In an attempt to enhance transparency in the valuation of the unlisted shares or unlisted companies, the Central Board of Direct Taxes (CBDT) has expressly barred the chartered accountants (CAs) from the valuation process of unlisted shares or unlisted companies for income tax purposes.

The reason behind the prohibition of CAs from valuation of unlisted shares and unlisted companies may be the flak the profession is facing due to negligent or fraudulent professional conduct of some CAs in discharging their duties. This is being attributed as among the main causes that contributed to the flurry of the corporate frauds that have crippled and de-stabilized Indian banking system and thereby a considerable corporate sector.

Previously, either a merchant banker or CA used to evaluate the fair market value of unlisted equity shares based on the book value on the valuation date or by the discounted cash flow method at the option of the company.

However, following the removal of CAs from the authorized professionals list to perform valuation of unlisted shares or companies, going forward a merchant banker is the only professionals who can perform valuation of unlisted shares or companies exclusively for income tax purposes.

Interesting prospect is that the foregoing does not affect the knack of the CAs to value the unlisted shares under the provisions of the Companies Act, 2013.

The latest modification is effected in line with the crux of Section 3 of the Income Tax Act, 1961 which provides that the valuation of unlisted shares (issued under the Employee Stock Ownership Schemes) is to be exclusively conducted by the merchant banker.

Now, this is only one side of the story.

On the other side, the decision of the CBDT to prohibit CAs from conducting the valuation of unlisted shares did not go well with the Institute of Chartered Accountants (ICAI).  

ICAI felt that CBDT should have consulted ICAI prior to effecting its decision as ICAI is one of the prominent institutions and partners in building the nation.

ICAI has submitted a letter to CBDT in this regard expressing its concerns over the CBDT decision.

The following are some of the major submissions and concerns quoted by the ICAI in its letter to CBDT:

·       Valuation standards prepared and issued by the ICAI are regarded as the benchmark for valuation practices pertinent to the CAs.

·       ICAI plays significant role in monitoring the matters associated with Valuation Standards and in educating CAs about the importance of uplifting the CA performance standards

·       Judicial Forum recognized the CA fraternity as the sole expert in the field of accounting, auditing and other connected valuations

·       CAs is eligible for registering as a valuer under the Section 247 of the Companies Act, 2013 and as registered valuer under the Wealth Tax Rules.

·       ICAI closely monitors the functionality of CAs with respect to any valuation activities.

·       Merchant Bankers are very limited in number when compared to large number of CA experts and permitting Merchant Bankers alone to perform the valuation of unlisted shares could lead to enhancement in the costs associated with valuation – which is not the government intent and which will have negative implications on the prospect of ease of doing business sentiment in India.

·       ICAI voiced its opinion that if the CBDT notification is reconsidered then the above mentioned situation can be easily avoided. 

ICAI hopes that its submissions and concerns will be considered by CBDT and the amendment made to Rules 11U and 11UA will be reconsidered.

In the prevailing circumstances, it is for the CBDT and ICAI to resolve the issue amicable in the best interest of the companies, tax department and CA fraternity or else could lead to tough war between CBDT and ICAI, which is detrimental to all the concerned quarters.

Research inputs by Paruchuri Baswanth Mohan