Date of transfer to be adopted for calculation of FMV of shares in capital reduction tax calculation

 The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has ruled in favour of RBS AA Holdings Netherlands B.V., holding that the relevant date for conducting valuation of unlisted shares in case of capital reduction ought to be the actual transfer date of transfer and not last adopted Balance Sheet date of the investee company. As a result, the Tribunal allowed the company’s full claim of long-term capital loss amounting to Rs.43.06 crores.

The Netherlands-based company had purchased shares of RBS Prime Services India Pvt. Ltd. in 2013 at Rs.13.02 per share. Later, under a Scheme approved by the NCLT, 14.67 crore shares were cancelled and the company received consideration as per Rs.10.09 per share. During assessments, the tax officer recomputed the per share value at Rs.12.58 per share based on 31 March 2017 financials, ignoring the value as on the actual transaction date of 20 November 2017and treated part of the amount as taxable capital gains.

The Tribunal rejected this approach of the tax officer and clarified that the share value must be determined based on the actual transfer date. Since a professional valuation confirmed the fair value at Rs.10 per share, and the company actually received slightly more than that (i.e. 10.09), the Tribunal held that no adjustment or tax on notional values was needed. It also accepted the company’s purchase price of Rs.13.02 per share as genuine, supported by the original share purchase agreement and financial records. Further, the Tribunal found no element of tax avoidance, recognizing that the capital reduction was part of a legitimate business restructuring.

This decision clarifies that while dealing with capital reduction of unlisted shares, the fair market value ought to be calculated based on the actual transfer date and not based on date of recent Balance Sheet. It may be noted that as there are other decisions on the subject matter of valuation allowing adoption of dates other than actual transfer date, taxpayers must therefore be cautious of applying the valuation rules based on their underlying facts to support selection of their valuation date.