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Section 56 of Income tax act, 1961.
NOTIFICATION NO 23/2010, Dated: April 8, 2010 F.No.142/21/2009-SO (TPL)
Section 56 was amended to provide for deemed income in case any individual or HUF received any property without consideration or at a price less than fair market value on or after 01.10.2009. Now CBDT has inserted new Rules in the income Tax Rules ,1962 to prescribe method of ascertainment of fair market value of certain properties.
The rule is made under general Rule making power conferred vide S. 295(1) of the income-tax Act, 1961. In the table given below the new Rules are reproduced in the left column with high lights for analysis and brief preliminary comments are given in the right column:
| From notification with highlights for analysis |
Remarks |
| NOTIFICATION NO23/2010, Dated: April 8, 2010 F.No.142/21/2009-SO (TPL) |
Reference number |
| In exercise of the powers conferred bysection 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:- |
Source of power is S.295 of IT Act. On a review it appears that the new rules are framed under general rule making power of CBDT vide sub-section (1) of S. 295.
We need to examine, whether the effective date of new rules is hit by S. 295 (4), in so far the new rules may prejudicially affect the interested assesses. Furthermore, how a provision which was not known and not effective on the first day of previous year, can be applied to compute income of that previous year is another question about applicability of amendments in S. 56 and the new Rules w.e.f. 01.10.2009 so far AY 2010-11 is concerned.
It can be argued that these amendments can be applied only for previous year which begins after coming into force of amendments that is previous year beginning 01.04.2010 relevant to AY 2011-12 on wards and cannot be applied to AY 2010-11 fro which previous year had already begun before the amendment. |
| 1. Short title and commencement. - (1) These rules may be called Income-tax (Second Amendment) Rules, 2010. |
Title |
| (2) They shall come into force from the1st day of October, 2009. |
w.e.f. 01.10.2009 |
| 2. Insertion of new rules.- In theIncome-tax Rules, 1962, after the sub-part G, the following shall be inserted, namely:- |
New part "H" is inserted after part "G". |
| 'H. - Determination of fair market value of the property other than immovable property |
New rules no.11U and 11UA are inserted |
| 11U. Meaning of expressions used in determination of fair market value.- For the proposes of this rule and rule 11UA,- |
Definition clause. The definitions are very popular and usual yet need some specific mention and discussion as mentioned in this column against relevant sub-clause. |
| (a) "accountant" shall have the same meaning as assigned in the Explanation tosection 288 of the Act; |
CA |
| (b) "balance-sheet", in relation to any company, means the balance-sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date; |
Balance sheet of company is to be drawn up to valuation date- that is date of receipt of equity shares.
How is it possible for a share holder to draw up balance sheet up to the date of receiving shares that is valuation date. |
| (c) "merchant banker" means category I merchant banker registered with Security and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992); |
Category I merchant Banker is recognized and not any other merchant banker. |
| (d) "quoted shares or securities" in relation to share or securities means a share or security quoted on any recognized stock exchange with regularity from time to time, where the quotations of such shares or securities are based on current transaction made in the ordinary course of business; |
Besides being quoted, there should be regularity in quotation and current transactions made in ordinary course of business is required. Otherwise the share may be considered as unquoted. |
| (e) "recognized stock exchange" shall have the same meaning as assigned to it in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); |
Recognized S/E. |
| (f) "registered dealer" means a dealer who is registered under Central Sale-tax Act, 1956 or General Sales-tax Law for the time being in force in any State including value added tax laws; |
Registered Dealers under CST , GST or VAT as the case may be. |
| (g) "registered valuer" shall have the same meaning as assigned to it in section 34ABof the Wealth Tax Act, 1957(27 of 1957) read with rule 8A of wealth-tax Rules, 1957; |
Registered valuer under WT Act and WT Rules. |
| (h) "securities" shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); |
Security. |
| (i) "unquoted shares and securities", in relation to shares or securities, means shares and securities which is not a quoted shares or securities; |
Share or security (a) not quoted and (b) quoted but not regularly quoted and transacted in regular course on S/E will at relevant time will be regarded as 'unquoted" |
| (j) "valuation date" means the date on which the respective property is received by the assessee. |
Valuation date is the date of receipt of property by assessee. Therefore there will be as many valuation dates as there are number of days on which any property is received which need to be valued.
The date of receipt is relevant and not the date of legal transfer of property. |
| 11 UA. Determination of Fair Market Value.- For the purposes of section 56of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- |
Rules 11 UA is for determination of fair market value |
| (a) valuation of Jewellery.- |
Jewellery |
| (i) the fair market value of jewellery shall be estimated to be the price which such jewellery would fetch if sold in the open market on the valuation date; |
Value which it will fetch if sold in open market. That means sold to persons who regularly buy jewellery in open market- dealers and not investors or actual users. This clause appears to be general clause applicable in all situatiosn except those mentioned in sub-clauses (ii) and (iii). |
| (ii) in case the jewellery is received by the way of purchase on the valuation date, from a registered dealer, the invoice value of the jewellery shall be the fair market value; |
If the jewellery is received from a registered dealer, by way of purchase, then invoice value will be fair market value. This clause appears to be redundant and of no use. Because when jewellery is purchased from a dealer, and invoice value is considered as fair market value, then there cannot be taxable gift.
