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Prescribed Class of Persons for The Purposes of Section 50CA Last updated: July 10th, 2020 3:11 AM

Prescribed Class of Persons for The Purposes of Section 50CA

CBDT vide Notification 42/2020 dated 30th June 2020 introduced a new rule 11UAD to prescribe the class of persons for which the provisions of Section 50CA shall not apply. The new Rule 11UAD prescribes the class of persons for the purposes of section 50CA. The rule states that the section 50CA of the Income Tax Act, 1961 shall not apply to the transfer of unquoted shares by an assessee of a company and its subsidiary and the further subsidiary of such a subsidiary if both the following two conditions are satisfied:
  1. Tribunal has suspended the Board of Directors of such a company as a result of the application moved by the Central Government under Section 241 of the Companies Act, 2013 and new directors have been appointed as nominated by the Central Government under Section 242 of the Act in place of the suspended directors.
  2. The transfer of shares of such a company, its subsidiary, and the subsidiary of such a subsidiary has been done in accordance with the resolution plan approved by the Tribunal pursuant to Section 242 of the Companies Act, 2013 after providing a reasonable opportunity of being heard to the Jurisdictional Principal Commissioner or Commissioner.
Further, for the purposes of this rule, a company is said to be a subsidiary company of another company if such another company holds more than 50% of the nominal value of equity share capital of the first-mentioned company. Also, the word “Tribunal” shall have the same meaning as referred to in Section 2(90) of the Companies Act, 2013. 

Section 50CA Provisions 

Section 50CA of the Income Tax Act, 1961 states that in a case where the consideration received or accrued to a taxpayer for the transfer of an unquoted share is less than the fair market value of such share, then such fair market value shall be deemed to be the full value of consideration resulting from such transfer for the computation of capital gains under Section 48.  Rule 11UAA states that the fair market value of unquoted shares as referred to in Section 50CA shall be calculated in accordance with the provisions contained in sub-clause (b) or (c) of Rule 11UA(1)(c) as may be applicable. Rule 11UA sets down a manner in which the fair market value of certain assets shall be arrived at. The valuation date shall be the date on which shares are transferred in case of unquoted shares. The manner in which the fair market value of unquoted equity and preference shares can be calculated is discussed below:

Fair Market Value of Unquoted Equity Shares

The fair market value of unquoted equity shares as on the valuation date shall be determined as follows: Fair Market Value = (A+B+C+D-L)×(PV)÷(PE) Here, 
A Book value of all the assets reflecting in the balance sheet (excluding jewellery, artistic work, shares, securities, and immovable property) reduced by following 2 amounts:
  1. Income-tax paid, if any, less income-tax refund claimed, if any
  2. Assets such as unamortized deferred expenditure (If they don’t represent any asset)
B Price expected to be realized for jewellery and artistic work if sold in the open market based on valuation report of a registered valuer 
C Fair market value of shares and securities as per Rule 11UA itself
D Value adopted or assessed for the purposes of stamp duty levy by the Government in respect of the immovable property
L Book value of liabilities reflecting in the balance sheet, excluding the following amounts:
  1. Paid-up equity share capital
  2. Amounts set aside for payment of equity and preference dividend when such dividends have not been declared at the general meeting of members prior to the date of transfer 
  3. Reserves and surplus, excluding amounts set apart towards depreciation
  4. Amounts representing provision for taxation, other than the amount of income-tax paid, if any, less the amount of income-tax claimed as refund
  5. Amounts set aside as provisions for meeting unascertained liabilities
  6. Amounts of contingent liabilities other than the dividend payable on cumulative preference shares  
PV Paid-up value of such equity shares
PE Total amount of paid-up equity share capital reflecting in the balance sheet

Fair Market Value of Unquoted Preference Shares

The fair market value of unquoted preference shares has to be calculated by estimating a price that such shares would fetch in the open market if sold on the valuation date. A taxpayer can obtain a report from a merchant banker or an accountant regarding such valuation as described herein.
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