Promoter’s quota shares which are listed on recognized stock exchange due to restrictions should not be treated as “quoted shares”

Issue of the Case:

• The Assessee company was holding shares of public company (whose shares were listed on recognised stock exchange). The shares held by the Assessee, being promoter quota shares, were under a lock-in as per SEBI guidelines although these shares were also listed on the recognised stock exchange.
• Later on, these shares were transferred by the Assessee to its sister concern in AY 1993-94 after complying with restrictions imposed on these shares. The assessing officer (AO) value these shares as ‘quoted shares’ as defined under the Wealth Tax Act, 1957 which states that “”quoted share” or “quoted debenture”, in relation to an equity share or a preference share or, as the case may be, a debenture, means a share or debenture quoted on any recognised stock exchange with regularity from time to time, where the quotations of such shares or debentures are based on current transactions made in the ordinary course of business”.
• As the matter went before the Hon’ble High Court, it was held that even though the shares are quoted on recognised stock exchange with regularity from time to time, for the simple reason that the shares were in a lock-in period and no current transactions relating to these shares were made in the ordinary course of business, the valuation of such shares has to be done in the same manner as the valuation of unquoted shares prescribed under the law.
• On this, the Hon’ble Supreme Court upheld the decision of the Hon’ble High Court on the same reasons that even if the shares were quoted on the recognised stock exchange but they were under a lock-in and not freely transferable or available for trade on stock exchange, then valuation of such quoted shares has to be done as per the prescribed method of valuation of unquoted shares.

Aid to interpretation of Section 50CA provisions:

• Section 50CA of the Income Tax Act, 1961 also use the term quoted shares in the provisions and it defines it in the similar manner as was defined in the erstwhile Wealth Tax Act. Now, where the Apex court has distinguished the shares which as per the definition qualify as quoted shares to be unquoted shares due to the attributes attached to such shares, one can take this as a reference for Section 50CA provisions and value the shares accordingly.

Lakshay Prakash Jonwal, Article Assistant – Direct Tax, SW India

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