Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3265 OF 2016
DEPUTY COMMISSIONER OF GIFT TAX,
CENTRAL CIRCLE-II
.....
APPELLANT
VERSUS
M/S BPL LIMITED ..... RESPONDENT
W I T H
CIVIL APPEAL NO. 3272 OF 2016
J U D G M E N T
SANJIV KHANNA, J.
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
nd
Limited, to M/s. Celestial Finance Limited on 2 March 1993. The
shares of M/s. BPL Sanyo Technologies Limited and M/s. BPL
Sanyo Utilities and Appliances Limited, both public limited
Signature Not Verified
companies, were listed and quoted on the stock exchanges.
Digitally signed by
SONIA BHASIN
Date: 2022.10.14
11:07:47 IST
Reason:
However, these gifted shares, being promoter quota shares,
Civil Appeal No. 3265 of 2016 & Anr. Page 1 of 18
th th
allotted to the assessee on 17 November 1990 and 10 July 1991,
th th
were under a lock-in period up to 16 November 1993 and 25 May
1
1994 , respectively.
2
2. 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)
3
to Section 4 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
4
made by the transferor. Sub-section (1) to Section 6 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
1
There appears to be some discrepancy in the date, which need not be authoritatively commented as
it is not material for adjudication of the present appeals.
2
For short, “G.T. Act”.
3
4. Gifts to include certain transfers. – (1) For the purpose of this Act, –
(a) where 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:
Provided that nothing contained in this clause shall apply in any case where the property is
transferred to the Government or where the value of the consideration for the transfer id determined or
approved by the Central Government or the Reserve Bank of India;
xx xx xx
4
6. Value of gifts, how determined.– (1) Subject to the provisions of sub-section (2), the value of any
property, other than cash, transferred by way of gift shall for the purpose of this Act, be its value as on
the date on which the gift was made and shall be determined in the manner laid down in Schedule II.
(2) Where a person makes a gift which is not revocable for a specific period, the value of the property
gifted shall be the capitalised value of the income from such property during the period for which the
gift is not revocable.
Civil Appeal No. 3265 of 2016 & Anr. Page 2 of 18
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
5
II of the G.T. Act is mandatory and cannot be deviated.
3. 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
6
the provisions of Schedule III of the Wealth Tax Act, 1957 .
Therefore, we are required to refer to and apply 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. For the
purpose of the present decision, we are required to interpret 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
5
See decisions of this Court in relation to the method of valuation when stipulated under the rules or
the Schedule in S.N. Wadiyar (Dead ) through Legal Representative v. Commissioner of Wealth Tax,
Karnataka , (2015) 15 SCC 38; and Commissioner of Wealth Tax, Meerut v. Sharvan Kumar Swarup &
Sons, (1994) 6 SCC 623.
6
For short, “W.T. Act”.
Civil Appeal No. 3265 of 2016 & Anr. Page 3 of 18
valuation of unquoted equity shares in companies other than
investment companies respectively and read thus:
“ 9. Quoted shares and debentures of companies. – The
value of an equity share or a preference share in any
company or a debenture of any company which is a quoted
share or a quoted debenture shall be taken as the value
quoted in respect of such share or debenture on the
valuation date or where there is no such quotation on the
valuation date, the quotation on the date closest to the
valuation date and immediately preceding such date.
xx xx Xx
11. Unquoted equity shares in companies other than
investment companies. – (1) The value of an unquoted
equity share in any company, other than an investment
company, shall be determined in the manner set out in sub-
rule (2).
(2) The value of all the liabilities as shown in the balance-
sheet of such company shall be deducted from the value of
all its assets shown in that balance-sheet; the net amount
so arrived at shall be divided by the total amount of its paid-
up equity share capital as shown in the balance sheet; the
result multiplied by the paid-up value of each equity share
shall be the break-up value of each unquoted equity share,
and an amount equal to eighty per cent of the break-up
value so determined shall be the value of the unquoted
equity share for the purposes of this Act.
(3) For the purposes of sub-rule (2),–
(a) the following amounts shown as assets in the
balance-sheet shall not be treated as assets,
namely:–
(i) any amount paid as advance-tax under the
Income-tax Act;
(ii) any amount shown in the balance-sheet
including the debit balance of the profit and
loss account or the profit and loss
appropriation account which does not
represent the value of any asset;
Civil Appeal No. 3265 of 2016 & Anr. Page 4 of 18
(b) the following amounts shown as liabilities in
the balance-sheet shall not be treated as
liabilities, namely:–
(i) the paid-up capital in respect of equity shares;
(ii) the amount set apart for payment of dividends
on preference shares and equity shares
where such dividends have not been declared
before the valuation date at a general body
meeting of the company;
(iii) reserves, by whatever name called, other than
those set apart towards depreciation;
(iv) credit balance of the profit and loss account;
(v) any amount representing provision for
taxation, other than the amount referred to in
sub-clause (i) of clause (a), to the extent of the
excess over the tax payable with reference to
the book profits in accordance with the law
applicable thereto;
(vi) any amount representing contingent liabilities
other than arrears of dividends payable in
respect of cumulative preference shares.
Explanation.– For the purposes of this rule, “balance-sheet”,
in relation to any company, means the balance-sheet of
such company (including the Notes annexed thereto and
forming part of the accounts) as drawn up on the valuation
date and, where there is no such balance-sheet, the
balance-sheet drawn up on a date immediately preceding
the valuation date, and, in the absence of both, the balance-
sheet drawn up on a date immediately after the valuation
date.
