
should not apply.
Gray Area
Audited
Balance Sheet
Issue Solution
Rule 11U of the Act states that for the
purpose of valuation under Rule
11UA, the balance sheet used for the
FMV computation should be audited.
However, the management of
company may not be able to provide
the audited financial statements as on
the transaction date.
Section 2(18) of the Act defines
‘company in which public are
substantially interested’.The
following companies are inter-alia
‘company in which public are
substantially interested’:
A listed company
An unlisted company, if
It is a company which is not a
private company as defined
under Companies Act; and
Shares in the company carrying
not less than 50% (40% in case
company is engaged in
manufacturing business) are
beneficially held by-
The Government, or
A corporation established
by Central, State or
Provincial Act, or
A listed company
The tax advisors may take a view after
concurring with management of the
company regarding no material changes
in the position of assets and liabilities
between the provisional financial
statements and the audited financial
statements which would be available at
a future date.
IncomeTax Regulations on Fair Valuation of Shares and Securities

15. 15
• Business & Equity Valuation
• Valuation of Brands, Goodwill, Other Intangible Assets &
Intellectual Property
• Valuation of Financial Securities, Instruments & Derivatives
• Valuation of Industrial Assets and Plant & Machinery
• Valuation of Real Estate
• Valuation of Infrastructure Assets & Specialized Assets
• Purchase Price Allocations (PPA) for Mergers & Acquisition (M&A)
• Impairment Studies forTangible Assets
• Impairment Studies for Cash Generating Units, Intangible
Assets & Goodwill
• Mines, Mineral Advisory and Valuation
• Valuation of ESOPs and Sweat Equity
• Valuation forTax,Transfer Pricing and Company Law Matters
• Fairness Opinions
• Valuation under Insolvency & Bankruptcy Code (IBC)
• Determination of Swap Ratio under Mergers and Demergers
• Valuation of Inventory / Stocks and Debtors / Receivables
• Litigation and Dispute Valuation Services
Valuation
• Valuation Services
• Damages & Loss of Profit Analysis
• Independent Expert testimony
• Anti-trust & Competition Advisory
• Post-Acquisition Disputes, Joint Venture & Shareholder Disputes
• Civil & Construction Disputes, Real Estate Disputes
• Intellectual Property Rights Dispute
Dispute & Litigation Support
• Buy side due diligence and closing due diligence
• Vendor due diligence and vendor assistance
• Setting up and managing dataroom
• Advice on sale and purchase agreements (SPA) and business
transfer agreements (BTA)
• Assistance in deal negotiation
Transaction Services (Due Diligence)
• Insolvency Professional services as per IBC
• Turnaround Advisory and Business transformation
• Interim Management Services
• CRO (Chief Restructuring Officer) Services
• Process Improvement and Financial Restructuring
• Outside NCLT – Restructuring Services
• Priority and Interim Funding
• Process Advisors
• Pre-pack and Cross Border Insolvency
• Advisor to Committee of Creditors
• Preparation of Resolution Plan and Information Memorandum
• Independent Bid Evaluation Services
Restructuring
DealTax Advisory (Strategic, IBC, PE/VC)
•Tax Due-Diligence
•Tax Structuring
• Deal Negotiation Review
•Transaction Documentation Review
• Post-Deal Integration
Corporate Restructuring
• Group Restructuring
• Financial/Capital Restructuring
Succession Planning
Holistic Implementation Support
• Merger/Amalgamation
• Demerger/Spin-off
• Capital Reduction
Transaction Tax
• Share Buyback
• BusinessTransfers
• Liquidation/Wind-up
• M&A Advisory:
• Sell Side & Buy Side
