The value of leasehold interest in land is to be included in assets while determining the fair market value of the shares held and owned by the shareholders as on 01.04.1981.
The “fair market value” of shares as on 01.04.81 is the fair market value of assets determined in accordance with provisions contained in section 2(22B) of the Act. So far as Wealth Tax Act is concerned, the value has to be determined as provided u/s 7 of the Act and, is subject to rules; whereas no such restriction is provided as far as Income Tax Act is concerned. In fact, if the definition contained in section 2(22B) of the Act is carefully perused, it will be seen that, fair market value as per rules was to be estimated only when the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date is not ascertainable. The term “ordinarily” is not provided in section 7 of the Wealth Tax Act” 1957 and, therefore, in such a situation, the fair market value as contemplated under Rule 1D of the Wealth Tax Rules” 1957 can neither be applied simpliciter and, nor has been applied, either by the assessee or the Assessing Officer in the orders of assessment.
1. It is evident from the conjoint reading of the aforesaid provisions contained in section 55(2)(b)(ii) of the Act and, section 2(22B) of the Act that, cost of acquisition of shares acquired prior to 01.04.1981 by the shareholders of M/s Jyoti (P) Ltd. would be fair market value as on 01.04.1981 and, fair market value as on 01.04.1981 would be the price that such shares would ordinarily fetch on sale in the open market on 01.04.1981. We, therefore, find merit in the submission of the Ld. Sr. Counsel for the assessee that in such a situation, it is obvious for determining the value of shares of a private limited company, one has to determine the value of assets on 01.04.1981, as if such assets were to be ordinarily sold in the open market on 01.04.81. In other words, while adopting the break up method, for the purpose of arriving at fair market value of shares of the company (of which shares are sold), it has to be necessarily held that, assets of the company have to be valued as if such assets are sold in the open market on 01.04.1981.
2. We find in the instant case the AO and the assessee both proceeded to determine the fair market value of the shares on the basis of the value of the assets held by the company. In our opinion, if the fair market value of all the assets held by the company as on 01.04.1981 as per the contention of the revenue is to be included then it would obviously mean a remand, which will only prejudice the interest of revenue since as on 01.04.1981, assets held by the company were many properties as against only one, which has been considered by the AO himself. The contention of the revenue overlooks the facts that as on 01.04.1981 the company M/s Jyoti Private Limited had number of buildings as is reflected in their balance sheet, the fair market value whereof would be many times more and it was for this reason the AO apparently had not proceeded to determine the cost of acquisition of shares as on 01.04.1981 by adopting the fair market value of all the assets. There is substantial difference between the fair market value of the asset and the value of an asset. It may be for the purpose of Wealth Tax Act, the value of asset is to be determined on the basis of book value but so far as the Income Tax Act is concerned, the fair market value of all the asset has been defined in section 2(22B) of the Act and is thus to be adopted.
3. So far as the contention of the Ld. Special Counsel for the revenue that the Apex Court has universally held that while adopting the value of shares, the only method is yield method is concerned, we find the said judgments were rendered in the context of the provisions of Wealth Tax Act which specifically provide the valuation of the shares to be made under Rule ID of the Wealth Tax Rules, whereas for the purpose of the computation of the capital gain, the Fair Market Value has to be determined and not the value of shares. There is a word of difference between the Fair Market Value and value to be determined in accordance with Wealth Tax Rules, that too only for the limited purpose. There is no dispute that breakup method is to be adopted in either of the case. In the judgments cited by the Ld. Special Counsel for the Revenue, we find the Hon’ble Supreme Court had neither considered nor decided the question of fair market value under section 2(22B) of the Act and are thus inapplicable. 59. We find the fair market value has not been defined under the Wealth Tax Act, whereas the same has been defined u/s 2(22B) of the Income Tax Act and thus for the purposes of section 55(2)(b)(ii) of the Act since it is a fair market value under the Income Tax Act which has to be adopted.
4. In the instant case, we find that the assessee‟s were shareholders of M/s Jyoti (P) Ltd., who undisputedly owned the hotel building which stood on the land owned by Shri Vikramaditya Singh one of the shareholder, who had become the owner of the land by virtue of the partition of the family properties and the land falling to his share had in fact been leased out by him to the company, M/s Jyoti (P)Ltd. and as such in order to determine the cost of acquisition, as provided under break up method, the fair market value of the lease hold interest in the land of the aforesaid company in any case has to be adopted which had been estimated at Rs. 1987.48 lacs and represented the value of land. We find force in the arguments of Ld. Sr. Counsel for the assessee that since in the state of Jammu and Kashmir no person other than the resident of the state can own the land, the title to the land stood in the name of Shri Vikramditya Singh and even the Hotel Building would have no independent value, if the land on which the building stood is not considered. Further, we find from deed of lease dt. 21.3.1973 that at the time when M/s Jyoti P. Ltd., had purchased the building by another deed of relinquishment on 21.3.1973, the Hotel Building was already existing on the land so leased and as such virtually it was a case where M/s Jyoti P. Ltd., had an absolute interest despite the fact it was only where the title of the land remained in the name of Shri Vikramaditya Singh. We find even the residual ownership rights were transferred in favour of Sh. Narendra Batra (who was the state subject i.e. resident of Jammu & Kashmir), who was a nominee of Bharat Hotels Ltd. on 16.1.1998 for a nominal value of Rs. 10 lacs when Perpetual Lease Deed was granted in favour of M/s Jyoti (P) Ltd.
5. We, therefore, find merit in the arguments of the ld. Senior Counsel for the assessee that virtually Shri Vikramditya Singh had divested his rights title and interest in respect of the aforesaid land as early as from 21.3.1973 and for all practical purposes the land was considered to be the property of the company. Since under the state laws of Jammu and Kashmir any immovable property could not be owned by a person who is not a resident, only title of the property remained in the name of Shri Vikramaditya Singh. It is true that, lessee had only disclosed the value of the building in its Balance Sheet, despite the fact that it had also acquired and held lease hold rights. We find as on 1.4.1981 un-expired period of lease was 32 years as the lease granted was to expire only on 20.3.2013.
6. We therefore hold that in order to determine the fair market value of each share as on 01.04.1981, it is necessary to adopt the aggregate of fair market value of the assets which would obviously include the value of leasehold interest in the land. In CWT vs. PN Sikand reported in 107 ITR 922, the Hon‟ble Apex Court had held that an asset also consists of leasehold interest in a land and should be included in the valuation of such leasehold interest in the land. Similar view has also been taken in the decisions relied on by Ld. Sr. Counsel for the assessee in the case law compilation.
7. In view of our above discussion, we hold that while adopting the fair market value as on 01.04.1981, the value of leasehold interest in the land be also held to be included in the value of asset of M/s Jyoti Private Limited, so as to determine the fair market value of shares held by the sharesholders. The lease hold interest in the land is an asset of company and is capable of valuation. That the assessee had made no capital gain and the method of valuation adopted under the Wealth Tax Act is not applicable, while arriving at the fair market value of shares as on 01.04.1981 for the purpose of section 55(2)(b)(ii) of the Act.
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