In case this clause is meant for gift of property on the day of purchase itself, then matter would be different. In such cases it will be advisable to gift the property after the day of purchase of jewellery so that instead of purchase value, the fair market value is considered under clause (i). |
| (iii) In case the jewellery is received by any other mode and the value of the jewellery exceeds rupees fifty thousand, then assessee may obtain the report of registered valuer in respect of the price it would fetch if sold in the open market on the valuation date; |
It appears that instead of valuation report from registered valuer, an offer from a jewellery shop for price the shop offer can also be a basis for valuation as per clause (i). |
| (b) valuation of archeological collections, drawings, paintings, sculptures or any work of art.- |
Arcehellogical collections, artistic work etc. |
| (i) the fair market value of archeological collections, drawings, paintings, sculptures or any work of art (hereinafter referred as artistic work) shall be estimated to be price which it would fetch if sold in the open market on the valuation date; |
Expected sale price on the valuation day- the day of receipt. |
| (ii) in case the artistic work is received by the way of purchase on the valuation date, from a registered dealer, the invoice value of the artistic work shall be the fair market value; |
Similar remarks as in case of jewellery under clause b (ii), subject to necessary modifications. |
| (iii) in case the artistic work is received by any other mode and the value of the artistic work exceeds rupees fifty thousand, then assessee may obtain the report of registered valuer in respect of the price it would fetch if sold in the open market on the valuation date; |
Similar remarks as in case of jewellery under clause b (iii) subject to necessary modifications. |
| (c) valuation of shares and securities.- |
Shares and securities: |
| (a) the fair market value of quoted shares and securities shall be determined in the following manner, namely;- |
|
| (i) if the quoted shares and securities are received by way of transaction carried out through any recognized stock exchange, the fair market value of such shares and securities shall be the transaction value as recorded in such stock exchange; |
As in case of clause b(ii) relating to jewellary this clause also appears to be redundant. If the transaction is through S/E and transaction value is considered as fair market value, then where is element of excess of FMV above consideration? |
| (ii) if such quoted shares and securities are received by way of transaction carried out other than through any recognized stock exchange, the fair market value of such shares and securities shall be,- |
When transaction is otherwise than through recognized S/E |
| (a) the lowest price of such shares and securities quoted on any recognized stock exchange on the valuation date, and |
Lowest price on S/E on valuation date.
Or |
| (b) the lowest price of such shares and securities on any recognized stock exchange on a date immediately preceding the valuation date when such shares and securities were traded on such stock exchange, in cases where on the valuation date there is no trading in such shares and securities on any recognized stock exchange; |
If there is no deal on valuation date on S/E then lowest price on a date immediately preceding the valuation date in which there was trade on S/E. |
| (b) 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:- |
Unquoted Equity shares: Broadly speaking break-up value that is net worth of company pertaining to equity shareholders divided by total equity paid up capital multiplied by paid up capital on shares to be valued. |
The fair market value of unquoted equity shares = (A-L) * (PV)
(PE) |
|
| Where, A= Book value of the assets in Balance Sheet as reduced by any amount paid as advance tax under the Income-tax Act and any amount shown in the balance sheet including the debit balance of the profit and loss account or the profit and loss appropriation account which does not represent the value of any asset. |
All assets at book value minus advance income tax, DR. balance of P & l account |
| L= Book value of liabilities shown in the Balance Sheet but not including the following amounts:-
the paid-up capital in respect of equity shares;
- 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, by whatever name called, other than those set apart towards depreciation;
(iv) credit balance of the profit and loss account;
(v) any amount representing provision for taxation, other than amount paid as advance tax 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 thereto;
(vi) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
(vii) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.
PE = Total amount of paid up equity share capital as shown in Balance Sheet.
PV = the paid up value of such equity shares. |
All liabilities at book value minus set apart dividend provision declared , reserves other than depreciation reserve, credit balance of P & L account, provisions of taxation in excess of MAT on book profit, contingent liabilities and provisions for such liabilities, |
| (c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation.'. |
Shares and securities other than unquoted equity shares that is preference shares, bonds, debenture etc. to be valued at price which it will fetch if sold in open market. The assessee may obtain valuation report from a merchant banker or from a CA. |
The general rule is that market value of any property is the price which it will fetch if sold on open market as on the valuation date. In relation to S. 56 the valuation date is the date on which a property is received without consideration or without full consideration. Therefore, if a market value can be established by means of offers from willing buyers of the same property, then it can be said that such price should be considered and not any notional value determined as per Rules. For example, we find that in case of many quoted companies, the market price of shares is many times more than the break-up value or assets value per share. On the other hand, we also find many companies whose market price of shares is substantially lower than the break-up value. Applying the same rule, in case of unquoted shares, one can determine the fair market value by ascertaining price which it will fetch if sold in open market as on the valuation date. In case of an unquoted share, its market may be small where one can buy or sell unquoted shares, however, still there is a definite market for such shares, therefore, one can adopt fair market value of such shares determined by way of process of bid and offers. If the market value ascertained in such process is lower than the break-up value, then the assessee must be allowed to take such valuation.