• Domestic & Cross Border
• Partner Search, Joint Ventures & Strategic Alliances
• Government Disinvestment & Privatization
• Fund Raising - Equity, Mezzanine, Structured Finance & Debt
(Corporate & Project Finance)
• Distressed Investment Banking - One-Time Settlement, Priority
and Interim Funding, Rescue Financing, and Buyouts
• Capital Market Advisory
Investment Banking (Category 1 Merchant Bank)
Risk Consulting
Strategic & Risk Advisory Services
•Techno Economic Feasibility Studies & Viability assessment
• Business Plan Review
Technical Support Services
• Lender’s & Investor’s / Independent Engineer Services
•Technical Due Diligence,Technical Opinions
• Chartered Engineers Opinion & Certification
• Project Cost Investigation and Monitoring
Agency for Specialized Monitoring (ASM)
• Cash outflow / Inflow and project monitoring, Ensure the end
usage of the Fund
Financial &Treasury Risk Advisory
• Assessment of risks - ALM, Credit, Market, Interest Rate &
Liquidity Risk
• Asset Quality Review & StressTesting
• Assessment of Expected Credit Loss
Business Risk Advisory
• Risk based Internal Audits & Enterprise Risk Manangement (ERM)
• Flow Chart Base Process Mapping & Process Excellence Studies (SOP)
• Compliances Studies, Assets management & Business support
SERVICES
IncomeTax Regulations on Fair Valuation of Shares and Securities

16. 16
Research Team
Neha Ghelani
+91 22 6130 6017
neha.ghelani@rbsa.in
Ajay Malik
Managing Director & Head
Investment Banking
+91 22 6130 6015
ajay.malik@rbsa.in
Vinod Nair
Managing Director & Head
Risk Advisory Services
+91 22 6130 6015
vinod.nair@rbsa.in
Management
Rajeev R. Shah
Managing Director & CEO
+91 79 4050 6070
rajeev@rbsa.in
Manish Kaneria
Managing Director & COO
Co - Head Valuation
+91 79 4050 6090
manish@rbsa.in
Mitali Shah
Managing Director & Head
Banking & Restructuring
+91 79 4050 6050
mitali@rbsa.in
India Offices Global Offices
Project Leader
Amrita Bhatnagar -
Gunesh Kawdia -
Yash Dhanurkar -
Creatives
Tarun Vataliya
+91 79 4050 6033
tarun.vataliya@rbsa.in
1121, Building No. 11, 2nd
Floor,
Solitaire Corporate Park, Chakala,
Andheri Kurla Road, Andheri (E),
Mumbai - 400 093
Tel: +91 22 6130 6000
Mumbai
607, 6th
Floor, Shangrila Plaza,
Road No. 2, Opposite KBR Park,
Banjara Hills,
Hyderabad - 500 034
M: +91 90526 60300
Tel: +91 40 4854 6254
Hyderabad
Bengaluru
104, 1st
Floor, Sufiya Elite,
#18, Cunningham Road,
Near Sigma Mall,
Bangalore - 560 052
M: +91 97435 50600
Tel: +91 80 4112 8593
Dubai
6001 Beach Road,
#22-01 Golden MileTower,
Singapore - 199589
M: +65 8589 4891
Email: singapore@rbsa.in
Singapore
Unit No. 1102, Al Jamal Building,
Al Ghatfah St, Al Danah,
Abu Dhabi
M: +971 52 617 3699
Email: abudhabi@rbsa.in
Abu Dhabi
2001-01, Level 20, 48 Burj GateTower,
Downtown, Sheikh Zayed Road,
PO Box 29734, Dubai, UAE
M: +971 52 382 2367
+971 52 617 3699
Tel: +971 4518 2608
Email: dubai@rbsa.in
Ahmedabad
912, Venus Atlantis Corp. Park,
Anand Nagar Road,
Prahladnagar,
Ahmedabad - 380 015
Tel: +91 79 4050 6000
2nd
Floor, IAPL House,
23 South Patel Nagar,
New Delhi - 110 008
M: +91 99585 62211
Tel: +91 11 2580 2300
Delhi
Ravishu Shah
Managing Director
Co - Head Valuation
+91 22 6130 6093
ravishu.shah@rbsa.in
Ravi Mehta
Managing Director & Head
TransactionTax
+91 22 6130 6052
ravi.mehta@rbsa.in
Chetan Khandhadia
Managing Director & Head
Transaction Services
+91 22 6130 6095
chetan.khandhadia@rbsa.in
Gift City (IFSC)
Unit No. 16, Office No. 7,
Wing D GIFT Aspire Block 12,
Road 1-D, GIFT SEZ,
Gandhinagar - 382 355
M: +91 97243 43847
CONTACT US
IncomeTax Regulations on Fair Valuation of Shares and Securities
amrita.bhatnagar@rbsa.in
gunesh.kawdia@rbsa.in
yash.dhanurkar@rbsa.in