Rule 189: Valuing assets and liabilities for tax on accreted income
Section 352 levies additional income-tax on the accreted income of a specified person in the cases listed in its Table. Section 352(2) computes accreted income as the aggregate fair market value of total assets minus total liability, each computed by the prescribed method. Rule 189 is that method: it reduces asset values for tax paid and non-asset balances, gives valuation methods for quoted and unquoted shares, other securities, immovable property, business undertakings and other assets, and lists liabilities that are excluded.
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Rule 189 - Method of valuation for the purposes of computing fair market value of assets and liabilities under section 352(2) for accreted income
(1) For the purposes of section 352(2), the aggregate fair market value of the total assets of the specified person, shall be the aggregate of the fair market value of all the assets in the balance sheet, as reduced by— (a) tax paid; and (b) any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset.
(2) For the purpose of sub-rule (1), the fair market value of the asset shall be determined in the following manner: — (I) valuation of shares and securities: (a) the fair market value of quoted share and securities shall be the following: — (i) the average of the lowest and highest price of such shares and securities quoted on a recognised stock exchange as on the specified date; or (ii) where on the specified date, there is no trading in such shares and securities on a recognised stock exchange, the average of the lowest and highest price of such shares and securities on the recognised stock exchange, on a date immediately preceding the specified date when such shares and securities were traded on the recognised stock exchange;
(b) the fair market value of unquoted equity shares shall be the value, on the specified date as determined in accordance with the following formula: —
Fair market value of unquoted equity shares = (A+B - L) × (PV) / (PE) [The Gazette prints this as a fraction: (A+B - L) × (PV) is the numerator and (PE) is the denominator printed beneath it. The "/" is added here only to show that layout on one line.]
Where, — A = book value of all the assets in the balance sheet (other than bullion, jewellery, precious stone, artistic work, shares, securities and immovable property) as reduced by— (i) tax paid; and (ii) any amount shown in the balance sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; B = fair market value of bullion, jewellery, precious stone, artistic work, shares, securities and immovable property as determined in the manner provided in this rule; L = book value of liabilities shown in the balance sheet, but not including the following amounts: — (i) representing contingent liabilities other than arrears of dividends payable in respect of the paid-up capital in respect of equity shares;
(ii) the amount set apart for payment of dividends on preference shares and equity shares; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than tax paid, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount cumulative preference shares; PE = total amount of paid-up equity share capital as shown in the balance sheet; and PV = the paid-up value of such equity share,
(c) the fair market value of shares and securities, other than equity shares, shall be estimated to be the price it would fetch, if sold in the open market on the specified date on the basis of the valuation report from a merchant banker or an accountant in respect of such valuation;
(II) the fair market value of an immovable property shall be higher of the following, namely: — (a) the price that the property shall ordinarily fetch, if sold in the open market on the specified date on the basis of the valuation report from a registered valuer; and (b) stamp duty value as on the specified date;
(III) the fair market value of a business undertaking, held by a specified person, shall be its net assets determined in accordance with the following formula: — Fair market value = (A + B - L), which shall be determined in the manner provided in clause (I)(b); and
(IV) the fair market value of any asset, other than those referred to in clauses (I), (II) and (III), shall be the price that the asset shall ordinarily fetch, if sold in the open market on the specified date on the basis of valuation report from a — (a) registered valuer; or (b) valuer, who is a member of any one of the following professional valuer bodies, where no valuer is registered for valuation of the said assets: (i) Institution of Valuers; or (ii) Institution of Surveyors (Valuation Branch); or (iii) Institution of Government Approved Valuers; or (iv) Practicing Valuers Association of India; or (v) the Indian Institution of Valuers; or (vi) Centre for Valuation Studies, Research and Training; or (vii) Royal Institute of Chartered Surveyors: India Chapter; or (vii) American Society of Appraisers, United States of America; or (viii) Appraisal Institute, United States of America; or (ix) a valuer who is appointed by any public sector bank or public sector undertakings for valuation purposes.
(3) For the purpose of section 352(2), the total liability of the specified person shall be the book value of liabilities in the balance sheet on the specified date but not including any of the following amounts: — (a) capital fund or accumulated funds or corpus, by whatever name called; or (b) reserves or surpluses or excess of income over expenditure, by whatever name called; or (c) any amount representing contingent liability; or (d) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; or (e) any amount representing provision for taxation, other than tax paid, to the extent of the excess over the income-tax payable with reference to the income in accordance with the law applicable thereto.
(4) For the purposes of this rule, — (a) ―accountant‖ shall have the meaning assigned to it in section 515(3)(b); (b) ―balance sheet‖ in relation to any specified person, means the balance sheet of such specified person (including the notes annexed thereto and forming part of the accounts) as drawn up on the specified date which has been audited by an accountant; (c) ―merchant banker‖ means a category I merchant banker registered with Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992); (d) ―quoted share or security‖ in relation to share or security means a share or security quoted on any recognised stock exchange with regularity from time to time, where the quotations of such shares or securities are based on current transaction made in the ordinary course of business;
(e) ―recognised stock exchange‖ shall have the meaning assigned to it in section 2(f) of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (f) ―registered valuer‖ means a person registered as a valuer under section under section 514; (g) ―securities‖ shall have the meaning assigned to it in section 2(h) of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (h) ―specified date‖ means the date specified in column C of the Table in section 352(4); (i) ―specified person‖ shall have the meaning assigned to it in section 355(l); (j) ―stamp duty value‖ means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property; (k) ―tax paid‖ means any amount of income-tax paid as deduction or collection at source or as advance tax payment, as reduced by the amount of income-tax claimed as refund under the Act; and (l) ―unquoted share and security‖, in relation to share or security, means share or security which is not a quoted share or security.
