My client's start-up took money from an overseas investor. Which valuation methods are open under Rule 11UA, and is there any tolerance if the issue price is a little above the valuation?
Sub-rules (2) to (4) of Rule 11UA were substituted for the old sub-rule (2) by the Income-tax (Twenty-first Amendment) Rules, 2023, with effect from 25 September 2023. For consideration received from a resident, the fair market value of unquoted equity shares may be taken at the assessee's option under sub-clause (a) (the adjusted book-value formula), (b) (merchant banker's Discounted Free Cash Flow), (c) (venture-capital price matching) or (e) (price matching against a notified entity); where the consideration is from a non-resident, sub-clauses (a) to (e) are all available, and sub-clause (d) opens five further merchant-banker methods — Comparable Company Multiple, Probability Weighted Expected Return, Option Pricing, Milestone Analysis and Replacement Cost. Sub-rule (4) is a safe harbour: where the issue price exceeds the value so determined by not more than ten per cent of the valuation price, the issue price is deemed to be the fair market value.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2023-09-25, reported as Income-tax Rules, 1962, r.11UA(2) to (4), substituted by the IT (Twenty-first Amdt.) Rules, 2023, w.e.f. 25-9-2023. It bears on section Rule 11UA, section Rule 11U, section Rule 11UAA, section 56(2)(viib), section 56(2)(x), section 50CA of the Income Tax Act 1961, in Gifts, Shares & Angel Tax, How Tax Law Is Read and Assessment & Scrutiny matters.
Three things matter in practice. First, the five extra methods in sub-clause (d) are available only for consideration received from a non-resident — a resident subscription still gets only (a), (b), (c) and (e), so quoting a Comparable Company Multiple valuation on a resident round is quoting a method the rule does not give. Second, the price-matching routes in (c) and (e) are conditional on the anchor consideration having been received within ninety days before or after the date of issue of the shares being valued, and the rule carries its own illustration of how that works. Third, sub-rule (3) lets the assessee treat the date of a merchant banker's valuation report as the valuation date if it is not more than ninety days before the issue — and where that option is exercised, clause (j) of Rule 11U does not apply. All of this attaches to section 56(2)(viib), which the Finance (No. 2) Act 2024 switched off from 1 April 2025 by a third proviso; so sub-rules (2) to (4) matter now for the open earlier years and for compliance histories, not for new issues. Rule 11UA(1) is a different animal and continues to serve section 56(2)(x); Rule 11UAA serves section 50CA.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Rule 11UA(1) prescribes the fair market value of property other than immovable property for the purposes of section 56 generally. Sub-rule (2) is the special code for unquoted equity shares and compulsorily convertible preference shares issued for the purposes of sub-clause (i) of clause (a) of the Explanation to section 56(2)(viib). Until 24 September 2023 sub-rule (2) offered essentially two options — the adjusted book-value formula and a merchant banker's Discounted Free Cash Flow valuation. The Income-tax (Twenty-first Amendment) Rules, 2023 substituted sub-rules (2) to (4) for the old sub-rule (2) with effect from 25 September 2023.
As currently printed, sub-rule (2)(A) gives the fair market value of unquoted equity shares as determined under sub-clause (a), (b), (c) or (e) at the assessee's option where the consideration is received from a resident, and under sub-clauses (a) to (e) at the assessee's option where the consideration is received from a non-resident. Sub-clause (a) is the (A minus L) multiplied by PV over PE formula; (b) is the merchant banker's Discounted Free Cash Flow method; (c) is venture-capital price matching, conditional on the anchor consideration having been received within ninety days before or after the date of issue; (d) is a merchant banker's valuation under the Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method or Replacement Cost Methods; (e) is price matching against an entity notified under clause (ii) of the first proviso to section 56(2)(viib), on the same ninety-day condition. Sub-rule (2)(B) deals with compulsorily convertible preference shares on the same resident/non-resident split but with a different menu: for consideration received from a resident, the value is determined under sub-clause (b), (c) or (e) of clause (A) at the assessee's option, or on the basis of the fair market value of unquoted equity shares determined under sub-clause (a), (b), (c) or (e); for consideration received from a non-resident, under sub-clauses (b) to (e), or on the basis of the fair market value of unquoted equity shares determined under sub-clauses (a) to (e). Sub-rule (3) permits the date of the merchant banker's valuation report, if not more than ninety days prior to the date of issue, to be treated at the assessee's option as the valuation date, in which case clause (j) of rule 11U does not apply. Sub-rule (4) deems the issue price to be the fair market value where it exceeds the value determined under sub-clause (a) or (b) of clause (A) for resident consideration, or under sub-clause (a), (b) or (d) for non-resident consideration, by an amount not exceeding ten per cent of the valuation price.
