Valuation Of Shares For The Purpose Of Gift Tax Should Take Into Consideration Limitation And Restrictions: Supreme Court

The Supreme Court has held that the valuation of shares for the purpose of gift tax must take into consideration the limitations and restrictions.

The division bench of Justice Sanjiv Khanna and Justice J.K. Maheshwari has observed that the equity shares under the lock-in period were not "quoted shares", for the simple reason that the shares in the lock-in period were not quoted on any recognised stock exchange regularity from time to time. There are no current transactions relating to these shares made in the ordinary course of business. The equity shares, being under the lock-in period, could not be traded and, therefore, remained unquoted on any recognised stock exchange.

The court noted that Rule 21 of Part H of Schedule III of the Wealth Tax Act, 1957 (W.T. Act) permits valuation and ascertainment of the market value. However, it does not state that the valuation will be done by disregarding the restrictions, by enhancing the rights that have been transferred, or by a revaluation of the asset for the purpose of valuation of an asset.

The appellant, Deputy Commissioner of Gift Tax, raised the issue relating to the valuation of shares which were gifted by the respondent-assessee to M/s. Celestial Finance Limited. The shares were listed and quoted on the stock exchanges. However, the gifted shares, being promoter quota shares, allotted to the assessee were under a lock-in period.

As per the provisions of the Gift Tax Act, of 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.

As per the definitions, the expression "quoted share" in the 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 shares is based on current transactions made in the ordinary course of business. The 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 as to 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.

The department has accepted that when the equity shares are in a lock-in period, then as per the SEBI guidelines, there is a complete bar on transfer, which is enforced by inscribing the words "not transferable" in the relevant share certificates.

Rule 21 of Part H of Schedule III of the W.T. Act permits the valuation of the property even when the right to transfer the property is forbidden, restricted or contingent. The rights and limitations attached to the property form the basis of 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.

The court stated that the property must be valued in accordance with the restrictions and not by ignoring them.

"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 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 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," the court stated.

Case Title: Deputy Commissioner of Gift Tax Versus M/s BPL Limited

Citation: 2022 LiveLaw (SC) 848

Gift Tax Act 1958 - Valuation of shares for the purpose of gift tax must take into consideration the limitations and restrictions.

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