The Deputy Commissioner Of Gift Tax vs M/S Bpl Limited

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

WITH

CIVIL APPEAL NO. 3272 OF 2016

JUDGMENT

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

Limited, to M/s. Celestial Finance Limited on 2nd 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 Digitally signed by SONIA BHASIN Date: 2022.10.14 companies, were listed and quoted on the stock exchanges. 11:07:47 IST Reason:

However, these gifted shares, being promoter quota shares,

Civil Appeal No. 3265 of 2016 & Anr. Page 1 of 18 allotted to the assessee on 17th November 1990 and 10th July 1991,

were under a lock-in period up to 16th November 1993 and 25th May

19941, respectively.

2. As per the provisions of the Gift Tax Act, 19582, 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)

to Section 43 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

made by the transferor. Sub-section (1) to Section 64 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;

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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

II of the G.T. Act is mandatory and cannot be deviated.5

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

the provisions of Schedule III of the Wealth Tax Act, 19576.

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;

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(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,

Calcutta7, 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,

Bombay8, 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. Crossman9, 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

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:

“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,

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 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