Gift Tax Act, 1958 – ss.4, 6 and Schedule II – Wealth Tax Act,1957 – Schedule III, Part A r.2(9) & r.2(11); Part C, rr.9 & 11; and Part H, r.21 – “Quoted” shares and “unquoted” shares – Equity shares in lock-in-period – Valuation of – Respondent-assessee gifted 29,46,500 shares of M/s. BPL Sanyo Technologies Limited and 69,49,900 shares of M/s. BPL Sanyo Utilities and Appliances Limited to M/s. Celestial Finance Limited –Shares of M/s. BPL Sanyo Technologies Limited and M/s. BPL Sanyo Utilities and Appliances Limited, both public limited companies, were listed and quoted on the stock exchanges – However, these gifted shares being promoter quota shares were under a lock-in period up to 16th November 1993 and 25th May 1994 respectively – In the impugned judgment, the High Court observed that the equity shares under the lock-in period were not ‘quoted shares’ – A general circular issued by SEBI however stated that shares under the lock-in period can be transferred inter se the promoters – Issue whether such restricted transfer would convert the equity shares in the lock-in-period into ‘quoted shares’ as defined vide sub-rule (9) to r.2 of Part A of Schedule III of the W.T. Act – Answering in negative, the Court held: The restricted transfer would not make the equity shares in the lock-in period into “quoted shares” 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 – The shares in question being “unquoted shares” have to be valued in terms of r.11 of Part C of Schedule III of the W.T. Act as a standalone valuation method – This would be in accord with sub-section (1) to s.6 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 – Valuation cannot ignore the limitations attached to the shares – r.21 of Part H of Schedule III of the W.T. Act permits valuation and ascertainment of the market value as per provisions of Schedule III of the W.T. Act, but does not state that 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 purpose of valuation of an asset under the W.T. Act.
Shares and Securities – Wealth Tax Act,1957 – Explanation to r.2(9) of Part A, Schedule III – Effect of – Held: Explanation to r.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 r.2 of Part A of Schedule III of the W.T. Act – 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 – A decision of the authority is however amenable and can be examined when challenged in an appeal – Gift Tax Act, 1958.
Dismissing the appeals, the Court
HELD:1.1. As per the provisions of the Gift Tax Act, 1958 , as it was applicable on the date on which the gift was made, gift tax at the applicable rate is chargeable on the value of the taxable gift. Sub-section (1)(a) to Section 43 of the G.T. 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. Sub-section (1) to Section 64 of the G.T. 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 G.T. Act. Sub-section (1) to Section 6 is subject to the provisions of sub-section (2) to Section 6 of the G.T. Act, which sub-section need not be elucidated as it is not applicable in the context of the present case. It is an accepted position that the machinery provision relating to the method of valuation in Schedule II of the G.T. Act is mandatory and cannot be deviated.[Para 2][944-F-G; 945-A-C]
1.2. Schedule II to the G.T. 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. Therefore, the provisions of Part C of Schedule III of the W.T. Act, which lays down the method of valuation of shares and debentures of a company, are required to be referred to and applied. For purpose of the present decision, Rules 9 and 11 of Part C of Schedule III of the W.T. Act, which relate to the valuation of quoted shares and debentures of companies and valuation of unquoted equity shares in companies other than investment companies respectively, are required to be interpreted. [Para 3][945-C-E]
2.1. 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 W.T. Act. 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. Explanation to sub-rule (9) of Rule 2 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. The expression “unquoted share”, in relation to an equity share, means a share which is not a quoted share. [Para 4][947-E-F; 948-B-C]
2.2. 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. This position is accepted by the Revenue, which, however, has relied upon a general circular issued by SEBI, wherein it is stated that the shares under the lock-in period can be transferred inter se the promoters. This restricted transfer would not make the equity shares in the lockin period into “quoted shares” as defined vide sub-rule (9) to Rule 2 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. Possibility of transfer to promoters by private transfer/sale does not satisfy the conditions to be satisfied to regard the shares as quoted shares. [Para 6][948-F-H]
3. Rule 11 of Part C of Schedule III of the W.T. Act is a statutory rule which prescribes the method of valuation of “unquoted equity shares” in companies, other than investment companies, which prescription and method of valuation is mandatory in nature. 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. No other method of valuation is permitted and allowed. [Para 7][949-C-D]
4. Equity shares which are quoted and transferable in the stock exchange are to be valued on the basis of 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. The shares in question would become transferable post the lock-in period. It is a fact that the market price fluctuates, and the share prices can move up and down. Share prices do not remain static. Equally, the restriction or bar on transferability has an effect on the value/price of the shares. Easy and unrestricted marketability are important considerations that would normally impact valuation/price of a share. [Para 8][949-D-F]
5. In terms of the Rules, one cannot apply a hybrid method of valuation while applying Rule 9 of Part C of Schedule III of the W.T. Act, which prescribes the method of valuation for quoted shares. Ad hoc depreciation/reduction from the quoted price of equity shares transferable in the open market is not permitted and allowed vide Rule 9 of Part C of Schedule III of the W.T. Act. The shares in question being “unquoted shares”, therefore, have to be valued in terms of Rule 11 as a standalone valuation method. This would be in accord with sub-section (1) to Section 6 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. [Para 9][949G-H; 950-A-B]
6.1. Valuation cannot ignore the limitations attached to the shares. The shares in the lock-in period have market value, which would be the value that they would fetch if sold in the open market. Rule 21 of Part H of Schedule III of the W.T. Act permits valuation of the property even when the right to transfer the property is forbidden, restricted or contingent. Rights and limitations attached to the property form the ingredients in its value. The purpose is to assume that the property which is being valued is being sold, and not to ignore the limitations for the purpose of valuation. This is clear from the wording of Rule 21 of Part H of Schedule III of the W.T. Act. [Para 13][953-F-G]
6.2. 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. [Para 14][954-D-E]
7. The certificate from the concerned stock exchange is only to state whether an equity share, preference share or debenture, as the case may be, was quoted with the regularity from time to time and whether the quotations of such shares or debentures are based on current transactions made in the ordinary course of business. 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. 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. A decision of the authority is amenable and can be examined when challenged in an appeal. [Para 15][954-F-H]
R. Rathinasabapathy Chettiar v. Commissioner of Wealth-Tax, Madras (1974) 93 ITR 555 – approved.
Ahmed G.H. Ariff and Others v. Commissioner of Wealth Tax, Calcutta (1969) 2 SCC 471 and Purshottam N. Amarsay and Another v. Commissioner of Wealth Tax, Bombay (1972) 4 SCC 376 – relied on.
S.N. Wadiyar (Dead) through Legal Representative v. Commissioner of Wealth Tax, Karnataka (2015) 15 SCC 38 : [2015] 9 SCR 1059 and Commissioner of Wealth Tax, Meerut v. Sharvan Kumar Swarup & Sons (1994) 6 SCC 623 : [1994] 3 Suppl. SCR 750 – referred to.
Commissioner of Wealth Tax, Chennai v. Shri
Thirupathy Kumar Khemka (2012) SCC OnLine Mad
2562 and Commissioner of Income Tax, Chennai v. Sadhana Devi Tax Case No. 788 of 2008 (Decision of Madras High Court dated 12th April, 2019) – referred to.
Commissioners of Inland Revenue v. Crossman (1937) A.C. 26; Lynall and Another v. Inland Revenue
Commissioners (1972) A.C. 680 and Abrahams v. The Federal Commissioner of Taxation (1944) HCA 32 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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