Rule breakdown
Where Rule 189 fits
Under section 352(2), accreted income equals the aggregate fair market value of the total assets of the specified person minus its total liability, both as on the date in column C of the Table in section 352(4) and both computed by the prescribed method. Section 352(3) then reduces accreted income attributable to specified assets and related liabilities.
Rule 189 does not decide whether tax on accreted income is triggered. That depends on the cases in the section 352(4) Table, such as cancellation of registration or non-conforming modification of objects.
Total assets under sub-rule (1)
The aggregate fair market value of total assets is the fair market value of all assets in the balance sheet, reduced by tax paid and by any amount shown as an asset that does not represent the value of any asset, including unamortised deferred expenditure.
"Tax paid" is defined as income-tax paid by deduction or collection at source or as advance tax, reduced by income-tax claimed as refund. The balance sheet is the audited balance sheet, including notes, drawn up on the specified date.
Shares and securities
Quoted shares and securities are valued at the average of the lowest and highest price on a recognised stock exchange on the specified date or, if there is no trading that day, on the immediately preceding date on which they were traded.
Unquoted equity shares use the formula built from A (book value of assets other than bullion, jewellery, precious stone, artistic work, shares, securities and immovable property, as reduced), B (fair market value of those excluded assets) and L (book liabilities with listed exclusions), together with PE and PV. The value is (A+B - L) multiplied by PV and divided by PE: in the Gazette, (PE) is printed as the denominator beneath (A+B - L) × (PV). Other shares and securities are valued at the estimated open-market price on the basis of a merchant banker or accountant valuation report.
Immovable property, business undertakings and other assets
Immovable property is valued at the higher of the registered-valuer open-market price and the stamp duty value on the specified date. A business undertaking is valued at its net assets, A + B - L, determined as in clause (I)(b).
Any other asset is valued at the open-market price on the basis of a report from a registered valuer or, where no valuer is registered for that asset, a valuer who is a member of one of the listed professional bodies, or a valuer appointed by a public sector bank or public sector undertaking for valuation purposes. The printed list numbers two items as "(vii)"; it is quoted as notified.
Total liability under sub-rule (3)
Total liability is the book value of liabilities in the balance sheet on the specified date, excluding capital fund, accumulated funds or corpus; reserves, surpluses or excess of income over expenditure; contingent liabilities; provisions other than for ascertained liabilities; and provision for taxation in excess of income-tax payable, other than tax paid.
Because corpus and accumulated funds are excluded from liabilities, they do not reduce accreted income under this computation.
Steps to compute
Identify the case and specified date from the section 352(4) Table; obtain the audited balance sheet as on that date; list every asset and apply the matching valuation method; reduce for tax paid and non-asset balances; compute liabilities with the sub-rule (3) exclusions; and apply section 352(2) and (3).
Obtain the required valuation reports (registered valuer, merchant banker or accountant, as applicable) dated to the specified date, and keep stock exchange price data for quoted holdings.
Hypothetical example
Hypothetical: a trust whose registration is cancelled has, on the specified date, a building, listed shares and a bank balance, and its balance sheet shows a corpus fund and a creditor for an ascertained expense. The building is taken at the higher of the registered-valuer price and stamp duty value; the listed shares at the average of the day's high and low price; the bank balance at its value. On the liability side, only the ascertained creditor counts; the corpus fund is excluded.
The difference, subject to the section 352(3) reduction for specified assets, is the accreted income. Figures are omitted deliberately; this example only shows the order of the computation.
Key takeaways
Prescribed method for section 352(2)
Rule 189 values both assets and liabilities.
Asset-specific methods
Separate methods apply to quoted shares, unquoted equity, other securities, immovable property, business undertakings and other assets.
Higher of valuer and stamp duty
Immovable property uses the higher figure.
Corpus is not a liability
Capital fund, corpus and reserves are excluded from total liability.
Practical checklist
- Confirm the case and specified date under section 352(4).
- Use the audited balance sheet drawn up on the specified date.
- Obtain valuation reports from the categories of valuer the rule names.
- Compare the registered-valuer price with stamp duty value for each immovable property.
- Apply each liability exclusion in sub-rule (3) separately.
Avoid
- Do not use book value for assets where the rule prescribes a fair market value method.
- Do not deduct corpus or reserves as liabilities.
FAQs
Does Rule 189 decide when accreted income tax applies?
No. The triggering cases are in the Table in section 352(4). Rule 189 only provides the valuation method.
Which date is used for valuation?
The specified date, defined as the date in column C of the Table in section 352(4).
How is immovable property valued?
At the higher of the open-market price based on a registered valuer's report and the stamp duty value on the specified date.
Is the corpus fund deducted as a liability?
No. Sub-rule (3)(a) excludes capital fund, accumulated funds or corpus, by whatever name called.
Who can value assets that have no specific method?
A registered valuer or, where no valuer is registered for that asset, a valuer from one of the listed professional bodies or one appointed by a public sector bank or undertaking for valuation purposes.
Glossary
- Specified date
- The date specified in column C of the Table in section 352(4).
- Tax paid
- Income-tax paid by deduction or collection at source or as advance tax, reduced by income-tax claimed as refund.
- Stamp duty value
- The value adopted or assessed or assessable by a Central or State Government authority for stamp duty on immovable property.
- Specified person
- As defined in section 355(l).
- Quoted share or security
- A share or security quoted with regularity on a recognised stock exchange based on current transactions in the ordinary course of business.