Valuation has become a cornerstone of business decision-making and regulatory compliance in India. Whether a company is raising fresh capital, issuing ESOPs, undergoing a merger, or facing tax scrutiny, an independent assessment of its fair value is not just desirable but legally required. The valuation process ensures transparency, protects stakeholders, and provides a basis for regulators and investors to evaluate transactions fairly.
However, one of the most common sources of confusion among businesses is the distinction between valuations conducted under the Companies Act, 2013 and those mandated by the Income Tax Act, 1961. At first glance, both processes appear to be aimed at determining the value of shares or assets. Yet, the legal basis, objectives, professionals involved, and methodologies permitted vary significantly across the two regimes.
This blog aims to demystify these differences. By examining the triggers, governing laws, valuation methods, and the professionals authorized to carry them out, we will provide clarity on how Income Tax valuations and Companies Act valuations operate, and why understanding the distinction is critical for businesses in India.
2.What is Companies Act Valuation?
The Companies Act, 2013 introduced a structured regime for corporate valuations, bringing transparency and accountability into the process. Section 247 of the Act, along with the Companies (Registered Valuers and Valuation) Rules, 2017, lays down the framework for when and how valuations must be conducted. Crucially, it mandates that valuations required under the Act can only be performed by a Registered Valuer (RV), an individual or entity accredited by the Insolvency and Bankruptcy Board of India (IBBI).
The scope of Companies Act valuation is broad, and it is triggered by several corporate actions. Some of the most common scenarios include:
- Mergers and Acquisitions (M&A): Determining swap ratios, fairness of consideration, and shareholder entitlement.
- Share Buyback: Establishing fair value of shares to ensure equitable treatment of all shareholders.
- Rights Issues or Preferential Allotments: Assessing value to protect existing shareholders and meet regulatory compliance.
- Minority Shareholder Protection: Valuations for cases involving exit or dissenting shareholders.
In essence, valuations under the Companies Act serve as a safeguard for investors, creditors, and regulators by ensuring that financial decisions within companies are based on objective, independent, and standardized assessments.
3.What is Income Tax Valuation?
While the Companies Act focuses on corporate governance and fairness among stakeholders, valuations under the Income Tax Act, 1961 are primarily tax-driven. The key objective here is to determine the Fair Market Value (FMV) of shares, securities, or assets for tax assessment purposes. By prescribing specific valuation rules, the Act ensures that companies and individuals cannot manipulate prices to avoid or reduce tax liabilities.
Income Tax valuation becomes necessary in a variety of situations, including:
- Transfer of Shares or Securities: Establishing FMV to calculate capital gains or losses.
- Issue of Shares at Premium: Ensuring that the premium charged is justified, particularly under Section 56(2)(viib), to prevent inflow of unaccounted funds.
- Employee Stock Option Plans (ESOPs): Valuing shares when employees exercise their options, which has direct tax implications.
- Gifts or Other Transfers: Determining FMV for taxation under Section 56(2)(x).
- Indirect Transfers of Indian Assets by Foreign Entities: Covered under Section 9(1), where valuation helps ascertain whether Indian tax provisions are triggered.
Unlike the broader scope of Companies Act valuation, the Income Tax regime prescribes narrowly defined methods and calculations, leaving little room for professional discretion. The end goal is clear: to ensure accurate tax treatment, curb evasion, and safeguard the revenue interests of the government.
4.Legal Basis and Regulatory Framework
The divergence between Companies Act and Income Tax valuations becomes most evident when we examine their legal foundations.
Together, these frameworks underline that while both valuations may deal with the same underlying asset—say, shares of a company—their legal intent, methodology, and enforcement mechanisms differ fundamentally.
5.Valuation Triggers: When is Each Needed?
Valuations under the Companies Act and the Income Tax Act are not interchangeable; each is triggered by very different circumstances.
Companies Act Triggers: Valuation under the Companies Act, 2013, typically arises when a company is undertaking a corporate action that affects shareholder interests or requires regulatory approval. Common scenarios include:
- Mergers and Acquisitions (M&A): To determine fair share-swap ratios.