Delegated legislation, not judicial reasoning. The structure of the substituted rule turns on two distinctions the reader must hold onto: who the subscriber is (resident or non-resident), which fixes the menu of methods; and what the option attaches to (the method, under sub-rule (2); the valuation date, under sub-rule (3); and the tolerance, under sub-rule (4)).
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Handle my notice → Ask a CA on WhatsAppSub-rules (2) to (4) of Rule 11UA were substituted for the old sub-rule (2) by the Income-tax (Twenty-first Amendment) Rules, 2023, with effect from 25 September 2023. For consideration received from a resident, the fair market value of unquoted equity shares may be taken at the assessee's option under sub-clause (a) (the adjusted book-value formula), (b) (merchant banker's Discounted Free Cash Flow), (c) (venture-capital price matching) or (e) (price matching against a notified entity); where the consideration is from a non-resident, sub-clauses (a) to (e) are all available, and sub-clause (d) opens five further merchant-banker methods — Comparable Company Multiple, Probability Weighted Expected Return, Option Pricing, Milestone Analysis and Replacement Cost. Sub-rule (4) is a safe harbour: where the issue price exceeds the value so determined by not more than ten per cent of the valuation price, the issue price is deemed to be the fair market value. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section Rule 11UA, section Rule 11U, section Rule 11UAA, section 56(2)(viib), section 56(2)(x), section 50CA of the Income Tax Act 1961. It is reported as Income-tax Rules, 1962, r.11UA(2) to (4), substituted by the IT (Twenty-first Amdt.) Rules, 2023, w.e.f. 25-9-2023. Three things matter in practice. First, the five extra methods in sub-clause (d) are available only for consideration received from a non-resident — a resident subscription still gets only (a), (b), (c) and (e), so quoting a Comparable Company Multiple valuation on a resident round is quoting a method the rule does not give. Second, the price-matching routes in (c) and (e) are conditional on the anchor consideration having been received within ninety days before or after the date of issue of the shares being valued, and the rule carries its own illustration of how that works. Third, sub-rule (3) lets the assessee treat the date of a merchant banker's valuation report as the valuation date if it is not more than ninety days before the issue — and where that option is exercised, clause (j) of Rule 11U does not apply. All of this attaches to section 56(2)(viib), which the Finance (No. 2) Act 2024 switched off from 1 April 2025 by a third proviso; so sub-rules (2) to (4) matter now for the open earlier years and for compliance histories, not for new issues. Rule 11UA(1) is a different animal and continues to serve section 56(2)(x); Rule 11UAA serves section 50CA. If it applies to you, the first step is this: Before naming a method, read the current text of Rule 11UA and check whether the subscriber is a resident or a non-resident — the menu differs.
