2019 (4) TMI 2126 - HC - Income Tax

Tax Dispute Resolved: Shares with Lock-In Period Valued Under Wealth Tax Act 1957, Rule 11, Schedule III for 1992-93.

Commissioner of Income Tax, Chennai Versus Sadhana Devi

The HC of Madras resolved a tax dispute concerning the valuation of shares under the Wealth Tax Act, 1957, specifically addressing shares subject to a ... Valuation of shares held by the Assessee in a closely held Private limited Company - restriction of a lock in period - Tribunal holding that the shares owned by the assessee could not be valued as per the rate quoted in the stock exchange as the assessee was bound by a lock in period, and could not sell those shares at that time - HELD THAT:- Both the parties fairly submit that the controversy involved in the present Tax Case about the valuation of shares held by the Assessee in a closely held Private limited Company has to be made as per Rule 11 in Part C of Schedule III, which stood omitted by Finance Act, 1992, with effect from 1.4.1993, but, since the Assessment Year in the present case is 1992-93, Rule 11 in part C of Schedule III will be applicable, which provides for, valuation to be made for Unquoted Equity Shares in Companies other than Investment Companies. As decided in Commissioner of Wealth Tax, Chennai v. Thirupathy Kumar Khemka [2012 (10) TMI 69 - MADRAS HIGH COURT] that the shares held in promoters' quota for a lock-in period could be allowed by adopting the methodology under Rule 11. Thus the Assessing Authority shall adopt the valuation of the Shares in terms of Rule 11 as it stood applicable to Assessment Year 1992-93 in question. Issues:Valuation of shares under the Wealth Tax Act, 1957 based on a lock-in period and applicability of Rule 11 of Schedule III.Analysis:The High Court of Madras addressed the issue of valuing shares under the Wealth Tax Act, 1957 in a case where the shares were subject to a lock-in period. The Revenue filed the Tax Case under Section 27A of the Wealth Tax Act, raising substantial questions of law regarding the valuation of shares owned by the assessee. The Tribunal had to determine whether the shares could be valued based on the rate quoted in the stock exchange, considering the lock-in period restricting the sale of shares at that time. Additionally, the Tribunal had to decide if shares bound by a lock-in period have any value and if they could be valued under Rule 11 of Schedule III of the Wealth Tax Act.The Court noted that the controversy revolved around the valuation of shares in a closely held private limited company as per Rule 11 in Part C of Schedule III, which was omitted by the Finance Act, 1992. However, since the Assessment Year in question was 1992-93, Rule 11 in Part C of Schedule III was deemed applicable for the valuation of unquoted equity shares in companies other than investment companies.Referring to a previous decision by a co-ordinate Bench of the Court in Commissioner of Wealth Tax, Chennai v. Thirupathy Kumar Khemka, the Court emphasized the importance of Rule 11 in determining the value of shares with restrictions on transferability. The Court highlighted the need to assign a depreciated value to such shares due to their limited marketability, even though market value principles still apply. The Court concluded that Rule 11 provides a plausible method to arrive at the depreciated value of shares subject to a lock-in period, especially when allocated as part of a promoters' quota.Based on the submissions and the precedent set by the co-ordinate Bench, the High Court disposed of the Tax Case by instructing the Assessing Authority to adopt the valuation of shares in accordance with Rule 11 as applicable to the Assessment Year 1992-93. The Court concurred with the decision of the co-ordinate Bench and directed the valuation methodology to be followed without awarding any costs in the matter.