This Tax Alert summarizes a recent decision[1] of the two-judge bench of the Supreme Court (SC) in the case of DCIT vs. BPL Ltd.[2] (Taxpayer) on valuation of equity shares of listed company held as part of promoter’s quota that was subject to lock-in-period of three years.
During tax year 1992-93, the Taxpayer transferred such shares at less than a price quoted by stock exchange to its sister companies, which was permitted as per extant securities regulations. The tax authority characterized such transfer as effected for inadequate consideration and, hence, treated it as a “deemed gift” chargeable under the Gift-tax Act, 1958 (GTA). For this purpose, the tax authority valued such shares by treating them as “quoted shares” (i.e., by adopting stock exchange quotation price), notwithstanding the restrictions on transferability during the lock-in-period. The Taxpayer contended that the valuation should be done under a prescribed break-up value method by considering the shares as “unquoted shares”, as the shares transferred were not tradeable on stock exchange during the lock-in-period.
The SC ruled in favor of the Taxpayer and held that the equity shares of listed company forming part of the promoter’s quota under the lock-in-period are not “quoted shares” and, hence, required to be valued as “unquoted shares”. The SC, inter alia, held that although the shares were of listed company, in view of being under lock-in restriction, they did not meet the essential conditions of being quoted in any recognized stock exchange with regularity from time to time and presence of current transactions made in the ordinary course of business.
