1997 (11) TMI 38 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Income-tax Officer was justified in adding the difference between the fair market value of the shares and the consideration received as deemed gift under section 4(1)(a) of the Gift-tax Act, 1958.
2. The correct method of valuation of shares for the purpose of Gift-tax.
3. Applicability of the Central Board of Direct Taxes (CBDT) circulars for valuation.
4. Jurisdiction of the Gift-tax Officer to reopen assessments.

Detailed Analysis:

1. Justification of Adding Difference as Deemed Gift:
The primary issue was whether the Income-tax Officer was justified in considering the difference between the fair market value of the shares and the consideration received as a deemed gift under section 4(1)(a) of the Gift-tax Act, 1958. The court examined the transactions involving the sale and gift of shares by the assessee during the assessment years 1972-73 and 1973-74. The Gift-tax Officer had determined the value of the shares based on the break-up value, substituting the fair market value of land and buildings. The Tribunal, however, concluded that the best evidence of the fair market value is the price at which the shares were sold, as there was no suggestion of collusion or undervaluation.

2. Correct Method of Valuation:
The Tribunal found that the valuation method adopted by the assessee, which was based on a recognised method involving the average of the break-up value and the capitalised value of maintainable profits, was correct. This method was in line with the CBDT Circular No. 2(WT) of 1967, which provided guidelines for valuing unquoted equity shares of investment companies. The Tribunal held that it was not open to the Revenue to substitute the book value of the assets for the market value of the shares when the assessee had adopted a recognised method.

3. Applicability of CBDT Circulars:
The court discussed the applicability of CBDT Circulars issued under the Wealth-tax Act for the purpose of Gift-tax. It was noted that the circulars provided for a uniform method of valuation and could be applied for Gift-tax purposes as well. The Tribunal found that the valuation method used by the assessee was in accordance with the CBDT Circular No. 2(WT) of 1967, which was in force during the relevant assessment years. The court also noted that subsequent modifications to the circular did not affect its applicability to the case at hand.

4. Jurisdiction to Reopen Assessments:
The Tribunal upheld the jurisdiction of the Gift-tax Officer to reopen the assessments for the assessment year 1973-74 under section 16(b) of the Act. The Tribunal found that the reassessment was justified, but ultimately dismissed the Revenue's appeals, holding that the value returned by the assessee was not inadequate to attract the provisions of section 4 of the Act.

Conclusion:
The court, after considering the rival submissions and the facts of the case, held that the provisions of section 4(1)(a) of the Gift-tax Act were not attracted. The valuation method adopted by the assessee, based on the CBDT circulars, was deemed correct. The court reframed the question of law and answered it in the affirmative, against the Revenue, concluding that the Appellate Tribunal was right in its decision. There was no order as to costs.