Section 79 — Fair Market Value for Transfer of Unquoted Shares: Analysis with Case Laws

Section Analysis

Section 79 is the equity-share counterpart to Section 78's stamp-duty valuation rule for land/buildings (Part 1, Article 8). It provides that where consideration received or accruing on transfer of a share of a company other than a quoted share (i.e., unlisted/unquoted shares) is less than the fair market value of such share (as determined by prescribed valuation rules), the FMV is deemed to be the full value of consideration for computing capital gains — overriding the actual transaction price, similar in spirit to Section 78 but specifically targeting unquoted equity rather than immovable property.

This provision was introduced as an anti-avoidance measure to prevent under-valuation of unlisted shares in related-party or family transactions designed to minimise the seller's reported capital gains (and, correspondingly, address a related gift-taxation concern on the buyer's side for under-priced acquisitions).

Case Laws

1. Globe Capital Market Ltd. (Delhi High Court, IT Appeal No. 364 of 2024) — As discussed in Article 20, this ruling clarified that share buy-backs (governed by the dedicated Section 69/46A mechanism) are not "acquisitions" of property by the company and therefore fall outside this FMV-substitution provision's scope — an important boundary-drawing precedent limiting Section 79's application.

2. Rulings on valuation methodology disputes — Tribunals have frequently addressed disputes over which prescribed valuation method (net asset value, discounted cash flow, or other prescribed approaches) should govern a particular unquoted share transfer, generally holding that taxpayers are entitled to choose from the methods permitted under the applicable valuation rules, provided the chosen method is applied consistently and with proper documentation — echoing similar valuation-method flexibility principles developed under related share-valuation provisions for other purposes.

3. Principle from Addl. CIT v. Durgamma P. (1987) 167 ITR 776 (AP) — As with Section 78 (Part 1, Article 8), the broader principle that a valuation-related legal fiction should not be extended beyond its intended statutory field remains relevant when disputes arise over whether Section 79 applies to a particular category of unquoted-share transaction (such as buy-backs, per Globe Capital Market, or other specialised transaction types).

FAQs

Q1. Does this provision apply to listed/quoted shares? No — it specifically targets unquoted (unlisted) shares; quoted shares transferred through recognised stock exchanges have their own market-price-based computation and are outside this specific provision's scope.

Q2. What valuation method is used to determine FMV for unquoted shares? Prescribed valuation rules (typically involving net asset value or other approved methodologies) govern the FMV determination — taxpayers generally have some choice among permitted methods, subject to consistent and well-documented application.

Q3. Does this provision apply to share buy-backs by unlisted companies? Per the Globe Capital Market ruling, no — buy-backs are treated as capital reduction (governed by the dedicated buy-back provision), not as an "acquisition" attracting this FMV-substitution rule.

Q4. Can the seller be taxed on FMV even if they genuinely received a lower price? Yes, in principle — that is precisely the deeming effect of this provision, similar to Section 78 for immovable property; the actual (lower) consideration is overridden by the deemed FMV figure for capital gains computation purposes.

Q5. Does this create a corresponding tax issue for the buyer? Potentially yes — a related but distinct provision (dealing with property received for inadequate consideration) can separately tax the buyer on the differential between FMV and actual price paid, so both sides of an undervalued unquoted-share transaction can face tax scrutiny.

Precautions

  • Obtain a proper, defensible valuation of unquoted shares (using a permitted method under the applicable valuation rules) before finalising any related-party or family transfer — informal or undocumented pricing invites both seller-side and buyer-side tax exposure.
  • If you're conducting a share buy-back, review the Globe Capital Market precedent with your tax advisor, but don't assume this settled position is beyond further litigation or legislative clarification — monitor developments in this area.
  • Retain full documentation of the valuation methodology and inputs used for any unquoted share transaction, since disputes over valuation approach are common and well-documented, consistently-applied methods fare better in litigation.
  • Consider obtaining a professional (chartered accountant/registered valuer) valuation report contemporaneously with the transaction, rather than after the fact, to strengthen your position if the transaction is later scrutinised.

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools