2024 (3) TMI 314 - HC - Income Tax

Capital gain - calculation of cost of acquisition - method of valuation of unquoted shares - FMV determination - stand of assessee is that no capital gain arose to him as a result of selling of his shares as the fair market value of such shares as on 01.04.1981 had far exceeded the amount of consideration received on such selling/transfer of shares - Assessee computed the fair market value of the asset of the company as per the report of registered valuer - what method of valuation of unquoted shares, held by the assessee in a private company, should be adopted for determining the market value as on 31.03.1981? HELD THAT - A perusal of the file reveals that on one hand the AO computed the value of shares as per the breakup method, as approved method, after accepting the fair market value of building as per the report of the approved valuer, but excluded the value of land on the ground that the said land belongs to Vikramaditya Singh, whereas, on the other hand, the AO in the case of Shri Vikramditya Singh though had made the assessment but did not include the value of land. Therefore, we are in agreement with the learned Tribunal that the action of AO was apparently erroneous and unsustainable in law. CIT(A) has rightly deleted the addition made by the AO after analyzing that the cost of acquisition of shares was higher than the value at which the shares were transferred. As on the date of sale of shares, the lease period of beyond 20 years was still left with M/s. Jyoti Pvt. Ltd. Hence, the land value in the hand of lessor was practically nil and for all practical purpose M/s. Jyoti Pvt. Ltd. was de facto owner of the underlying land, as such the value of leasehold land cannot be excluded for calculating the Fair Market Value of shares of M/s. Jyoti Pvt. Ltd. Tribunal, while rejecting the plea of revenue to adopt the value of assets as reflected in the balance sheet as provided under Rule 11 of the Wealth Tax Rules, has rightly held that the AO had himself applied the Fair Market Value of buildings and other assets while computing capital gain in the assessment order. Also, it is the fair market value, and not book value, of an asset which is relevant for determining the cost of acquisition as envisaged under Section 55(2)(b)(ii) for determining capital gain under Section 45 of the Act. The fair market value is defined under Section 2(22B) of the Act as the price that such asset would ordinarily fetch on sale in open market on 01.04.1981. Therefore, for the purposes of computation of capital gain, the fair market value has to be determined and not the value of shares, the valuation of shares is to be made under Rule 1D of the Wealth Tax Rules. We are also in agreement with the learned Tribunal that the lease hold interest in the land is an asset of the company and is capable of valuation; as such the same is to be included in the value of asset of M/s. Jyoti Private Limited so as to determine the fair market value of shares held by the assessee as well as other shareholders. No substantial question of law arises for our consideration out of the judgment rendered by the Income Tax Appellate Tribunal.

Summary

Issues involved:
The valuation of unquoted shares in a private company for determining the market value as on 31.03.1981.

Issue 1: Indexed cost of shares calculation
The assessee transferred/sold shares in a company to another for a consideration, but the Assessing Officer disputed the indexed cost of the shares, leading to a disagreement on the capital gain amount.

Judgment: The Commissioner of Income Tax (Appeals) deleted the addition made by the Assessing Officer, stating that the lease period of the land was still left with the company, making the land value negligible. The Income Tax Appellate Tribunal upheld this decision, dismissing the revenue's appeal.

Issue 2: Dispute over capital gain
The appellant-revenue argued that the value of land should be excluded while calculating the cost of acquisition, resulting in a dispute over the quantum of capital gain from the transfer of shares.

Judgment: The respondent-assessee contended that no capital gain arose as the fair market value of the shares exceeded the consideration received. The Tribunal agreed with the assessee, emphasizing the importance of determining the fair market value of the shares accurately.

Issue 3: Method of valuation for unquoted shares
The main dispute was regarding the method of valuation of unquoted shares in a private company to determine the market value as on 31.03.1981.

Judgment: The Tribunal rejected the plea to adopt the value of assets as reflected in the balance sheet, emphasizing the relevance of fair market value for determining capital gain. The Tribunal also highlighted the importance of including the leasehold interest in the land while valuing the company's assets.

In conclusion, the High Court upheld the Tribunal's decision, stating that no substantial question of law arose for consideration. The appeal was dismissed, affirming the valuation method for determining the fair market value of the shares in the private company.