Share Valuation for Gift Tax Purposes shall be in accordance with Restrictions on Transfer: Supreme Court [Read Judgment]

The Supreme Court of India, in a recent ruling, has held that the valuation of shares shall be done taking into consideration the restrictions and limitations on transfer of said shares.

The issue raised in these appeals relates to the valuation of 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, which were gifted by the respondent-assessee, M/s. BPL Limited.

A two-judge bench Bench of Justice Sanjiv Khanna and Justice J K Maheshwari dismissed the appeal of the Revenue. The provisions of the Gift Tax Act, 1958 was discussed at length along with the Wealth Tax Act, 1957.

Gift Tax is to be levied on the date on which the gift was made as per the provisions of Gift Tax Act, 1958. Sub-section (1) to Section 64 of the Gift Tax 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 as laid down in Schedule II of the Gift Tax Act. It is an accepted position that the machinery provision relating to the method of valuation in Schedule II of the Gift Tax Act is mandatory and cannot be deviated, the Court observed.

The differentiation between quoted shares and unquoted shares have been identified and evaluated by the bench for the purpose of determining the nature of shares in the present case. It was said that “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.”  It was also observed that “These equity shares being under the lock-in period could not be traded and, therefore, remained unquoted in any recognised stock exchange.”

Following the observations made, it was held that “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 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”, in addition to the conclusion that “Valuation cannot ignore the limitations attached to the shares” by the Apex Court.

To Read the full text of the Judgment CLICK HERE

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