Sch. II , Rule 7
UNQUOTED EQUITY SHARES IN INTERLOCKED COMPANIES.
(1) The value of an unquoted equity share in one of the two interlocked companies held by the other interlocked company for the purposes of rule 6 shall be equal to the paid-up value of such share or the value determined under sub-rule (2), whichever is higher.
(2) For the purpose of sub-rule (1), the aggregate value of all the equity shares in an interlocked company shall be arrived at by multiplying the maintainable profits of such company by –
(a) the fraction 100/8.5, in a case where the gross total income of the company consists, to the extent of not less than 51 per cent of income chargeable under the head “Income from house property” under the Income-tax Act; or
(b) the fraction 100/10, in the case of any other interlocked company, and the resultant amount divided by the number of such equity shares shall be the value of such an equity share in such company.
(3) The maintainable profits of the company, for the purpose of sub-rule
(2), shall be computed in the following manner, namely :-
(a) the book profits of the company of the five accounting years of the company immediately preceding the date on which the gift was made shall first be ascertained;
(b) adjustments shall be made to the book profits for each of the said five years for all non-recurring and extraordinary items of income and expenditure and losses;
(c) adjustments shall be made to the book profits for expenditure which is not of a revenue nature but is debited in the accounts and for receipts which are in the nature of revenue receipts but are not accounted for in the profit and loss account;
(d) any development rebate or investment allowance debited in the books
of account shall be added back to the book profits;
(e) the tax liability of the company on the book profits, arrived at after the
adjustments at items (a), (b), (c) and (d), shall be deducted from such book profits;
(f) amounts required for paying dividends on preference share or shares with prior rights shall be deducted from such book profits;
(g) the aggregate of the book profits for the five accounting years so arrived at, divided by 5, shall be the maintainable profits of the company.
Explanation : For the purposes of this rule, “interlocked companies” means any two investment companies each of which holds shares in the other company.