Rule 11UA(1) prescribes the fair market value of property other than immovable property for the purposes of section 56 generally. Sub-rule (2) is the special code for unquoted equity shares and compulsorily convertible preference shares issued for the purposes of sub-clause (i) of clause (a) of the Explanation to section 56(2)(viib). Until 24 September 2023 sub-rule (2) offered essentially two options — the adjusted book-value formula and a merchant banker's Discounted Free Cash Flow valuation. The Income-tax (Twenty-first Amendment) Rules, 2023 substituted sub-rules (2) to (4) for the old sub-rule (2) with effect from 25 September 2023. The matter was decided on 2023-09-25 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. As currently printed, sub-rule (2)(A) gives the fair market value of unquoted equity shares as determined under sub-clause (a), (b), (c) or (e) at the assessee's option where the consideration is received from a resident, and under sub-clauses (a) to (e) at the assessee's option where the consideration is received from a non-resident. Sub-clause (a) is the (A minus L) multiplied by PV over PE formula; (b) is the merchant banker's Discounted Free Cash Flow method; (c) is venture-capital price matching, conditional on the anchor consideration having been received within ninety days before or after the date of issue; (d) is a merchant banker's valuation under the Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method or Replacement Cost Methods; (e) is price matching against an entity notified under clause (ii) of the first proviso to section 56(2)(viib), on the same ninety-day condition. Sub-rule (2)(B) deals with compulsorily convertible preference shares on the same resident/non-resident split but with a different menu: for consideration received from a resident, the value is determined under sub-clause (b), (c) or (e) of clause (A) at the assessee's option, or on the basis of the fair market value of unquoted equity shares determined under sub-clause (a), (b), (c) or (e); for consideration received from a non-resident, under sub-clauses (b) to (e), or on the basis of the fair market value of unquoted equity shares determined under sub-clauses (a) to (e). Sub-rule (3) permits the date of the merchant banker's valuation report, if not more than ninety days prior to the date of issue, to be treated at the assessee's option as the valuation date, in which case clause (j) of rule 11U does not apply. Sub-rule (4) deems the issue price to be the fair market value where it exceeds the value determined under sub-clause (a) or (b) of clause (A) for resident consideration, or under sub-clause (a), (b) or (d) for non-resident consideration, by an amount not exceeding ten per cent of the valuation price.
Delegated legislation, not judicial reasoning. The structure of the substituted rule turns on two distinctions the reader must hold onto: who the subscriber is (resident or non-resident), which fixes the menu of methods; and what the option attaches to (the method, under sub-rule (2); the valuation date, under sub-rule (3); and the tolerance, under sub-rule (4)).
It was decided by the CBDT Circulars & Instructions on 2023-09-25 and is reported as Income-tax Rules, 1962, r.11UA(2) to (4), substituted by the IT (Twenty-first Amdt.) Rules, 2023, w.e.f. 25-9-2023. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section Rule 11UA, section Rule 11U, section Rule 11UAA, section 56(2)(viib), section 56(2)(x), section 50CA, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. As currently printed, sub-rule (2)(A) gives the fair market value of unquoted equity shares as determined under sub-clause (a), (b), (c) or (e) at the assessee's option where the consideration is received from a resident, and under sub-clauses (a) to (e) at the assessee's option where the consideration is received from a non-resident. Sub-clause (a) is the (A minus L) multiplied by PV over PE formula; (b) is the merchant banker's Discounted Free Cash Flow method; (c) is venture-capital price matching, conditional on the anchor consideration having been received within ninety days before or after the date of issue; (d) is a merchant banker's valuation under the Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method or Replacement Cost Methods; (e) is price matching against an entity notified under clause (ii) of the first proviso to section 56(2)(viib), on the same ninety-day condition. Sub-rule (2)(B) deals with compulsorily convertible preference shares on the same resident/non-resident split but with a different menu: for consideration received from a resident, the value is determined under sub-clause (b), (c) or (e) of clause (A) at the assessee's option, or on the basis of the fair market value of unquoted equity shares determined under sub-clause (a), (b), (c) or (e); for consideration received from a non-resident, under sub-clauses (b) to (e), or on the basis of the fair market value of unquoted equity shares determined under sub-clauses (a) to (e). Sub-rule (3) permits the date of the merchant banker's valuation report, if not more than ninety days prior to the date of issue, to be treated at the assessee's option as the valuation date, in which case clause (j) of rule 11U does not apply. Sub-rule (4) deems the issue price to be the fair market value where it exceeds the value determined under sub-clause (a) or (b) of clause (A) for resident consideration, or under sub-clause (a), (b) or (d) for non-resident consideration, by an amount not exceeding ten per cent of the valuation price. It arises in Gifts, Shares & Angel Tax, How Tax Law Is Read and Assessment & Scrutiny matters, on section Rule 11UA, section Rule 11U, section Rule 11UAA, section 56(2)(viib), section 56(2)(x), section 50CA of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where price matching under sub-clause (c) or (e) is relied on, put the ninety-day window on the record with the dates of receipt of the anchor consideration and of the issue being valued. If the merchant banker's report post-dates the issue, check sub-rule (3): the option is only available where the report date is not more than ninety days prior to the date of issue, so a report obtained during assessment proceedings does not come within it. Where the issue price sits slightly above the computed value, test sub-rule (4) before conceding — ten per cent of the valuation price is deemed away, but only against sub-clause (a) or (b) for a resident, and (a), (b) or (d) for a non-resident. State the assessment year on every Rule 11UA(2) argument: the sub-rules apply from 25 September 2023 and the section they serve stops applying from 1 April 2025.
