Determination of price in certain cases

3. (1) For the purposes of sub-clause(ii) of clause (16) of the section 2 of the Act, the price shall be determined in the following manner, namely:—

       (a) the price of unquoted equity shares shall be the higher of,—
             (I) its cost of acquisition;
             (II) the fair market value of such equity shares determined, on the date of transaction, by a merchant banker or an accountant as per the Discounted Free Cash Flow method; and
             (III) the value, on the date of transaction, of such equity shares as determined in the following manner, namely:—

           The fair market value of unquoted equity shares = (A+B - L)× (PV)/(PE)
           where,
          A= book value of all the assets (other than bullion, jewellery, precious stone, artistic work, shares, securities and immovable property) as reduced by,- (i) any amount of income-tax paid, if any, less the amount of income-              tax refund claimed, if any, and (ii) any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;
          B= the price that the bullion, jewellery, precious stone, artistic work, shares, securities and immovable property would ordinarily fetch on sale in the open market on the date of transaction;
          L= book value of liabilities, but not including the following amounts, namely:—

                 (i) the paid-up capital in respect of equity shares;
                 (ii) the amount set apart for payment of dividends on preference shares and equity shares;
                 (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
                 (iv) any amount representing provision for taxation, other than 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;
                 (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
                 (vi) 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;