Summary of Valuation rules for Jewellery, Artistic Work, Shares and securities

Notification No. 23/2010 dated 8 April 2010 (Notification) issued by the Central Board of Direct Taxes (CBDT)  prescribed the  rules (Rules) for determining the fair market value (FMV), for the purposes of taxation, of certain specified assets received by a taxpayer without consideration or for inadequate consideration i.e. a consideration which is less than the FMV by an amount exceeding INR 50,000. The Finance (No. 2) Act, 2009 had inserted Section 56(2) (vii) (Section) to tax such specified assets received on or after 1 October 2009 (See Note-1 below). Specified assets are archaeological collections, drawings, paintings, sculptures or any other work of art (artistic work), jewellery and shares and securities.

Summary of the Rules

• The Rules prescribe different methods for the purpose of valuation of specified assets.
• The Rules come into effect from 1 October 2009, being the date from which the Section became operative.
• The FMV needs to be determined as on the valuation date. For this purpose, the valuation date is the date on which the taxpayer receives specified assets.

Valuation methods

A) Valuation of jewellery and artistic work:

1. Valuation of jewelery and artistic work (assets) is as follows:

• Estimated to be the price which the asset would fetch if sold in the open market on the valuation date.
• In case the asset is received by way of purchase on the valuation date from a registered dealer, the FMV is the invoice value of the asset.
• In case the asset is received by any other mode and the value of the asset exceeds INR 50,000, the taxpayer may obtain a report from a registered valuer in respect of the price it would fetch if sold in the open market on the valuation date.

2. For the purposes of the Rules, a registered dealer means a dealer who is registered under Central Sales Tax Act, 1956 or general sales tax laws prevailing in a State, including value added tax laws.

3. A registered valuer is a person who is entitled to function as a registered valuer for the purposes of the Wealth Tax Act.

B) Valuation of Quoted shares and securities:

1. ‘Quoted shares and securities’ are defined to mean shares or securities quoted, with regularity from time to time, on any RSE where the quotations of such shares or securities are based on current transactions made in the ordinary course of business.

2. Valuation of shares and securities quoted in a recognised stock exchange (RSE) is as follows:

• Transaction carried out through RSE: – Transaction value recorded in such RSE
• Others i.e. Transaction carried out otherwise than through RSE:-

>Lowest price quoted on any RSE as on the valuation date

>In case no trading on the valuation date, lowest price on the date immediately preceding the valuation date when trading happened

C) Valuation of Unqoted shares and securities: Valuation of unquoted equity shares is as follows:

• The Rules prescribe the method to determine the value, based on the break-up value method. To start with, under this method, the excess of book value of specified assets over specified liabilities as per the investee company’s balance sheet is determined. The excess so arrived at is divided by total amount of paid-up equity share capital of the investee company. The value so determined is then multiplied by paid-up value of equity shares received by the taxpayer. The value so arrived at is the FMV of unquoted equity shares received by the taxpayer.
• The FMV of unquoted equity shares needs to be determined on the valuation date, being the date of receipt of the shares by the taxpayer.
• For the purposes of valuation, the value of specified assets is that of all assets in the investee company’s balance sheet, as reduced by advance tax, debit balance of profit and loss account or any amount not represented by the value of any asset.
• The value of specified liabilities is that of all liabilities in the investee company’s balance sheet, excluding the following:

> 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 investee company.

> Reserve, by whatever name called, other than those set apart towards depreciation.

> Credit balance of the profit and loss account.

> Provision for taxation other than the amount paid as advance tax, to the extent of the excess over the tax payable with reference to the book profits, in accordance with the law applicable thereto.

> Provision for unascertained liabilities.

> Provision for contingent liabilities other than the arrears of dividends payable in respect of cumulative preference shares.

• Valuation of unquoted shares other than equity shares is as follows:

>. Estimated to be the price it would fetch if sold in the open market on the valuation date.
>. The taxpayer is required to obtain a report from a merchant banker or a chartered accountant in support of the FMV.

Comments

The Rules provide guidance on the methodology of valuation of different specified assets. The Section became operative from 1 October 2009 whereas the Rules were notified on 8 April 2010 with effect from 1 October 2009. Question may arise about the validity of applicability of the Rules for the tax year ended on 31 March 2010, in view of the general understanding that rules need to be in existence as on the first day of the year immediately following the end of the relevant tax year. Question may also arise about the validity of the normative provisions of the Rules e.g. in the context of shares of an unlisted company, if the prescribed methodology results in determining an FMV which is higher than the bonafide/commercially agreed value.

Notes:-

1. The Finance Bill, 2010 proposes to insert a similar provision to tax the receipt of shares of a closely-held company by a firm or another closely-held company. If the Bill is enacted, the Rules will also apply to the valuation of shares covered by the proposed provision.