- Share Buyback or Reduction of Capital: Ensuring fairness in compensation to shareholders.
- Rights Issues or Preferential Allotments: To justify the issue price of new shares.
- Exit of Minority Shareholders: Providing an independent basis for buyout prices.
Income Tax Act Triggers:
In contrast, valuations under the Income Tax Act are driven by taxable events, where the determination of Fair Market Value (FMV) directly influences tax liability. Typical situations include:
- Transfer of Unlisted Shares: Valuation determines the capital gains tax payable.
- Issue of Shares at Premium: Section 56(2)(viib) requires FMV verification to prevent inflow of unaccounted money.
- ESOP Exercise by Employees: FMV establishes the taxable perquisite value.
- Gifts or Transfers Without Consideration: Section 56(2)(x) mandates valuation to determine taxable income.
Illustrative Example: If a company issues shares to an investor at a premium, it may require a Companies Act valuation to justify the price for regulatory compliance, and at the same time, an Income Tax valuation to ensure the premium is not deemed taxable in the hands of the company.
6.Who Can Perform Valuations?
The professionals authorized to carry out valuations differ significantly under the two laws.
Companies Act, 2013:
Only Registered Valuers (RVs) recognized by the Insolvency and Bankruptcy Board of India (IBBI) are permitted to issue valuation reports. These valuers must adhere to strict standards of independence, competence, and accountability, ensuring that reports meet the regulatory objectives of corporate governance.
Income Tax Act, 1961:
The Act permits a wider pool of professionals depending on the nature of the transaction. Valuations can be carried out by:
- Chartered Accountants (CAs)
- Merchant Bankers (registered with SEBI)
- Cost Accountants
The choice of professional is often dictated by the specific rule being applied (e.g., Rule 11UA for share valuation).
- Key Distinction:
Importantly, not every IBBI Registered Valuer is automatically eligible to perform valuations under the Income Tax Act. Unless the individual or firm separately qualifies as a Chartered Accountant, Merchant Banker, or Cost Accountant, their Companies Act authorization does not extend to tax-related valuations.
This distinction underscores the importance of engaging the right professional for the right requirement—choosing incorrectly can result in reports being rejected by authorities, leading to compliance failures or tax disputes.
7.Valuation Methods Allowed
The methods permitted for valuation represent one of the most significant differences between the Companies Act and the Income Tax Act.
Companies Act Methods:
Under the Companies Act, valuations are based on globally recognized and professionally accepted approaches. These include:
- Discounted Cash Flow (DCF): Valuation based on projected future cash flows.
- Market Approach: Using comparable companies or transactions to benchmark value.
Asset-Based Approach: Valuing a company based on the fair value of its underlying assets and liabilities.
- These methods provide flexibility to the Registered Valuer, who selects the most appropriate approach depending on the nature of the business, the industry, and the context of the transaction.
Income Tax Act Methods:
The Income Tax regime, by contrast, is far more prescriptive. Rule 11UA specifies the methods that may be used to determine Fair Market Value (FMV), which are generally limited to:
- Net Asset Value (NAV): Based on the book value of assets and liabilities, adjusted as per the rules.
- Discounted Cash Flow (DCF): Permitted for certain cases, particularly share premium taxation.
The application of these rules leaves little discretion to the valuer, as the Income Tax Department expects strict compliance with formula-driven calculations.
8.Valuation Methods Allowed
The methods permitted for valuation represent one of the most significant differences between the Companies Act and the Income Tax Act.
Companies Act Methods:
Under the Companies Act, valuations are based on globally recognized and professionally accepted approaches. These include:
- Discounted Cash Flow (DCF): Valuation based on projected future cash flows.
- Market Approach: Using comparable companies or transactions to benchmark value.
- Asset-Based Approach: Valuing a company based on the fair value of its underlying assets and liabilities.
These methods provide flexibility to the Registered Valuer, who selects the most appropriate approach depending on the nature of the business, the industry, and the context of the transaction.
