2004 (4) TMI 49 - HC - Wealth-tax

Whether the Appellate Tribunal was justified in holding that the valuation of the gift of the shares for the assessment year 1991-92 was to be made under section 6 of the Gift-tax Act in accordance with Schedule III to the Wealth-tax Act? - In view of our finding regarding the applicability of Schedule II to the Act to deemed gifts under section 4(1)(a) of the Act the decision of the Tribunal to the contrary cannot be sustained. - We accordingly answer the question referred in the negative i.e. in favour of the assessee and against the Revenue.

Issues Involved:
1. Valuation of the gift of shares for the assessment year 1991-92.
2. Applicability of section 4(1)(a) of the Gift-tax Act in relation to the transaction.
3. Procedural versus substantive nature of the valuation rules.
4. Retrospective application of Schedule III to the Wealth-tax Act.

Issue-wise Detailed Analysis:

1. Valuation of the Gift of Shares for the Assessment Year 1991-92:
The primary issue was whether the valuation of the gift of shares for the assessment year 1991-92 should be made under section 6 of the Gift-tax Act in accordance with Schedule III to the Wealth-tax Act. The assessee sold shares at Rs. 37 per share to close relatives but gifted some shares to his minor daughter, valuing them at Rs. 77.85 per share. The Assessing Officer deemed the difference in valuation as a gift and taxed it accordingly. The Tribunal and the Commissioner of Income-tax (Appeals) upheld this valuation method.

2. Applicability of Section 4(1)(a) of the Gift-tax Act in Relation to the Transaction:
The assessee argued that the shares were of a private limited company with transfer restrictions, and thus the valuation by the Assessing Officer was incorrect. The Tribunal rejected the assessee's petition, stating no mistake in their order. The court found that section 4(1)(a) as it stood up to the assessment year 1992-93 required the market value of the property to be used for deemed gifts, not the valuation method provided in Schedule II to the Act.

3. Procedural Versus Substantive Nature of the Valuation Rules:
The court discussed whether the rules regarding the valuation of shares were procedural or substantive. It was noted that the Supreme Court in Bharat Hari Singhania's case held that valuation methods are procedural and apply to pending assessments. However, the court differentiated between the valuation of gifts simpliciter and deemed gifts, stating that Schedule II's application to deemed gifts was substantive and only effective from April 1, 1992.

4. Retrospective Application of Schedule III to the Wealth-tax Act:
The court examined whether Schedule III to the Wealth-tax Act, which was procedural, could be applied retrospectively. It concluded that Schedule III, inserted with effect from April 1, 1989, had no retrospective operation as per the decision in P. J. George v. CIT. The court emphasized that the valuation for deemed gifts prior to April 1, 1992, should be based on the market value of the property at the date of transfer, not the valuation method in Schedule II.

Conclusion:
The court concluded that the valuation method under Schedule II to the Act could not be applied to deemed gifts for the assessment year 1991-92. It held that the proper method for valuation of unquoted shares of a private company for deemed gifts was the yield method, not the break-up value method. The court answered the referred question in the negative, favoring the assessee and against the Revenue. The judgment emphasized the distinction between procedural and substantive rules and their applicability to pending assessments.

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