As per section 56(2)(vii)(c)(ii) of the Income-tax Act, 1961 (the Act) if an individual or a Hindu undivided family receives any property other than immovable property on or after 1 October 2009 for a consideration which is less than the Fair Market Value (FMV) of the property by an amount exceeding fifty thousand rupees then aggregate fair market value of such property exceeding such consideration will be treated as income of the receiver.
Recently, the Central Board of Direct taxes (CBDT) notified vide Notification no. 23/2010 dated 7 April 2010, new valuation rules to determine FMV of a property other then immovable property for the purpose of above section of the Act. It deals with the determination of FMV of –
Shares and Securities (Securities have the meaning as per Section 2(h) of Securities Contracts(Regulation) Act 1956)
Jewellery, Archaeological collection, Drawings, Paintings, Sculptures or any work of art
The new valuation rule comes into effect from 1 October 2009.
The mechanism to determine the FMV of above assets is given below:
1. Shares and Securities
If the shares and securities are quoted and If the shares and securities are not quoted and
a. The transaction is carried out through stock exchange then the FMV of such shares and securities will be transaction value as recorded in such stock exchange.
a. The shares transferred are equity shares then the FMV of such shares on the valuation date3 shall be determined in following manner:
FMV = (A-L) * (PV)
Where A = (Book value of all the assets shown in Balance Sheet) –(Advance tax paid under the Act) –(any amount which does not represent the value of any asset like Profit and Loss Account or the profit and loss appropriation account)
L = (Book value of all liabilities shown in the Balance Sheet) –(paid up equity share capital) –(provision for dividend on preference and equity shares where such dividends is not declared before the date of transfer at a general body meeting of thecompany) – (Reserves except those set apart towards depreciation) – (amount of Profit and Loss Account) – (tax provision in excess of the tax payable with reference to the book profits as per the Act) – (provision for unascertained liabilities) – (amount of contingent liabilities except outstanding dividend on cumulative preference shares)
PE = Total amount of paid up equity share capital as shown in Balance Sheet.
PV = Paid up value of such equity shares
b. The transaction is not carried out through recognised stock exchange then the FMV will be
1. the lowest price of such
shares and securities on any recognized stock exchange on the valuation date
2. If shares and not traded onthe valuation date then the lowest price of such shares and securities on any recognised stock exchange on a date immediately preceding the valuation date when such shares and securities were traded on such stock exchange
b) The shares and securities transferred are other than equity shares, then the FMV of such shares shall be estimated selling price which such shares would fetch if sold in the open market on the valuation date.
The taxpayer may obtain a report from a merchant banker (See Note-1) or an accountant in respect of such valuation.
2. Jewellery and Archaeological collection, Drawings, Paintings, Sculptures or any work
The FMV of above property received shall be estimated to be the price which such jewellery would fetch if sold in the open market on the valuation date.
In case the above property is received by the way of purchase from a registered dealer on the valuation date then the FMV shall be the invoice value of such property.
In case the above property is received by any other mode and its value 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.
Note :- 1
Merchant Banker means category 1 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)