2012 (10) TMI 69 - HC - Wealth-tax

Valuation of shares under Wealth Tax Assessee contended that the value should be taken as nil, considering the restriction on free marketability due to lock in period under promoter quota - AO pointed that shares of the company were quoted shares and arrived at the market value of Rs. 210/- as on the valuation date Following the decision in case of R. Rathinasabapathy Chettiar (1973 (5) TMI 8 - MADRAS HIGH COURT) lock-in period on the shares held out of the promoters quota, necessarily one has to arrive at the depreciated value of these shares. Since these shares, in reality, would not fetch the same amount of price as the shares enjoying easy transferability, the shares could not be treated on par more or less with the shares which can be dealt with easily or saleable readily. What could be the depreciated value of a promoters quota shares suffering restriction on free transferability Rule 11 or Rule 21 Held that - In absence of any such guideline, the depreciation may range from 0 to 100 and it is always a question of debate. By adopting the principle as given under Rule 11, we are neither treating the shares as unquoted shares, nor are we ignoring the fact that the company s shares are quoted shares. Though the assessee is not in a position to show what could be the depreciated value of the restriction on the transfer, even invoking Rule 21, as had been done by the Revenue, we find that Rule 11 could only be a plausible method to arrive at the depreciated value of a quoted share, which suffers a lock-in period, by reason of it being allotted as a promoters quota. Appeal decides in favour of revenue & case remand back to AO

Summary

Issues:
1. Valuation of shares under Wealth Tax Act with a lock-in period.
2. Applicability of Rule 11 of Schedule III of the Wealth Tax Act.
3. Interpretation of market value for shares with restrictive covenants.

Issue 1: Valuation of shares with a lock-in period
The case involved the valuation of shares allotted from promoters' quota with a lock-in period. The assessee argued that due to the restriction on free marketability, the value of the shares should be considered nil. However, the Assessing Officer valued the shares at Rs. 210/- per share as per Rule 21 of Schedule III of the Wealth Tax Act, which states that restrictive covenants should be ignored for determining market value. The Commissioner of Wealth Tax (Appeals) emphasized that stock exchange quotations should be considered for valuation unless unavailable, in which case Rule 11 would apply.

Issue 2: Applicability of Rule 11 of Schedule III
The Tribunal held that due to the lock-in period, the valuation as per Rule 11 did not apply, and the open market value could not be considered. The Tribunal directed the Assessing Officer to calculate the value based on previous decisions, emphasizing that shares without marketability could not be valued based on stock exchange prices. The Revenue contended that the shares should be valued based on stock market prices regardless of restrictive covenants.

Issue 3: Interpretation of market value for shares with restrictive covenants
The Court referred to past decisions where restrictions on transferability impacted share valuation. It was established that even with restrictions, shares should be valued as if they could be freely sold in the market. The Court highlighted the need to assign a depreciated value to reflect the impact of restrictions on market value. Rule 11 was deemed appropriate for arriving at the depreciated value of shares with a lock-in period, even though the exact degree of depreciation was not specified. The Court allowed the Tax Case Appeals by the Revenue, affirming that Rule 11 methodology should be used for valuing shares held in promoters' quota with a lock-in period.