Shares of listed companies under lock-in-period are not “quoted shares”

Cause Title : Deputy Commissioner Of Gift Tax, Central Circle-II vs M/s Bpl Limited, Civil Appeal No. 3265 Of 2016, Supreme Court Of India

Date of Judgment/Order : October 13, 2022

Corum : Sanjiv Khanna & J.K. Maheshwari, JJ

Citied: 

1. Ahmed G.H. Ariff and Others v. Commissioner of Wealth Tax, Calcutta
2. Purshottam N. Amarsay and Another v. Commissioner of Wealth Tax, Bombay
3. Commissioners of Inland Revenue v. Crossman
4. Lynall and Another v. Inland Revenue Commissioners
5. Abrahams v. The Federal Commissioner of Taxation
6. R. Rathinasabapathy Chettiar v. Commissioner of Wealth-Tax, Madras
7. Commissioner of Wealth Tax, Chennai v. Shri Thirupathy Kumar Khemka
8. Commissioner of Income Tax, Chennai v. Sadhana Devi

Background

The Taxpayer was holding shares in two public limited companies (transferred companies), which were listed and quoted on Bangalore stock exchange. The shares held by the Taxpayer were part of promoter’s quota and were, therefore, restricted from being traded on stock exchange for a lock-in period of three years.

On 2 March 1993, which fell within the lock-in period, the Taxpayer transferred these shares to its sister concerns, for inadequate consideration (i.e., consideration was lesser than the market quotation-based value of shares).

The transfer was undertaken in the tax year 1992- 93 when the Gift Tax Act was applicable to the transferor/donor. Since the transfer was for inadequate consideration, the tax authority treated the transfer as a “deemed gift” taxable in the hands of the Taxpayer. As per the tax authority, the shares transferred were “quoted shares” as the lock-in-period of shares had not affected the transfer of shares by the Taxpayer. Accordingly, the tax authority took the value of shares of transferred companies quoted on the stock exchange on the date of impugned transfer, as the value of shares transferred by the Taxpayer to arrive at the valuation of INR 209.40m.

Before the appellate authorities, the Taxpayer had submitted the certificates issued by the Bangalore stock exchange, which stated that;

(i) the impugned shares were not being transacted on the stock exchange; (ii) value as quoted on relevant dates for these shares was ‘Nil’; and (iii) the impugned shares are not tradeable on stock exchange during the lock-in-period and price quoted on stock exchange is applicable only to shares freely tradeable on the stock exchange.

The first appellate authority agreed with the Taxpayer holding that these shares could not be treated as “quoted shares” and upheld the valuation considered by the Taxpayer.

However the Bangalore Tribunal ruled that merely because there is a bar on trading did not mean that shares were itself “unquoted shares”. The Tribunal set aside the findings of the first appellate authority and valued the shares as quoted, at INR 167.60m.

The Karnataka HC agreed with the appellate authorities and rejected the contention of the Tribunal. Finally the matter reached the SC.

Judgment

Referring to Sub-section (1)(a) of Section 43, Sub-section(1) of Section 64 and Schedule II of the G.T. Act, as well as 9 and 11 of  Part C of Schedule III of the Wealth Tax Act, the SC decided that :-

• since the impugned equity shares under the lock-in period could not be traded, it did not meet the two conditions in the definition of “quoted shares”, viz. (a) shares were not quoted in any stock exchange with regularity from time to time and (b) there were no current transactions made in the ordinary course of business. Accordingly, these shares remained unquoted in any stock exchange.
• As per Securities and Exchange Board of India (SEBI) guidelines, there is a complete bar on transfer of impugned shares during the lock-in-period and this is enforced by inscribing the words “not transferable” in share certificate. Although, as per a general circular issued by SEBI, the shares under the lock-in period can be transferred inter se the promoters, such restricted transfer to promoters by private transfer/sale, does not satisfy the above two conditions of “quoted share”.
• The valuation of unquoted shares as per the prescribed normative formula is mandatory and no other method is permitted.
•  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 lI of the G.T. Act, which, makes the provisions of Schedule III of the W.T. Act applicable.
• 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 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 Ill 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. 

Considering the above issues, the SC dismissed the appeal filed by the Tax authorities.