Company: XXXX Private Limited
Issues Involved:
1. Whether there is any requirement for valuation of shares on transfer in Oct, 2016?
2. Whether transfer of shares in cash is permitted in Oct, 2016?
Laws Applicable:
1. Companies Act, 2013 read with relevant rules made thereunder.
2. Income Tax Act, 1961 read with relevant rules made thereunder.
Discussions:
Issue 1: Whether there is any requirement for valuation of shares on transfer?Companies Act:
Section 44 of the Companies Act, 2013 provides that shares in any company shall be movable property and freely transferable in the manner provided in the articles of the company. The Companies Act, 2013 is silent on valuation of shares on transfer.
Thus, Articles can provide for valuation of shares subject to valuation under Income Tax Act, 1961. There is no methodology prescribed for valuation of shares being transferred under Companies Act, 2013.
Income Tax Act:
• Sub section 2(x)(c) of Section 56 of the Income Tax Act, 1961 states that if any property (other than immovable) is transferred for a consideration less than its fair market value the difference in excess of Rs. 50,000 between the fair market value & purchase consideration is chargeable to tax in the hands of the transferee.
• For the purpose of section 56(2)(x)(c) fair market value is determined in accordance with the sub-rule (1)(c)(b) of rule 11UA of Income Tax Rules, 1962.
• Sub-rule (1)(c)(b) of rule 11UA has been amended from assessment year 2018-19 i.e., from 01.04.2017 vide Income-tax (Twentieth Amendment) Rules, 2017. The amendment of said sub-rule reads as below:
(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+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;
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;
• Prior to amendment the said sub- rule read as below:
(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)×(PV)/(PE), where,
A= book value of the assets in the balance-sheet as reduced by any 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 and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure 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, 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 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 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;
PE= total amount of paid up equity share capital as shown in the balance-sheet;
PV= the paid up value of such equity shares;
The only difference between the current sub-rule & earlier sub-rule is that earlier valuation of shares ( on net worth basis) was based on the book value of assets & liabilities of a company as appearing in the Balance sheet of the company, whereas under the amended rule, the valuation is based on the market valuations of assets & liabilities of the company.
Conclusion:
From the above discussion on provisions in Companies Act, 2013 & Income Tax Act, 1961, we summarise:
• There is no requirement to value share on transfer as per Companies Act, 2013.
• The shares shall be valued at fair market value as per Income Tax Act, 1961 failing which gift tax shall be levied in the hands of transferee.
The fair market value of shares is based on the net worth of the company; the net worth for this purpose is calculated by taking book values of assets & liabilities of the Company. However, with the amendment in the above mentioned sub-rule w.e.f 01.04.2017 the net worth is calculated by taking market value of the assets & liabilities of the company.
• In the present case of XXXX Pvt. Ltd., the shares were transferred on 15th October, 2016 prior to amendment in the valuation rules as per Income Tax Act, 1961. As on that date, the net worth appearing in Balance Sheet was below (negative) the paid-up face value of shares of the company.
Issue 2: whether transfer of share & in cash is permitted?
Companies Act:
• Section 56 of the Companies Act, 2013 read with rule 11 of Companies (Share Capital & Debentures) Rules, 2014 prescribes the procedure related to transfer & transmission of shares. It states that a company shall register a transfer of shares only when a proper transfer deed in Form SH 04 is duly stamped & executed by transferor & transferee and delivered to the company within 60 days of execution.
• Section 56 of the Companies Act, 2013 provides that company shall within a period of one month from the date of receipt of share transfer deed in SH 04 issue new share certificates in the name of the transferee in Form SH 01.
Thus, Companies Act, 2013 is silent on transfer of shares of a company in cash.
• Under Section 21 read with Article 62 of Schedule 1 of Indian Stamp Act, 1899, stamp duty shall be payable on share transfer at the rate of 25 paise for every Rs. 100 or part thereof of the sale value of the share. Therefore, for the transfer of shares worth Rs. 50,000 stamp duty of Rs. 125 is required to be paid.
Income Tax:
• Section 40A(3) of the Income Tax Act, 1961 states:
Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.
• The said disallowance is applicable to purchase of assets purchased in cash and used for the purpose of business or profession i.e., no depreciation is allowed on said assets. However, this provision does not apply to assets held as Capital Asset and not meant for use in business or profession.
• Section 269ST restricts receipt of Rs. 2,00,000 or more in cash in a single day or single transaction. This restriction was brought up by the Finance Act 2017 & is applicable with effect from the 1st April, 2017 only. The shares transfer value, in context being only Rs. 50,000 is out of preview of above section even after amendment.
Conclusion:
From the above discussion on provisions in Companies Act, 2013 & Income Tax Act, 1961, we conclude that shares were freely transferrable in cash in FY 2016-17 at the transfer value.