Fair Market Value

What is the fair market value (FMV)?

Fair market value is the price an asset would fetch if sold in an open and competitive market fulfilling certain conditions. The condition is that neither the buyer nor the seller could be forced to strike a deal. The transaction must be entered willingly by both. In other words, fair market value is the highest price an asset would bring in an open and unrestricted market between a willing buyer and a willing seller who are both acting independently of each other. The term fair market value is commonly used by taxation authorities and in the real estate market.

How to determine Fair Market Value?

The fair market value of shares and securities can be found in the P&L statement provided by brokers.

As per Rule 11UA of the Income-tax Rules, the fair market value of various assets can be determined in the following manner:

Jewellery  -  

• the fair market value of jewellery shall be estimated to be the price which such jewellery would fetch if sold in the open market on the valuation date; 
•  in case the jewellery is received by the way of purchase on the valuation date, from a registered dealer, the invoice value of the jewellery shall be the fair market value;
•  in case the jewellery is received by any other mode and the value of the jewellery exceeds rupees fifty thousand, then the assessee may obtain the report of the registered valuer in respect of the price it would fetch if sold in the open market on the valuation date

Archaeological collections, drawings, paintings, sculptures, or any work of art –

• the fair market value of archaeological collections, drawings, paintings, sculptures, or any work of art (hereinafter referred to as artistic work) shall be estimated to be the price which it would fetch if sold in the open market on the valuation date;
• in case the artistic work is received by the way of purchase on the valuation date, from a registered dealer, the invoice value of the artistic work shall be the fair market value;
• in case the artistic work is received by any other mode and the value of the artistic work exceeds rupees fifty thousand, then the assessee may obtain the report of the registered valuer in respect of the price it would fetch if sold in the open market on the valuation date

 Quoted shares and securities – 

• if the quoted shares and securities are received by way of a transaction carried out through any recognized stock exchange, the fair market value of such shares and securities shall be the transaction value as recorded in such stock exchange;
• if such quoted shares and securities are received by way of transaction carried out other than through any recognized stock exchange, the fair market value of such shares and securities shall be, —

• the lowest price of such shares and securities quoted on any recognized stock exchange on the valuation date, and
• the lowest price of such shares and securities on any recognized stock exchange on a date immediately preceding the valuation date when such shares and securities were traded on such stock exchange, in cases where on the valuation date there is no trading in such shares and securities on any recognized stock exchange

Unquoted shares and securities –

            The fair market value of unquoted equity shares = (A+B+C+D - L) × (PV)                                                                                                                                                                                    (PE)      

            Where,

  A = book value of all the assets (other than jewellery, artistic work, shares, securities, and immovable property) in the balance sheet as reduced by, —

• any amount of income-tax paid if any, less the amount of income-tax refund claimed if any; and
• any amount is shown as an asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;

 B = the price which the jewellery and artwork would fetch if sold in the open market based on the valuation report obtained from a registered valuer;

 C = fair market value of shares and securities as determined in the manner provided in this rule;

 D = the value adopted or assessed or assessable by any authority of the Government for purpose of payment of stamp duty in respect of the immovable property;

 L= book value of liabilities shown in the balance sheet, but not including the following amounts, namely:—

• the paid-up capital in respect of equity shares;
• the amount set apart for payment of dividends on preference shares and equity where such dividends have not been declared before the date of transfer at a general body meeting of the company;
• reserves and surplus, by whatever name called, even if the resulting figure is negative,  other than those set apart towards depreciation;
• any amount representing provision for taxation, other than the amount of income-tax paid if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
• any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
• any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;

    PV= the paid-up value of such equity shares;

    PE = total amount of paid-up equity share capital as shown in the balance-sheet

The fair market value of unquoted shares and securities other than equity shares in a company that are not listed in any recognized stock exchange shall be estimated to be the price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of which such valuation.

Another option for the assessee to calculate the fair market value of unquoted shares is below:

(a)  the fair market value of unquoted equity shares = (A-L) X (PV)     

                                                                                               (PE)

where,

A =  Book value of assets in the balance sheet as reduced by –

• Tax deduction or collection at source or any amount of tax paid
• Advance tax payment as reduced by the amount of tax claimed as a refund
• Unamortised amount of deferred expenditure which does not represent the value of any asset;

L = book value of liabilities shown in the balance sheet, but not including -

• the paid-up capital in respect of equity shares;
• the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;
• reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; 
• any amount representing provision for taxation, other than the amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;  
• any amount representing provisions made for meeting liabilities, other than ascertained liabilities;  
• any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;

PE =  total amount of paid-up equity share capital as shown in the balance sheet;

PV = the paid-up value of such equity shares;

OR

(b) the fair market value of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash Flow method.