Fair market value deemed to be full value of consideration in certain cases

80

If the consideration received or accruing from the transfer of a capital asset is not ascertainable or is unable to be determined, its fair market value on the date of transfer shall be deemed as the full value of consideration received or accruing as a result of the transfer for the purposes of computing income under the head “Capital gains”.

Explanation

Section Summary:

Section 80 of the new income tax law addresses situations where the consideration received from the transfer of a capital asset cannot be determined or is not ascertainable. In such cases, the fair market value (FMV) of the asset on the date of transfer is deemed to be the full value of consideration for calculating capital gains. This ensures that taxable income from capital gains is computed even when the actual sale price is unclear or unavailable.

Key Changes:

• Prior Law: Under the previous income tax regime, there was no explicit provision deeming the fair market value as the consideration in cases where the sale price was unascertainable. Taxpayers typically relied on actual transaction values or other valuation methods.
• New Law: Section 80 introduces a clear rule that the FMV on the date of transfer will be treated as the full value of consideration if the actual consideration cannot be determined.

Practical Implications:

• Taxpayers: This provision ensures that taxpayers cannot avoid capital gains tax by claiming that the sale price of an asset is unascertainable. The FMV will now be used as the basis for calculating taxable gains.
• Businesses: Businesses transferring capital assets (e.g., shares, property) must ensure proper documentation of transaction values. If the sale price is not clearly documented, the FMV will apply, potentially leading to higher tax liabilities.
• Compliance: Tax authorities now have a clear basis to assess capital gains in cases where the sale price is disputed or unavailable.

Critical Concepts:

• Fair Market Value (FMV): The price an asset would fetch in the open market on the date of transfer, determined by recognized valuation methods.
• Capital Asset: Any property held by a taxpayer, such as real estate, shares, or jewelry, except for certain excluded items like personal effects.
• Capital Gains: The profit arising from the transfer of a capital asset, calculated as the difference between the sale price (or FMV, in this case) and the cost of acquisition.

Compliance Steps:

1. Documentation: Ensure proper documentation of the sale price for all capital asset transfers. If the sale price is not clearly stated, the FMV will apply.
2. Valuation: Obtain a certified valuation report for the FMV of the asset on the date of transfer if the sale price is unascertainable.
3. Reporting: Report the FMV as the full value of consideration in the capital gains computation when filing income tax returns.

Examples:

• Scenario 1: A taxpayer sells a piece of land but does not disclose the sale price in the agreement. The tax authorities cannot determine the actual consideration. Under Section 80, the FMV of the land on the date of sale will be used to calculate capital gains.
• Scenario 2: A company transfers shares to a related party without specifying the sale price. The FMV of the shares on the transfer date will be deemed as the consideration for capital gains computation.

This section ensures clarity and fairness in taxing capital gains, especially in cases where the sale price is ambiguous or undisclosed.