2003 (9) TMI 16 - HC - Income Tax

Gift-tax Act, 1958 - 1. Whether, Tribunal should have upheld that deemed gift theory was not applicable to the sale of the unquoted shares made on compelling circumstances, which are amply established by the petitioner? - 2. Whether, Tribunal was wrong in upholding the application of wealth-tax valuation in the place of valuation as per the yield method, with regard to the sale of unquoted shares? - We answer the first question referred in the negative, i.e., in favour of the Revenue and against the assessee. We answer the second question in the affirmative, i.e., in favour of the assessee and against the Revenue.

Summary

Issues Involved:
1. Applicability of deemed gift theory to the sale of unquoted shares under compelling circumstances.
2. Appropriateness of using wealth-tax valuation versus yield method for valuing unquoted shares.

Issue-wise Detailed Analysis:

1. Applicability of Deemed Gift Theory:
The court examined whether the sale of unquoted shares at a price lower than the market value constituted a deemed gift under the Gift-tax Act. The assessee sold shares at Rs. 5 per share to relatives, while the market value was Rs. 44.14 per share. The Gift-tax Officer deemed the difference as a gift, which was upheld by the Tribunal. The assessee contended that the sale was due to compelling circumstances, specifically the need for funds for his son's marriage. However, both the Assessing Officer and the first appellate authority rejected this contention. The Tribunal noted that the sale was to relatives at a price significantly lower than the market value. The court found no reason to interfere with the concurrent findings of fact by the appellate authorities and answered the first question in the negative, favoring the Revenue.

2. Valuation Method for Unquoted Shares:
The court considered whether the valuation of unquoted shares should follow the wealth-tax valuation method (break-up method) as per rule 1D of the Wealth-tax Rules or the yield method. The Tribunal had applied the wealth-tax valuation, while the Commissioner of Income-tax (Appeals) had applied the yield method based on the Supreme Court decision in CGT v. Smt. Kusumben D. Mahadevia. The court noted that there is no specific provision in the Gift-tax Rules for valuing unquoted shares, and in such cases, the principles laid down by the Supreme Court in Kusumben D. Mahadevia's case should apply, which favor the yield method over the break-up method. The court cited several precedents, including the Supreme Court's decisions in CWT v. Mahadeo Jalan and CGT v. Executors and Trustees of the Estate of Late Sh. Ambalal Sarabhai, which supported the yield method for valuing shares of a going concern. The court concluded that the yield method is the appropriate method for valuing unquoted shares for the purpose of gift-tax, rejecting the Tribunal's reliance on the break-up method. The second question was answered in the affirmative, favoring the assessee.

Conclusion:
The court upheld the Tribunal's decision regarding the applicability of the deemed gift theory but overturned the Tribunal's valuation method, favoring the yield method for valuing unquoted shares. The first question was answered in favor of the Revenue, and the second question was answered in favor of the assessee.