Readers are requested to send their views and comments.
NOTIFICATION NO. 23/2010
Dated: April 8, 2010
In exercise of the powers conferred by 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. Short title and commencement. - (1) These rules may be called Income-tax (Second Amendment) Rules, 2010.
(2) They shall come into force from the 1st day of October, 2009.
2. Insertion of new rules.- In the Income-tax Rules, 1962, after the sub-part G, the following shall be inserted, namely:-
'H. - Determination of fair market value of the property other than immovable property
11U. Meaning of expressions used in determination of fair market value.- For the proposes of this rule and rule 11UA,-
(a) "accountant" shall have the same meaning as assigned in the Explanation to section 288 of the Act;
(b) "balance-sheet", in relation to any company, means the balance-sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date;
(c) "merchant banker" means category I merchant banker registered with Security and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(d) "quoted shares or securities" in relation to share or securities means a share or security quoted on any recognized stock exchange with regularity from time to time, where the quotations of such shares or securities are based on current transaction made in the ordinary course of business;
(e) "recognized stock exchange" shall have the same meaning as assigned to it in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(f) "registered dealer" means a dealer who is registered under Central Sale-tax Act, 1956 or General Sales-tax Law for the time being in force in any State including value added tax laws;
(g) "registered valuer" shall have the same meaning as assigned to it in section 34AB of the Wealth Tax Act, 1957(27 of 1957) read with rule 8A of wealth-tax Rules, 1957;
(h) "securities" shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(i) "unquoted shares and securities", in relation to shares or securities, means shares and securities which is not a quoted shares or securities;
(j) "valuation date" means the date on which the respective property is received by the assessee.
11 UA. Determination of Fair Market Value.- For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,-
(a) valuation of Jewellery.-
(i) the fair market value of jewellery shall be estimated to be the price which such jewellery would fetch if sold in the open market on the valuation date;
(ii) in case the jewellery is received by the way of purchase on the valuation date, from a registered dealer, the invoice value of the jewellery shall be the fair market value;
(iii) In case the jewellery is received by any other mode and the value of the jewellery exceeds rupees fifty thousand, then assessee may obtain the report of registered valuer in respect of the price it would fetch if sold in the open market on the valuation date;
(b) valuation of archeological collections, drawings, paintings, sculptures or any work of art.-
(i) the fair market value of archeological collections, drawings, paintings, sculptures or any work of art (hereinafter referred as artistic work) shall be estimated to be price which it would fetch if sold in the open market on the valuation date;
(ii) in case the artistic work is received by the way of purchase on the valuation date, from a registered dealer, the invoice value of the artistic work shall be the fair market value;
(iii) in case the artistic work is received by any other mode and the value of the artistic work exceeds rupees fifty thousand, then assessee may obtain the report of registered valuer in respect of the price it would fetch if sold in the open market on the valuation date;
(c) valuation of shares and securities.-
(a) the fair market value of quoted shares and securities shall be determined in the following manner, namely;-
(i) if the quoted shares and securities are received by way of transaction carried out through any recognized stock exchange, the fair market value of such shares and securities shall be the transaction value as recorded in such stock exchange;
(ii) if such quoted shares and securities are received by way of transaction carried out other than through any recognized stock exchange, the fair market value of such shares and securities shall be,-
(a) the lowest price of such shares and securities quoted on any recognized stock exchange on the valuation date, and
(b) the lowest price of such shares and securities on any recognized stock exchange on a date immediately preceding the valuation date when such shares and securities were traded on such stock exchange, in cases where on the valuation date there is no trading in such shares and securities on any recognized stock exchange;
(b) 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-L)/(PE) * (PV)
Where, A= Book value of the assets in Balance Sheet as reduced by any amount paid as advance tax under the Income-tax Act and any amount shown in the balance sheet including the debit balance of the profit and loss account or the profit and loss appropriation account which does not represent the value of any asset.
L= Book value of liabilities shown in the Balance Sheet but not including the following amounts:-
(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, by whatever name called, other than those set apart towards depreciation;
(iv) credit balance of the profit and loss account;
(v) any amount representing provision for taxation, other than amount paid as advance tax 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 thereto;
(vi) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
(vii) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.
PE = Total amount of paid up equity share capital as shown in Balance Sheet.
PV = the paid up value of such equity shares.
(c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation.'.
F.No.142/21/2009-SO (TPL)
(Ashish Kumar)
Director (Tax Policy and Legislation)
Note:- The principal rules were published, vide, Notification No. S.O. 969(E), dated the 26th March 1962 and last amended by Income-tax (First Amendment) Rules, 2010 vide Notification S.O. No. 424(E) dated 18th February, 2010.
