Supreme Court: In appeals relating to the valuation of shares of BPL Sanyo Technologies Ltd. and BPL Sanyo Utilities and Appliances Ltd. gifted by the respondent/assessee to Celestial Finance Ltd. in 1993, Sanjiv Khanna* and J.K. Maheshwari, JJ., while dismissing the appeal, held that equity shares which are quoted and transferable in the stock exchange are to be valued based on the current transactions and quotations in the open market. The market quotations would reflect the market value of the equity shares that are transferable in a stock exchange, but this market price would not reflect the true and correct market price of shares suffering restrictions and bar on their transferability. Thus, the shares in question would become transferable post the lock-in period. The Court noted that the shares of both the public limited companies were listed and quoted on the stock exchanges. However, these gifted shares, being promoter quota shares allotted to the assessee in 1990 and 1991 were under a lock-in period up to 1993 and 1994, respectively.
The Court observed that as per the provisions of the Gift Tax Act, 1958 (‘GT Act’), a gift tax at the applicable rate is chargeable on the value of the taxable gift. Further, Section 43(1)(a) of the GT Act states that where a property is transferred otherwise than for adequate consideration, the amount by which the market value of the property, at the date of the transfer, exceeds the value of the consideration, shall be deemed to be a gift made by the transferor and Section 64(1) of the GT Act states that the value of any property, other than cash, which is transferred by way of gift, shall be its value on the date on which the gift was made, and shall be determined in the manner as laid down in Schedule II of the Act.
It was also observed that it is an accepted position that the machinery provision relating to the method of valuation in Schedule II of the GT Act which incorporates the rules for determining the value of a gifted property, states that the value of any property, other than cash, transferred by way of gift, subject to the modifications as stated, shall be determined in accordance with the provisions of Schedule III of the Wealth Tax Act, 1957 (‘WT Act’), is mandatory and cannot be deviated.
The Court interpreted Rules 9 and 11 of Part C of Schedule III of the WT Act, which relates to the valuation of quoted shares and debentures of companies and valuation of unquoted equity shares in companies other than investment companies. It was observed that the expressions “quoted share” and “quoted debentures”, and “unquoted shares” and “unquoted debentures” have been defined vide sub-rules (9) and (11), respectively, to Rule 2 of Part A of Schedule III of the WT Act, and as per the definitions the expression “quoted share” in case of an equity share means a share which is quoted on any recognised stock exchange with regularity from time to time and where the quotation of such shares is based on current transactions made in the ordinary course of business, and Explanation to Rule 2((9) of Part A of Schedule III of the W.T. Act states that when a question arises on whether a share is a quoted share within the meaning of the rule, a certificate to that effect furnished by the concerned stock exchange in the prescribed form shall be accepted as conclusive. Further, the expression “unquoted share”, in relation to an equity share, means a share which is not a quoted share.
The Court agreed with the views of the impugned judgment that the equity shares under the lock-in period were not “quoted shares”, as the shares in the lock-in period were not quoted in any recognised stock exchange with regularity from time to time. There are no current transactions relating to these shares made in the ordinary course of business. These equity shares being under the lock-in period could not be traded and, therefore, remained unquoted in any recognised stock exchange. Therefore, there would be no current transactions in respect of these shares made in the ordinary course of business.
Moreover, it was observed that when the equity shares are in a lock-in period, then as per the guidelines issued by the Securities and Exchange Board of India (SEBI), there is a complete bar on transfer, which is enforced by inscribing the words “not transferable” in the relevant share certificates, and this restricted transfer would not make the equity shares in the lock-in period into “quoted shares” as defined vide Rule 2 (9) of Part A of Schedule III of the W.T. Act, as the lock-in shares are not quoted in any recognised stock exchange with regularity from time to time, and it is not possible to have quotations based upon current transactions made in the ordinary course of business. Further, the possibility of transfer to promoters by private transfer/sale does not satisfy the conditions to be satisfied to regard the shares as quoted shares. It was also observed that the effect of Rule 11 of Part C of Schedule III of the W.T. Act is that unquoted shares must be valued as per the formula prescribed and no other method of valuation is permitted or allowed.
It was also viewed that the market price fluctuates, the share prices do not remain static, and the restriction or bar on transferability influences the price of the shares. Further, easy and unrestricted marketability are important considerations that would normally impact valuation/price of a share. Therefore, one must depreciate the value of the lock-in equity shares, viz. shares that are free from such restrictions.
The Court observed that in terms of the Rules, a hybrid method of valuation cannot be applied, while applying Rule 9 of Part C of Schedule III of the W.T. Act, which prescribes the method of valuation for quoted shares. Further, ad hoc depreciation from the quoted price of equity shares transferable in the open market is not permitted and allowed vide the said Rule, and as the shares in question being “unquoted shares”, therefore, must be valued in terms of Rule 11 as a standalone valuation method. This would be in accord with Section 6(1) of the G.T. Act, which states that the value of a property, other than cash, transferred by way of gift, shall be valued on the date on which the gift was made and shall be determined in the manner as laid down in Schedule II of the G.T. Act, which makes the provisions of Schedule III of the W.T. Act applicable.
The Court to understand the import of Rule 21 of Part H of Schedule III of the W.T. Act referred to the judgments in, Ahmed G.H. Ariff v. CWT, (1969) 2 SCC 471, Purshottam N. Amarsay v. CWT, (1972) 4 SCC 376 wherein it was held that “wealth tax under Section 3 of the W.T. Act is imposed on the charge of net wealth, which necessarily includes in it every description of property of the assessee, movable or immovable, barring the exceptions as stated in the provisions of the W.T. Act”. It further referred to the decision in Commissioners of Inland Revenue v. Crossman, (1937) A.C. 26. wherein it was held that “where the right to transfer shares of a limited company is restricted and while its value is not ‘nil’, it should be valued on the basis and accounting for the restriction” and observed that Rule 21 of Part H of Schedule III of the W.T. Act is a rule which has been enacted to clarify and remove doubts, and has reiterated and affirmed the dictum of the abovementioned decisions, that notwithstanding the negative covenants prohibiting or restricting transfer, the property should be valued for the purpose of the W.T. Act and the G.T. Act, but the valuation is not by overlooking or ignoring the restrictive conditions.
Thus, Rule 21 of Part H of Schedule III of the W.T. Act permits valuation and ascertainment of the market value as per the provisions of Schedule III of the W.T. Act, but does not state that the valuation will be done by disregarding the restrictions, or by enhancing the rights which have been transferred, or by revaluation of the asset when provisions of Schedule III are invoked for the purpose of valuation of an asset under the W.T. Act
The Court further clarified that, the explanation to Rule 2(9) of Part A, Schedule III of the W.T. Act does not prohibit the authority, tribunal or the court from examining whether a particular share, be it equity or preference share, is a “quoted share” or an “unquoted share” in terms of sub-rules (9) and (11) of Rule 2 of Part A of Schedule III of the W.T. Act. Further, this right which is conferred on the authorities under the W.T. Act, or the G.T. Act, is not delegated to the stock exchange; and a decision of the authority is amenable and can be examined when challenged in an appeal.
[Commr. of Gift Tax v. BPL Ltd., 2022 SCC OnLine SC 1405, decided on 13.10.2022]
*Judgment by: Justice Sanjiv Khanna
