Amended Rules for Valuation of Unlisted Shares

Notification No. 61/2017 – Dt. 12.07.2017


In exercise of the powers conferred by section 50CA and sub-section (2) of section 56 read
with section 295 of the Income-tax Act, 1961 ( 43 of 1961), the Central Board of Direct Taxes hereby makes the
following rules further to amend the Income-tax Rules, 1962, namely:-
1. (1) These rules may be called the Income-tax (20th Amendment), Rules, 2017.
(2) They shall come into force from the 1st day of April, 2018 and shall apply in relation to assessment
year 2018-19 and subsequent years.


• Value of unlisted shares have to be determined solely on the basis of value of underlying assets of the Company w.e.f 1st April, 2017 (i.e. A.Y. 2018-19). “Discounted Cash Flow Method” can not be adopted for determining Fair Market Value (FMV) of shares purchased or sold for determining tax liability u/s 50CA r.w.s. 56(2)(x) of the Income Tax Act, 1961 (Act).
• Section 50CA & Section 56(2)(x) of the Act were introduced by the Finance Act, 20117 to tax transfer of unlisted shares of the companies at a price less than their FMV.
• Section 50CA of the Act deems the FMV of the shares as the actual consideration for the transfer in the hands of the transferor for determining capital gain tax liability in his hands.
• On the other hand, section 56(2)(x) of the Act deems the difference between the FMV and the actual consideration paid on transfer of any asset (including the shares of unlisted company) as the income of the transferee taxable under the head of “Income from Other Sources”.
• New Valuation Rules
The fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:—

the fair market value of unquoted equity shares =(A+B+C+D – L)× (PV)/(PE), where,
A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by,-
(i) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and
(ii) any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;

B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer (FMV);
C = fair market value of shares and securities as determined in the manner provided in this rule;
D = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property;

L= book value of liabilities shown in the balance sheet, but not including the following amounts, namely:—
(i) the paid-up capital in respect of equity shares;
(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;
(iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
(iv) any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
(v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
(vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;

PV= the paid up value of such equity shares;
PE = total amount of paid up equity share capital as shown in the balance-sheet;”

Categories: CBDT