Validity check could not be completed. Validity check could not be completed. The rule page carries no 'Year:' stamp, so I cannot certify from the page itself that it is the live version rather than an archive; it was read twice with consistent results and the amending instrument and sub-rule (3) were corroborated from a Tribunal order of 29 November 2024. No key_quote is offered because no sentence of the rule was obtained from two independent sources. A later pass should attempt the Gazette notification (Notification No. 81/2023 dated 25 September 2023) directly; the department's own /communications/notification/notification-81-2023.pdf returned HTTP 404 on this build. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Sourcing limitation, stated plainly. The rule text was read on a single departmental URL, incometaxindia.gov.in/w/rule-11ua, which prints the rule heading 'Determination of fair market value' but carries NO 'Year:' stamp — the departmental rule pages do not appear to carry one, so the archived/live test used elsewhere in this library could not be applied. That page was fetched twice with differently worded requests and returned consistent, non-overlapping text (sub-rule (2) and its footnote on the first pass, sub-rules (3) and (4) on the second). The footnote, marker number 77, reads: 'Sub-rules (2) to (4) substituted for sub-rule (2) by the IT (Twenty-first Amdt.) Rules, 2023, w.e.f. 25-9-2023.' 'decided_on' is that commencement date, not a judgment date or the date of checking, which is in 'checked_on'. Independent corroboration of the amending instrument and of the content of sub-rule (3) comes from the ITAT Chennai in SPL Infrastructure Pvt. Ltd. (order of 29 November 2024, para 10), which describes the Income Tax (Twenty First Amendment) Rules, 2023 in respect of Rule 11UA and sets out the ninety-day option in sub-rule (3). No second independent source for sub-rules (2) and (4) was found, and no attempt was made to read the notification in the Gazette; the department's own notification PDF URL returned HTTP 404. Treat the detail of sub-clauses (a) to (e) as read once and checked against the rule's own internal cross-references, not as doubly sourced. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
As currently printed, sub-rule (2)(A) gives the fair market value of unquoted equity shares as determined under sub-clause (a), (b), (c) or (e) at the assessee's option where the consideration is received from a resident, and under sub-clauses (a) to (e) at the assessee's option where the consideration is received from a non-resident. Sub-clause (a) is the (A minus L) multiplied by PV over PE formula; (b) is the merchant banker's Discounted Free Cash Flow method; (c) is venture-capital price matching, conditional on the anchor consideration having been received within ninety days before or after the date of issue; (d) is a merchant banker's valuation under the Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method or Replacement Cost Methods; (e) is price matching against an entity notified under clause (ii) of the first proviso to section 56(2)(viib), on the same ninety-day condition. Sub-rule (2)(B) deals with compulsorily convertible preference shares on the same resident/non-resident split but with a different menu: for consideration received from a resident, the value is determined under sub-clause (b), (c) or (e) of clause (A) at the assessee's option, or on the basis of the fair market value of unquoted equity shares determined under sub-clause (a), (b), (c) or (e); for consideration received from a non-resident, under sub-clauses (b) to (e), or on the basis of the fair market value of unquoted equity shares determined under sub-clauses (a) to (e). Sub-rule (3) permits the date of the merchant banker's valuation report, if not more than ninety days prior to the date of issue, to be treated at the assessee's option as the valuation date, in which case clause (j) of rule 11U does not apply. Sub-rule (4) deems the issue price to be the fair market value where it exceeds the value determined under sub-clause (a) or (b) of clause (A) for resident consideration, or under sub-clause (a), (b) or (d) for non-resident consideration, by an amount not exceeding ten per cent of the valuation price.
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