Understanding how to value unquoted equity shares is crucial for tax compliance in India. This guide explains the Book Value Valuation Method under Rule 11UA of the Income Tax Rules, 1962, with practical examples.
What is Rule 11UA and Why is it Important?
Rule 11UA of the Income Tax Rules, 1962 provides a standardized methodology for determining the Fair Market Value (FMV) of unquoted equity shares. This valuation is crucial for:
- Tax compliance under Section 56(2)(x)
- Transfer pricing assessments
- Share transfer valuations
The Book Value Formula Explained
Book Value = (A + B + C + D – L) × (PE) ÷ (PV)
Components Breakdown:
A = Book value of assets
Includes all assets except jewelry, artistic work, shares, securities, and immovable property
B = Market value of jewelry and artistic work
Based on registered valuer’s report
C = FMV of shares and securities
Determined as per prescribed manner
D = Value of immovable property
As assessed for stamp duty purposes
L = Book value of liabilities
Excluding specific items like paid-up capital and reserves
Practical Example
Company Balance Sheet Information
Assets:
- Machinery: ₹10,00,000
- Trade Receivables: ₹1,50,000
- Cash and Bank: ₹5,00,000
- Other Current Assets: ₹2,00,000
Liabilities:
- Equity Share Capital: ₹1,00,000
- Preference Share Capital: ₹11,00,000
- Reserves and Surplus: ₹2,50,000
- Other Current Liabilities: ₹4,00,000
Step-by-Step Calculation
- Calculate A (Total Assets – Adjustments):₹17,70,000 = (₹10,00,000 + ₹1,50,000 + ₹5,00,000 + ₹2,00,000) – ₹80,000
- Calculate L (Adjusted Liabilities):₹15,00,000 = (₹18,50,000 – ₹1,00,000 – ₹2,50,000)
- Final Calculation:Book Value = (₹17,70,000 – ₹15,00,000) × (₹100) ÷ (₹1,00,000) = ₹270
Key Considerations and Limitations
- The method provides a conservative valuation based on historical costs
- Doesn’t consider future growth potential
- Useful for tax compliance but may not reflect true market value
- Regular updates needed as per latest amendments to Rule 11UA
