ITAT Chandigarh holds leasehold rights cannot to be equated with freehold property for share valuation

 In a recent ruling, the Chandigarh Tribunal held that leasehold rights in land cannot be regarded as “immovable property” for the purposes of valuation of unquoted shares and such rights cannot be equated with freehold property while determining fair market value.

In this case, the assessee acquired shares in a company whose underlying asset was a hotel constructed on land held on a 99-year lease from the Municipal Corporation, Chandigarh. While computing the fair market value of shares, the assessee considered the leasehold land and building at book value, contending that the land was not freely transferable and only limited rights were held under the lease. The Assessing Officer, however, treated the leasehold rights as immovable property and substituted the book value with stamp duty value by equating it with freehold property. This approach was upheld by the CIT(Appeals).

The Tribunal observed that leasehold rights are inherently distinct from freehold ownership, particularly where such rights are subject to restrictions on transfer and other conditions imposed by the lessor. Accordingly, it held that such rights cannot be mechanically equated with freehold property for valuation purposes, and directed that the nature and limitations of leasehold rights must be duly considered while determining fair market value.

This ruling highlights the importance of appropriately characterising property rights in valuation exercises and underscores the need for careful evaluation of leasehold structures, particularly where statutory valuation rules interact with commercial realities.