Income Tax Act Methods:
The Income Tax regime, by contrast, is far more prescriptive. Rule 11UA specifies the methods that may be used to determine Fair Market Value (FMV), which are generally limited to:
- Net Asset Value (NAV): Based on the book value of assets and liabilities, adjusted as per the rules.
- Discounted Cash Flow (DCF): Permitted for certain cases, particularly share premium taxation.
The application of these rules leaves little discretion to the valuer, as the Income Tax Department expects strict compliance with formula-driven calculations.
Why Results May Differ:
Because Companies Act valuations allow professional judgment across multiple approaches while Income Tax valuations rely on prescribed formulas, the outcome for the same company or asset may vary considerably. For instance, a startup valued on future growth potential under DCF (Companies Act) might show a higher figure than its NAV-based valuation under Rule 11UA (Income Tax Act).
9.Purpose and Objectives of Each
At their core, the intent behind valuations under the two laws is very different, even if the subject of valuation—the shares or assets—is the same.
- Companies Act Valuation Objectives:
The Companies Act framework is built around corporate governance and fairness. Its purposes include: - Protecting the interests of shareholders, especially minorities.
- Ensuring fairness and transparency in corporate actions like mergers, acquisitions, and buybacks.
- Providing reliable reports for regulatory and judicial scrutiny (e.g., ROC, NCLT).
- In short, the Companies Act uses valuation as a mechanism to uphold trust and integrity in corporate decision-making.
- Income Tax Act Valuation Objectives:
The Income Tax Act’s valuation regime is tax-centric. Its primary goals are to: - Prevent tax evasion through manipulation of share prices or asset transfers.
- Ensure correct computation of taxable income, capital gains, or perquisites.
- Here, valuation acts as a safeguard against under-reporting of income or inflow of unaccounted funds, thereby reinforcing the integrity of the tax system.
10.Valuation Methods Allowed
The methods permitted for valuation represent one of the most significant differences between the Companies Act and the Income Tax Act.
Companies Act Methods:
Under the Companies Act, valuations are based on globally recognized and professionally accepted approaches. These include:
- Discounted Cash Flow (DCF): Valuation based on projected future cash flows.
- Market Approach: Using comparable companies or transactions to benchmark value.
Asset-Based Approach: Valuing a company based on the fair value of its underlying assets and liabilities.
- These methods provide flexibility to the Registered Valuer, who selects the most appropriate approach depending on the nature of the business, the industry, and the context of the transaction.
- Income Tax Act Methods:
The Income Tax regime, by contrast, is far more prescriptive. Rule 11UA specifies the methods that may be used to determine Fair Market Value (FMV), which are generally limited to: - Net Asset Value (NAV): Based on the book value of assets and liabilities, adjusted as per the rules.
- The application of these rules leaves little discretion to the valuer, as the Income Tax Department expects strict compliance with formula-driven calculations.
Why Results May Differ:
Because Companies Act valuations allow professional judgment across multiple approaches while Income Tax valuations rely on prescribed formulas, the outcome for the same company or asset may vary considerably. For instance, a startup valued on future growth potential under DCF (Companies Act) might show a higher figure than its NAV-based valuation under Rule 11UA (Income Tax Act).
11.Purpose and Objectives of Each
At their core, the intent behind valuations under the two laws is very different, even if the subject of valuation—the shares or assets—is the same.
Companies Act Valuation Objectives:
The Companies Act framework is built around corporate governance and fairness. Its purposes include:
- Protecting the interests of shareholders, especially minorities.
- Ensuring fairness and transparency in corporate actions like mergers, acquisitions, and buybacks.
- Providing reliable reports for regulatory and judicial scrutiny (e.g., ROC, NCLT).
- In short, the Companies Act uses valuation as a mechanism to uphold trust and integrity in corporate decision-making.
Income Tax Act Valuation Objectives:
The Income Tax Act’s valuation regime is tax-centric. Its primary goals are to:
- Prevent tax evasion through manipulation of share prices or asset transfers.
- Ensure correct computation of taxable income, capital gains, or perquisites.
- Capture the Fair Market Value (FMV) in monetary terms to safeguard government revenue.
