Q. Valuation of shares for further issue of shares

Question

As per Rule 11U(b)(i) of Income Tax Act 1961, if further issue of shares to be made by company then then either (1) audited balance sheet as on valuation date or (2) B/S (including the notes) drawn up as on a date immediately preceding the valuation date which has been approved & adopted in AGM  can be taken. However, as per Valuation rules the balance sheet can not be ,more than 6 months old from the date of valution report.

Now, for instance, if a company is issuing shares in the month of  Feb 2021 then which balance sheet is to be taken : ((Assuming auditing balance sheet as on 28.02.2021 is not available)

1. Audited balance sheet as on 31.03.2020
2. Provisional balance sheet as on 28.02.2021

Please clarify from Companies Act perspective and also income tax act perspective

Thanks in advance

Answer 1

For further issue of shares first of all you have to be clear whether it is a preferential issue or rights issue

Under the companies act there is no requirement for the valuation in case of rights issue of shares however in the case of issue of preferential issue of shares the valuation is required

Income tax doesn’t differentiate between a right issue or a preferential issue for the applicability of section 56(2)(viib) the shares have to be issued at or below the fair market value arrived as per rule 11 UA. For which the balance sheet has to be taken as on the date of issue duly audited by the statue auditors along with complete notes the accounts or as per the last audited balance sheet as approved in the EGM