The judgment by the High Court of Jammu & Kashmir and Ladakh in the case of Principal Commissioner of Income Tax v/s Dr. Karan Singh; ITA No.1/2022 sheds light on the significance of leasehold interest in land as an asset of a company and its valuation implications. The ruling of the Hon’ble High Court emphasizes that leasehold interest in land is indeed an asset of the company and is capable of valuation, thereby impacting the determination of fair market value of shares held by shareholders.
In this case, the dispute revolved around the method of valuation of unquoted shares in a private company to ascertain the market value as of 31.03.1981. The company in question, M/s. Jyoti Private Limited, held a leasehold interest in land on which its hotel building stood. The court noted that the company had acquired the rights in the building and other superstructures, while the land was leased due to restrictions in the state of Jammu & Kashmir.
The Assessing Officer had initially excluded the value of the land from the calculation of fair market value of shares, leading to a discrepancy in the assessment of capital gains. However, the Hon’ble Court highlighted that the leasehold interest in the land is a valuable asset of the company and should be considered in the valuation process, and rejected the plea to adopt the value of assets as per the balance sheet, emphasizing the importance of determining the fair market value for capital gain computation.
Furthermore, the judgment underscored that for the purpose of computing capital gains, it is the fair market value, not the book value, that is crucial. The fair market value is defined as the price the asset would fetch in an open market on a specific date. Therefore, the valuation of shares must adhere to the relevant rules and regulations, such as Rule 1D of the Wealth Tax Rules.
In conclusion, the Hon’ble High Court’s ruling highlighted the importance of fair market value determination and rejecting arbitrary exclusions, the judgment provides clarity on the valuation of shares in private companies, ensuring a fair and accurate assessment of capital gains.

Author of this article:
Adv. Ravish Bhatt,
Partner, R&D Law Chambers,
Dual Qualified Lawyer Solicitor | International Tax Affiliate

Connect with Mr. Bhatt on Linkedin: https://www.linkedin.com/in/adit-ravishbhatt/

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