Share valuation methods as per Income Tax Act

Before getting funds from Angel investors, either you need to get your business valuation done or investors do it yourself on the bases of current and future business perspective.

Once you get funds in your company, you need to do comply with legal requirements. Income tax act has clearly notified in section 56(2)(viib) if a company receives any consideration for issue of shares that exceeds the face value then valuation report has to be taken from merchant bankers.

Section 56(2)(viib) refer rule 11UA which elaborate the methods of valuation be accepted. There are 2 methods defined in rules:

* Discounted Cash Flow (DCF), or

* Net Assets Value (NAV)

In most of the cases DCF method are adopted for valuation. In a recent case Income tax appellate tribunal pronounced that the company has right to adopt the method of its choice for valuing shares (DCF, NAV). The Income tax officer has no jurisdiction to insist that you should adopt only a particular method for determining the value of the shares.

Keep reading! And reach out to us if you have any queries and you are looking for an CA in Gurgaon, Faridabad, Delhi for further clarification.

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