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TMI Blog2022 (10) TMI 556X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. The price of such property is the price of the property with the restrictions if sold in the open market on the valuation date. Notwithstanding the restrictions, hypothetically the property would 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. 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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, 1957 6 . 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds 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: 2. Definitions.- (9) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. Crossman (1937) A.C. 26, which decision was referred to with approval in both Ahmed G.H. Ariff (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company. The question arose as to how the 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 ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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