1971 (7) TMI 155 - HC - Income Tax

Summary

Issues Involved:
1. Proper valuation of shares for estate duty purposes.
2. Applicability of restrictions on share transfers in the valuation process.
3. Consideration of confidential information in determining share value.
4. Adherence to the decision in Inland Revenue Commissioners v. Crossman.

Detailed Analysis:

1. Proper Valuation of Shares for Estate Duty Purposes
The central issue was the proper valuation of 67,886 shares in Linread Ltd., a private company, for estate duty purposes under section 7(5) of the Finance Act, 1894. The Inland Revenue Commissioners initially valued the shares at lb4 each, later increasing to lb5 10s. The executors contended for a value of lb2, later suggesting lb1 or lb3 10s. Plowman J. fixed the value at lb3 10s, which the Court of Appeal increased to lb4 10s. The House of Lords ultimately decided that the shares should be valued at lb3 10s each.

2. Applicability of Restrictions on Share Transfers in the Valuation Process
Linread Ltd.'s articles of association contained restrictions on share transfers, specifically requiring shares to be first offered to Ezra Herbert Lynall at lb1 per share. The Court had to decide whether these restrictions should be considered in the hypothetical open market sale required by section 7(5). The House of Lords upheld the decision in Inland Revenue Commissioners v. Crossman, confirming that the hypothetical sale must assume the shares could be sold in the open market, but the shares would still be subject to the transfer restrictions post-sale.

3. Consideration of Confidential Information in Determining Share Value
The executors argued that confidential information, such as reports from Messrs. Thomson McLintock and Cazenoves regarding a potential public issue, should not be considered in the valuation. The Court of Appeal had held that such information should be deemed available to a hypothetical purchaser, thus justifying a higher value of lb4 10s. The House of Lords disagreed, stating that confidential information would not be available in an open market sale and should not be considered. Thus, they restored the valuation to lb3 10s per share.

4. Adherence to the Decision in Inland Revenue Commissioners v. Crossman
The appellants urged the House of Lords to reconsider and depart from the decision in Inland Revenue Commissioners v. Crossman, which had established that shares should be valued as if sold in the open market, disregarding restrictions on transfer. The House of Lords reaffirmed the Crossman decision, emphasizing its long-standing application and the lack of legislative change since its establishment. They concluded that the decision was correct and should be adhered to.

Conclusion:
The House of Lords allowed the appeal, restoring the valuation of the shares to lb3 10s each. They confirmed that the valuation must assume a hypothetical sale in the open market, disregarding restrictions on transfer but considering the shares' nature post-sale. Confidential information not available to all potential purchasers in the open market should not influence the valuation. The decision in Inland Revenue Commissioners v. Crossman was upheld as authoritative and correct.