Deputy Commissioner of Gift Tax, Central Circle-II v. M/S BPL Limited

4. 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, which read:

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.

5. We are in agreement with the view expressed in the impugned judgment, which observes 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 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. There, therefore, would be no current transactions in respect of these shares made in the ordinary course of business.

6. 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, in our opinion, would not make the equity shares in the lock-in 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.

7. Rule 11 of Part C of Schedule III of the W.T. Act applies to “unquoted shares” which, as per the definition vide sub-rule (11) to Rule 2 of Part A of Schedule III of the W.T. Act, means a share which is not a “quoted share”. Sub-rule (1) to Rule 11 of Part C of Schedule III of the W.T. Act, states that other than investment companies, the value of unquoted equity shares is to be determined in the manner specified in sub-rule (2) to Rule 11 of Part C of Schedule III of the W.T. Act. Sub-rule (2) to Rule 11 of Part C of Schedule III of the W.T. Act states the method of valuation in the case of “unquoted equity shares in any company, other than investment companies”, which, in the context of the limited controversy raised before us, need not be elaborated. Suffice it is to observe that 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.

8. 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. Therefore, one may have to depreciate the value of the lock-in equity shares, viz. shares that are free from such restriction.

9. In terms of the Rules, we 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, as noticed above, makes the provisions of Schedule III of the W.T. Act applicable.

10. Faced with the aforesaid position, the Revenue has relied upon Rule 21 of Part H of Schedule III of the W.T. Act, which reads thus:

Schedule III of the W.T. Act, it is necessary to refer to earlier judgments of this Court on the valuation of equity shares or property not freely transferrable or where transfer is restricted. Reference to these decisions is also relevant as it supports our interpretation in highlighting the difference between “quoted” and “unquoted” shares.

11. In Ahmed G.H. Ariff and Others v. Commissioner of Wealth Tax, Calcutta[7], a three Judge Bench of this Court, in a matter relating to the W.T. Act for a period when Schedule III of the W.T. Act was not applicable, had observed that the expression ‘property’ is a term of the widest import as it signifies every possible interest which a person can clearly hold or enjoy. ‘Property’, as a term, should be given a liberal and wide connotation, and extends to those wellrecognised types of interests that have the insignia or characteristics of a proprietary right. Having held so, this Court rejected the argument of the assessee therein that his right to receive a specified share of the net income from an estate in respect of a Wakf-Alal-Aulad was not an asset assessable to wealth tax, on the ground that this asset had ‘nil’ or no value as it was of a non-transferable nature. 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. More significant for our purposes are the observations that the words “if sold in the open market” does not contemplate actual sale or the actual state in the market, but only enjoins that it should be assumed that there is an open market and the property, even with the restrictions, can be sold in such a market, and on that basis the value has to be found out. Therefore, the expression “if sold in the open market” refers to a hypothetical case, where, for the purpose of valuation, one must assume that there is an open market in which an asset with restrictions or bar on transfer can be sold. This decision was followed in Purshottam N. Amarsay and Another v. Commissioner of Wealth Tax, Bombay[8], which was a case relating to the valuation of the right to property of the assessee in a trust. The argument of the assessee that the right to property in a trust, being a personal estate, is incapable of being sold in the open market and, therefore, it would have ‘nil’ or no value was rejected. This decision in this context quotes Ahmed G.H. Ariff (supra). At this stage, it would be relevant to refer to the decision of the House of Lords in Commissioners of Inland Revenue v. Crossman[9], which decision was referred to with approval in both Ahmed G.H. Ariff

9 (1937) A.C. 26. (supra) and Purshottam N. Amarsay (supra). The majority decision of the House of Lords in Crossman’s case (supra), a case relating to estate duty, holds that where the right to transfer shares of a limited company is restricted and while its value is not ‘nil’ or ‘0’, it should be valued on the basis and accounting for the restriction. The contention that in view of the bar on transfer no property was actually passed on death, and a fresh set of rights in favour of the legatees came into existence was disapproved. At the same time, it was held that the shares cannot be valued ignoring the restrictions on transfer, as contained in the Articles of Association in that case, as that would be to value the property which the deceased as an owner did not own. Even if the shares were not transferable in the open market in terms of the Articles of Association, the shares had certain privileges and rights, which form the ingredients in its value. The expression “if sold in the open market” does not alter the nature of the property. What the expression postulates is to permit the assessee or the authorities to assume a sale in the open market, which is to limit the property to be valued at the price that a person would be prepared to pay in the open market with all rights and obligations. The value would not exceed the sum, which a willing purchaser would pay, given the fact that the right to purchase is restricted or barred. This does not imply that the valuation of the shares can be made artificially and by ignoring the restrictions on the property. Valuation cannot ignore the limitations attached to the shares. This judgment in Crossman’s case (supra) has been subsequently reiterated by the House of Lords in Lynall and Another v. Inland Revenue Commissioners10. Referring to the decision in Crossman’s case (supra) and a decision of the High Court of Australia in Abrahams v. The Federal Commissioner of Taxation11, a Division Bench of the Madras High Court in R. Rathinasabapathy Chettiar v. Commissioner of Wealth-Tax, Madras12, in our opinion, has rightly observed:

12. The aforesaid decision was subsequently followed by the Madras High Court in two other decisions, Commissioner of Wealth Tax, Chennai v. Shri Thirupathy Kumar Khemka13, and the decision dated 12th April 2019 in Commissioner of Income Tax, Chennai v. Sadhana Devi14, which relates to the valuation of shares in lockin period as per the provisions of Schedule III of the W.T. Act.

13. Read in this manner, 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. It has reiterated and affirmed the dictum in Ahmed G.H. Ariff (supra) and Purshottam N. Amarsay (supra) that notwithstanding

14 Tax Case No. 788 of 2008. 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. 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, which when read carefully expresses the legislative intent by using the words “hereby declared”. The Rule declares that the price or other consideration for which any property may be acquired by, or transferred, to any person under the terms of a deed of trust or through any other restrictive covenant, in any instrument of transfer, is to be ignored as per the provisions of the Schedule III of the W.T. Act. However, the price of such property is the price of the property with the restrictions if sold in the open market on the valuation date. In other words, notwithstanding the restrictions, hypothetically the property would be assumed to be saleable, but the valuation as per the Schedule III of the W.T. Act would be made accounting and taking the limitation and restrictions, and such valuation would be treated as the market value. The rules do not postulate a charge in the nature and character of the property. Therefore, the property has to be valued as per the restrictions and not by ignoring them.

14. 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.

15. However, one aspect is required to be clarified, viz. explanation to Rule 2(9) of Part A, Schedule III of the W.T. Act. 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 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 subrules (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.

16. In view of the aforesaid discussion, and for the reasons stated above, the present appeal by the Revenue is to be dismissed. We must record that the assessee has not pressed the ground raised in its appeal challenging the impugned order, which is to be dismissed as not pressed. We order accordingly. There shall be no order as to costs ....................................... J. (SANJIV KHANNA) ...................................... J. (J.K. MAHESHWARI) NEW DELHI; OCTOBER 13, 2022.