Restricted Transfer Would Not Make Equity Shares In Lock-In Period Into "Quoted Shares" Defined Under Wealth Tax Act- SC

The Supreme Court has observed that restricted transfer 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 Wealth Tax Act, 1957.

The Bench of Justice Sanjiv Khanna and Justice JK Maheshwari observed that "…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 inany 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 Court further held that the possibility of transfer of shares to promoters by private transfer/sale does not satisfy the conditions to be satisfied to regard the shares as quoted shares.

The issue raised in the instant appeals was regarding 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, to M/s. Celestial Finance Limited.

The 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, allotted to the assessee on November 17, 1990 and July 10, 1991, were under a lock-in period up to November 16, 1993 and May 25, 1994, respectively.

Advocate Raj Bahadur Yadav represented the Appellants whereas Advocate Gautam Narayan represented Respondent.

The Court agreed 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 reason that the shares in the lock-in period were not quoted in any recognised stock exchange with regularity from time to time.

The Court observed that these equity shares being under the lock-in period could not be traded and, therefore, remained unquoted in any recognised stock exchange. The Court noted that there, therefore, would be no current transactions in respect of these shares made in the ordinary course of business.

The Court further observed that "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."

The Court held that this restricted transfer would not make the equity shares in the lock-in period into "quoted shares".

The Court noted that it cannot apply a hybrid method of valuation while applying Rule 9 of Part C of Schedule III of the Wealth Tax 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.", the Court held.

While clarifying the explanation to Rule 2(9) of Part A, Schedule III of the Wealth Tax Act, the Court noted that "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. 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."

Accordingly, the Court dismissed the appeal by the revenue.

Cause Title- Deputy Commissioner of Gift Tax v M/S BPL Limited

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