Sec 56
This query is : Resolved
26 June 2012
Is it required for a company to take the certificate from a CA for calculating FMV of unlisted equity shares for the purpose of Sec 56? Or a company can itself make calculations for FMV of shares as on the date of issue?
26 June 2012
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:
[Assets-Liabilities]x[Paidup value of such shares/paidup value of Equity]
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.]
Summary: If it is unquoted equity share, certificate is not required otherwise required.
[Assets-Liabilities]x[Paidup value of such shares/paidup value of Equity]
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.]
Summary: If it is unquoted equity share, certificate is not required otherwise required.
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27 June 2012
Thanks a lot Mr. Sudarshan. Can you also give advise regarding that suppose the company is issuing the shares in the middle of the year, then is it necessary to draw the balance sheet of the company on that date and also to be certified by a CA.
23 July 2025
You're dealing with the calculation of the Fair Market Value (FMV) of unlisted equity shares for the purpose of Section 56 of the Income Tax Act, particularly when shares are being issued by a company. Let me break down your questions and provide some clarity on the process.
1. Is it required for a company to take a certificate from a CA for calculating FMV of unlisted equity shares under Section 56?
For unlisted equity shares, Section 56 of the Income Tax Act requires the FMV to be calculated in a specific manner, as mentioned in the rules:
The formula for FMV is:
FMV
=
(
Assets
−
Liabilities
)
×
(
Paid-up Value of Shares
)
Paid-up Capital of the Company
FMV=
Paid-up Capital of the Company
(Assets−Liabilities)×(Paid-up Value of Shares)
Here, you subtract the company's liabilities from its assets, then multiply by the paid-up value of the share and divide by the total paid-up capital.
Certificate Requirement: While the company can calculate the FMV of its unlisted equity shares internally, obtaining a certificate from a CA (Chartered Accountant) is generally recommended to ensure that the calculation is accurate and in compliance with tax laws. A CA’s certificate can provide assurance that the FMV is calculated correctly, which is useful in the event of any scrutiny by tax authorities.
However, a CA's certificate is not legally mandatory unless specifically stated. The Income Tax Act permits the company to calculate the FMV itself, but obtaining a certificate from a CA or a merchant banker provides a level of reliability, especially if the shares are being issued to investors or related parties.
2. Is it necessary to draw the balance sheet of the company on the date of issuance of shares (especially if the shares are issued in the middle of the year)?
Yes, if the company is issuing shares during the year, then for the purpose of calculating FMV, you will need to use the balance sheet as of the date of issuance. This is because the FMV is based on the company’s assets and liabilities on the specific date the shares are issued.
Certified Balance Sheet: The balance sheet should ideally be drawn up as of the date of issue of shares and, to ensure compliance with tax laws, it should be certified by a Chartered Accountant (CA). The balance sheet will reflect the company’s financial position on that specific date, and this is essential for calculating the FMV correctly.
Key Points to Note:
For issuing shares in the middle of the year:
Yes, you need the balance sheet as of that date, not just the year-end balance sheet. This ensures that the FMV calculation is based on the most current financial data.
A CA certification of the balance sheet is not mandatory by law for FMV calculation, but it is highly advisable to avoid any issues with the tax authorities.
Valuation Report: In the case of unlisted shares, the company can also consider seeking a valuation report from a merchant banker or accountant for a more professional and credible determination of FMV. This can add an extra layer of validity to the calculation.
Summary:
FMV Calculation: While the company can perform the calculation itself, obtaining a certificate from a CA or merchant banker is advisable for accuracy and compliance, especially if shares are being issued to related parties or investors.
Balance Sheet: A balance sheet as of the date of issue of the shares is necessary for the FMV calculation. While a CA-certified balance sheet is not strictly required by law, it is highly recommended for ensuring compliance and avoiding issues with the tax authorities.
1. Is it required for a company to take a certificate from a CA for calculating FMV of unlisted equity shares under Section 56?
For unlisted equity shares, Section 56 of the Income Tax Act requires the FMV to be calculated in a specific manner, as mentioned in the rules:
The formula for FMV is:
FMV
=
(
Assets
−
Liabilities
)
×
(
Paid-up Value of Shares
)
Paid-up Capital of the Company
FMV=
Paid-up Capital of the Company
(Assets−Liabilities)×(Paid-up Value of Shares)
Here, you subtract the company's liabilities from its assets, then multiply by the paid-up value of the share and divide by the total paid-up capital.
Certificate Requirement: While the company can calculate the FMV of its unlisted equity shares internally, obtaining a certificate from a CA (Chartered Accountant) is generally recommended to ensure that the calculation is accurate and in compliance with tax laws. A CA’s certificate can provide assurance that the FMV is calculated correctly, which is useful in the event of any scrutiny by tax authorities.
However, a CA's certificate is not legally mandatory unless specifically stated. The Income Tax Act permits the company to calculate the FMV itself, but obtaining a certificate from a CA or a merchant banker provides a level of reliability, especially if the shares are being issued to investors or related parties.
2. Is it necessary to draw the balance sheet of the company on the date of issuance of shares (especially if the shares are issued in the middle of the year)?
Yes, if the company is issuing shares during the year, then for the purpose of calculating FMV, you will need to use the balance sheet as of the date of issuance. This is because the FMV is based on the company’s assets and liabilities on the specific date the shares are issued.
Certified Balance Sheet: The balance sheet should ideally be drawn up as of the date of issue of shares and, to ensure compliance with tax laws, it should be certified by a Chartered Accountant (CA). The balance sheet will reflect the company’s financial position on that specific date, and this is essential for calculating the FMV correctly.
Key Points to Note:
For issuing shares in the middle of the year:
Yes, you need the balance sheet as of that date, not just the year-end balance sheet. This ensures that the FMV calculation is based on the most current financial data.
A CA certification of the balance sheet is not mandatory by law for FMV calculation, but it is highly advisable to avoid any issues with the tax authorities.
Valuation Report: In the case of unlisted shares, the company can also consider seeking a valuation report from a merchant banker or accountant for a more professional and credible determination of FMV. This can add an extra layer of validity to the calculation.
Summary:
FMV Calculation: While the company can perform the calculation itself, obtaining a certificate from a CA or merchant banker is advisable for accuracy and compliance, especially if shares are being issued to related parties or investors.
Balance Sheet: A balance sheet as of the date of issue of the shares is necessary for the FMV calculation. While a CA-certified balance sheet is not strictly required by law, it is highly recommended for ensuring compliance and avoiding issues with the tax authorities.
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