1964 (3) TMI 85 - HC - Income Tax

Summary

Issues Involved:
1. Proper mode of valuation of shares for gift-tax purposes.
2. Applicability of section 6(1) and section 6(3) of the Gift-tax Act, 1958.
3. Method of valuation under Rule 10 of the Gift-tax Rules, 1958.
4. Consideration of liabilities, specifically "provision for taxation" and "proposed dividend," in valuing shares.

Detailed Analysis:

1. Proper Mode of Valuation of Shares for Gift-Tax Purposes:
The primary issue was the correct valuation of shares gifted by the respondent to his daughter. The Gift-tax Officer valued the shares at Rs. 2,68,503, rejecting the face value of Rs. 35,000 submitted by the respondent. The valuation was challenged, leading to a legal examination of the appropriate method for valuing such shares under the Gift-tax Act, 1958.

2. Applicability of Section 6(1) and Section 6(3) of the Gift-tax Act, 1958:
Section 6(1) of the Gift-tax Act, 1958, states that the value of any property transferred by way of gift should be estimated as the price it would fetch if sold in the open market on the date of the gift. However, if the property is not saleable in the open market, Section 6(3) provides that its value shall be determined in the prescribed manner. The court noted that the machinery of section 6(1) does not exactly fit cases where the property cannot be sold in the open market, necessitating the application of section 6(3) and the corresponding rules.

3. Method of Valuation under Rule 10 of the Gift-tax Rules, 1958:
Rule 10(2) of the Gift-tax Rules, 1958, prescribes the mode of valuation for shares in a private company with restrictive provisions on alienation. The rule implies that if the value of the shares is ascertainable by reference to the value of the total assets of the company, it must be so ascertained. Both the respondent and the Gift-tax Officer agreed that the shares should be valued by adopting this method. The Gift-tax Officer valued the shares by reference to the balance-sheet value of the company's assets but made errors in the computation.

4. Consideration of Liabilities in Valuing Shares:
The Gift-tax Officer's valuation excluded certain liabilities, specifically the "provision for taxation" and "proposed dividend." The court held that the "provision for taxation" should be considered a genuine pre-estimate of the tax liability and should be deducted from the value of the company's assets. However, the "proposed dividend" was not considered a liability on the date of the gift, as it had not yet been declared by the company. The court concluded that the Gift-tax Officer erred in not taking into account the "provision for taxation," making the assessment order and notice of demand illegal.

Conclusion:
The court affirmed the decision regarding the "provision for taxation" but set aside the finding concerning the "proposed dividend." The assessment order and notice of demand were quashed and set aside. Each party was directed to bear its own costs of the appeal.