Here, valuation acts as a safeguard against under-reporting of income or inflow of unaccounted funds, thereby reinforcing the integrity of the tax system.
12.Documentation and Reporting Standards
- Companies Act:
Valuations carried out under the Companies Act are highly formal in nature. The Registered Valuer is required to prepare a detailed valuation report that includes background, methodology, assumptions, and the conclusion on value. These reports often form part of filings with regulators such as the Registrar of Companies (ROC) or submissions before the National Company Law Tribunal (NCLT). In many cases, they are also shared with shareholders to ensure transparency and compliance. - Income Tax Act:
Valuations under the Income Tax framework are more compliance-oriented and focused on structured Fair Market Value (FMV) reporting. The report must align with the specific requirements of the Income Tax Rules (such as Rule 11UA or Rule 11UB). These reports are not generally filed with shareholders but are used for tax return purposes and may be scrutinized during assessments by the Income Tax Department. The emphasis here is on accuracy and adherence to the formula-driven approach prescribed by the law.
13.Key Differences Between Companies Act Valuation and Income Tax Valuation
Aspect
Companies Act Valuation
Income Tax Valuation
Governing Law
Section 247 of the Companies Act, 2013; Valuation Rules; IBBI standards
Income Tax Act, 1961; Sections 56(2)(viib), 50CA, 56(2)(x); Rule 11UA, Rule 11UB
Triggers
Corporate events like mergers, acquisitions, buyback of shares, rights issue, preferential allotment
Taxable events like issue of shares above FMV, ESOP taxation, transfer of unlisted shares, capital gains computation
Purpose
Ensure fairness, protect minority shareholders, regulatory compliance
Prevent tax evasion, ensure correct tax computation, safeguard government revenue
Who Can Perform
Only IBBI Registered Valuers
Chartered Accountants, Merchant Bankers, Cost Accountants (depending on context)
Methods Allowed
Professional discretion: DCF, Market Approach, Asset-Based Approach
Prescribed methods only: DCF (in select cases), NAV (Rule 11UA)
Report Usage
Submitted to ROC, NCLT, or shared with shareholders; part of corporate governance records
Used for tax compliance and Income Tax Department scrutiny; part of tax filings
Flexibility
High flexibility in method selection
Strictly rule-based, little professional judgment allowed
Objective
Fairness, transparency, governance
Tax compliance, revenue protection
14.Conclusion
Valuation in India operates under two distinct legal regimes—the Companies Act, 2013, and the Income Tax Act, 1961. While both use the term “valuation,” their purpose, methodology, governing authority, and professional requirements differ sharply. The Companies Act emphasizes fairness, transparency, and shareholder protection, whereas the Income Tax Act is focused on accurate tax computation and preventing revenue leakage.
For businesses, this means a single transaction may often demand two separate valuations, creating the risk of conflicting figures and compliance challenges. The safest approach is to engage the right professional early—a Registered Valuer for Companies Act purposes, and a Merchant Banker, Chartered Accountant, or Cost Accountant (as applicable) for Income Tax compliance. Proper planning not only ensures regulatory alignment but also prevents costly disputes, penalties, and delays.
FAQS
Because each law serves a different purpose: the Companies Act ensures fairness in corporate transactions (like M&A or buyback), while the Income Tax Act ensures correct tax computation and prevents revenue leakage.
No. Since the governing laws, prescribed methods, and eligible professionals differ, a single report rarely satisfies both requirements. Companies often need two separate valuations.
Under the Companies Act, only IBBI-registered valuers can conduct valuations. Under the Income Tax Act, depending on the rule, a Chartered Accountant, Merchant Banker, or Cost Accountant may perform valuations.
The Income Tax Act prescribes strict methods (NAV, DCF under Rule 11UA), while the Companies Act allows internationally accepted approaches. This difference in methodology often leads to different outcomes for the same asset or company.
Companies should plan ahead, engage the appropriate professionals for each law, and maintain clear documentation. This ensures compliance, avoids penalties, and helps in smoother execution of corporate and tax-related transactions.
