Rule 56 — Meaning of expressions used in determination of fair market value. Made under s.92, s.79, s.26, s.513 of the Income-tax Act, 2025.
Rule 56 gives effect to Section 92, Section 79, Section 26 and Section 513 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.
The rule defines the expressions used in itself and in rule 57. "Balance sheet" for an Indian company means the balance sheet including the notes annexed and forming part of the accounts, as drawn up on the valuation date and audited by the auditor appointed under the laws relating to companies in force; for a company that is not an Indian company, it means the balance sheet so drawn up and audited by the auditor, if any, appointed under the laws in force of the country in which the company is registered or incorporated. "Merchant banker" means a category I merchant banker registered with the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992. "Quoted shares or securities" means a share or security quoted on any recognised stock exchange with regularity from time to time, where the quotations are based on current transactions made in the ordinary course of business, and "unquoted shares and securities" means shares and securities that are not quoted shares or securities. "Recognised stock exchange" and "securities" take their meanings from section 2(f) and section 2(h) respectively of the Securities Contracts (Regulation) Act, 1956. "Registered dealer" means a dealer registered under the Central Sales Tax Act, 1956 or the general sales tax law for the time being in force in any State, including value added tax laws. "Registered valuer" has the meaning assigned to it in section 513.
Clause (i) fixes the "valuation date" by a Table of three entries: for section 92, the date on which the property or consideration referred to in section 92 is received by the assessee; for section 79, the date on which the capital asset, being a share of a company other than a quoted share, referred to in section 79 is transferred; and for section 26(2)(j), the date on which the inventory is converted, or treated, as a capital asset.
Rule 57 determines fair market value, and a valuation is only as certain as the date it is made on and the terms it is built from. Section 92, section 79 and section 26(2)(j) each trigger a valuation at a different moment in a transaction, so the rule fixes a separate valuation date for each rather than leaving the parties to choose one. The remaining definitions decide which balance sheet may be used, who may value, and whether a share counts as quoted — the three questions that otherwise decide the answer.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Valuation date for section 92 | The date on which the property or consideration is received by the assessee | Property or consideration referred to in section 92 | Clause (i), Table Sl. No. 1 |
| Valuation date for section 79 | The date on which the capital asset is transferred | The capital asset being a share of a company other than a quoted share, referred to in section 79 | Clause (i), Table Sl. No. 2 |
| Valuation date for section 26(2)(j) | The date on which the inventory is converted, or treated, as a capital asset | Conversion or treatment of inventory as a capital asset | Clause (i), Table Sl. No. 3 |
The valuation date is not the date of the agreement, the date of registration or the last day of the tax year — it is fixed separately for each of the three sections in the Table, and the balance sheet that may be used is the one drawn up on that date and audited. Quotation alone does not make a share "quoted": clause (c) requires quotation on a recognised stock exchange with regularity from time to time and quotations based on current transactions made in the ordinary course of business, so a thinly or nominally traded share falls into "unquoted shares and securities" and is valued accordingly under rule 57. Where the rule requires a merchant banker, only a category I merchant banker registered with the Securities and Exchange Board of India qualifies; a registered valuer is a different person, defined by section 513.
A company transfers unquoted shares in another company under an agreement signed in March and completed by transfer in June of the same tax year. For section 79, entry 2 of the Table in clause (i) fixes the valuation date as the date of transfer in June, so the balance sheet drawn up on that date and audited is the one to be used, not the March agreement date or the previous 31 March accounts.
In a valuation report supporting a return where property or shares have been received or transferred, and in an assessment where the Assessing Officer questions the date or the basis on which the fair market value under rule 57 was computed.
"merchant banker" means 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)
"quoted shares or securities" in relation to shares or securities 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