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:
Civil Appeal No. 3265 of 2016 & Anr. Page 5 of 18
“ 2. Definitions.- … (9) “quoted share” or “quoted
debenture”, in relation to an equity share or a preference
share or, as the case may be, a debenture, means a share
or debenture quoted on any recognised stock exchange
with regularity from time to time, where the quotations of
such shares or debentures are based on current
transactions made in the ordinary course of business.
Explanation. – Where any question arises whether a share
or debenture is a “quoted share” or a “quoted debenture”
within the meaning of this clause, a certificate to that effect
furnished by the concerned stock exchange in the
prescribed form shall be accepted as conclusive;
xx xx xx
(11) “unquoted share” or “unquoted debenture”, in relation
to an equity share or a preference share or, as the case may
be, a debenture, means a share or debenture which is not a
quoted share or a quoted debenture.”
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.
Civil Appeal No. 3265 of 2016 & Anr. Page 6 of 18
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
Civil Appeal No. 3265 of 2016 & Anr. Page 7 of 18
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
Civil Appeal No. 3265 of 2016 & Anr. Page 8 of 18
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
Civil Appeal No. 3265 of 2016 & Anr. Page 9 of 18
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:
“ 21. Restrictive covenants to be ignored in determining
market value .–For, the removal of doubts, it is hereby
declared 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 or under any
restrictive covenant in any instrument of transfer shall be
ignored for the purposes of determining under any provision
of this Schedule, the price such property would fetch if sold
in the open market on the valuation date.”
In order to understand the import of Rule 21 of Part H of
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
Civil Appeal No. 3265 of 2016 & Anr. Page 10 of 18
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,
7
Calcutta , 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 well-
recognised 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
7
(1969) 2 SCC 471.
Civil Appeal No. 3265 of 2016 & Anr. Page 11 of 18
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 ,
8
Bombay , 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
9
Commissioners of Inland Revenue v. Crossman , which
decision was referred to with approval in both Ahmed G.H. Ariff
8
(1972) 4 SCC 376.
9
(1937) A.C. 26.
Civil Appeal No. 3265 of 2016 & Anr. Page 12 of 18
(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
Civil Appeal No. 3265 of 2016 & Anr. Page 13 of 18
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
10
Commissioners . Referring to the decision in Crossman’s case
(supra) and a decision of the High Court of Australia in Abrahams
11
v. The Federal Commissioner of Taxation , a Division Bench of
the Madras High Court in R. Rathinasabapathy Chettiar v.
12
Commissioner of Wealth-Tax, Madras , in our opinion, has
rightly observed:
“13. In Abraham v. Federal Commissioner of Taxation at
the time of his death a deceased owned shares in five
companies, four of which carried on investment business,
and the fifth a pastoral business. The brother of the
deceased who held equal interest in the whole of the issued
capital of the companies was appointed the sole executor.
The memorandum and articles of association of the four
companies contained a restriction on transfer of shares
whereby the board of directors may refuse to register any
transfer of shares to a transferee who was in their opinion
an undesirable person to be admitted as a member of the
company. In the fifth company the articles of association
provided that the governing directors should have a right at
any time of purchasing the shares of all the-members of the
company, the purchase price to be the amount paid up
thereon or, at the option of the governing directors, the
amount which bore the same proportion to the excess value
of the assets over the liabilities of the company as the total
amount paid up on the shares bore to the total paid up
capital of the company. The question arose as to how the
10
(1972) A.C. 680.
11
(1944) HCA 32.
12
(1974) 93 ITR 555.
Civil Appeal No. 3265 of 2016 & Anr. Page 14 of 18
shares left by the deceased are to be valued for the purpose
of estate duty. The court held that the assessment of value
of the shares held by the deceased in the five companies
must normally be made principally on the basis of the
income yield including the strong probability of distribution
of accumulated profits and that the effect of the restrictions
on transfer of shares and the right of pre-emption given to
the governing directors to purchase the shares must all be
taken note of and depreciation on that account had to be
allowed for in the primary valuation. The above case laid
down the principle that the restrictions contained in the
articles of association on the transfer and also on the price
for which the shares could be transferred has to be ignored
and the transferability in the open market must be assumed,
for the purpose of valuation, but that the market value of the
shares has to be depreciated to a certain extent having
regard to the said restrictions contained in the articles of
association, and that if the market value of such shares
could not be ascertained otherwise, it is possible to value
the shares on a break-up basis with reference to the
balance-sheet of the company for the relevant year.”
12. The aforesaid decision was subsequently followed by the Madras
High Court in two other decisions, Commissioner of Wealth Tax,
13
Chennai v. Shri Thirupathy Kumar Khemka , and the decision
th
dated 12 April 2019 in Commissioner of Income Tax, Chennai
14
v. Sadhana Devi , which relates to the valuation of shares in lock-
in 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
13
(2012) SCC OnLine Mad 2562.
14
Tax Case No. 788 of 2008.
Civil Appeal No. 3265 of 2016 & Anr. Page 15 of 18
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
Civil Appeal No. 3265 of 2016 & Anr. Page 16 of 18
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
Civil Appeal No. 3265 of 2016 & Anr. Page 17 of 18
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.
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.
Civil Appeal No. 3265 of 2016 & Anr. Page 18 of 18